2023 Coverage Report

FMG Insurance Coverage Annual Report A summary of the year’s important insurance coverage and extra-contractual cases within FMG’s footprint across the country. 2023

Contents Arizona -3 California -6 Colorado -11 Connecticut -15 Florida -19 Georgia -23 Illinois -27 Indiana -34 Kentucky -37 Massachusetts -42 Michigan -45 Minnesota -48 New Jersey -52 New Mexico -54 New York -57 Ohio -59 Pennsylvania -64 Rhode Island -67 South Carolina -70 Tennessee -75 Texas -78 Washington -82 Wisconsin -87

www.fmglaw.com © Freeman Mathis & Gary Megan Ritenour Prepared by: Arizona Page 3

www.fmglaw.com © Freeman Mathis & Gary Swift Transportation Co. of Arizona, LLC v. Carmen The plaintiffs brought a negligence action under a theory of respondeat superior against Swift Transportation, whose employee was alleged to have caused a fatal traffic accident due in part to that employee operating his semi-truck on cruise control in rainy conditions. In conjunction with the negligence action, the plaintiffs filed a motion on prima facie case of punitive damages, seeking discovery of Swift Transportation’s financial records. Citing to several factors, including that the employee had been trained it was dangerous to drive in the rain and “knew driving with an empty trailer makes the truck less stable and more likely to hydroplane … and he did not slow down as he went downhill and around a curve in the rain immediately prior to the collision”, the Superior Court granted the plaintiffs’ motion. On appeal, the Arizona Supreme Court held that “a plaintiff must establish that there is a reasonable likelihood that the punitive damages claim will be submitted to the jury.” The Court also held that “a punitive damages claim will be submitted to the jury only where there is proof that the defendant’s conduct was either intended to cause harm, motivated by spite or ill will, or outrageous, in which the defendant consciously pursued a court of conduct knowing that it created a substantial risk of significant injury to others.” The Arizona Supreme Court addressed the standard of proof applicable to “establishing a prima facie case for punitive damages necessary to justify the discovery of a defendant’s financial information.” 253 Ariz. 499, Supreme Court of Arizona, filed August 23, 2022 Extending this ruling to an insured’s claim against an insurer for common law bad faith in which that insured seeks punitive damages, Arizona law permits an insured to conduct discovery of an insurer’s financial information only where the insured has proof that the insurer’s conduct was intended to cause harm, motivated by spite, or outrageous. As stated by the Court, “a plaintiff must establish that the defendant knew, or intentionally disregarded, facts that created an unreasonable risk of physical harm—a risk substantially greater than that necessary to make his or her conduct negligent or even grossly negligent—and consciously disregarded that risk”. As applied to the facts of the case before it, the Court ruled that while the employee’s acts and/or omissions may have been negligent, or even grossly negligent, they did not rise to the sort of outrageous conduct required to establish an “evil mind.” There was no evidence showing that the employee “consciously pursued a course of conduct knowing that it created a substantial risk of significant harm to others.” As such, the Court found that plaintiffs failed to make a prima facie case for punitive damages. Page 4

www.fmglaw.com © Freeman Mathis & Gary Kay Franklin v. CSAA General Insurance Company In Franklin, the plaintiff’s mother died in a vehicle collision caused by a negligent driver who was underinsured. The plaintiff submitted a UIM claim to her mother’s insurer, CSAA, which policy covered two vehicles and provided $50,000 of UIM coverage “per person.” While CSAA paid out $50,000 in UIM coverage, the plaintiff argued that she was entitled to stack $50,000 per vehicle, for total coverage of $100,000. In support of her argument, the plaintiff asserted that CSAA failed to comply with the anti-stacking provision requirements of § 20-259.01(H), which voided the Policy’s attempt to limit intra-policy stacking. A.R.S. § 20-259.01 (H) provides, in relevant part: “If multiple policies or coverages purchased by one insured on different vehicles apply to an accident or claim, the insurer may limit the coverage so that only one policy or coverage, selected by the insured, shall be applicable to any one accident. If the policy does not contain a statement that informs the insured of the insured’s right to select one policy or coverage as required by this subsection, within thirty days after the insurer receives notice of the accident, the insurer shall notify the insured in writing of the insured’s right to select one policy or coverage.” The Arizona Supreme Court ruled that, “to limit stacking under subsection (H), insurers must (1) expressly and plainly limit stacking in the policy and (2) satisfy the notice requirement informing the insured of their ‘right to select one policy or coverage’ either in the policy itself or in writing to the insured within thirty days after the insurer is notified of the accident.” The Arizona Supreme Court issued a ruling holding that, pursuant to A.R.S. § 20-259.01, a single auto insurance policy that insures multiple vehicles provides different underinsured motorist (“UIM”) coverages for each vehicle. No. CV-22-0266-CQ, Supreme Court of the State of Arizona, filed July 28, 2023 Intrinsic in the Court’s ruling is their finding that a single policy covering multiple vehicles constitutes multiple coverages. According to the Court, interpreting § 20- 259.01 and its legislative history to “support a broad interpretation of ‘coverages purchased’ that recognizes a separate UIM coverage ‘purchased’ for each vehicle in a multi-vehicle policy” conforms to the Act’s object to afford insurance coverage. In the Opinion, the Court also held that “by its plain language and non-stacking function,” § 20-259.01(B) “does not bar an insured from receiving UIM coverage from the policy in an amount greater than the bodily injury or death liability limits of the policy.” Citing the statute language, the Court held that while an insurer is obligated to sell UIM coverage “’in any amount’ the insured authorizes ‘up to the liability limits for bodily injury or death contained within the policy,’” the language of § 20-259.01(B) does not “statutorily proscribe UIM coverage in excess of those limits.” Thus, an insured can have greater UIM coverage under a policy than its limits for bodily injury. Page 5

www.fmglaw.com © Freeman Mathis & Gary Al Alikin Mike Gelfound Nick Directo Will Hadikusumo Betty Su Tyler Lindberg Prepared by: California Page 6

www.fmglaw.com © Freeman Mathis & Gary Bennett v. Ohio National Life Assurance Corp. In this case, the California Court of Appeal considered when the 4-year breach of contract and 2-year bad faith statutes of limitation began running in an insured’s action against his disability insurer. The appellate court reversed and remanded the trial court’s ruling, concluding the trial court erred in holding these causes of action accrued when the insurer issued its denial letter on June 8, 2015. Instead, the Court of Appeal agreed with the insured that accrual commenced when the disability insurer ceased paying benefits on September 3, 2018, because that is when all the elements of these causes of action (including actual damages) were present. The coverage dispute centered on whether Bennett was entitled to lifetime or time-limited monthly disability payments. As the court described it, the policies each provided “a maximum benefit period, the ‘longest period of time that Income will be paid for one Disability or for a combined period of Residual and Total Disability from the same or related cause.’ ” If Bennett’s total disability either “(a) starts before Age 55 due to Sickness; or (b) starts before Age 65 due to Injury,” then he would be entitled to lifetime benefit payments. If his total disability due to sickness started on or after age 55, his benefit payments would end at age 65. Therefore, the main coverage issues were when Bennett became totally disabled and whether this disability was due to injury or sickness. Bennett alleged that he was thrown from a horse at age 53 in 2006, injuring his left shoulder and collarbone. The California Court of Appeal held that the statutes of limitations for breach of contract and bad faith claims against a disability insurer accrued not when the insurer issued its denial letter but when the insurer ceased paying benefits since that is when all the required elements for breach of contract (including actual damages) were satisfied. 92 Cal.App.5th 723(2023) After surgery to repair the injuries, he experienced ongoing numbness and tingling in his left hand. Through accommodations, medication, and physical therapy, he was able to continue work until eventually developing chronic pain in his left hand. By 2012, he reduced his surgeries and patient load, and ceased to work entirely in 2014. The claim he filed with Ohio National asserted his condition developed from that 2006 accident. Ohio National initially approved the claim in a letter dated April 2014 and issued benefit payments beginning January 2, 2014, subject to its continuing evaluation of the case. In a June 8, 2015 letter, Ohio National unconditionally denied Bennett’s claim for lifetime benefits, stating Bennett’s condition was due to sickness (that is, “a degenerative disc disease” that caused the left-hand tingling and numbness) rather than injury and his total disability began after age 55. Based on Ohio National’s June 2015 conclusions, the benefit payments would end “on the first day of the policy year upon reaching age 65 — September 3, 2018.” After unsuccessfully asking Ohio National to change its decision, Bennett sued Ohio National in August 2019, alleging breach of contract and “bad faith.” The trial court granted Ohio National’s motion for summary judgment that the statutes of limitation barred the claims because the time on those began running on June 8, 2015. The Court of Appeal reversed, determining that Bennett was not “damaged” as required to state a claim for breach of contract and bad faith until Ohio National ceased paying him benefits on September 3, 2018. Page 7

www.fmglaw.com © Freeman Mathis & Gary Dua v. Stillwater Ins. Co. The homeowner, Dua, initiated legal proceedings against Stillwater Insurance Company (“Stillwater”), her homeowner insurance carrier. Her allegations included breach of contract and related claims, all stemming from Stillwater’s refusal to defend her in an underlying action. The underlying action itself involved damages caused by pit bull dogs attacking the plaintiff’s dogs. The claim further asserted that Dua had a duty to prevent the dogs, owned by her then-boyfriend, from attacking the plaintiff’s dogs. The Stillwater policy issued to Dua included the following Animal Liability Exclusion: “This insurance does not apply to any occurrence or damages caused by any animal, at any time, at any premises insured hereunder, or caused by, arising out of, or in any way related to any animal owned by or in the care, custody, or control of the insured, or any member of the insured’s family or household.” Dua tendered the defense of the action to Stillwater. In tendering the defense, she explicitly informed Stillwater that she did not own the dogs and that her boyfriend was responsible for their care, custody, and control at the time of the dog attack as he was walking them. Stillwater reviewed the underlying complaint and concluded that the exclusion applied due to the allegation that the pit bulls resided at the insured's home, which they believed could cause the claims to fall within an animal liability exclusion. Consequently, Stillwater believed there was no obligation to defend or indemnify an excluded claim. Despite Dua’s denial of ownership or control of the pit bulls, asserting that they belonged to her boyfriend who did not live at her home, Stillwater maintained its position. The California Court of Appeal reversed the trial court’s order finding that a homeowners’ insurer owed no duty to defend an action arising out of a dog attack based on an Animal Liability Exclusion. In so doing, the Court of Appeal held that the insured had presented extrinsic facts about her lack of ownership of the dogs in question that would, if true, possibly give rise to a covered claim. 91 Cal.App.5th 127 (2023) Dua eventually settled the underlying action and, in September 2018, initiated a lawsuit against Stillwater. She contended that Stillwater failed to conduct a thorough investigation into the claims against her in the underlying lawsuit. Dua also alleged that Stillwater neglected to defend her in the action and cover her settlement due to an "unreasonable and narrow" interpretation of the policy. In response, Stillwater filed a motion for summary judgment, which the trial court granted. The court determined that because Dua's liability could only be established based on facts triggering the Animal Liability Exclusion there was no duty to defend since there was no possibility of coverage. The California Second District Court of Appeal reversed the trial court’s entry of summary judgment. The Second District held that “Stillwater ignored the facts provided by Dua suggesting that the policy's animal exclusions did not apply because she did not own the dogs, nor were they in her care, custody, or control. The duty to defend exists where extrinsic facts, both disputed and undisputed, that the insurer knows or becomes aware of from any source at the time of the inception of the third party lawsuit or at the time of tender, suggest there may be coverage.” The Second District further opined that, “there is no evidence that Stillwater took any measures to investigate or otherwise negate the facts suggesting that an animal liability exclusion may not apply and there was potential coverage, and therefore it had a duty to defend Dua.” As the Court noted, an insurer can be excused from the duty to defend “only when the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.” Hartford Casualty Ins. Co. v. Swift Distribution, Inc., 59 Cal.4th 277, 288 (2014). The Court found that Stillwater had not established that there was no conceivable theory to bring the third party complaint within the possibility of coverage, and the facts Dua provided to Stillwater suggested that there may be coverage. This case is a good reminder that California law is quite broad as to the duty to defend and investigate claims. Page 8

www.fmglaw.com © Freeman Mathis & Gary Infinity Select Ins. Co. v. Superior Court In this case, Infinity Select Insurance Company issued an automobile liability policy to an individual with liability limits for bodily injury of $25,000 for each person and $50,000 for each accident. An insured driver collided with two other vehicles, causing significant injuries to the people in one of the vehicles, including one fatality. The injured parties filed a lawsuit against the named insured and driver of the insured vehicle, alleging negligence and wrongful death. In that action, the plaintiffs alleged that the insured was a motor carrier of property that required a minimum limit of $750,000 for the protection of the public under the Motor Carriers of Property Permit Act (MCPPA). Plaintiffs made a 998 Offer for $750,000 which was not accepted. The action settled with the parties agreeing that “(1) plaintiffs’ overall damages total $3,565,995.23; (2) plaintiffs would dismiss the prior action; (3) plaintiffs would be assigned [the insureds’] claim against Infinity for bad faith failure to settle; and (4) plaintiffs could pursue their legal claims against Infinity to establish Infinity’s liability for damages in excess of its stated policy limits without having to secure a judgment against [the insureds].” The parties also stipulated that, inter alia, the insured was a motor carrier of property. The trial court found that the insureds were required to carry the minimum motor carrier limits of $750,000; thus, the court ordered reformation of the automobile liability policy. The Court of Appeal in California held that the trial court erred in reforming an auto policy to increase its limits from $50,000 to $750,000, thereby converting it from a personal to a commercial auto policy. The Court stated that an insured bears the responsibility of obtaining adequate insurance and policy limits and the insurer is not required to provide more insurance coverage than requested by the insured. 94 Cal.App.5th 190(2023) Infiniti filed a writ of mandate to vacate the trial court’s ruling and declare that Infinity’s policy limit was $50,000. The appellate court found that a commercial highway carrier “bears the ultimate responsibility for maintaining adequate liability coverage.” The court went on to explain that an insurer does not owe an insured a duty to provide greater coverage than requested by the insured; rather, “[i]t is the insured’s responsibility to advise the agent of the insurance he wants, including the limits of the policy to be issued.” Jones v. Grewe, 189 Cal. App. 3d 950, 956 (1987). Accordingly, the appellate court declared that Infinity’s policy limit was $50,000 and issued a peremptory writ of mandate that vacated the trial court’s rulings and remanded the case to the trial court to make a new ruling that was consistent with the appellate court’s opinion. Page 9

www.fmglaw.com © Freeman Mathis & Gary Rosenberg-Wohl v. State Farm Fire and Casualty Company A homeowner filed a claim with her homeowner’s insurer after the homeowner replaced a staircase in her home. The insurer denied the claim on the ground that there was no accidental physical damage to the property that would trigger coverage. Approximately a year after the initial denial, the insurer reopened the claim at the request of the homeowner’s husband and, following further investigation, again denied the claim. The policy at issue had a “Suit Against Us” provision that provided as follows: “No action shall be brought unless there has been compliance with the policy provisions. The action must be started within one year after the date of loss or damage.” Plaintiff filed two actions, one for breach of the policy and breach of the implied covenant of good faith and fair dealing, and one for injunctive relief under the Unfair Competition Law (“UCL”). The first action was removed to federal court, where it was dismissed based on the one-year limitation period in the policy. In the operative complaint in the second matter, Plaintiff expressly stated that she was not seeking money damages and was instead only seeking injunctive relief and attorney’s fees. The insurer filed a demurrer on the ground that Plaintiff’s action was time-barred. In opposition, Plaintiff argued that the insurer had waived its limitations period defense by reopening the claim, and that because the action was not for breach of contract, the UCL’s four-year statute of limitations applied. The California Court of Appeal held that a one-year contractual limitation provision in a homeowner’s policy barred the insured’s purported UCL action—which was actually a bad faith action arising from the contract. The Court further held that the insurer did not waive the contractual limitation period by re-opening the claim after the limitation period had run. 93 Cal.App.5th 436(2023) The trial court sustained the insurer’s demurrer to the complaint without leave to amend, finding that the one-year limitation period in the policy applied to the plaintiff’s UCL cause of action and that the insurer did not waive the limitations period by re-opening the claim. Judgment was entered in favor of the insurer, and the plaintiff appealed. On appeal, the Court of Appeal, First District, affirmed the trial court’s ruling, holding that the one-year limitations period applied because, although Plaintiff labeled the cause of action a UCL claim, it was in fact a bad faith cause of action that arose out of the contractual relationship, and therefore the contractual limitations period applied. The Court of Appeal further held that there was no waiver when the insurer reopened the claim more than a year after the first loss. The Court cited longstanding case law that holds that conduct by the insurer after the limitation period has run cannot, as a matter of law, amount to a waiver or estoppel. The Court held that there was no waiver in writing, as required by the policy, and that there was no authority to support plaintiff’s arguments that waiver was implied. Page 10

www.fmglaw.com © Freeman Mathis & Gary Lorne Hiller Katie Morsman Prepared by: Colorado Page 11

www.fmglaw.com © Freeman Mathis & Gary Farmers Ins. Exch. v. Kretzer Nathan and Alicia Kretzer, a married couple, purchased an auto policy (“Policy”) with Farmers Insurance Exchange (“Farmers”). However, after issues arose during the underwriting process, the Policy was modified to exclude Alicia Kretzer from coverage. The modified policy contained a “Named Driver Exclusion Endorsement” and the Declaration page of the policy identified Alicia as an “excluded driver.” There were two insured vehicles under the Policy, a 2012 Jeep Wrangler and a 2015 Subaru Forester. Sometime after Nathan Kretzer entered into the Policy with Farmers, Alicia Kretzer was severely injured in a car wreck. Alicia was driving a separately insured 2016 Jeep Patriot when she was hit by an underinsured motorist. The underinsured motorist’s insurance covered only a small portion of Alicia’s damages, so the Kretzers made a claim against Farmers to recover the remainder of Alicia’s damages under Nathan’s Policy for UM/UIM and Medpay benefits for Alicia. Farmers denied coverage maintaining that the Named Driver Exclusion Endorsement expressly excluded Alicia from coverage, and then filed a declaratory judgment action seeking a determination that Farmers did not owe Alicia coverage under Nathan’s Policy. The Court eventually granted Farmers’ motion for summary judgment, holding that Alicia was expressly excluded from coverage and Farmers did not need to provide UIM and Medpay coverage to Alicia. The Kretzers appealed the district court’s grant of summary judgment to Farmers. In their first argument, the Kretzers claimed that the Policy was ambiguous because it was “susceptible to more than one interpretation: (1) the exclusion barred Alicia from just liability coverage or (2) it barred her from all coverage, including liability, UM/UIM, and Medpay.” To that end, in the Policy, Part I addresses liability coverage, Part II addresses UM/UIM coverage, and Part III addresses Medpay coverage. The Court of Appeals of Colorado held that a driver’s exclusion found in an endorsement applied to the entirety of the Policy, excluding the insured’s wife from coverage. 2023 COA 94, 2023 WL 6470575 (Colo. App. Oct. 5, 2023) While the definition applying to all three parts defined an “insured person” as “any family member of the named insured—Nathan,” Part I was the only Part of the Policy that expressly states “that an ‘[i]nsured person does not mean. . . [a]ny named excluded driver.’” Id. The Kretzers argued that this meant that Alicia was only excluded from liability coverage under Part I. The Court of Appeals disagreed, citing the language of the “Named Driver Exclusion Endorsement.” The “Named Driver Exclusion Endorsement” states that “this endorsement is part of the policy. It changes the policy so please read it carefully.” The Endorsement names Alicia Kretzer under “persons restricted” and stated, with emphasis added by the Court, that: In consideration of the premium, it is agreed that all coverage for bodily injury, loss or damages afforded by this policy and all liability or obligation of any kind shall not, at any time on or after the effective date shown, apply to the operation or use of any vehicle by the person(s) named above. The Court of Appeals agreed with the district court that this language unambiguously applied to the entire Policy and made Alicia an excluded driver as to any coverage the Policy provided. In their second argument to the Court of Appeals, the Krezters claimed that “pursuant to section 10-4-630(2), named driver exclusions apply only when a claim arises out of the operation or use of an insured motor vehicle listed on the Policy.” Because Alicia was driving a separately insured vehicle, the Kretzers argue that Farmers “wasn’t permitted to exclude her from the policy’s UM/UIM and Medpay coverage.” The Court of Appeals, citing to another division of the Court in Massingill v. State Farm Mutual Automobile Insurance Co., 176 P.3d 816, 819 (Colo. App. 2007), held that this argument was illogical as it would not make sense to allow an insurer to exclude a driver of a covered vehicle “and at the same time require it to cover that person while operating an uninsured vehicle.” Therefore, the Court of Appeals affirmed the district court’s grant of summary judgment to Farmers. Page 12

www.fmglaw.com © Freeman Mathis & Gary Fear v. GEICO Cas. Co. An insured of Geico’s, Marcus Fear (“Insured”), was injured when an underinsured motorist crashed into the Insured’s car. The Insured’s economic losses totaled $21,761, and with Geico’s consent, the Insured ultimately settled with the at-fault driver’s auto insurer for the policy limits of $25,000. Asserting that he had not been made whole by this settlement, the Insured made a claim under the underinsured motorist (“UIM”) benefits in his Geico policy, under- which he had $100,000 in coverage. Setting off the $25,000 the Insured had already received, Geico set aside reserves and an internal “negotiation range” of $2,500 to $9,000 to resolve the Insured’s claim, which consisted of additional non-economic damages claimed by the Insured. Geico initially offered the Insured $2,500, but after reviewing additional medical records, Geico ultimately offered the Insured $4,004 (the new medical records totaled $1,504), in exchange for a release of his UIM claim. Following Geico’s second offer, and after no attempts to negotiate the claim, the Insured filed suit, claiming an unreasonable delay as a first-party claimant in violation of Col. Rev. Stat. Ann. § 10-3-1115, and that he was therefore owed “an additional two times the covered benefits plus reasonable attorney’s fees and court costs” under Col. Rev. Stat. Ann. § 10-3-1116. The Insured based his position on State Farm Mutual Automobile Insurance Co. v. Fisher, 418 P.3d 501 (Colo. 2018), known as Fisher II, which held that the aforementioned statutes “prohibit[] an insurer from withholding payment of undisputed covered benefits owed to an insured simply because other portions of an insured’s UIM claim remain disputed.” As such, the Insured asserted that “the holding in Fisher II compelled Geico to pay him $4,004 without requiring a release because that amount, which corresponded to the minimum of Geico’s negotiation range, was owed under the UIM policy.” The case proceeded to a bench trial, where the trial court permitted testimony from the Insured’s expert witness on the meaning of the adjuster’s negotiation range. In response, Geico pointed to discrepancies in the expert’s testimony, “and maintained that neither its internal evaluation nor its settlement offers amounted to a concession that any The Colorado Court of Appeals opined that it was improper for the trial court to consider Geico Casualty Company’s (“Geico”) internal evaluation of a UIM claim to measure its insured’s “undisputed” noneconomic damages. The Court likened the insurer’s internal evaluation to a settlement offer which cannot be admitted as evidence to prove the amount of a disputed claim. 532 P.3d 382 (Colo. App. 2023) portion of [the Insured’s] claim for UIM benefits was ‘undisputed,’ and thus subject to a Fisher payment.” Further, Geico objected “to the court’s consideration of its internal claim evaluation, arguing that it was inextricably intertwined with its settlement offers and thus did not constitute an admission of undisputed amounts owed.” The trial court ultimately found in the Insured’s favor and awarded the statutory penalties under Colo. Rev. Stat. Ann. § 10-3-1116. On appeal, Geico argued that the trial court had “erred by relying on its internal settlement evaluation as a basis for concluding that some portion of [the Insured’s] claimed noneconomic damages was undisputed.” In considering this question, the Court of Appeals observed that unlike economic damages, “noneconomic damages are inherently subjective and thus can be difficult to quantify and determine.” As such, “[i]nternal evaluations like the one that Geico completed in this case are not intended to confine the fact finder to a particular range of damages, or even to inform its decision-making process.” In relying on the Supreme Court of Colorado’s decision in Sunahara v. State Farm Mutual Automobile Insurance Co., 280 P.3d 649 (Colo. 2012), the Court opined that “insurers conduct internal evaluations for the limited internal purposes of setting reserves and determining settlement authority to comply with insurance regulatory standards and to estimate their potential financial liability.” As such, a “fact finder is free to conclude that [a plaintiff’s damages] fell below, within, or above the range that the insurer has targeted for settlement.” The Court also looked to the Colorado Rule of Evidence 408, which like the federal rule, “expressly prohibits admitting into evidence the amount of a settlement offer to prove the amount of a claim that was disputed.” In doing so, the Court held that “relying on an insurer’s internal assessment of noneconomic damages as a basis for calculating ‘undisputed’ damages would run counter to the limitations of CRE 408,” as while “Geico’s internal evaluation of its potential liability was not itself a ‘settlement offer,’ the two were inextricably intertwined, as will be true in virtually every case.” As such, the Court held that it had been inappropriate for the trial court to consider evidence of Geico’s internal evaluation of the Insured’s economic and noneconomic damages in its determination of “undisputed ‘benefits owed.’” The Court therefore reversed the award of statutory penalties under Colo. Rev. Stat. Ann. § 10-3-1116, along with the award of attorneys’ fees and costs. Page 13

www.fmglaw.com © Freeman Mathis & Gary Reynolds v. Great N. Ins. Co. Maria Victoria Reynolds, was involved in a car accident with one of Great Northern’s insureds. On November 4, 2020, following the procedure set out in Colo. Rev. Stat. Ann. § 10-3-1117(2)(a) (“the Statute”), she sent a request to Great Northern seeking the insured’s policy information. As pertinent here, the Statute was added in 2020 and provides that a claimant or their attorney may send a written request to any insurer that provides commercial or personal automobile liability insurance coverage, and within thirty calendar days after receiving the request, the insurer must provide a statement setting forth the following information: “(I) The name of the insurer; (II) The name of each insured party, as the name appears on the declarations page of the policy; (III) The limits of the liability coverage; and (IV) A copy of the policy.” The Statute also provides for a statutory penalty of $100 per day following that 30-day period if an insurer violates the Statute, including attorneys’ fees and costs incurred by a claimant in enforcing the penalty. Here, while Ms. Reynolds sent her request on November 4, 2020, which was received by Great Northern’s registered agent on November 17, 2020, Great Northern did not comply until April 22, 2022. When Ms. Reynolds sued Great Northern on May 4, 2022 for violation of the Statute, Great Northern moved to dismiss, arguing that the one-year statute of limitations applicable to “all causes of action for any penalty” applied to bar Ms. Reynolds’ claim. The district court agreed, holding that Ms. Reynolds’ claim “accrued, and the limitations period began to run, on the thirty-first day – the day following the statutory period allowed to produce the required disclosures.” Therefore, Ms. Reynolds’ claim accrued on December 18, 2020, and the statute of limitations expired on December 18, 2021. In a case of first impression, the Colorado Court of Appeals examined the statute of limitations for bringing a claim for failure to provide the disclosures required by Colo. Rev. Stat. Ann. § 10-3-1117, which requires all motor vehicle insurers to provide policy information to a claimant within thirty days of the request or face a penalty of $100 a day starting the thirty-first day after the request. 2023 COA 77, 2023 WL 5762373 (Colo. App. Sept. 7, 2023) Ms. Reynolds filed an appeal with the Colorado Court of Appeals, arguing instead that “the claim accrues the day after an insurer complies with a request.” The Court first observed that the parties appeared to agree that the one-year statute of limitations on actions for penalties under Colo. Rev. Stat. Ann. § 13-80-103(1)(d) was the correct cause of action to apply to claims under the Statute. The Court then looked to Colo. Rev. Stat. Ann. § 13-80-108(9), which states that “a cause of action for penalties shall be deemed to accrue when the determination of overpayment or delinquency for which such penalties are assessed is no longer subject to appeal.” Applying that language to the Statute, the Court held that the “determination of delinquency – here, not providing the insurance policy – is statutorily established as the thirty-first day after the written request is received by the insurer’s registered agent.” As the Statute “does not provide an appeal process to challenge the imposition or amount of the penalty,” then the one-year statute of limitations period would accrue on the thirtyfirst day after the request was received by the insurer. In rejecting Ms. Reynolds’ argument, the Court also looked to the practical reason that the “day after an insurer complies with a request” may be a “day that never occur[s].” To that end, the Court held that “a noncompliant insurer could escape liability for penalties by never complying with a claimant’s request, as the claim would not accrue, and therefore not exist, until a disclosure occurred.” The Court also rejected Ms. Reynolds’ argument that even if the one-year period applied, the limitations period was actually tolled under the “continuing violation doctrine.” To that end, Ms. Reynolds argued that “each day of an insurer’s noncompliance with the disclosure requirements is to be considered a new, distinct violation with a separate date of accrual….” However, as this doctrine had been limited to discrimination cases in Colorado, the Court declined to apply it here. Page 14

www.fmglaw.com © Freeman Mathis & Gary Edward Storck Prepared by: Connecticut Page 15

www.fmglaw.com © Freeman Mathis & Gary Connecticut Dermatology Grp., PC v. Twin City Fire Ins. Co. In this matter, the plaintiffs were operators of various healthcare facilities in Connecticut. Following orders by the Governor of Connecticut during the Covid-19 pandemic, the healthcare facilities suspended their business operations and claimed losses of business income. The plaintiffs filed claims with their insurance carriers alleging that their business policies covered the losses. The insurance carriers denied the claims and the plaintiffs brought suit seeking a judgement declaring that they were entitled to coverage. The insurance companies filed a motion for summary judgment on the grounds that the claims were excluded from coverage under the virus exclusion in the policy. On appeal, the Defendants offered alternative grounds for affirming the trial court’s decision in that the policies did not provide coverage because there was no direct physical loss of or physical damage to any covered property. In affirming the trial court’s ruling on the motion for summary judgment, the Connecticut Supreme Court agreed with the insurance company’s alternative grounds and, therefore, did not decide whether or not the trial court was correct on the applicability of the virus exclusion. The Court agreed that that the insurance policies at issue did not cover plaintiffs’ claims because the plaintiffs suffered no “direct physical loss of property”. The Court acknowledged that it had not previously construed the specific policy language contained in the “Special Property Coverage Form” previously. However, the considered the meaning behind a similar provision a general liability policy to come to the conclusion that coverage required proof of a direct physical loss of property which clearly and unambiguously means that there was some physical, tangible alteration to or deprivation of property that renders it physically unusable or inaccessible. The Connecticut Supreme Court, in a case of first impression, continued the trend that courts across the nation have followed when it comes to Covid-19 and business interruption/all-risk insurance claims: insureds must show that Covid-19 somehow caused a direct physical or tangible loss to property in order to obtain coverage for a business income loss. 346 Conn. 33 (2023) The court acknowledged the creative argument set forth by the Plaintiffs that the pandemic transformed their business into potential viral incubators that were imminently dangerous to human beings. The Court noted that the record before it did not indicate that there was actually any physical transformation of the property. The court noted that what really happened was that the pandemic caused a transformation in governmental and societal expectations that had a negative impact on the Plaintiffs’ businesses. The court also rejected the Plaintiffs’ argument that physical loss could also be defined loss of the productive use of the property. The court held that loss of the use of property does not necessarily mean the loss of the property itself. If the court allowed loss of use to be a factor, then insureds could seek coverage any time a business experienced a necessary suspension of its operations. The court also rejected the claims that physical loss could be proven because they had to undertake repairs to allow the properties to be used again. Additionally, the court rejected the Plaintiffs’ argument that contamination by the virus was proof of physical loss. In affirming the trial court’s decision, the Connecticut Supreme Court held that the plaintiffs’ interpretation that there was coverage for direct physical loss of property even though there was no physical, tangible alteration of the property, no persistent, physical contamination of the properties rendering them uninhabitable, and no imminent threat of physical damage to or destruction of the properties rendering them unusable or inaccessible was not reasonable. Therefore, there was no genuine issue of material fact that the policies did not provide coverage. Page 16

www.fmglaw.com © Freeman Mathis & Gary Liberty Insurance Company v. Johnson The Plaintiff insurance companies filed a Declaratory Judgment action seeking a judgment that they did not owe a duty to defend their insureds under various insurance policies following a lawsuit filed against the insureds following a motor vehicle accident. In the underlying accident, the insured homeowners allowed their son to drive their vehicle when visibly intoxicated and the son caused an accident injuring the passenger in the vehicle. The underlying lawsuit asserted claims of negligence relating to the operation of the vehicle as well as allowing the son to consume alcohol when already visibly intoxicated. The insurance company filed a Motion for Summary Judgment arguing that no reasonable fact finder could conclude the lawsuit sought damages covered under any of the insurance policies at issue. The insurance company asserted that the homeowner’s policy contained a motor vehicle exclusion, the automobile policy was cancelled prior to the accident, and the umbrella policy did not provide any coverage because there was no coverage in either of the underlying policies. The trial court granted the Motion for Summary Judgment on those grounds. In the appeal of the trial court’s decision, the insureds argued that the trial court improperly granted the motion for summary judgment as to the motor vehicle exclusion in the homeowner’s policy because the court did not look at all the specific allegations of negligence to determine if any specific allegation would be covered, the court erred in relying on case law involving alleged negligence of motor vehicle operators, the court failed to construe the homeowner’s policy from the standpoint of a reasonable layperson, and the duty to defend did exist under the umbrella policy. The Court of Appeals held that insurance companies did not owe a duty to defend its insureds against negligence claims following a motor vehicle accident where there were also allegations of negligence that would not necessarily fall under a motor vehicle exclusion of a homeowners insurance policy. 218 Conn. App. 226 (2023) The basis of the argument by the insureds was that the underlying lawsuit involved allegations of negligence that did not involve the use or ownership of a motor vehicle and, therefore, the court should have found that there was coverage. In affirming the trial court’s decision granting the motion for summary judgment, the court acknowledged that the insured’s argument relating to the trial court’s failure to look at all the specific allegations of negligence was premised on the principle that a duty to defend is triggered if at least one allegation of the complaint even falls possibly within the coverage. However, the Court held that because the operative event that gave rise to the injuries and damage came from the use of a motor vehicle, there was no duty to defend. The court held that this was not a case where it could be argued that the alleged injuries could only have occurred from the negligent supervision of negligent provision of alcohol to a minor. The Court came to the inescapable conclusion that the injuries were connected with, had their origins in, grew out of, flowed from, or were incident to the use of an automobile. The Court rejected the argument set forth by the insureds that there was a lapse in time between the non-motor vehicle related negligent acts and the motor vehicle accident. The Court found that none of the case law it reviewed rested their decisions on the timing of the alleged negligence and the operation of a motor vehicle. Further, the Court held whether there is a duty to defend rests on whether the injury is covered by the policy, not whether the allegations of negligence are so covered. Finally, the court concluded that since there was no coverage under the homeowner’s policy, there was no coverage under the umbrella policy. Page 17

www.fmglaw.com © Freeman Mathis & Gary Jeffery Stewart et al. v. Old Republic National Title Insurance Company This matter involved a lawsuit collectively brought by two separate insureds against a title insurance company for the alleged breach of the title insurance policies for failing to defend and indemnify its insureds in two separate underlying actions. The first underlying action involved a suit against an insured company brought by a plaintiff claiming that the insured obstructed the plaintiff’s use and enjoyment of an easement located on the insured’s property. The insured denied coverage for the first underlying action on the grounds that the action did not involve a dispute as to the title of the property as a whole and the action of the insureds caused the alleged obstruction. The second action involved a suit filed by an insured couple seeking a declaratory judgment to quiet title to a portion of their driveway that passed over a cemetery acquired by the town. Following the settlement of the second underlying action, the insurer denied coverage sought by the insureds for reimbursement of litigation expenses on the grounds that the insureds did not notify the insurer that they were filing the declaratory judgment action and, therefore, the insurer did not approve the expenses as required by the policy. The insurer filed Motions for Summary Judgment as to both claims. In granting the Motion for Summary Judgment, the trial court held that as to the insured company, the duty to defend as not triggered as the underlying action did not challenge the title to the property but rather the right to exclusive use of the easement on the property. Additionally, the trial court held that the duty to defend was not triggered because of the insured company’s affirmative actions taken after the policy was issued. The Connecticut Appellate Court held that an Insurer did not have a duty to defend or indemnify its insureds pursuant to the title insurance policy for litigation costs incurred as the duty was not triggered under the policy since the underlying actions did not involve a dispute as to the title of the property and the insureds failed to obtain approval prior to incurring the litigation costs. AC 44925 (2023) As to the insured individuals, summary judgment was granted because the insured’s brought the action themselves and were not defending title to its property and the insureds breached the policy by not notifying the insurer of the action and depriving the insure of its right to control the defense, among other things. In upholding the trial court’s granting of the Motion for Summary Judgment filed by the insurer, the court agreed with the trial court that the underlying action against the insured company did not involve a challenge to title and, therefore, the allegations on their face did not fall reasonably within coverage. Moreover, the fact that the underlying action came about because of actions taken by the company which were specifically excluded under the policy. The court held that all of the claims asserted against the insured company were clearly and unambiguously excluded from coverage under the policy. As to the individual insureds, the court held that since the subject of the underlying declaratory judgment action involved the towns taking of property by condemnation, actions taken by a town or municipality such as this were explicitly excluded from coverage. Moreover, the court held that any actions taken by the town would occur after the date of the policy and would also be excluded. In a footnote, the appellate court indicated that since the trial court did not find that the delay in providing notice was unexcused or unreasonable or that the delay resulted in material prejudice, the appellate court did not consider the failing to timely notify the insurer as a basis for affirming the trial court’s decision. Page 18

www.fmglaw.com © Freeman Mathis & Gary Cathi Carson-Freymann Jessica Cauley Prepared by: Florida Page 19

www.fmglaw.com © Freeman Mathis & Gary Amy Neal v. GEICO General Insurance Company In November 2012, the insured, Amy Neal reported her vehicle was stolen to the Tampa Police Department and her auto insurance carrier, GEICO. The vehicle was found in the possession of a new owner and GEICO’s special investigator suspected title fraud. As a result, the Florida Highway Patrol was referred to investigate further. Despite this, in August 2013, GEICO notified its insured that it did not consider the vehicle stolen. The insured later filed suit for breach of contract and simultaneously served a Civil Remedy Notice (CRN) on the Department of Financial Services pursuant to Florida Statute 624.155(3)(b) (2017) to preserve a bad faith action. In response, GEICO responded to the CRN on the merits by denying any bad faith action. But, GEICO’s response did not challenge the sufficiency of the CRN in any respect. The breach of contract litigation ultimately settled, and the insured subsequently filed a bad faith action consistent with the CRN. Thereafter, GEICO engaged in litigation for over 18 months before filing a motion to dismiss and then a motion for summary judgment that the insured’s bad faith action, alleging the CRN was legally insufficient for failure to provide adequate facts giving rise to the A Florida appellate court held that an insurer must assert all objections and defenses in response to a Civil Remedy Notice or they are deemed waived for any subsequent litigation. 358 So.3d 749 (Fla. 4th DCA 2023) violations, failure to reference specific policy language, and failure to state the curative action the insured sought. The trial court first agreed with GEICO that the insured’s CRN was insufficient and entered judgment for GEICO, prompting this appeal. On review, the Fourth District Court of Appeal overturned the trial court’s judgment for GEICO, finding that it waived all of its objections to the CRN’s deficiencies by failing to raise them in their original response to the CRN. The Court relied on its earlier decision in Bay v. United States Automobile Ass’n, 305 So. 3d 294, 297 (Fla. 4th DCA 2020), which similarly held that even where the insurer addressed the CRN deficiency immediately in response to litigation, it waived that objection where it was not raised in response to the CRN. The importance of responding to a CRN with all available objections and defenses cannot be overstated as the consequences can result in breathing life into a bad faith claim which would otherwise be legally dead-on-arrival. Page 20

www.fmglaw.com © Freeman Mathis & Gary Castro v. Citizens Property Insurance Corporation Maritzia Castro owned real property in Miami-Dade County in 2017 with homeowners’ insurance through state-backed Citizens Property Insurance Corporation. When Hurricane Irma came through in September 2017, Castro was renting the property to a tenant. Once the tenant left the property in February 2020, Castro became aware of damage to the property’s roof and reported it to Citizens. Following Citizens’ denial of coverage due to untimely reporting and prejudice in investigating the loss, Castro sued for breach of the insurance contract. The trial court granted Citizens’ Motion for Summary Judgment based on the fact Castro waited more than two years to report the claim. On appeal, the Third District Court of Appeal noted Florida’s two-step process for applying notice provisions. First, the court is to analyze whether notice is timely given. Second, if the notice was untimely, then prejudice to the insurer is presumed. But, that presumption may be rebutted by insured by showing that the insurer was not prejudiced. The insured argued that the first step of the analysis was not satisfied because a factual dispute remained regarding whether her notice was prompt, due to her lack of knowledge of the loss. A Florida appellate court held that even a more than two year delay in reporting a property claim was not unreasonable, as a matter of law. Rather, based on the facts and circumstances surrounding the claim, the court found there were genuine issues of material fact as to whether the insured was prompt in reporting the claim. 2023 WL 4094675 (Fla. 3rd DCA 2023) In particular, Castro explained that the property had been occupied by a tenant, that the tenant did not advise her of any damage, that she was not otherwise aware of the damage until her tenant moved out, and that once she was aware of the damage, she reported it within three weeks. The insured also asserted that the second prong was also not met because there was at least an issue of fact as to whether the insurer was prejudiced. As to the first prong of the analysis, the appellate court noted that “prompt” with respect to notice under an insurance policy means “forthwith, immediate, and as soon as practicable.” And, that “notice should be provided with reasonable dispatch and with reasonable time in view of all the facts and circumstances of the particular case.” The appellate court further noted that “whether notice was provided in a prompt manner is ordinarily a question for the factfinder.” Applying these parameters and analyzing the facts of this case against other cases in which the issue of prompt notice was addressed, the appellate court found that Castro presented sufficient evidence to create a genuine issue of material as to the first prong of the analysis, whether her notice to Citizens was prompt. As noted by the appellate court, though undisputed evidence can result in a finding that notice was not timely as a matter of law, timeliness of notice is typically a question for the factfinder. Therefore, even in instances of lengthy delay, insurers must carefully consider the strength of a notice defense against all of the facts and circumstances surrounding such delay. Page 21

www.fmglaw.com © Freeman Mathis & Gary Alberta S. Ellison v. Randy Willoughby Plaintiff Willoughby filed suit against defendant Ellison, alleging he sustained serious injuries in a motor vehicle accident. Willoughby not only sought damages from Ellison but also filed a lawsuit against his uninsured motorist (UM) carrier for both the $10,000 policy limits and bad faith damages. The UM carrier eventually settled for the UM benefits and bad faith claim for $4 million before the trial, with no specific allocation of proceeds to distinct categories of damages. At trial, the jury returned a verdict of $30 million against Ellison. Subsequently, Ellison sought to set off the $4 million UM settlement against the $30 million verdict. However, the trial court denied this motion. The Second District Court of Appeal affirmed the denial and certified the following two-part question, as one of great importance, to the Florida Supreme Court: The Supreme Court first noted that Ellison did not request setoff under section 768.041(2) and quashed the portion of the Court of Appeal’s decision that addressed that issue. The Court then turned its attention the issue of whether the UM bad faith settlement constituted a “collateral source.” In a ruling with significant implications for insurance companies, the Supreme Court of Florida held that bad faith settlement proceeds from a plaintiff’s uninsured motorist insurer should not be considered a “collateral source” under section 768.76(2)(a)(2) of the Florida Statutes. 2023 WL 7203352, Supreme Court of Florida (November 2, 2023) Subject to certain exceptions, section 768.76 requires that damages awards be reduced by sums that the plaintiff has received from “collateral sources.” Focusing on the application of section 768.76, the court ruled that a settlement payment made by an uninsured motorist insurer to settle a first-party bad faith claim does not meet the criteria for a collateral source. The Supreme Court noted that section 768.76(1) states, in part: Section 768.76(2)(a)2 goes on to define “collateral sources” in part as “automobile accident insurance that provides health benefits or income disability coverage; and any other similar insurance benefits, except life insurance benefits available to the claimant, whether purchased by her or him or provided by others.” Applying this definition, the Court determined that bad faith damages do not fit because they aren’t “benefits” of the insurance contract, but instead a statutory penalty. Therefore, an at-fault defendant is not entitled to a reduction of the awarded damages for any UM bad faith award the Plaintiff has recovered. Is a settlement payment made by an uninsured motorist insurer to settle a first-party bad faith claim subject to setoff under section 768.041(2) or a collateral source within the meaning of section 768.76? In any action to which this part applies in which liability is admitted or is determined by the trier of fact and in which damages are awarded to compensate the claimant for losses sustained, the court shall reduce the amount of such award by the total of all amounts which have been paid for the benefit of the claimant, or which are otherwise available to the claimant, from all collateral sources; however, there shall be no reduction for collateral sources for which a subrogation or reimbursement right exists. Page 22

www.fmglaw.com © Freeman Mathis & Gary Jessica Samford Matt Boyer Rachael Slimmon Kyle Ference Lee Whatling Breandan Cotter Prepared by: Georgia Page 23

www.fmglaw.com © Freeman Mathis & Gary Pierce v. Banks In this case, a personal injury claimant submitted a pre-suit settlement demand to the tortfeasor’s insurance carrier pursuant to O.C.G.A. § 9-11- 67.1. Within what the appellate court describes as a “detailed offer letter” were terms including that the settlement payment must “be received 15 days after” the insurance carrier’s written acceptance of the demand, and that the payment “must not include any terms, conditions, descriptions, expirations, or restrictions that are not expressly permitted in this offer” (emphasis added). A few days after its receipt of the demand, the insurance carrier sent a letter to the claimant’s attorney including, in pertinent part, a settlement check containing a standard notation that it was “void after 180 days.” Thereafter, the claimant’s attorney took the position that the insurance company’s “purported acceptance was not identical to the offer” because, among other reasons, the check was not delivered on a specific day (i.e., the 15th day following acceptance) and contained an expiration date. After suit was filed, the trial court found that the carrier had accepted the demand and that an enforceable settlement had, in fact, been reached between the parties. The Court of Appeals of Georgia, however, reversed the trial court and found that the insurance carrier “failed to comply with the requirements of the offer as to the performance to be rendered.” As a result, the carrier had not properly accepted the demand. Central to the decision was the Court’s finding that the demand was a “unilateral contract, whereby an offer calls for acceptance by act rather than by communication.” Notably, the act required to accept a demand of that sort “must be ‘identical’ and ‘without variance of any sort.’” Therefore, both because the insurance carrier delivered the payment to the plaintiff’s attorney before the 15th day following its acceptance of the demand, and because the check stated that it was “void after 180 days,” it had failed to accept the demand and a settlement had not been reached. The Court of Appeals of Georgia found that an insurance carrier failed to properly accept a timelimited, pre-suit settlement demand issued under O.C.G.A. § 9-11-67.1 due to the carrier’s failure to precisely mirror certain detailed terms contained in the demand. 368 Ga. App. 496, 890 S.E.2d 496 (2023) The Court of Appeals rejected the carrier’s argument that, because parties are only required to agree on “material terms” in order to form a binding contract, and because the terms at issue in the plaintiff’s demand were not material, the demand had been properly accepted. The Court instead found that, while that principle “may be typically true of bilateral contracts,” it did not apply to an offer to form a unilateral contract (emphasis added). Therefore, because the insurance carrier failed to act in the manner specifically prescribed in the demand, the plaintiff’s offer to enter into a unilateral contract had not been accepted. The Court explicitly declined to address two additional arguments made by the plaintiff, i.e., that the carrier’s acceptance was invalid because of a “missing comma” on the settlement check, and that the carrier’s attorney’s representation that she had been “authorized to accept” the demand (rather than that she was “actually” accepting it) did not constitute a valid acceptance. Therefore, it remains to be seen just how many hoops the Court may ultimately require carriers to jump through when attempting to accept detailed, sometimes byzantine, settlement demands. In a potential silver lining, two of the three judges in Pierce issued a concurring opinion seeming to grasp the potential for abuse by claimants, cautioning them “to avoid crossing the line from vigorous advocacy to gamesmanship.” At the same time, however, the Court’s holdings in Pierce serve as a cautionary tale that the precise terms of a settlement demand should be complied with whenever doing so is plausible and within reason. Page 24

www.fmglaw.com © Freeman Mathis & Gary Nationwide Agribusiness Ins. Co. v. Onionman Co., LLC Following an accident while operating a farm tractor, the insured attempted to recover UM benefits under a business automobile policy. Under that policy, UM coverage was not specifically provided for the tractor. However, the insured, Onionman, attempted to get around its failure to obtain UM coverage for the tractor by claiming that the liability coverage provided under the policy imputed UM coverage by operation of Georgia’s uninsured/underinsured motorist (“UM”) statute. Onionman claimed that UM coverage that is not rejected in writing is imputed for the full amount of the liability insurance available for that vehicle. Onionman reasoned that the policy provided liability coverage for the tractor because it qualified as an “auto” under the policy because it was subject to “compulsory or financial responsibility law or other motor vehicle insurance law.” Therefore, the insured asserted, the policy was required under the UM statute to also provide UM coverage for the tractor. The trial court agreed with Onionman but its reasoning was rejected by the appeals court. In a comprehensive published opinion, the Court of Appeals explained that UM coverage was not available under the plain language of the policy. The court based this conclusion on the fact that liability insurance is not mandatory for farm equipment such that the tractor did not qualify as an “auto” under the policy. FMG attorneys Philip Savrin and Lee Whatling secured a victory in the Georgia Court of Appeals in a dispute over UM coverage for injuries sustained by a Georgia farmer in a collision while operating a farm tractor on a public road. 2023 WL 6936374 (Ga. Ct. App. Oct. 20, 2023) In so finding, the Court rejected Onionman’s reliance on Hinton v. Interstate Guaranty Insurance Company, 267 Ga. 516, 480 S.E.2d 842 (1997), where the Supreme Court of Georgia found that UM coverage applied to a vehicle that was struck by an uninsured tractor. In contrast, the question in Onionman’s case was whether the driver of the tractor was entitled to UM coverage as the claimant. In answering that question in the negative, the Court of Appeals found that UM coverage could not be imputed from liability coverage that did not exist. Onionman also attempted to shoehorn an alternative argument that Nationwide somehow acted as its agent in procuring insurance. The appellate court did not bite, holding that there is no authority that imposes a “general duty upon an insurer, as opposed to an agent, related to the procurement of insurance that provides the coverage sought by the insured.” Page 25

www.fmglaw.com © Freeman Mathis & Gary Continental Casualty Co. v. Winder Laboratories LLC Concordia sued Winder and Pressman in the United States District Court for the Northern District of Georgia, asserting various claims under the Lanham Act and Georgia law for false advertising. The insurers agreed to provide the insureds a defense subject to a reservation of rights that included a provision in which the insurer specifically reserved its right to seek reimbursement of defense costs incurred on the insureds’ behalf for all claims not covered by the policy. The insureds signed and returned an “Acknowledgement of Defense under a Reservation of Rights.” While the underlying action was pending, the insurers filed suit in the Northern District of Georgia seeking a declaratory judgment that they had no duty to defend or to indemnify the insureds under the policies and were entitled to reimbursement of legal costs and fees spent in providing the insured a defense in the Concordia suit under the reservation of rights in the underlying action. The district court granted summary judgment to the insurer, ruling it had no duty to defend the insured, and granted the insureds summary judgment as to reimbursement. The district court recognized that the question at hand—whether an insurer could seek reimbursement solely based on a reservation of rights, without reimbursement specified in the insurance contract— remained unanswered in Georgia law. In a case of first impression,the Eleventh Circuit Court of Appeals found that under Georgia law an insurer cannot recoup reimbursement of defense costs from insured parties based solely on a reservation of rights unless such reimbursement is explicitly outlined in the insurance policy. 73 F.4th 934 (11th Cir. 2023) The Eleventh Circuit upheld both determinations of the trial court, rejecting the insurer’s argument that the insureds had agreed to the reimbursement provision in the reservation of rights letters and emphasizing they failed to create a new contract as the insurance contract already obligated the insurers to defend the insureds, and thus no consideration existed for the new reimbursement requirement. It also noted that a reservation of rights required an existing contractual right to be effective. Thus, absent a provision actually present in the insurance policy or some other explicit new contractual agreement, the insurers could not recover defense fees or costs from the insureds. The Court also dismissed the insurers’ argument that the insureds were unjustly enriched by receiving a legal defense, noting that while some states like California, Florida, and New Jersey have allowed insurers to recover defense costs under an unjust enrichment theory, its ruling “comports with the national trend” in most other states demanding an express policy provision for reimbursement. The Eleventh Circuit predicted that the Georgia Supreme Court would also likely find that Georgia law does not allow insurers to recoup expenses based solely on a reservation of rights letter without an explicit policy provision. Page 26

www.fmglaw.com © Freeman Mathis & Gary Jonathan Schwartz Patrick Eckler Prepared by: Illinois Page 27

www.fmglaw.com © Freeman Mathis & Gary Acuity v. MI Homes of Chicago, LLC The underlying lawsuit stemmed from construction defects in a residential townhome development overseen by M/I Homes of Chicago, LLC (“M/I Homes”). The townhome owners’ association (“Association”) initiated legal action against M/I Homes, alleging breaches of contract and implied warranty due to construction defects attributed to subcontractors. The complaint asserted “water damage to the interior units” from subcontractors’ faulty work and defective materials, causing physical harm to the townhomes and surrounding properties. Seeking defense, M/I Homes turned to Acuity as an additional insured under a CGL policy issued to one of its subcontractors. Acuity rejected its obligation to defend M/I Homes contending that the damages did not arise from an “occurrence” as defined in the policy. Initially, the circuit court ruled in favor of Acuity, emphasizing that the complaint did not assert “property damage” caused by an “occurrence” as stipulated in the initial grant of coverage. On appeal, both parties agreed with the long-standing premise that there could be no “property damage” resulting from an “occurrence” “unless the underlying complaint alleged property damage to something beyond the townhome construction project.” The appellate court acknowledged that this premise was not “directly tied to the language of the insurance policy” but rather evolved from appellate court caselaw interpreting CGL policies, prompting the Supreme Court to reconsider the approach to CGL coverage for construction defects. The Court, emphasizing the need for clarity, asserted that returning to first principles and applying a comprehensive legal framework was the best approach. It highlighted that the duty to defend analysis should first evaluate whether the allegations in the underlying lawsuit could potentially fall within the scope of coverage defined in the initial grant of coverage. If it becomes evident that the policy does not potentially cover the asserted claim, the analysis concludes. If the claim has this potential, the court then examines relevant exclusions to determine if any restrict coverage, investigating exceptions that could reinstate coverage. In this pivotal case the Illinois Supreme Court rejected a two-decade long interpretation that defective construction could never be characterized as an “accident,” holding that an inadvertent construction defect qualified as an “occurrence” under a standard Commercial General Liability (CGL) policy. 2023 IL 129087 Acuity’s CGL policy defined “property damage” as the “physical injury to tangible property,” and the Court clarified that tangible property sustains “physical injury” when “altered in appearance, shape, color, or other material dimensions.” The Court found that the allegations in the Association’s complaint met this standard. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” While the appellate court defined “accident” as an unforeseen occurrence, the Court diverged from prior interpretations and held that “accident” reasonably encompassed “unintended, unexpected harm caused by negligent conduct.” Acuity argued that damage resulting from faulty work could never be an “accident,” contending it to be a natural and probable risk of doing business. The Court disagreed, emphasizing that “to hold that all construction defects [resulting] in property damage to the completed project [as] always excluded would mean that the exclusions in the policy related to business risk become meaningless.” The Court asserted that considerations beyond the insuring agreement’s express language, not tied to the policy language, should no longer be relied upon. In concluding its analysis, the Court outlined common exclusions in construction defect cases, such as “business risks exclusions,” noting that these were not addressed by the parties. To ultimately resolve whether Acuity had a duty to defend, the Court remanded to the circuit court for further consideration of whether the exclusions in the CGL policy barred coverage and to address any remaining challenges applying the new legal framework. This holding signifies a departure from the previous norm, bringing Illinois in line with most jurisdictions and clarifying insurance coverage for inadvertent construction defects. Page 28

www.fmglaw.com © Freeman Mathis & Gary Citizens Insurance Company of America v. Wynndalco Enterprises, LLC, et al. BIPA “codifies an individual’s right of privacy in and control over his or her biometric identifiers and biometric information.” It “currently provides the broadest private right of action among the states that have adopted similar statutory protections for biometric data.” Wynndalco was sued in two putative class action lawsuits for violating BIPA. Its business liability insurer, Citizens Insurance Company of America (“Citizens”), filed an action for declaratory judgment, seeking a declaration that it had no obligation under the terms of the insurance contract to defend or indemnify Wynndalco for the BIPA violations. The Seventh Circuit Court of Appeals affirmed the district court’s finding that the catch-all provision in the “Distribution of Material in Violation of Statutes Exclusion” was “ambiguous on its face,” consequently finding that Citizens had a duty to defend Wynndalco in the two class action lawsuits. According to the Insuring Agreement for Section II of the Citizens policy, it provides liability coverage for “personal and advertising injury,” including “injury … arising out of … [o]ral or written publication, in any manner, of material that violates a person’s right of privacy.” Citizens did not challenge whether Wynndalco’s alleged misconduct satisfied the Insuring Agreement, at least for purposes of the duty to defend. However, Citizens contended that coverage was barred by, in part, a the “catch-all provision” of a Distribution of Material in Violation of Statutes Exclusion, which applied to “Any other laws, statutes, ordinances, or regulations, that address, prohibit or limit the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.” The Seventh Circuit Court of Appeals held that a broad catch-all provision in a violation of statutes exclusion was ambiguous, finding that a “plain-text reading of that provision would swallow a substantial portion of the coverage that the policy otherwise explicitly purports to provide” and, accordingly, did not relieve the insurer of the duty to defend its insured in litigation over violations of Illinois’ Biometric Information Privacy Act (“BIPA”), 740 ILCS 141 et seq. 70 F.4th 987 (7th Cir. 2023) The Seventh Circuit decided that “a literal, plain-text reading of the catch-all provision would include BIPA violations,” but the scope of the exclusion was still too broad because it would “literally … exclude from the policy's coverage injuries resulting from all such statutory prohibitions [including libel/slander, disparagement, Lanham Act, and Copyright Act claims], as they all have to do with the recording, distribution, and so forth of information and material.” The Seventh Circuit thus agreed with the district court that coverage for “personal and advertising injury” would be “wholly illusory,” as “the broad language of the catch-all exclusion purports to take away with one hand what the policy purports to give with the other in defining covered personal and advertising injuries.“ In trying to resolve the purported conflict between the exclusion and Insuring Agreement, the Seventh Circuit explored whether interpretive canons could resolve the ambiguity. Yet, the Seventh Circuit concluded: “This clash between competing provisions of the policy gives rise to an ambiguity, one that neither ejusdem generis [a textual canon meaning that “where general words follow specific words, the general words are usually construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words”] nor noscitur a sociis [a textual canon meaning that a word is known by the company it keeps and is used to “avoid ascribing to one word a meaning so broad that it is inconsistent with its accompanying words”] can plausibly resolve.” Page 29

www.fmglaw.com © Freeman Mathis & Gary National Fire Ins. Co. v. Visual Pak Co. Inc. On January 19, 2023, the Illinois Appellate Court, First District unanimously held the insurers in National Fire Insurance Co. v. Visual Pak Co. Inc. have no duty to defend their policyholder, Visual Pak, against a lawsuit alleging violations of the Illinois Biometric Information Privacy Act, finding that the policies’ Violation of Law Exclusion precludes coverage under Illinois law. In doing so, the court meticulously picked apart the recent Seventh Circuit decision in Citizens Insurance Co. v. Wynndalco Enterprises, 70 F.4th 987 (7th Cir. 2023), which reached the opposite conclusion. This decision tees up what will assuredly be a hard-fought battle before the Illinois Supreme Court. Visual Pak’s insurers filed a declaratory judgment action regarding their obligation to defend Visual Pak in a BIPA class action. The trial court granted the insurers’ motion for judgment on the pleadings, holding that the insurers had no duty to defend under their policies because the Recording And Distribution Of Material Or Information In Violation of Law (“Violation of Law”) exclusion precluded coverage for the BIPA Lawsuit. The Appellate Court affirmed, finding that claims for damages under BIPA are excluded by the Subsection (4) catchall provision: “[I]t is simply impossible to deny that it describes BIPA. BIPA regulates the collection, dissemination, and disposal of one’s biometric identifiers and information.” The opinion, notably, concludes: “the catchall provision is amenable to a reasonable limiting construction of statutes or other laws that protect personal privacy. BIPA is clearly one such statute. So an underlying lawsuit alleging a violation of BIPA would fall under the catchall phrase of the violation-of-laws exclusion.” The Illinois Appellate Court, First District expressly disagreed with the Seventh Circuit in Citizens Ins. Co. v. Wynndalco Enterprises, 70 F.4th 987 (7th Cir. 2023), finding that the circuit court misapplied Illinois law in finding there is coverage under a CGL policy for claims made under the Biometric Information Privacy Act (“BIPA”). The Appellate Court held that the Statutory Violation exclusion vitiated coverage for BIPA claims, and it remains for the Illinois Supreme Court to decide this issue--which it will likely have the opportunity to do in the latter half of 2024. 2023 IL App (1st) 221160 As part of its decision, the Appellate Court dissected the Seventh Circuit’s decision in Wynndalco, which found the same provision ambiguous. The Appellate Court pointed out that although Wynndalco court recognized “[t]hat there is no dispute that a literal, plain-text reading of the catch-all provision would include BIPA violations”, the court concluded that the catchall provision was unduly broad and, in turn, unenforceable. The Appellate Court found the Wynndalco analysis to violate long-standing Illinois law in two fundamental ways. First, the Appellate Court explained that contrary to Wynndalco’s belief that the catchall was unenforceable because it was overly broad, an exclusion’s breadth does not make coverage illusory; rather, coverage is only illusory when the exclusion has the effect of “swallowing” the coverage entirely. The Appellate Court observed that while the Violation of Law Exclusion applies to statutory invasion-of-privacy claims, it does not exclude common law invasion-of-privacy claims. Hence, the Exclusion cannot create illusory coverage. Second, the Appellate Court took issue with Wynndalco’s approach to nullify the entire Exclusion as illusory based on a purported conflict between policy provisions not at issue, i.e., based on the Seventh Circuit’s purely hypothetical scenario. This dovetails with settled Illinois law that instructs courts to resolve only the controversies actually before it. The Appellate Court’s holding and meticulous review of case law misapplied by the Seventh Circuit reaffirms the application of long-standing Illinois contract interpretation law, in the context of insurance coverage for alleged BIPA violations. While this decision does not yet “win the war” of coverage for BIPA claims for insurers, it is indicative of how courts interpreting Illinois law would rule, assuming the courts follow Illinois’ established precedent and doctrine. All eyes will now be on the Illinois Supreme Court to see whether it will be asked to consider these issues, and if so, whether it will accept the task. Given the Court’s track record of accepting BIPA-related issues, the odds of that are high. Page 30

www.fmglaw.com © Freeman Mathis & Gary Continental Casualty Company v. 401 North Wabash Venture, LLC et al. In 2018, the State of Illinois filed a complaint in the Circuit Court of Cook County against 401 North Wabash alleging violations of the Illinois’ Environmental Protection Act (“Act”) because 401 North Wabash’s HVAC system withdrew water from the Chicago River for cooling purposes and was discharging the water back into the river as heated effluent. The Act considers effluent to be a contaminant and thus required 401 North Wabash to obtain a permit to discharge the effluent into the river. The State’s complaint alleged the permit expired on August 31, 2017. 401 North Wabash had applied to renew its permit in May 2017, but no permit had yet been issued. Despite the lapse of its permit, 401 North Wabash continued discharging effluent. Two environmental agencies also filed an intervenor complaint, alleging 401 North Wabash caused a nuisance by interfering with the right to fish and harming aquatic life and ecosystems. Continental filed suit seeking a declaration that it had no duty to defend or indemnify 401 North Wabash with respect to the State’s complaint, arguing the complaint contained no allegations of “bodily injury,” “property damage,” or an “occurrence,” and did not seek “damages.” Continental also alleged it was not timely notified and policy exclusions, including the pollution exclusion, applied to prevent coverage. Other insurers made similar arguments. All insurers moved for judgment on their pleadings, arguing there was no coverage for the State’s complaint since it did not allege an “occurrence,” did not seek to recover damages for “property damage,” and the pollution exclusions prevented coverage. The policies defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Illinois First District Appellate Court held that 401 North Wabash’s insurers did not have a duty to defend 401 North Wabash in the State of Illinois’ lawsuit against it since the alleged improper operation of a cooling water intake structure did not constitute an “occurrence” under any of its insurance policies. 2023 IL App (1st) 221625 401 North Wabash argued the relevant inquiry is whether it expected or intended the discharge of effluent to cause harm to aquatic life while the insurers argued the focus is on 401 North Wabash’s intentional discharge without a permit. All insurers moved for judgment on their pleadings, arguing there was no coverage for the State’s complaint since it did not allege an “occurrence,” did not seek to recover damages for “property damage,” and the pollution exclusions prevented coverage. The policies defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” 401 North Wabash argued the relevant inquiry is whether it expected or intended the discharge of effluent to cause harm to aquatic life while the insurers argued the focus is on 401 North Wabash’s intentional discharge without a permit. The appellate court noted that Illinois courts have generally interpreted “accident” as meaning an unforeseen occurrence. It agreed with the insurers that 401 North Wabash was being sued for failing to comply with regulations rather than endangering the local fish population, and 401 North Wabash’s intentional discharge of effluent without a permit did not constitute an “occurrence.” The natural and ordinary consequences of an act also do not constitute an accident. Therefore, the appellate court noted that even if harm to aquatic life was the relevant focus, it would not be an “accident” either. In the past, 401 North Wabash was required to report on the impact of its cooling water on aquatic organisms; thus, 401 North Wabash was aware such impacts were “natural and ordinary consequences” of operating its cooling water intake structure, even if it was unaware of the extent of the impact. The court did not decide whether the State’s complaint alleged “property damage” or whether the pollution exclusion applied. Page 31

www.fmglaw.com © Freeman Mathis & Gary Galarza v. Direct Auto Insurance Company The 14-year-old son of Direct Auto’s named insured was struck by a hit-and-run vehicle while riding his bicycle. The insured made an uninsured motorist claim under the Direct Auto policy, asserting that UM coverage applied to the son based upon his status as a “relative.” Direct Auto denied coverage on the basis that the son was not an occupant of a covered vehicle at the time of the accident. Under Part II of Direct Auto’s policy, which provided UM coverage, the policy stated that UM coverage shall be available to insureds provided the damages “(1) were caused by accident, (2) while the insured was an occupant in an “insured automobile,” and (3) were as a result of the ownership, maintenance or use of the uninsured motor vehicle.” The definition of “insured” under Part II includes “(1) the named insured and (2) a ‘relative’ as defined under Part I” (the opinion does not state how “relative” is defined under Part I). Under Part II, a hit-and-run automobile is defined as “a motor vehicle which hits or causes an object to hit an owned automobile which the insured is occupying at the time of the accident.” The trial court granted summary judgment in favor of Direct Auto on the basis that the minor was not occupying an “insured automobile” at the time of the hit-and-run accident. The appellate court reversed and remanded, finding that Direct Auto’s policy, as written, was contrary to both the language of Section 143a of the Insurance Code and its underlying public policy. The appellate court found that Section 143a was “expressly designed to broadly mandate UM coverage for ‘the protection of persons insured,’” and that “Direct Auto effectively evaded this requirement by linking coverage to the insured’s occupancy of an automobile.” The Illinois Supreme Court held that Direct Auto’s policy provision excluding pedestrians from uninsured motorist coverage violated Section 143a of the Insurance Code and its underlying public policy. 2023 IL 129031 The Supreme Court, in a unanimous decision, identified the issue as being “whether a provision in an automobile insurance policy that limits UM coverage to insureds occupying an ‘insured automobile’ violates section 143a of the Insurance Code (215 ILCS 5/143a (West 2020)) and is unenforceable as a matter of public policy.” The Supreme Court held that it did and was thus unenforceable. Applying a de novo standard of review, the Supreme Court, citing its prior holding in Squire v. Economy Fire & Casualty Co., 69 Ill.2d 167 (1977), stated that, “it is well settled that section 143a requires coverage of insured persons regardless of the motor vehicle the uninsured motorist is driving, and regardless of the vehicle in which the insured person is located when injured.” Squire, 69 Ill. 2d at 179. The Supreme Court found the minor to be an insured under both Parts I and II of the Direct Auto Policy, and that the public policy behind UM coverage is to “place the insured in the same position as if the at-fault party carried the requisite liability insurance.” The Court went on to state that the inquiry should not be whether the injured person occupied a vehicle at the time of the accident, but rather whether the person’s injuries resulted “out of the ownership, maintenance or use of a motor vehicle, including the uninsured at-fault vehicle.” Because a bicyclist is a “person,” as contemplated by section 143a, and because the statute includes “any person” in the protected category, the “injured person’s status as an occupant of a vehicle is irrelevant.” Page 32

www.fmglaw.com © Freeman Mathis & Gary LM Insurance Corporation et al. v. City of Sycamore et al. Two City of Sycamore residents filed a putative class action complaint in federal court against the City, alleging that “Sycamore’s failure to maintain its water mains had harmed Sycamore residents by providing them with unsafe drinking water and damaging the equipment that used water in their homes.” The complaint alleged that “Sycamore residents had suffered physical injuries and property damage due to allegedly contaminated water” supplied by Sycamore. The class action lawsuit implicated CGL insurance and umbrella policies issued by two Liberty Mutual companies. Sycamore tendered the claim to its Liberty Mutual insurers. They denied coverage and filed an action for declaratory judgment, relying upon, in pertinent part, the policies’ Total Pollution Exclusion, which applied to “‘bodily injury’ or ‘property damage’ which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” The Illinois Appellate Court, Second District held that the iron, lead, and bacteria that the City of Sycamore “allegedly distributed to its residents” did not constitute “traditional environmental pollution” or “pollution harms as traditionally understood,” and accordingly, the Pollution Exclusions in the insurer’s policies were inapplicable. 2023 IL App (2d) 220234 In deciding the Total Pollution Exclusion’s application, the Appellate Court held that the “iron, lead and bacteria that Sycamore allegedly distributed to its residents” did not constitute “traditional environmental pollution” or “pollution harms as traditionally understood.” The Court found compelling that “there was no release, discharge or escape of a pollutant into the ground that caused the groundwater to become contaminated,” but rather “the complaint alleged that the water did not become contaminated until it was already in Sycamore’s water pipes.” The Court noted further that Liberty had no authority for its assertion that the “degrading water mains that cause lead, iron and bacteria to be distributed to the community constitute ‘traditional environmental pollution,’” and instead, cases that had addressed similar issues had determined that “this type of pollution does not constitute environmental pollution.” Thus, the exclusions were deemed inapplicable. Notably, the Court refused to apply a lead pollution exclusion as barring all coverage for the class action lawsuit. Also notably, the Appellate Court found that the underlying complaints alleged an “occurrence,” for purposes of the duty to defend, because the Court’s focus was “on whether the insured allegedly expected or intended the injury, not whether the acts allegedly were performed intentionally.” Page 33

www.fmglaw.com © Freeman Mathis & Gary Patrick Eckler Katherine A. Ferry Joshua W. Zhao Prepared by: Indiana Page 34

www.fmglaw.com © Freeman Mathis & Gary U.S. Automatic Sprinkler Corp. v. Erie Ins. Exch. In Automatic Sprinkler, four commercial tenants occupied a fourstory building. The top floor tenant, Surgery Center, contracted with U.S. Automatic Sprinkler Corp. (“Automatic Sprinkler”) to install a sprinkler system and conduct periodic inspections and testing. The contract provided that “[n]o insurer or other third party will have subrogation rights against” Automatic Sprinkler and that Surgery Center “will be responsible for maintaining all liability and property insurance,” among other provisions regarding the scope of the work and conditions of liability. Approximately one month after the contractor conducted a routine inspection of the system, water was observed to be leaking from the system and Automatic Sprinkler inspected the system again. One week after that inspection, the system froze and ruptured the pipes, causing flooding and extensive property damage to all four tenants. Surgery Center made a claim with its insurer for damages caused by the leak. The insurer brought a subrogation lawsuit against Automatic Sprinkler, and the other three tenants filed lawsuits against Automatic Sprinkler. Automatic Sprinkler moved for summary judgment against the insurer based on the waiver of subrogation and insurance provisions in the contract. Automatic Sprinkler also moved for summary judgment against the tenants, arguing that it did not owe a duty due to a lack of contractual privity. Both motions were denied by the Superior Court of Marion County, and the Indiana Supreme Court reversed the order of the trial court. The Indiana Supreme Court reaffirmed the legal effects attributable to subrogation waiver and insurance clauses in contracts in this property damage dispute. In a 4-1 decision, the Indiana high court held that the contract between a contractor and insured tenant, which contained an agreement to insure and a waiver of subrogation, foreclosed the ability of a subrogation action by the tenant’s insurance company against the contractor. 204 N.E.3d 215, 219 (Ind. 2023) The opinion, authored by Chief Justice Rush, addressed the contract language, opining that “an agreement to insure is intended to provide both parties with the benefits of insurance regardless of the cause of the loss.” The contract’s “unambiguously broad subrogation waiver and agreement to ensure evidence the parties’ intent to shift all risk of loss – irrespective of its source – to insurance.” The court further found that a subrogated insurer’s rights “rise no higher than those of the insured” and “a subrogation waiver signifies the contracting parties’ intent to recover damages through insurance claims, not lawsuits.” The court next considered whether Automatic Sprinkler was entitled to summary judgment against the tenants. Due to the lack of contractual privity between the parties, the court rejected the argument that Automatic Sprinkler owed a duty to the non-contract tenants, citing common-law rules for determining when a contractor can be liable for a third party’s property damages. The court noted that imposing liability on Automatic Sprinkler would force them to insure against a risk which they may not know or cannot control. This decision highlights the necessity of an insurer’s due diligence in investigation upon receipt of a property damage claim, but in particular, the importance of identifying and reviewing relevant contracts for subrogation waivers or insurance agreements, and determining whether the property damage arose out of the scope of work identified in the contract. Page 35

www.fmglaw.com © Freeman Mathis & Gary Tom James Company, et al. v. Zurich American Insurance Company Tom James is incorporated and headquartered in Tennessee. Tom James has an executive office located in Indianapolis and its executive officers and members of its board of directors are located in offices in Tennessee, Indiana, and Maryland. The remaining plaintiffs are Tom James’ subsidiaries but none are located in or incorporated in Indiana. Zurich is incorporated in New York with its principal place of business in Illinois. Zurich issues insurance polices to customers across the United States, including Indiana. However, Zurich did not insure Tom James’ Indiana location. On April 10, 2020, Tom James filed a complaint against Zurich in an Indiana trial court. Tom James sought a judgment declaring the scope of Zurich’s obligations to cover Tom James’ COVID19 related losses. Zurich moved to remove the case to federal court to which Tom James eventually successfully moved to have the case remanded to state court. The Indiana Court of Appeals affirmed the trial court’s dismissal of the Tom James Company’s complaint for lack of personal jurisdiction because the court lacked jurisdiction over Zurich American Insurance Company as none of the parties were citizens of Indiana, the insurance policy was not entered in Indiana, there was no insured risk in Indiana and Zurich did not consent to personal jurisdiction. 2023 WL 7203846 (Ind. Ct. App. 2023) On December 10, 2020, Zurich filed a motion in state court to dismiss the claims of Tom James for lack of personal jurisdiction. Following discovery on the issue of jurisdiction and a hearing, the trial court dismissed Tom James’ complaint on December 19, 2022 for lack of personal jurisdiction. Tom James appealed. The appellate court held that Zurich had not waived its personal jurisdiction defense. The court held that Zurich’s personal jurisdiction waiver only applied in federal court. Moreover, not raising a defense in federal court does not preclude the ability to raise that defense in state court upon remand. The court held that there was no general personal jurisdiction because the suit was not filed in New York or Illinois. The court held that since Zurich specifically did not insure Tom James’ Indiana location, and did not enter the insurance policy in Indiana, there was no specific personal jurisdiction. The court held that “court of competent jurisdiction” within the language of the policy did not mean that Zurich consented to jurisdiction. Page 36

www.fmglaw.com © Freeman Mathis & Gary Barry Miller Sean Harrison Prepared by: Kentucky Page 37

www.fmglaw.com © Freeman Mathis & Gary Kentucky State University v. Darwin National Assurance Co. An insurer properly denied coverage under a claims-made management liability policy to a university that provided notice of loss three days after the policy’s extended reporting period expired. While Kentucky requires liability insurers, under occurrence-based policies to show prejudice from late notice of a claim or occurrence, the Kentucky Supreme Court held that the rationale supporting that rule does not apply to claimsmade policies. Kentucky State University (“KSU”) received notice on June 23, 2015, that two professors had filed discrimination claims against it with the Equal Employment Opportunity Commission (“EEOC”). It was not until October 2, 2015, when the professors sued KSU for the same claims in state court, that KSU reported the claims to its insurer. KSU’s policy period ran from July 1, 2014 through July 1, 2015. It allowed 90 days—until September 29, 2015—for the university to report claims that occurred during the policy period. KSU’s report on October 2, 2015, fell three days after the reporting period. After the carrier denied the claim on this basis, KSU sued for a judgment that coverage was owed, and made a bad faith claim against the carrier. The university relied on the notice-prejudice rule that Kentucky has applied to occurrence-based policies for more than 30 years. It argued that the policy in question was an adhesion contract like all insurance policies, which was one reason supporting the requirement for prejudice. The Kentucky Supreme Court rejected this argument, noting that a number of amendments modified the standard form of the policy, and that the university had the ability to negotiate some terms— including a different notice provision. Kentucky’s notice-prejudice rule does not apply to claims-made policies, and notice given three days after an extended reporting period was not timely. 677 S.W.3d 294 (KY, June 15, 2023) It also rejected the university’s public policy argument. The university noted that it was a publicly supported institution and said a finding of no-coverage would give the insurer a windfall at the expense of the public. But the Court found that no windfall arose from following the plain terms of the insurance contract. It also noted that the terms of claims-made policies provide benefits to both insurers and insureds, and it is not for the Court to rewrite those terms. Finally, the Court rejected the argument that the insured should have the benefit of a three-day mail rule, as is afforded litigants under the Kentucky and Federal Rules of Civil Procedure. Plaintiff argued that by stating that the insured could provide notice by United States Mail the policy allowed some fluidity regarding the exact date the insurer must receive notice. The Court noted that the policy also allowed notice by email, which the insured used, and the email was three days late. While the Court had no reason to address the ambit of the noticeprejudice rule in cases with occurrence-based policies, it was willing to restrict that rule to its original rationale. The notice-prejudice rule is based on policy provisions requiring notice of an occurrence or a claim “as soon as practicable.” But the Supreme Court of Kentucky has not ruled on other notice provisions of the CGL, including one that requires “immediate” notice of a lawsuit. Insurers often face a quick decision on whether they must defend, so there is a rational basis for them to require immediate notice that an insured has been sued. Perhaps the Court may consider a different analysis of suitnotice limitations for that reason. Page 38

www.fmglaw.com © Freeman Mathis & Gary Westfield National Insurance Company v. Quest Pharmaceuticals, Inc. Predicting that the Supreme Court of Kentucky would conclude that none of the lawsuits against a pharmaceutical company arose “because of bodily injury,” the United States Court of Appeals for the Sixth Circuit found that the Quest Pharmaceutical’s insurers owed no duty to defend against those suits. Two insurers denied coverage after Quest tendered defense of more than 70 lawsuits from cities and counties in Illinois faced with law-enforcement and health department costs from responding to opioid-related injuries. Each of the underlying lawsuits alleged RICO violations as well as violations of state statutes, and common law claims for nuisance and negligence. Not all, but many of the underlying lawsuits specified that the municipal claims were not derivative, and that the plaintiffs sought no damages “for death, physical injury to person, emotional distress, or physical damages to property.” Both insurers wrote Commercial General Liability policies for Quest, containing the standard insuring agreement obligating them to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” Insurers were not obligated under Kentucky law to defend a pharmaceutical company facing more than 70 lawsuits alleging that it wrongfully promoted and distributed prescription opioids. 57 F. 4th 558 (6th Cir. 2023) Although the underlying suits were filed in Illinois, the Court applied Kentucky law to the coverage question. And, absent controlling Kentucky authority, the federal appellate court had to predict how the Supreme Court of Kentucky would determine coverage. The court focused on how Kentucky would determine whether the damages the underlying plaintiffs sought were “because of bodily injury.” (Emphasis in original.) The Court noted that Kentucky had rejected arguments that claims for punitive damages, and for loss of consortium, constituted damages “because of bodily injury.” Applying that rationale to the instant case, the court noted that the underlying plaintiffs did not plead and prove a covered bodily injury. Therefore, the Court predicted that the Kentucky Supreme Court would find no coverage. Finally, the Court addressed the argument that the policies were ambiguous. It noted that even ambiguous policies must be applied consistently with the parties’ intentions at the time they entered the insurance contract. Thus, even though the policy used “because of bodily injury” and “for bodily injury” interchangeably, context did not indicate a reason to treat the phrases differently. Under either wording “an insured would reasonably expect coverage only for claims requiring proof of an actual bodily injury,” and not for claims that might be tangential to such an injury. Nothing in the language of either policy suggested that they were meant to cover lawsuits “brought primarily by local governments to recover purely economic damages.” Page 39

www.fmglaw.com © Freeman Mathis & Gary Grange Insurance Company v. Georgetown Chicken Coop et al. This case arises out of a tragic automobile accident in which Joey Lee Bailey drove the wrong way on I75 after consuming alcohol at two different establishments and, ultimately, hit a vehicle carrying the Abbas family. All five members of the Abbas family and Bailey were killed. When estates of the Abbas family sued one of the establishments, Roosters, and others, Rooster filed a third-party petition against its insurer, Grange. Grange sought a ruling as to its obligations to Roosters under a commercial umbrella policy. The primary business owners’ policy issued to Roosters included a liquor liability endorsement, but the umbrella policy did not. However, finding in favor of Roosters, the trial court held that the umbrella policy also provided coverage because the purpose of an umbrella policy was to supplement the primary policy: “[W]hen an insured purchases both an underlying and umbrella policy, the intent is for them to work in concert. There is no purpose for an umbrella policy if not to supplement the underlying policy if exhausted.” Rejecting this idea, reversing the trial court, and directing judgment in favor of Grange, the Court of Appeals noted that intent is not relevant unless the In a question of first impression, a split Court of Appeals ruled that an umbrella policy unambiguously excluded liquor liability, even though the primary policy covered it. 2023 WL 6932590 (KY.App., Oct. 20, 2023) Court finds an ambiguity. And the fact that an umbrella excludes risks that the primary covers does not in itself create an ambiguity. Unless umbrella coverage is granted by a clear “broad as primary endorsement,” such policies may have their own exclusions. In this case the umbrella excluded liquor liability by an endorsement that “replaced” a broader grant of coverage. The appellate court found the word “replace” was not ambiguous, and left no room for the argument that the umbrella was intended as mirror-image supplement to the primary coverage. The court used the analogy of batteries: “When batteries run down, we replace them…. [W]e do not chop up parts of the old batteries and graft them to newer parts. The old batteries are removed completely, and the new ones replace them.” In the policy, the old language was removed completely, and the language of the endorsement replaced it. Finally, the Court of Appeals held that because there was no ambiguity there was no license to refer to the insured’s expectation of coverage to resolve that ambiguity. The policy holder and other interested appellants have asked the Supreme Court of Kentucky for discretionary review. Page 40

www.fmglaw.com © Freeman Mathis & Gary Blankenship v. Shelter Mutual Insurance Company A day care director argued that her homeowners and general liability carriers had the duty to defend her against claims that she had abused a child at the facility. Before the United States District Court, the homeowner’s carrier prevailed on a business activity exclusion. The general liability carrier, GuideOne, moved for summary judgment, which the trial court granted due to several exclusions in the policy, including those for “expected or intended” acts and “arising out of the willful or intentional violation of any statute.” On appeal, the day care director, Blankenship, only challenged the summary judgment ruling in favor of GuideOne. The United States Court of Appeals for the Sixth Circuit first noted that it could affirm the ruling of the trial court on grounds different that the district court relied on. The trial court granted summary judgment based on the two exclusions noted above. However, the federal appellate court took aim at the policy’s insuring agreement, which required GuideOne to only provide coverage for actions (or inactions) which constitute an “occurrence” or accident. As the court noted, settled Kentucky law holds that policies that define “occurrence” as an “accident” require a showing that the loss was fortuitous—meaning that the insured did not intend the event to occur and that the event or result was a “chance event beyond the insured’s control.” Looking to the allegations of the complaints in the underlying lawsuits against Blankenshiop, the court noted that they alleged intentional acts of assault and other abusive conduct, Upholding a case reported on in FMG’s 2022 year-end summary, the Sixth Circuit held the insurers owned no duty to defend a former day care director against claims of abuse. 2023 WL 6799581 (6th Cir., October 16, 2023) meaning there was no accident and that she intended to harm the minors. The court also found that the control prong of the fortuity analysis was not met. Noting that Blankenship directly interacted with the children and supervised another employee who also assaulted and abused the children, the court found that Blankenship could control whether the children were safe from abuse. The presence of either intent or control means there was no accident; here both were present. The insured argued that the claims “sounded in negligence,” using some form of that word at least 19 times, and that negligence implies an accident. Rejecting that argument, the court stated that under Kentucky law “‘accident’ is not synonymous with negligence,” and merely alleging negligence in a complaint does not compel an insurer to defend. Finally, the insured argued that an insurer cannot unilaterally decide not to defend, and the insurer in this case must defend because it did not file a declaratory judgment action. The Court said no Kentucky authority supports that argument, but did note that Kentucky cases hold insurers liable for all losses the insured suffers when an insurer wrongfully declines to defend. Finding that the claims against Blankenship did not constitute an “occurrence,” the Court of Appeals held that GuideOne had no duty to defend and, therefore, no duty to indemnify Blankenship. The court also found that since there was no coverage and, therefore, no duty to pay Blankenship’s claims, her bad faith claims also failed. Page 41

www.fmglaw.com © Freeman Mathis & Gary Catherine Bednar Katherine Chenail Prepared by: Massachusetts Page 42

www.fmglaw.com © Freeman Mathis & Gary Ken’s Foods, Inc. v. Steadfast Insurance Company In the underlying dispute, Ken’s Foods sought recovery from Steadfast for costs it incurred after a wastewater treatment facility failed at its McDonough, Georgia manufacturing plant. The pollution liability policy issued by Steadfast to Ken’s Foods (the “Policy”) provided coverage for necessary cleanup costs, including “emergency expenses” incurred to avoid “actual imminent and substantial endangerment to the public health or welfare or the environment.” The Policy also covered business interruption losses resulting from a covered pollution event, including mitigation expenses incurred to reduce the costs of the business interruption. Steadfast reimbursed Ken’s Foods for nearly $1 Million in cleanup costs under the Policy but denied Ken’s Foods claim for an additional $2 Million of costs the salad dressing company incurred to avoid a business interruption. Specifically, in order to continue its operations, Ken’s Foods installed new equipment and implemented a temporary wastewater treatment process to reprocess water from a stormwater pond. Ken’s Foods also negotiated a schedule of fines for the release of the wastewater which still exceeded acceptable levels. The company claimed it would have suffered a loss of over $10 Million per month in expenses and lost profits absent the temporary wastewater treatment measures. At the start of 2023, the Massachusetts Supreme Judicial Court answered the following certified question from the First Circuit Court of Appeals: “To what extent, if any, does Massachusetts recognize a common-law duty for insurers to cover costs incurred by an insured party to prevent imminent covered loss, even if those costs are not covered by the policy?” 491 Mass. 200 (2023) The Supreme Judicial Court found the costs were not covered under the policy as mitigation of a business interruption loss because there was no “suspension of operations,” defined under the Policy as a “necessary partial or complete suspension of operations at the covered location as a direct result of a cleanup required by a governmental authority.” The Court explained a shutdown had not been “necessary” under the Policy, “albeit due to the creative response of Ken’s Foods and the flexibility of government regulators.” The Court also noted the costs fell squarely within the Policy’s express exclusion for costs associated with maintenance or upgrades, even where such maintenance or upgrades were required as a result of covered cleanup costs. Having concluded the express terms of the Policy did not provide coverage for the temporary measures, the Supreme Judicial Court next addressed the certified question of whether there is nevertheless a common-law right to reimbursement for costs incurred to prevent an imminent covered loss, an issue previously undecided in Massachusetts. The Court declined to answer the question in the abstract, but instead answered the question in the context of the plain language of the subject Policy’s provisions and exclusions and “the term that the policy does not contain that we are essentially asked to incorporate.” as well as considering the sophistication of the parties. The Court concluded there is no common-law duty for insurers to cover the insured’s costs of preventing an imminent covered loss “when the plain, unambiguous terms of the policy at issue speak directly to the question of mitigation and reimbursement and do not provide coverage, and the costs are otherwise excluded by other provisions of the policy.” Page 43

www.fmglaw.com © Freeman Mathis & Gary In President and Fellows of Harvard College v. Zurich American Ins. Co., the First Circuit Court of Appeals upheld summary judgment in favor of Zurich. Harvard had purchased a primary policy from AIG and an excess policy from Zurich; both were claims-made policies for a one-year period beginning November 1, 2014. The excess policy provided: “As a condition precedent to exercising any rights under this policy, the Policyholder shall give the Underwriter written notice of any claim or any potential claim under this policy or any Underlying Insurance in the same manner required by the terms and conditions of the [AIG] Policy.” In November 2014, the group Students for Fair Admission challenged Harvard’s race-conscious admissions policy in a lawsuit that ultimately reached the Supreme Court in 2022. Harvard timely notified AIG under the primary policy in November 2014 but did not provide notice to Zurich until May 2017. The First Circuit followed Massachusetts law, which requires strict enforcement of specific notice requirements in “claims made” policies. The court found Harvard’s argument that the notice requirement should not be enforced because Zurich may have had actual notice of the highprofile claim was simply another way of arguing that Zurich was not prejudiced. Such a result, the court reasoned, would collapse the distinction that the Massachusetts Supreme Judicial Court has drawn between “occurrence based” and “claims made” policies. Two successive federal court cases reaffirmed the distinction between notice requirements in “occurrence based” and “claims made” policies under Massachusetts law. While Massachusetts courts have required insurers to demonstrate prejudice in denying coverage for failure to strictly adhere to notice requirements under an “occurrence based” policy, the requirement to provide notice within the requisite time period is an essential aspect of a “claims made” policy. Following closely on the heels of Harvard College, the potentially harsh effects of Massachusetts’ notice rule were illustrated in Stormo v. State National Insurance. In Stormo, the U.S. District Court of Massachusetts granted the insurer’s motion for judgment notwithstanding the verdict, overruling a $1 Million jury award to the plaintiff for breach of a “claims made” professional liability policy. In Stormo, the insured attorney represented the plaintiff in the sale of real estate, which failed to close due in part to the insured’s conduct. On October 14, 2014, the plaintiff sued for legal malpractice and violation of M.G.L. c. 93A, Massachusetts’ Unfair and Deceptive Trade Practices Act. The insured did not notify State National until December 1, 2015, roughly six weeks later. Accordingly, the carrier denied coverage, citing the policy’s “prompt-written-notice requirement” and the “prior knowledge exclusion.” The plaintiff subsequently obtained two judgments against the insured, and the court assigned to her any claims that the insured had against his professional liability insurance carriers. As assignee, the plaintiff, Stormo, sued State National for breach of contract based on its refusal to defend and indemnify the insured attorney in the underlying legal malpractice action. Applying Massachusetts law, the court strictly enforced the prompt written notice requirement. Relying on the First Circuit’s decision in Harvard College, Chief Judge Saylor explained an insurer is not required to show it did not have actual notice of the claim. Although the insurer likely had actual notice of the claim and there was no evidence of prejudice, those facts were not legally relevant. Acknowledging the result was unfortunate and possibly unfair to the plaintiff, the Court nonetheless held there was no coverage because the insured’s notice to the insurer was too late. President and Fellows of Harvard College v. Zurich American Ins. Co. Storm v. State National Insurance Co. 77 F.4th 33 (1st Cir. 2023) 2023 WL 5515823 (D. Mass. 2023) Page 44

www.fmglaw.com © Freeman Mathis & Gary Jonathan Schwartz Patrick Eckler Prepared by: Michigan Page 45

www.fmglaw.com © Freeman Mathis & Gary L&K Coffee LLC v. LM Insurance Corporation Coffee growers from the Kona region of Hawai’i (“Kona Plaintiffs”) sued L&K Coffee LLC (“L&K”) for false advertising in violation of the Lanham Act, 15 U.S.C. § 1125(a). The Kona Plaintiffs alleged that L&K’s marketing was designed to mislead consumers into believing that L&K’s products contained coffee from the Kona region, when the products actually did not contain significant amounts of Kona coffee, if any. L&K argued its insurer had to defend under its CGL policies’ “personal and advertising injury” coverage, pointing specifically to the disparagement and slogan infringement components from the policy. The court rejected the insured’s claim for coverage. The court found that under Michigan law and the policy, “a disparagement claim requires a company to make false, derogatory, or disparaging communications about a competitor’s product.” The court held no coverage was available since the word “disparagement” did not appear in the Kona Plaintiffs’ complaint and there were no claims that L&K published a false allegation about the Kona Plaintiffs’ product. L&K attempted to get around the lack of direct allegations of disparagement by arguing that the L&K was accused of implicitly disparaging the Kona Plaintiffs’ coffee by attempting to pass-off an allegedly inferior coffee thereby causing the Kona Plaintiffs to lose sales. The United States Circuit Court for the Sixth Circuit held that a policies’ disparagement and slogan infringement provisions did not trigger the insurer’s duty to defend. In coming to its conclusions, the court provided a useful review of Michigan’s requirements for coverage for disparagement and slogan infringement under CGL policies. No. 22-1727, 2023 WL 3756145 (6th Cir. 2023) The court rejected that argument since it focused on the effect of the false advertising campaign, which may have caused consumers to have a negative impression of the coffee and not on any statements by L&K. The court noted that L&K was allegedly making false statements about the amount of Kona coffee in its own products as opposed to making negative comparisons of its products to the Kona Plaintiffs’ products. The court also found the complaint did not trigger coverage for slogan infringement. L&K argued that the use of the word “Kona” was a slogan since coffee grown there is “renowned,” “famous,” “referred,” and has “distinctive characteristics.” However, Michigan law has defined “slogan” as a “distinctive cry, phrase, or motto of any party, group, manufacturer, or person; catchword or catch phrase.” While the Kona Plaintiffs outlined the coffee’s flavor profiles and the reasons consumers find it enjoyable in their complaint, the court determined that the complaint employed the term “Kona” primarily as a source identifier for their coffee rather than as a distinct catchphrase. Finally, the court rejected the insured’s argument that certain discovery responses by the Kona Plaintiffs and a post-complaint demand letter from Kona Plaintiffs’ triggered coverage. Although the court noted that there may be a question regarding whether and what evidence extrinsic to the complaint may be used to determine whether a duty to defend has been triggered, the court concluded it need not resolve the issue since the discovery responses simply parroted the complaint and the demand letter was an attempt to broadly construe the claims in an attempt to gain a settlement advantage. Page 46

www.fmglaw.com © Freeman Mathis & Gary Wilmore-Moody v. Zakir Adora Wilmore-Moody and her son were sitting in a parked vehicle when it was rear-ended by a vehicle driven by Mohammed Zakir, resulting in severe injuries to both Wilmore-Moody and her son. Wilmore-Moody submitted a claim to her insurer, Everest National Insurance Company (“Everest”), for first-party no-fault benefits. Everest rescinded the policy after concluding that Wilmore-Moody had made a material misrepresentation on her insurance application. Wilmore-Moody then filed suit against Zakir for firstparty personal protection benefits (PIP) and also advanced a third-party tort claim against Everest. Everest moved for summary disposition, arguing it owed no benefits because it had properly rescinded WilmoreMoody’s policy. The trial agreed and granted Everest’s motion. Following that ruling, Zakir also moved for summary disposition, arguing that due to the policy’s rescission, Wilmore-Moody no longer had the required security “at the time the injury occurred” under MCL 500.3135(2)(c) (“third-party” benefits are not recoverable if the injured person was operating their own vehicle at the time the injury occurred and did not have an insurance policy in effect for that vehicle). The trial court granted Zakir’s motion. The Michigan Supreme Court ruled that a motorist is considered to be insured under Michigan’s No-Fault Act (MCL 500.3101 et seq) at the time of a motor vehicle accident despite the subsequent rescission of the motorist’s insurance policy. No. 163116, 2023 WL 3743480 (2023) Wilmore-Moody appealed both rulings. The Michigan Court of Appeals affirmed the summary disposition in Everest’s favor but reversed the similar ruling in Zakir’s favor, remanding the case for further proceedings. Zakir then sought leave to appeal the Court of Appeals’ decision. The Michigan Supreme Court’s decision that Everest’s post-accident rescission did not trigger the exclusion in MCL 500.3135(2)(c) turned on the following two issues. First, the court explained that rescission is an equitable remedy, the availability of which is exclusive to the contracting parties. Because Zakir was not a party to the Everest insurance policy, the court found that he could not use Everest’s chosen contractual remedy to defend against Wilmore-Moody’s statutory negligence claim. Second, the court clarified that the plain language of the statute indicates that the relevant timeframe for determining a motorist’s insured status is, indeed, “at the time the injury occurred.” The Court found that because rescission is exercised at the insurer’s discretion, it “does not alter the reality that, at the time of the injury occurred, [Wilmore-Moody] held the required security” under the statute. Thus, the Supreme Court affirmed the Court of Appeals’ ruling, and Wilmore-Moody was permitted to pursue her third-party claim against Zakir. Page 47

www.fmglaw.com © Freeman Mathis & Gary Michael Sanders Amy Frantz Prepared by: Minnesota Page 48

www.fmglaw.com © Freeman Mathis & Gary Rosenberg v. Homesite Insurance Agency, Inc. In this case, the U.S. District Court of Minnesota became the first court in Minnesota, and the broader Eighth Circuit, to explore the coverage of digital assets under the “direct physical loss” provision of an insurance policy. In 2020, Plaintiffs Evan and Shira Rosenberg (“the Rosenbergs”), entered a homeowner’s insurance policy (the “Policy”) with Homesite Insurance Agency, Inc. (“Homesite”). The Policy covered personal property that was “owned or used by an ‘insured’ while [the personal property] is anywhere in the world,” to a maximum limit of $359,500. The coverage extended to direct physical loss caused by theft, but the policy did not explicitly define personal property. The policy did include provisions providing “special limits of liability” for certain items, including a $200 limit “on money, bank notes, bullion . . . .” The Rosenbergs computer was compromised by hackers who transferred $750,000 worth of crypto tokens from their crypto wallets to an inaccessible destination. Following the incident, the Rosenbergs reported the hacking to the FBI and filed an insurance claim with Homesite. In a case of first impression, the District Court of Minnesota found that cryptocurrency was not covered as personal property under a homeowners policy since it lacked physicality as required under Minnesota law and, therefore, theft of cryptocurrency tokens did not constitute “direct physical loss” necessary to impute coverage. 2023 WL 4686412 (D. Minn. 2023) Homesite eventually paid the claim, applying the policy’s $200 special limit of liability. Seeking coverage to the higher limit for theft of personal property, the Rosenbergs initiated legal proceedings, alleging breach of contract and unreasonable denial of coverage in violation of Minnesota Statute § 604.18. In response, Homesite filed a motion for judgment on the pleadings, asserting that crypto tokens did not constitute “direct physical loss.” The Rosenbergs argued that the language of the Policy was ambiguous, suggesting the court to consider that insurance contracts could “provide for broad general coverage and then whittle down the coverage through limitations and exclusions.” The court rejected this argument, agreeing with Homesite that under Minnesota law the phrase “direct physical loss” requests a “distinct, demonstrable, and physical alteration” to the covered property. As a result, since the lost crypto tokens were “a purely digital asset” that lacked any physicality, the tokens did not satisfy the “direct physical loss” requirement under Minnesota law and, therefore, did not fall within the coverage for personal property under the homeowners portion of the policy. Accordingly, the court found that Homesite did not breach its insurance contract and the Rosenbergs could not establish a claim for statutory bad faith. Page 49

www.fmglaw.com © Freeman Mathis & Gary Prisk v. Travelers Indemnity Company of America In this case, Plaintiff James Prisk (“Prisk”) was struck and injured by a vehicle owned by the city of Hermantown and being driven by a city employee. Travelers Indemnity Company of American issued an automobile insurance policy to Hermantown with a $2 million limit of liability. Prisk filed suit against Travelers seeking a declaration that he could recover up to the policy limit since the existence of the policy waived Hermantown’s statutory limit of liability. Minnesota law provides that a municipality is liable for its torts and those of its employees acting within the scope of their employment, but a municipality’s tort liability to any individual claimant is capped at $500,000. Minn. Stat. §466.02, 466.04. However, a municipality may obtain insurance coverage for damages in excess of the statutory cap and the procurement of such insurance waives the statutory limit of liability. Minn. Stat. §466.06. Prisk argued that the Travelers policy resulted in a waiver of the $500,000 statutory cap and therefore he could recover up to $2 million. However, the Travelers policy contained an endorsement entitled “Statutory Cap Limits of Insurance Endorsement – Minnesota,” which modifies the coverage limit. The U.S. Court of Appeals for the Eighth Circuit found that a policy issued to a Minnesota municipality did not waive the municipality’s statutory limit of liability based on the application of an endorsement . 81 F.4th 782 (8th Cir. 2023) The endorsement sated that the limit of liability is $500,000 for damages (1) “[r]esulting from any one ‘accident’ and sustained by any one person or organization that is determined to be a claimant under Minnesota Statute Section 466.04” and (2) that “are subject to Minnesota’s statutory cap on damages for governmental tort liability in . . . Minnesota Statute Section 466.04.” Travelers argued that the endorsement resulted in the policy having two coverage limits: a $500,000 limit for claims subject to the municipal tort liability cap, and a $2 million limit for claims not subject to the liability cap. Thus, Hermantown did not waive the statutory limit on municipal tort liability. The federal appellate court agreed with Travelers, finding that the policy provided different policy limits for different types of claims. The court noted that the policy limit would be $2 million if the claim was a federal tort claim or is governed by the law of a different state. However, it found that since Prisk’s claim arose from an automobile accident in Hermantown it was subject to the statutory limit of $500,000 under § 466.04 and that the endorsement expressly limited coverage to $500,000. Consequently, the court held the policy did not trigger the waiver of the limits of liability. This case reinforces the need for public entities and their insurers to consider their policies in the context of statutes impacting sovereign immunity, and for practitioners to carefully read the endorsements included within their policies. Page 50