Nanotechnology, the science and business of manufacturing on a very small scale, is continuing to grow despite global economic downturns.  In fact, some estimate that over 20,000 companies and institutions from 48 countries are involved in some aspect of nanotechnology – - e.g., research, manufacturing or application.  Coincident with this growth is a rising awareness of risk assessment issues and a need for insurance coverage. 

In general, insurers are monitoring nanotechnology, including keeping a close watch on regulatory proposals around the world.  One concern of the insurance industry is that nanotechnology will “become the next asbestos” and will result in a flood of “long tail” claims.  In what was perhaps a knee jerk reaction to reports analogizing carbon nanotubes to asbestos fibers, in September 2008, Insurance Services Office (“ISO”), came out with a Nanotubes and Nanotechnology Exclusion.  There are numerous issues concerning the definitions and overall viability of this exclusion and this exclusion has not been widely adopted by insurers.  To date, only one insurer in the United States, Continental Western Insurance Group, has issued a purported nano-specific commercial insurance exclusion.

The recent trend among insurers appears to be focused on trying to better understand nano-risk exposures and weigh in on regulatory debates.  In addition, some insurers view nanotechnology as an opportunity to grow their own book of business.  Setting aside whether nano-specific insurance products are necessary in light of the existence of CGL policies and other broad coverages which already encompass risks arising from nanotechnology, some insurers are marketing specialty products geared toward the nanotechnology market. 

For instance, Lexington Insurance Company recently introduced “LexNanoShield,” which is being marketed as “integrated liability coverage and an array of risk management services to help those insureds manufacturing, distributing, or using nanoparticles or nanomaterials assess and manage their products liability exposures.”  Lexington Insurance Chartis, “LexNanoShield,” LEXCASHS118 250 3/10 (March 2010).  Other insurers will no doubt come out with competing products as nanotechnology continues to grow.

If during the Policy Period . . . an insured becomes aware of circumstances which could give rise to a claim and gives written notice of such circumstances to the [Insurer], then any claims subsequently arising from such circumstances shall be considered to have been made during the Policy Period . . . in which the circumstances were first reported to the [Insurer].

Waiver is the voluntary relinquishment of a known right.  Although the law across the country continues to be mixed, the rule in some states is that, if an insurance company does not timely raise an issue or defense, such as stating all grounds upon which it may refuse to indemnify an insured in a reservation of rights letter, it may waive that issue or defense.  See July 20, 2010 blog post by Ty Childress regarding the Georgia Supreme Court decision in World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., S10Q341 (Ga. May 3, 2010).  In addition to losing the right to make certain arguments against its policyholder or assert certain defenses to coverage, an insurance company also may, by its conduct, lose its subrogation rights.  A California appellate court recently found that an insurance company impliedly waived its subrogation rights, and it must “lie in the bed it made.” 

In Essex Insurance Company v. Richard Heck, F058139 (Ca. 5th App Div. July 29, 2010), the insurance company provided a defense to a defendant in a personal injury action who was not its insured, but did not raise that issue until after an adverse judgment had been entered against that person.  Three lawsuits (including the personal injury action) eventually were filed involving the insured, the purported insured, and others, including a bad faith lawsuit against the insurance company.  The insurance company entered into a settlement agreement with the purported insured, the named insured, and the injured party.  The settlement covered all three suits.  The insurance company paid one lump sum, but did not identify its insured or allocate a specific amount to any particular suit or claim.  Because of the settlement, the issues of who was an insured under the policy, and exactly how much was paid to settle the personal injury suit (as opposed to the two other suits), were never resolved.  The insurance company was substituted in as a defendant in the personal injury suit in place of the named insured with whom it had settled, and the insurance company then filed a cross-complaint based on equitable subrogation trying to recover the entire settlement from the co-defendant doctor in the personal injury suit. 

Affirming the trial court’s grant of summary judgment in favor of the doctor, the Court of Appeal of the State of California, Fifth Appellate Division, found that the insurance company’s conduct amounted to an implied waiver of its subrogation rights against the doctor.  Without an identification of the insured and an allocation of what sums were paid for each settled lawsuit, the agreement “left unsettled into whose shoes [the insurance company] was stepping,” (i.e., the purported insured or named insured), and “what was being paid to compensate each claim.”  The insurance company offered to produce evidence of its intent in entering into the settlement agreement to prove those things, but the court rejected that offer, finding that it would be inequitable to allow the insurance company to offer such evidence, thereby forcing the doctor to try to “establish something that cannot be proven.”

Policyholders are smart to focus on the actual grounds raised in reservation of rights letters, and to be diligent about not permitting an insurer to “switch horses in mid-stream” by belatedly trying to assert new coverage defenses.  Similarly, parties being pursued by an insurance company supposedly asserting subrogation rights also should examine whether there may have been a waiver of those rights.

In the Southern District of Indiana case, Bernstein v. Bankert, No. 1:08-cv-0427, 2010 US Dist. LEXIS 24329 (Mar. 16, 2010), the Court declined to grant summary judgment to Auto-Owners Mutual Insurance Company (“Auto-Owners”), when Auto-Owners argued the underlying environmental claims against the policyholder were barred by the Indiana Code’s statute of limitation and/or res judicata.

This is a case involving recovery of environmental response costs and other damages under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”).  This CERCLA case has a long history, involving a number of pollution sites resulting from Enviro-Chem Corporation’s (“Enviro-Chem”) business operations.  Previous judgments in 1984 for two of the sites excluded insurance coverage.  Later, a third site was located and a remedy ordered.  The plaintiffs, trustees of the third site, sought reimbursement of the clean-up costs for this third site under a number of Enviro-Chem’s insurance policies, including several that mirrored the policies involved in the 1984 action. 

Auto-Owners moved for summary judgment.  Auto-Owners argued that it had no obligation to provide reimbursement for the clean-up costs of the third site for several reasons.  First, Auto-Owners claimed that there could be no liability to indemnify, as the policyholder, Enviro-Chem, was dissolved in 1987, and, thus, all claims made subject to a 2-year statute of limitations pursuant to Indiana Code § 23-1-45-7.  Auto-Owners also argued that the earlier 1984 judgments barred plaintiffs’ instant action.

The Court disagreed with Auto-Owners on both counts.  First, the Court held that the plaintiffs were not time-barred under Indiana Code § 23-1-45-7. Section 23-1-45-7 applies a two-year SOL for voluntarily dissolved corporations.  Enviro-Chem did not dissolve voluntarily, however, but rather was administratively dissolved pursuant to a different Indiana Code provision that did not contain the two-year limit on liability.  Second, the Court determined that Auto-Owners’ defense of res judicata was inapplicable because there existed material issues of fact as to whether the previous judgments contained within their scope contamination of the third site.  Thus, the Court could not summarily rule that the insurers had no coverage obligations relating to the clean-up of the third site.

In Clarendon America Ins. Co. v. North American Capacity Ins. Co., Case No. E048176 (Fourth Appellate District, Div. Two, July 7, 2010), the Court of Appeal reversed a trial court entry of summary judgment in favor of defendant insurer North American Capacity (NAC) concerning the application of the policy’s self-insured retention (“SIR”) clause and the insured’s reasonable expectation of coverage. 

 The case involved a construction defect action that eventually included 43 homes and 73 homeowners in a large housing development.  The builder, Tanamera Homes, tendered its defense to both Clarendon and NAC, as the consecutive general commercial liability insurance providers for the development.  Although the parties eventually agreed that NAC was only responsible for the 8 homes completed after the inception of its policy, NAC refused to provide a defense claiming that the insured had not paid the SIR of $25,000 “per claim,” which it insisted applied for each home in the action.  After providing a defense to Tanamera, Clarendon sued NAC for contribution.

NAC successfully moved for summary judgment, arguing that it did not have a duty to defend because the insured never paid the applicable SIR.  Pursuant to NAC’s policy, NAC had “no duty to defend or indemnify unless and until the amount of the ‘Retained Limit’ is exhausted.”  Additionally, the policy stated that the SIR “applies to each and every claim made against any insured, to which this insurance applies, regardless of how many claims arise from a single ‘occurrence’ or are combined in a single ‘suit.’”  NAC argued that each home was a separate claim, and, thus, it had no duty to defend until Tanamera paid its SIR of $200,000 (8 homes at $25,000 each).

 The Court of Appeal reversed the trial court’s decision, determining that NAC had failed to show that the term “claim,” in its ordinary and popular sense, could only have referred to each and every home in the defect action.  The court held that the policy definitions, and use of the word “claim” throughout the policy, could lead to varying conclusions about whether a suit involving many homes could represent a single claim.  The court based its decision on the fundamental principal that contract interpretation must reflect the “mutual intention” of the parties.  The mutual intent must first be derived solely from the written provisions of the contract, in their “ordinary and popular meaning.”  If ambiguity is found, the terms can be resolved in the insureds’ favor, but only to the extent consistent with the insureds’ objectively reasonable expectations. 

 Next, in the absence of a compelling interpretation of claim, the court turned to whether NAC had shown that Tanamera could not have reasonably expected a single SIR payment to apply to multiple homes in a single suit.  The court held that NAC had not offered any evidence of whether or not Tanamera had a reasonable expectation that the SIR would apply only once for a multi-home construction defect action. 

 Moreover, the court suggested that if Tanamera believed this insurance policy covered all 450 homes in the development, an expectation of a single SIR payment in a multi-home suit was reasonable.  Indeed, the court pointed out, the alternate conclusion offered by NAC – that Tanamera paid $404,320 in premiums for just $2 million in coverage that, in the event of a development-wide suit, would only take effect after $11.25 million in SIR payments – seems like the far less reasonable expectation.

In World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., S10Q341 (Ga. May 3, 2010), the Georgia Supreme Court held that an insurer waives its right to deny defense or indemnity obligations if it fails to timely reserve rights and that the policyholder need not show prejudice for that rule to apply.

 In World Harvest, the World Harvest church was a defendant in an underlying action in Illinois involving the recovery of donated funds which had originated from an illegal financial scheme.  The church tendered the claim to its insurer, GuideOne, and (for some unknown reason) a sister company of GuideOne responded denying coverage for the Illinois action.  In the meantime, the Illinois court had dismissed the action on personal jurisdiction grounds.

 After the dismissal of the Illinois action, the underlying plaintiff brought an identical action in Georgia.  In response to World Harvest Church’s tender of the Georgia action, GuideOne actually defended the action for nearly a year before denying the claim and instructing appointed counsel to withdraw from the case.  Ultimately, summary judgment was entered against the insured in the underlying case and the case was settled for $1,000,000.

 Saddled with the $1,000,000 judgment, World Harvest Church brought an action against GuideOne seeking coverage for the judgment.  The insurer argued that its prior denial of the Illinois action, as well as oral comments by its adjuster to the policyholder questioning the availability of coverage for the Georgia action, sufficed as a legally adequate and timely preservation of rights.  The insurer further argued that the policyholder could not have been prejudiced by any delay given the claim was not covered.

 The Georgia Supreme Court rejected both of the insurer’s arguments.  While it did not reject the possibility of an oral reservation of rights being potentially legally effective, the Court found that the insurer’s statements and conduct were ambiguous.  Therefore, the Court held, the insurer was estopped from raising any coverage defenses given it had retained counsel and controlled the underlying defense.  The Court further rejected the insurer’s argument that the policyholder must show prejudice from the insurer’s actions.  Instead, the Court found that prejudice is presumed in those circumstances.

There continue to be differing decisions across the country regarding the effects of an insurer’s delays in timely reserving rights, including whether the policyholder must show prejudice before an insurer’s coverage defenses for indemnity will be deemed waived.  Here, the Georgia Supreme Court gave policyholders a substantial victory by finding a conclusive presumption of prejudice that prevents an insurer from seeking to avoid the legal effects of its delays in informing the policyholder of its coverage position.

Commercial umbrella policies typically provide two types of liability coverage.  Like excess policies, umbrella policies provide additional coverage in the event that the limits of the underlying primary policy are exhausted.  What makes such policies unique, however, is that they also provide coverage for claims or suits that are not covered by primary insurance but are covered under the terms of the umbrella policies.  In those instances, an umbrella insurer is supposed to “drop down” to provide primary coverage to the insured.  

While primary insurers are obligated to provide a duty to defend against suits that are potentially covered by the policy, many umbrella liability policies contain language stating that their defense obligation is only triggered if the claim or suit is “covered” by the umbrella policy and not “covered” by the underlying primary insurance.  As a result, many umbrella carriers try to avoid providing a defense unless it is clear that the underlying claim is “actually covered” under the terms of the policy. 

In Legacy Vulcan Corp. v. Superior Court, 185 Cal. App. 4^th 677 (June 11, 2010), the California Court of Appeal rejected this interpretation and confirmed that an insured does not have to show that a claim is actually covered under an umbrella policy to trigger the umbrella insurer’s duty to defend.  Instead, the umbrella insurer has a duty to defend if there is a potential for coverage under the policy.  The Legacy court confirmed that where umbrella coverage “drops down” and functions like primary insurance, “the ordinary rules regarding a duty to defend in connection with primary liability coverage apply.”  

The “ordinary rules” governing a primary insurer’s duty to defend are well-known.  A duty to defend arises if the facts alleged in the complaint, or other facts known to the insurer, potentially could give rise to coverage under the policy.  The facts need only “raise the possibility” that the insured will be held liable for covered damages.  Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 304 (1993).  “Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured’s favor.”  Id. at 299-300.  “If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer’s duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage.”  Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 655 (2005).  

Thus, it is now clear that under California law, umbrella policies that drop down to provide primary coverage must provide a defense if any of the claims are potentially covered by the umbrella policy and are not within the coverage of the underlying insurance.

In dealing a blow to the insurance industry, the California Supreme Court, in Minkler v. Safeco Ins. Co., recently held that the existence of a “separate insurance” clause in a homeowners’ policy precluded the insurer from asserting the policy’s intentional acts exclusion to deny coverage for the mother (the named insured) based on the alleged intentional conduct of the son (also deemed “an insured” because he was a relative resident of the named insured’s household).  Specifically, the Supreme Court answered “no” to the certified question asked by the United States Ninth Circuit Court of Appeal: “Where a contract of liability insurance covering multiple insureds contains a severability clause, does an exclusion barring coverage for injuries arising out of the intentional acts of ‘an insured’ bar coverage for claims that one insured negligently failed to prevent the intentional acts of another insured?”

In 2003,  Scott Minkler sued Betty Schwartz and her son David,  alleging that David,  Scott’s Little League coach, had sexually molested Scott over a period of several years.  Scott asserted multiple causes of action against David, including sexual battery and intentional infliction of emotional distress.  Scott also asserted a cause of action for negligent supervision against Betty, based on allegations that David molested Scott in Betty’s home with her knowledge and that she failed to take reasonable steps to stop her son from doing so.  Scott’s lawsuit was tendered under a series of homeowners policies issued by Safeco.  In response to the tender, Safeco cited the intentional acts exclusion to deny the claim as to both David and Betty.  Specifically, Safeco argued that its policy did not cover the named homeowner, Betty, for liability stemming from the intentional sexual molestation committed by her son.  Safeco claimed that the policy excluded coverage for intentional acts of “an insured” and since David was an insured because he was a relative resident in Betty’s house, there was no coverage under the homeowner’s policy.

Justice Marvin Baxter, writing for the unanimous Supreme Court, disagreed and stated that the policy was unclear because it contained a severability-of-interests clause that provided “separate insurance” to each insured.  The high court reasoned that under California law, ambiguous insurance contract terms must be interpreted in favor of what a policyholder would reasonably expect and thus, concluded that “a reasonable interpretation of the severability language simply contradicts any inference that a coverage exclusion for the intentional acts of ‘an insured’ — i.e., one insured among several — would bar coverage for all others, such that all must sink or swim together.”  “The severability clause stated that ‘[t]his insurance‘ (italics added) was ’separately’ applicable to ‘each insured.’  The broad reference to separate application of ‘this insurance’ suggested . . . that each person the policies covered would be treated, for all policy purposes, as if he or she were the sole person covered — i.e., that in effect, each insured had an individual policy whose terms applied only to him or her.”  (Emphasis in original.)

Although coverage for David’s intentional acts was properly denied, Betty “had no reason to expect that David’s residence in her home, and his consequent status as an additional insured on her homeowners policies, would narrow her own coverage, and the protection of her separate assets, against claims arising from his intentional acts.”

In a recent New Jersey appellate decision entitled Somerset Med. Ctr. v. Exec. Risk Indem., Inc., 2010 N.J. Super. Unpub. LEXIS 605, A-6214-08T2 (App.Div. Mar. 22, 2010), the court was faced with the question of whether a bodily injury exclusion in Somerset Medical Center’s directors and officers liability insurance policy excluded coverage for the negligent hiring and supervision of a nurse who pled guilty to committing numerous murders while in the employ of Somerset.  More specifically, nurse Charles Cullen pled guilty to approximately twenty-nine murders (and six attempted murders) of patients at various health care facilities, including the Somerset facility.  Lawsuits against Somerset and its officers then followed, alleging “negligent hiring, negligent supervision and entrustment, negligent reporting, and negligent continuation of employment.”  Id. at *2.

The insurer sought to avoid coverage pursuant to an exclusion in the policy for claims “based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged bodily injury…disease or death of any person….”  Id. at *5.   According to the insurer, phrases such as “arising out of” and “in any way involving” are so broad that they necessarily encompassed the underlying claim, insofar as the claim related to the murders of Somerset’s patients. 

However, the court rejected the insurer’s argument, stating as follows:

 “[T]he origin of the underlying lawsuits as they relate to Somerset is not the death or physical injury of patients placed in Cullen’s care while a nurse at Somerset. Instead, it is the acts and omissions of Somerset’s officers that resulted in the allegations of negligence.”

Id. at *19.

This decision serves as a key reminder that underlying allegations need to be carefully analyzed when determining the application of an exclusion—and that exclusionary phrases often relied on by insurers, such as “arising out of” and “in any way involving,” must be construed narrowly.  While the opinion is not for publication, it contains an informative analysis of New Jersey case law supporting the result.