2023 Coverage Report

www.fmglaw.com © Freeman Mathis & Gary Wesser v. State Farm Fire & Cas. Co. Like many states, Minnesota has a statute dictating how interest accrues on verdicts, awards, and judgments. Codified at Minn. Stat. Ann. § 549.09, subdivision 1(b) states that “[e]xcept as otherwise provided by contract or allowed by law, pre-verdict, pre-award, or pre-report interest on pecuniary damages shall be computed … from the time of the commencement of the action or a demand for arbitration, or the time of a written notice of claim, whichever occurs first, except as provided herein …” After a fire damaged the insured’s home, the insured submitted a claim to his homeowners insurer and subsequently disagreed with the insurer’s valuation of the cost to rebuild the home. The parties submitted the dispute to appraisal. The appraisal panel determined the value of the home. Thereafter, the insured demanded more than $30,000 in pre-award interest on the appraisal award, calculated based on the statute, by multiplying the entire amount of his loss replacement cost, as determined by the appraisal panel, by the 10 percent per annum rate set forth in statute. The insurer refused to pay based on a loss payment provision in the policy that stated “[n]o interest accrues on the loss until after the loss becomes payable.” The Minnesota Supreme Court enforced a policy provision on the accrual of interest on an appraisal award despite a state statute governing interest accrual on a judgment. 989 N.W.2d 294 (Minn. 2023) After reviewing the statute and the policy language, the Minnesota Supreme Court applied the policy language in a straightforward manner, finding that it precluded pre-award interest and was enforceable in spite of the language of the statute. The court also found that Minnesota’s standard fire policy did not preclude the insurer from denying the insured statutory pre-award interest on the appraisal award because the standard fire policy did not contemplate interest accruing before an appraisal award was filed with the insurer – plus, the insurer did not disclaim liability, but rather, engaged in the appraisal process. Page 51

www.fmglaw.com © Freeman Mathis & Gary Edward Solensky, Jr. Prepared by: New Jersey Page 52

www.fmglaw.com © Freeman Mathis & Gary Statewide Insurance Fund v. Star Insurance Company This case involved an insurance coverage dispute between a public entity joint insurance fund (JIF) and Star Insurance Company, a commercial general liability insurance company. At issue was whether the JIF provided “insurance” to its members or, instead, the JIF members protect against liability through “self-insurance.” A resolution of this issue was important because a clause in Star's insurance policy stated its coverage obligations began only after coverage available through “other insurance” had been exhausted; the clause, however, made no mention of “self-insurance.” Star took the position that the JIF provided insurance and as a consequence Star's coverage was excess to the JIF; the JIF disagreed, contending that Star’s coverage was primary because its members are instead “self-insured.” The dispute arose after a 2012 accident that led to the death of a 12-year-old boy when a sand tunnel he had built with his brothers collapsed on him at a beach in Long Branch, New Jersey. The boy's parents filed a negligence action against Long Branch, Long Branch Beach Patrol, and seasonal beach police officers who were responsible for patrolling the area. The parties settled the underlying negligence action, but payment of the settlement required review of the sources of liability coverage available to Long Br. Long Branch took two steps to protect itself from the type of claims involved in this case. First, it joined the Statewide Insurance Fund (the Fund), which is a public entity JIF created under the New Jersey Joint Insurance Fund Act. As a member, Long Branch was afforded $10 million in liability coverage per occurrence in excess over other “insurance or self-insurance” coverage. Stated another way, Long Branch could recover from the Fund only after it had exhausted other insurance or selfinsurance coverage to which it was entitled. Second, Long Branch purchased a commercial insurance policy from Greenwich Insurance Company (Greenwich), which provided primary insurance coverage for law enforcement liability claims. Greenwich was not involved in this appeal. Finally, Long Branch purchased a commercial general liability insurance policy from Star with $10 million in liability insurance coverage, excess to a $1 million self-insured retention (SIR). The parties agreed that Star's insurance coverage was excess only over “other insurance.” Long Branch and Greenwich paid the SIR to the plaintiffs in the underlying negligence action, therefore the SIR was not an issue on appeal. After both parties moved for summary judgment, the trial judge granted the Fund's motion and denied Star's. The judge concluded that Long Branch's membership in the Fund did not trigger Star's “other insurance” clause. He determined that the Fund did not provide insurance coverage to its members, but rather Long Branch self-insured by joining the Fund. Consequently, the plaintiffs in the underlying action could look to Star's primary policy limits, above the SIR, for the balance of their settlement with Long Branch. On appeal, the Appellate Division upheld the trial judge’s decision, finding that: (1) the Fund is not an insurance company; (2) the Fund is not an insurer under New Jersey law; and (3) the Fund's authorized activities did not amount to transacting insurance business. Additionally, the Appellate Division determined that Fund membership protected Long Branch against liability claims through “self-insurance.” On appeal, the Supreme Court first noted the following with respect to the plain text of the Joint Insurance Fund Act: (1) the Fund is not an insurance company; (2) the Fund's authorized activities do not constitute either the transaction of insurance or doing the business of insurance; and, importantly, (3) the Fund is not subject to the extensive insurance laws contained in Subtitle 3 of Title 17 of the Revised Statutes and associated regulations. The Court further noted that the New Jersey Legislature has heavily regulated the insurance industry and enacted comprehensive legislation governing the business of insurance by authorized New Jersey insurers, and JIFs are not authorized insurers. According to the Court, New Jersey’s approach was consistent with that of most states which permit governmental risk-pooling. In those states, risk pools are exempted from most of the statutory requirements of the state's insurance code. The Court noted that some of those states, in fact, have statutes nearly identical to N.J.S.A. 40A:10-48. The Supreme Court next pointed out that, pursuant to the clear and plain terms of N.J.S.A. 40A:10-48, “JIFs cannot insure members; instead, JIFs enable members to self-insure, spread risk, and reduce insurance costs.” The Court thus rejected Star's argument that “general references to ‘insurance’ in the Joint Insurance Fund Act should be interpreted to mean that JIFs are ‘providing insurance to their members.’” The Court emphasized that that appearance of the word “insurance” in Title 40A did not mean JIFs provide insurance, nor did referencing the word “insurance” in the Fund's contracting document override the Legislature's clear mandate that “JIFs are not insurance companies, that they cannot insure members, and that their authorized activities do not constitute ‘the transaction of insurance nor doing an insurance business.’” According to the Court, Long Branch's liability protection as a Fund member was, as a matter of law, through “self-insurance,” not “insurance.” The Court further reasoned that an examination of the differences in risk allocation between JIFs and commercial general liability carriers reinforced its conclusion that JIF members are self-insured. The Court pointed out that the Fund's stated purpose includes permitting local units “to make a more efficient use of their powers and resources by cooperating on a basis that will be of mutual advantage.” According to the Court, “ ‘risk-pooling’ arrangements, such as JIFs, are different from typical insurance contracts in which an authorized insurer assumes the risk in exchange for a premium. JIF members decidedly retain the risk typically assumed by carriers. Public entities do not purchase insurance from JIFs; instead, they join JIFs, manage risk, and optimize taxpayer dollars by self-insuring or reducing coverage costs. A JIF ‘risk-pooling’ statutory option spreads liability risk among public entity JIF members. Here, as envisioned by the enabling statute and applying the explicit limitations of N.J.S.A. 40A:10-48, risk-bearing is therefore substantially undertaken by members. They bear substantial risk given that payment on liability claims comes from government coffers. In that sense, JIFs provide “self-insurance,” which is the opposite of insurance.” According to the Court, the “retention of risk in JIFs and the plain language of N.J.S.A. 40A:10-48 support our holding: the Fund does not provide “insurance” in any traditional or legal sense.” In affirming the Appellate Division’s decision, the Court concluded that Star's “other insurance” clause was not triggered. In so holding, the Court explained that, unlike the Fund's contracting document, which specified that the Fund's obligations are excess over “insurance or self-insurance.” Star’s clause stated only that insurance coverage available under the Star policy was “excess over ... any of the other insurance.” Thus, according to the Court, “because Star's clause does not encompass the selfinsurance available to members through the Fund, Star's insurance policy is primary in covering the underlying plaintiffs’ settlement of the negligence action against Long Branch.” The New Jersey Supreme Court weighed in on a coverage dispute between a public entity joint insurance fund and a commercial general liability insurance company. 253 N.J. 119 (2023) Page 53

www.fmglaw.com © Freeman Mathis & Gary Megan Ritenour Sean Harrison Nick Directo Prepared by: New Mexico Page 54

www.fmglaw.com © Freeman Mathis & Gary Murphy v. The Doctors Company Lopez v. State Farm Mutual Automobile Ins. In Murphy, et al. v. The Doctors Company, et al., a jury awarded $52 million dollars against Professional Underwriters Liability Insurance Company (“PULIC”) for immediately canceling Pawankumar Jain, M.D’s insurance policy after it learned of impending claims in an apparent attempt to avoid its duty to defend and indemnity Dr. Jain. In July 2012, PULIC received notice that the New Mexico Medical Board accused Dr. Jain of overprescribing opioids that resulted in the death of at least 17 patients. After it learned of the deaths, PULIC immediately cancelled Dr. Jain’s liability insurance policy and chose not to record the deaths in its claims system. In August 2013, the families of two deceased patients, Ruben Bonilla, Jr. and Serina Clark, sued Dr. Jain for medical malpractice resulting in wrongful death. PULIC refused to defend Dr. Jain on the grounds that Dr. Jain failed to give PULIC timely notice of the claims before his policy was cancelled. Dr. Jain filed for bankruptcy and the Bonilla and Clark families were the only creditors with claims in the bankruptcy proceedings. In 2016, the U.S. Bankruptcy Trustee brought a bad faith lawsuit against PULIC on Dr. Jain’s behalf. In 2020, the New Mexico District Court held that PULIC owed a duty to defend and indemnify Dr. Jain for the claims brought by Bonilla and Clark’s families. On January 18, 2023, a jury determined that PULIC willfully violated New Mexico’s Unfair Practices Act and awarded $52 million in punitive damages. New Mexico had two “nuclear” insurance bad faith verdicts of which insurers should take note. In Lopez, et al. v. State Farm Mutual Automobile Insurance, et al., a jury in New Mexico state court awarded $36 million in damages and bad faith punitive damages against State Farm in relation to an automobile accident. On September 2, 2017, State Farm’s insured, Andrea Lovato and her 4-year-old nephew were involved in a headon collision on Highway 47 in Valencia County. Ms. Lovato died because of the accident. Her nephew survived with serious physical injuries. Five days before the accident and unbeknownst to her friends and family, Ms. Lovato reinstated her automobile coverage and upgraded her coverage from $25,000 to $1 million. Ms. Lovato’s mother later discovered the $1 million policy via a declarations page that had been mailed to Ms. Lovato and brought it to State Farm’s attention. State Farm claimed that the new policy had been issued by mistake and that Ms. Lovato’s limits were only $25,000. On October 31, 2023, a jury determined that Ms. Lovato was not fully at fault for the accident and that State Farm had breached its obligations owed under the $1 million policy. As a result, the jury awarded $12 million in damages for the auto accident, $4 million in damages for State Farm’s bad faith and breach of contract, and $20 million in punitive damages. Both of these cases illustrate the potential consequences when New Mexico jurors perceive that insurers have committed egregious practices to avoid their duties owed to their insureds. Dist. Ct. of N.M., 2nd Judicial District, Bernalillo County, D-202-CV-2016-04582 Dist. Ct. of N.M., 1st Judicial District, Santa Fe County, D-101-CV-2020-01092 Page 55

www.fmglaw.com © Freeman Mathis & Gary Ullman v. Safeway Ins. Co. The underlying fact pattern involved numerous consumers who purchased automobile insurance policies that provided liability coverage for multiple vehicles, but who rejected UM/UIM coverage via a signed selection/rejection form. When the consumers were involved in accidents with underinsured or uninsured motorists, they each sought UM/UIM benefits from their insurers. The insurers each denied the consumers’ claims, citing the signed rejection from. Each consumer filed suit against their insurer, alleging that their rejections of UM/UIM coverage were legally deficient because the insurers failed to provide information about stacked coverages in the offers including the premium costs per vehicle. The primary issue decided by the Supreme Court of New Mexico was “whether insurers, in their offer of coverage, must include information about stacked (or aggregated) benefits insureds may be entitled to recover if they pay multiple premiums for UM/UIM coverage on multiple vehicles.” The Court concluded that insurers must provide basic information about stacking to potential insureds so that the offer is meaningful and any rejection is effective. 539 P.3d 668 (N.M. 2023) An earlier 2010 decision already required an offer of UM/UIM coverage equal to the insured’s liability limits, informing the insured about premium costs and the corresponding level of coverage available for those premiums, obtaining a written rejection of UM/UIM coverage equal to the insured’s liability limits, and incorporation of that rejection into the policy in such a way that the insured has the opportunity to reconsider his or her decision to reject UM/UIM coverage. In light of recent litigation, the Court found it necessary to provide further clarification, holding, inter alia , that insurers must provide consumers with information about stacking UM/UIM coverage to ensure that consumers “understand what they may be waiving in rejecting UM/UIM coverage.” The Court reasoned that informing consumers about stacking could encourage consumers to purchase UM/UIM coverage, which advances the legislative purposes of New Mexico’s statutory scheme governing UM/UIM coverage. Page 56

www.fmglaw.com © Freeman Mathis & Gary Jack Shea Julia Bover Prepared by: New York Page 57

www.fmglaw.com © Freeman Mathis & Gary Covington Specialty Ins. Co. v. Indian Lookout Country Club, Inc. An insurance-coverage dispute arose out of a June 21, 2019 automobilemotorcycle collision between parties attempting to attend the Harley Rendezvous Classic, an annual motorcycle rally in Pattersonville, New York (the “Harley Rendezvous,” or the “Rendezvous”). Two motorcycle riders (the “Riders”) were entering the premises of the Indian Lookout Country Club (the “Club”) to attend the Rendezvous when the driver of a Kia automobile (the “Driver”), also attempting to enter the Club's premises, allegedly failed to yield the right of way and turned left into the direct path of the Riders, causing a collision and injuries to both Riders. The Riders filed a personal-injury action in state court (the “Underlying Action”) against the Driver and the operators of the Rendezvous - Francis and Antoinette Potter, the Club, and Harley Rendezvous Classic, Inc. - alleging that the Driver was negligent in the operation of her automobile and that the Rendezvous operators were negligent in supervising vehicular traffic entering and exiting the Club's premises. Covington Specialty Insurance Company (“Covington”) issued a general commercial liability policy (the “Policy”) to Francis and Antoinette Potter, the Club, and Harley Rendezvous Classic, Inc. (collectively, the “Insureds”), and in December 2019, the Insureds notified Covington of the Underlying Action in a letter stating their belief that the Policy would cover their defense and indemnity against the Riders’ claims. The Policy provided that Covington: (1) “will pay those sums that the Insureds become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies,” and (2) “will have the right and duty to defend the Insureds against any suit seeking [such] damages,” but “will have no duty to defend the Insureds against any suit seeking damages for bodily injury or property damage to which this insurance does not apply.” The Policy contained a standard exclusion specifying that “this insurance does not apply” to “bodily injury ... arising out of the ... use ... of any aircraft, auto, or watercraft owned or operatedby ... any insured.” Additionally, the Policy contained an Absolute Auto Exclusion that deleted and replaced the standard exclusion with a disclaimer of coverage for any “bodily injury ... arising out of or resulting from the ... use ... of any aircraft, auto, or watercraft.”Unlike the standard exclusion it replaced, the Absolute Auto Exclusion contained no language conditioning its disclaimer on whether the “aircraft, auto, or watercraft” in question was “owned or operated by ... an insured.” United States Court of Appeals for the Second Circuit upholds a disclaimer of coverage under New York law. 62 F.4th 748 (2d Cir. 2023) Moreover, the Absolute Auto Exclusion clarified that “this exclusion applies even if the claims against any insured allege negligence or other wrongdoing in the supervision ... or monitoring of others by that insured, if the occurrence which caused the bodily injury ... involved the ... use ... of any aircraft, auto, or watercraft.” Covington subsequently responded to the Insureds in a letter denying coverage for the Underlying Action based on the Absolute Auto Exclusion endorsement. Covington advised that it would not appoint counsel to defend the Insureds, pay or contribute to defense costs, or “pay any judgment, verdict, or settlement against them. However, upon learning that the Riders had moved for a default judgment against the Club in the Underlying Action, Covington assigned defense counsel to represent the Club for the limited purpose of opposing the default motion. In advising the Insureds of this “gratuitous” defense, Covington emphasized that it was not waiving any of the grounds for disclaiming coverage as previously asserted, including that the Absolute Auto Exclusion excluded coverage for the Underlying Action because it arose out of an auto accident. In June 2020, Covington commenced a declaratory-judgment action in U.S. District Court for (1) a declaration that, under the Absolute Auto Exclusion, it need not indemnify the Insureds for any liability established in the Underlying Action; and (2) recovery of costs incurred in providing the Club with a gratuitous defense in the Underlying Action. In February 2021, Covington moved for summary judgment, asserting that the Absolute Auto Exclusion precluded coverage in the Underlying Action, as the Underlying Action had arisen out of an automobile accident. The district court granted summary judgment in favor of Covington, finding that the Absolute Auto Exclusion made “unambiguously clear that liability coverage for automobile accidents is excluded” from the Policy, regardless of “whether ... the Insureds themselves owned or operated ... the vehicle at issue.” The Insureds appealed, arguing that the district court erred in finding the language of the Absolute Auto Exclusion unambiguouslyprecluded coverage. The Second Circuit rejected this argument for substantially the same reasons as stated in the district court's “wellreasoned” decision, concluding that, under New York law, the Absolute Auto Exclusion unambiguously precluded coverage of the Insureds’ defense and indemnity in the Underlying Action. In affirming the district court’s decision, the Court explained, “Here, after all, the Policy is explicit in clarifying that the Absolute Auto Exclusion “applies even if the claims against any insured allege negligence ... in the supervision ... or monitoring of others by that insured, if the occurrence which caused the bodily injury ... involved the ... use ... of any ... auto.”To the Court, there could be no doubt that such language covered the Riders’ underlying claim that the Insureds “negligently ... failed” to “provide traffic control” for the “multiple thousands of motorcyclists” and “motorists traveling to and from ... the entrance of the Harley Rendezvous.” Page 58

www.fmglaw.com © Freeman Mathis & Gary Doug Holthus Prepared by: Ohio Page 59

www.fmglaw.com © Freeman Mathis & Gary Krewina v. United Specialty Insurance Company United Specialty Insurance Company (“USIC”) insured an adult-care facility under a commercial general liability policy. Austin Krewina, a resident at the facility, was attacked by another resident wielding a knife. Ultimately, on criminal charges of attempted murder and felonious assault, the attacker was found not guilty by reason of insanity. Krewina sued the adult-care facility and the facility sought coverage under the USIC policy. USIC denied coverage, citing the policy’s assault or battery exclusion. Krewina and the facility then entered into a consent judgment and Krewina brought a declaratory judgment action against USIC to collect the judgment. Before the trial court in the declaratory judgment action, Krewina asserted that the assault or battery exclusion under the USIC policy did not apply because the attacker did not have the requisite mental state to commit an assault or battery. The trial disagreed and found in favor of USIC. Ohio’s First District Court of Appeals, however, reversed, holding that the attacker did not have the requisite mental state under Ohio law to commit an assault or battery. In doing so, the Appellate Court relied on prior case law holding that a provision in a liability policy excluding loss that it expected or intended does not apply when a tortfeasor is incapable of committing an intentional act. Ohio Supreme Court reinstates trial court ruling that an insurer was not obligated to pay damages arising from a knife attack based on an assault and battery exclusion. 221 N.E.3d 819 (OH 2023) The Supreme Court of Ohio reversed, stating that the prior case upon which the Court of Appeal had relied focused on an intentional acts exclusion, and not an assault or battery exclusion. Noting that the policy was a commercial general liability insurance contract, the Supreme Court applied a civil and common law definition of assault as a “willful threat or attempt to harm another” that “places the other in fear of such a contact.” The Supreme Court then found that under the stipulated facts of the case there was no question that the attacker had acted willfully and that his attack would cause fear or apprehension. Accordingly, the Supreme Court reversed the Court of Appeals and reinstated the trial court’s decision, finding that to conclude that the attack did not constitute an assault would be to rewrite the policy and insert an exception into the contract where it did not exist. Page 60

www.fmglaw.com © Freeman Mathis & Gary SHH Holdings, LLC v. Allied World Specialty Insurance Company The insured SHH Holdings, LLC sought coverage under its Directors & Officers liability policy issued by Allied World for retaliation claims brought against it in a qui tam action. Allied World denied coverage, asserting that SHH had not provided full details of the claims against it in its application for claims-made coverage, which was submitted almost two (2) years after the False Claims Act case began. Following Allied World’s denial of coverage, SHH sued Allied World in federal district court for breach of contract and breach of duty of good faith and fair dealing, seeking damages for the costs of defending the retaliation claims and a declaratory judgment as to the rights and obligations owed under the policy. While that action was pending, SHH settled the retaliation claims. In the coverage action, the federal trial court granted Allied World summary judgment on SHH’s bad faith claim, but found that the policy had been breached. In doing so, the trial court held that the coverage application questions to SHH were ambiguous regarding the scope of existing claims SHH was obligated to report. The District Court posed a hypothetical under which the insured would be required to disclose such insignificant matters as “local zoning citation for an unpermitted shed,” or a divorce proceeding involving an officer or director. United States Court of Appeals for the Sixth Circuit reverses award of attorney’s fees against insurer, holding that settlements of retaliation claims was excluded from coverage. 65 F.4th 830 (6th Cir. 2023) As a result, the trial court ordered Allied World to pay SHH’s attorneys’ fees for defending the retaliation claims, to indemnify SHH for settlement amount for the retaliation claims, plus pre and post-judgment interest, and to pay SHH’s attorneys’ fees for bringing the coverage lawsuit. Upon review, the Sixth Circuit reversed, holding that the breadth of the application question did not render it ambiguous. The Court first focused on the correct and most natural reading of the application questions, noting the general rule that “a qualifying word or phrase should ordinarily be read to modify only the noun or phrase that immediately follows.” The Court of Appeals further noted that contracts can be ambiguous under some facts, but not others, and the district court’s hypothetical was not dispositive. In the Sixth Circuit’s view, the application question clearly required the insured to report claims such as those made under the False Claims Act. The Sixth Circuit also rejected an argument that a second application question could be read to require disclosure only of matters for which the insured intended to seek coverage. It noted that the question was broad and sought disclosure of any acts, errors, or omission that “could give rise to a claim.” Based upon this reasoning, the Sixth Circuit enforced the exclusion in the Allied World policy for matters not disclosed in the application. It reversed and ordered the district court to enter judgment in favor of Allied World, finding no breach of contract and awarding no attorneys’ fees. Page 61

www.fmglaw.com © Freeman Mathis & Gary EMOI Services, L.L.C. v. Owners Insurance Company In a case decided just four days before 2023, the Ohio Supreme Court determined that a ransomware attack caused no “direct physical loss of or damage to” the insured’s software and reversed a judgment against the insurer for breach of contract and bad faith. EMOI provided software (including its own and thirdparty software) to medical offices. The software was designed to assist in scheduling appointments, patient record keeping and billing functions. In 2019, a hacker breached EMOI’s systems and encrypted its files. Upon opening a file, EMOI or its customers would see a ransomware message demanding three bitcoin (approximately $35,000 at the time). EMOI decided to pay the ransom and was able to decrypt most of its files. Owners Ins. Co. insured EMOI under a Businessowners policy. EMOI reported the attack, and Owners denied coverage. After EMOI filed suit, the trial court found that the attack constituted a data compromise rather than physical damage to electronic equipment. While EMOI had coverage for data compromise, that coverage excluded losses arising from “threat, extortion or blackmail, including ransom payments.” It granted summary judgment to Owners. A divided Ohio Second District Court of Appeals reversed, holding that if EMOI could prove that its software was damaged by the encryption it could recover under the electronicequipment coverage. The Ohio Supreme Court finds that ransomware losses are not covered under an electronic-equipment endorsement. 208 N.E.3d 818 (2022) Upon further review, a unanimous Ohio Supreme Court reinstated the trial court’s judgment, finding that the electronic equipment part of the policy expressly applied to physical media (such as magnetic tape, disks, or cards) and that “media” could include software if “contained on covered media.” Thus, in the Court’s opinion, coverage depended upon physically existing media and reasoned that software itself cannot experience physical loss or damage because it does not physically exist. The Court’s holding may become influential as other courts around the country struggle with “silent cyber” issues, where insureds seek coverage under traditional policies for losses that insurers are trying to push to cyber insurance coverages. Page 62

www.fmglaw.com © Freeman Mathis & Gary The Scott Fetzer Co. v. American Home Assurance Co., et al.; Travelers Cas. and Surety Co., Appellant In a case decided November 1, 2023, the Ohio Supreme Court determined that bad-faith claims sound in tort, “are not rooted in any particular text of a contract and instead arise by operation of law.” The underlying dispute arose from the work performed to remediate two Superfund sites located in the state of Michigan. The Scott Fetzer Co. had acquired one of the sites in 1968 and thereafter engaged in manufacturing activities at a facility there. In 1986, USEPA identified Fetzer as a potentially responsible party, obligated to investigate and remediate environmental risks and consequences. USEPA pursued enforcement against Fetzer, and a consent decree followed. A subsequent owner of the Fetzer site (ITT, Inc.) also sued Fetzer, resulting in an order obligating Fetzer to reimburse ITT, Inc. for ITT’s own remediation costs. Fetzer sought coverage under multiple liability policies issued to it in the 1960’s: one general liability policy, two excess-blanket-catastrophe policies, and one umbrella policy. Fetzer claimed it repeatedly communicated its coverage, defense, and indemnity demands to the various insurers, without any response. As a result, Fetzer field suit in Ohio state court claiming breach of contract and bad faith. The claims were bifurcated, but the trial court did not stay discovery on the bad faith claim. During discovery, a further dispute arose when Traveler’s sought to withhold certain claim file information based upon an asserted attorney-client privilege. Fetzer objected, arguing that under applicable Ohio common law, Traveler’s position was unsupportable. The Ohio Supreme Court finds that an insurance bad-faith claim is a tort claim and, therefore, the applicable choice-of-law analysis is provided by Section 145 of 1 Restatement of the Law 2d, Conflict of Laws. 2023 WL 7170739, 2023-Ohio-3921 Travelers responded that the analysis was not governed by Ohio law, but rather by the common law of either Michigan or Indiana. Specifically, Travelers argued that under Ohio’s choice of law rules, because the original site owner was an Indiana company, and the underlying claims arose in Michigan, the laws of either of those states should apply. The trial court referred the discovery dispute to an administrative judge, who found that Ohio law applied, and ordered that some of the documents be produced. Travelers appeal the administrative judge’s order, but the Eight District Court of Appeals affirmed the administrative judge’s order, relying on the choiceof-law criteria set forth in 1 Restatement of the Law 2d, Conflict of Laws and finding that the bad-faith claim sounded in tort. Fetzer argued that because the bad-faith claim sounded in tort, the criteria set forth in Section 145 of the Restatement should control the choice of law analysis. The Court of Appeals agreed and, applying Section 145’s criteria, found that Ohio was the state with the most significant relationship to the parties and the basis for the bad faith claim against Travelers. Travelers appealed to the Supreme Court of Ohio, asserting that the bad faith claim sounds in contract “because they arise out of insurance contracts” and, therefore, the choice of law provisions in Section 193 of the Restatement should apply. Travelers’ position was again rejected by the Supreme Court of Ohio. The Supreme Court affirmed that insurance bad faith claims sound in tort because “an insurer has the duty to act in good faith in the handling and payment of the claims of its insured. A breach of this duty will give rise to a cause of action in tort against the insurer.” The Supreme Court further noted that, importantly, “a bad faith claim is not rooted in any particular text of the contract,” but rather arises “from the breach of a positive legal duty imposed by law due to the relationship of the parties.” Further, because a bad faith claim sounds in tort, the Supreme Court held, the choice of law considerations set forth in Section 145 of the Restatement are the most appropriate for determining the applicable law for addressing bad faith claims. Page 63

www.fmglaw.com © Freeman Mathis & Gary Prepared by: Pennsylvania Erin Lamb Page 64

www.fmglaw.com © Freeman Mathis & Gary Erie Insurance Exchange, Appellee v. Albert Mione and Lisa Mione In this case, the Pennsylvania Supreme Court returns to a perennial issue: the “stacking” of insurance coverages. “Stacking” refers to “the ability to add coverages from other vehicles and/or policies to provide a greater amount of coverage available under any one vehicle or policy.” The Miones’ two automobile insurance policies contained two household vehicle exclusions. Mr. Mione owned a motorcycle that was insured under a Progressive Insurance policy that did not include UM/UIM coverage. He was involved in a collision while driving that motorcycle. He also owned a car with his wife. That car was insured by Erie “on a single-vehicle policy that included UM/UIM coverage with stacking.” Another adult in the household owned a car, also insured by Erie on a single-vehicle policy. “Both of the Erie policies contained household vehicle exclusions barring UM/UIM coverage for injuries sustained while operating a household vehicle not list on the policy under which benefits are sought.” After recovering the policy limits from the at-fault driver, the Miones tried to recover UIM benefits from Erie under the twohousehold single-vehicle policies. Erie denied coverage for both claims under the household vehicle exclusion in both policies. Erie then filed for a declaratory judgment that it was not required to pay the Miones UIM benefits. The trial court granted a judgment on the pleadings. The trial court applied the Eichelman v Nationwide Ins. Co., 551 Pa. 558 (1998) holding in upholding the exclusions. In that matter, the Plaintiff, Eichelman, argued that the household vehicle exclusion violated public policy. The Pennsylvania Supreme Court upheld lower court decisions enforcing household exclusion to preclude stacking of UIM coverages. 289 A.3d 524 (Pa. 2023) The Eichelman Court dismissed that argument while noting that public policy also involved cost-containment of automobile insurance costs in the Commonwealth. Cost-containment was a stated goal of the Legislature when it passed the Pennsylvania Motor Vehicle Financial Responsibility law. Like Eichelman, Mione waived UIM coverage for his motorcycle. The cost-containment public policy of keeping down premiums would be furthered by enforcing the exclusion. The Miones also argued that the Court’s 2019 decision in Gallagher v. GEICO Indem. Co. 201 A.3d 131 (Pa. 2019) “invalidated all household exclusions in Pennsylvania.” But, the Plaintiff in Gallagher had not waived UM/UIM coverage on his motorcycle policy. “Section 1738 of the MVFRL states that, when multiple vehicles are insured under one or more policies, any UM/UIM coverage is attached by default.” An insured can waive stacked coverage limits by signing a written waiver form. Gallagher did not sign the waiver, and “would have received coverage but for the household vehicle exclusion.” The Supreme Court held that, to the contrary, the Miones “are not attempting to attach anything at all. They have not yet received any UIM benefits, but their theory is that one or both household policies can provide UIM coverage in the first instance.” Section 1738 is “not implicated” because they are not “stacking UIM benefits from the household policies on top of UIM benefits from the motorcycle policy.” There is no “disguised waiver” as in Gallagher. “For a household vehicle exclusion to be acting as an impermissible de facto waiver of stacking, the insured must have received UM/UIM coverage under some other policy first, or else Section 1738 is not implicated at all.” The Supreme Court affirmed the lower courts order and enforced the exclusions. Page 65

www.fmglaw.com © Freeman Mathis & Gary HTR Restaurants, Inc. v. Erie Ins. Exch. This decision of the Supreme Court of Pennsylvania concerned the limitation of Rule Pennsylvania Rule of Civil Procedure 213.1. It is a piece of the much larger sea of decisions and implications arising out of the COVID-19 pandemic. All the cases involved policyholders suing Erie Insurance for denial of their business interruption coverage claims. They petitioned the Allegheny County (Pittsburgh) Court that ruled in their favor, ordering Erie to cover such claims, to consolidate not only cases in Allegheny County, but any pending and future cases in the Commonwealth of Pennsylvania. Their request was granted by the Allegheny County court. That decision was appealed to the Superior Court of Pennsylvania, and the Supreme Court took up the appeal from the Superior Court decision. The Supreme Court agreed that, “the trial court lacked authority to coordinate actions that had not been filed.” But, they also held that “Erie waived any argument that Plaintiffs could not seek coordination when it failed to raise this issue in the trial court.” The Superior Court was affirmed. Rule 213.1(a) provides that “in actions pending in different counties which involve a common question of law or fact which arise from the same transaction or occurrence, any party, with notice to all other parties, may file a motion requesting the court in which a complaint was first filed to order coordination of the actions.” Plaintiffs petitioned Allegheny County to coordinate all statewide cases for business interruption claims against Erie Insurance in Allegheny County. Pending claims already existed in both Philadelphia and Lancaster Counties. Allegheny County did so. Erie appealed the decision to the Superior Court. The Superior Court affirmed in part and reversed in part. The Superior Court agreed that the Allegheny County Court exceed the authority of Rule 213.1 because they ordered that not only existing cases be coordinated in Allegheny County but also cases against Erie that were not yet filed. However, Erie also argued that Rule 213.1 did not allow the Plaintiffs to petition for coordination. The Superior Court ruled against Erie and held that “the Plaintiffs were parties who were empowered by Rule 213.1 to file the motion for consolidation.” The Plaintiffs argued that the Supreme Court’s principles of construction supported interpreting Rule 213.1 to allow the coordination of related cases that are not yet filed. They argued that the word “pending” in Rule 213.1 was “ambiguous.” Both the trial court and Plaintiffs pointed to Rule 213.(d)(3) in arguing that it “affords broad discretion to the trial court to ‘make any other appropriate order’ and “is not limited to ‘pending’ actions. In a matter arising out of claims against a carrier related to the COVID-19 pandemic, Supreme Court of Pennsylvania affirmed a Superior Court ruling that Rule 213.1 does not allow for the state-wide coordination of unfiled lawsuits at the time coordination is sought. No. 21 WAP 2022, 2023 WL 8518946 (PA. Dec. 8, 2023) An Explanatory Comment to the rule also states that the Rule “responds to the absence of any guidelines in Pennsylvania similar to multi-district litigation in the federal courts (“MDL”) and generally affords trial courts more discretion than their federal counterparts enjoy.” The Rule, its intended purpose, and the need to preserve judicial economy required that coordination orders also applied to future cases. Erie countered that the plain language of Rule 213.1 and the “unambiguous meaning” of the word “pending” made it clear that Rule 213.1 only applied to “actions in existence at the time the coordination motion is filed.” Erie also distinguished Pennsylvania’s coordination rule from federal Multi-District Litigation, which is a separate court with specialized judges. Due process concerns were also present given that Plaintiffs’ counsel had sought to be considered “lead counsel,” Delaware County Plaintiffs were trying to reverse the consolidation as consolidated cases move more slowly, and Erie’s own right to separate trials to “focus on individualized claims” were all implicated and impaired. The Court noted that Erie did not argue that the various actions did not involve common questions of law or fact or arise form the same transaction or occurrence. The sole dispute before them was whether Rule 213.1 allowed a trial court to consolidate existing cases and future cases, and whether future cases could be considered “pending.” The Court held that “this provision plainly limits coordination to cases that already have been filed.” “Accepting Plaintiffs’ argument would require us to rewrite Rule 213.1 and hold that it does not mean what it says.” The trial court’s order exceeded the scope of Rule 213.1. The second issue, appealed by Erie, concerned who is “any party” under Rule 213.1(a) that may bring a motion for coordination. Erie argued that “”any party’ means a party who wants their subsequently-filed case to be coordinated with the first-filed case.” Erie argued that, “Rule 213.1 has never been read to permit nonparties to file a motion to coordinate and transfer venue for cases in other county courts to which the movant is not a party, where none of the actual parties to such cases have move to transfer their case (and where, as here, in many instances, all the parties in cases to be transferred to venues across the state opposed having their cases transferred to an inconvenient forum).” Plaintiffs countered that “Erie did not dispute Plaintiffs’ ability to seek coordination in the trial court” and only raised the issue on appeal. Plaintiffs contended Erie had waived the issue. The trial court agreed (noting that Erie did not address the waiver agreement in its reply brief). The order of the Superior Court was affirmed. Page 66

www.fmglaw.com © Freeman Mathis & Gary Prepared by: Rhode Island Marc E. Finkel Sean Rapela Page 67

www.fmglaw.com © Freeman Mathis & Gary Romeo v. Allstate Property and Casualty Insurance Company On February 5, 2010, the Plaintiff Insured’s residence suffered a water loss followed by ice and flood. Plaintiff Insured made a claim for the loss under a policy of insurance issued by Defendant Insurer. While the parties agreed the loss was covered by the terms of the policy, they could not agree as to the extent of the loss and the cost of remediation. The policy mandated that, if the parties disagreed as to the amount of the loss, either party could seek an appraisal within the two-year window provided under the policy. Plaintiff Insured immediately demanded appraisal after the loss, but Defendant Insurer refused. Thereafter, Plaintiff Insured filed suit (“First Action”). In the First Action, Defendant Insurer filed a counterclaim seeking an order from the trial court justice declaring the parties were required to submit the matter to appraisal. Subsequently, the parties filed cross-motions for summary judgment. At the hearing on the cross-motions for summary judgment, both parties agreed the loss was covered, but disagreed as to the amount of the loss. Further, both parties agreed this could be addressed at appraisal and that appraisal was the proper forum for resolution of the dispute. Based upon this agreement, the trial justice granted Defendant Insurer’s motion for summary judgment “without prejudice” and assured Plaintiff Insured that “if the appraisal process doesn’t allow you to address [the] issues, then you can press your case at a later date.” Final judgment entered thereafter. Plaintiff Insured did not file a motion for reconsideration or an appeal from the judgment. Four years later, on March 7, 2017, Plaintiff Insured designated an appraiser and requested Defendant Insurer do the same. Defendant Insurer refused, stating Plaintiff Insured’s demand for appraisal was not timely. Rhode Island Supreme Court reversed trial court holding and found that insured’s demand for appraisal and initial lawsuit on first party loss were timely and that insurer made judicial admission that appraisal was the proper forum for resolution. 292 A.3d 1190 (2023) According to Defendant Insurer, this second demand for appraisal was subject to the same two-year limitation period contained within the policy, which had long since passed, and Plaintiff Insured failed to make a demand within that time period. Plaintiff Insured then commenced the instant action on September 15, 2017. The parties again filed cross-motions for summary judgment. A hearing was held before the same trial court justice who granted Defendant Insurer ’s motion for summary judgment in the First Action. The trial court justice denied the Plaintiff Insured’s motion for summary judgment. Final judgment entered for Defendant Insurer. The Plaintiff Insured appealed. The Rhode Island Supreme Court held that both parties acknowledged that after the loss Plaintiff Insured demanded appraisal and Defendant Insurer refused to proceed to appraisal, arguing that portions of Plaintiff Insured’s alleged loss were not covered by the policy. Only then did Plaintiff Insured file suit. Because the two-year limitation period would have ended on February 5, 2012, Plaintiff Insured’s original demand for appraisal and the initial action brought in 2011 were timely, as they fell within the requisite limitation period. Thus, neither was time-barred. Moreover, in the First Action, Defendant Insurer urged the trial justice to grant its motion for summary judgment based on its contention that Plaintiff Insured’s claim was required to be resolved at appraisal. Additionally, at the conclusion of the hearing in the First Action, there was a clear understanding the “appraisal process would be, or already was, ongoing.” The court held that Defendant Insurer’s assertion both in its motion for summary judgment and counterclaim that appraisal was required amounted to a binding judicial admission. Accordingly, the Rhode Island Supreme Court ruled that the trial court erred in granting Defendant Insurer ’s motion for summary judgment. Page 68

www.fmglaw.com © Freeman Mathis & Gary Atmed Treatment Center, Inc. v. Travelers Indemnity Company The underlying action arose from an allegation of racial discrimination that purportedly occurred at Plaintiff Insured’s business in July 2015. In November 2015, the complainant in the underlying action filed a charge of discrimination (“Charge”) with the Rhode Island Commission for Human Rights (“Commission”). Plaintiff Insured retained counsel to defend the Charge. On January 17, 2019, Plaintiff Insured removed the case to the United States District Court for the District of Rhode Island. Plaintiff Insured did not notify Defendant Insurer of the Charge and demand Defendant Insurer defend it against the Charge until August 20, 2019. In response to the demand, Defendant Insurer informed Plaintiff Insured the Charge was not covered because the Charge did not “set forth a claim for ‘bodily injury’ or ‘property damage’ caused by an ‘occurrence.’” The policy also contained a “Discrimination” exclusion. On December 5, 2019, Plaintiff Insured filed the present action against Defendant Insurer. Plaintiff Insured sought declaratory judgment that Defendant Insurer had a duty to defend it, asserting breach of contract, and a bad faith claim. The trial court ruled in Defendant Insurer favor. Plaintiff Insured appealed the decision. 285 A.3d 352 (2022) The Rhode Island Supreme Court agreed Defendant Insurer did not have a duty to defend Plaintiff Insured under the policy exclusion. However, it ruled the bad faith claim “was not properly before the trial justice.” Plaintiff Insured alleged Defendant Insurer breached the insurance contract by making misrepresentations of pertinent provisions of the policy. The court held because the parties were not presented with the opportunity to fully debate the claims set forth, the trial justice erred in granting summary judgment on the bad faith claim because facts may be proven at trial which support a claim for breach of contract or breach of implied covenant of good faith and fair dealing based on Defendant Insurer’ alleged misrepresentations. Accordingly, the court affirmed the judgment of the Superior Court except as to the bad faith claim, which it vacated and remanded to the Superior Court for further proceedings. The Rhode Island Supreme Court ruled that Defendant Insurer did not have a duty to defend Plaintiff Insured, an urgent care facility, in the discrimination case, as the suit did not fall within the scope of risk covered under the CGL policy. But, it remanded a bad faith claim back to a lower court for further consideration. Page 69

www.fmglaw.com © Freeman Mathis & Gary Prepared by: South Carolina Shawn Bingham Adam Reichel Marissa Dunn Page 70

www.fmglaw.com © Freeman Mathis & Gary In USAA Casualty Insurance Company v. Rafferty, USAA’s insured was struck and killed by an underinsured motorist while riding her bicycle. The insured’s representative filed a claim under underinsured motorist property damage coverage for the damage to the bicycle, but USAA denied the claim because the bicycle did not fall within the policy’s definition of “your covered auto.” The plaintiff argued that notwithstanding the policy language, USAA was required to offer property damage coverage, and the failure to make such an offer meant that the policy would be construed to include such coverage. The U.S. District Court for the District of South Carolina certified to South Carolina’s Supreme Court the question of whether USAA’s limitation of UIM coverage to vehicles defined in the policy as “covered autos” was valid. The Rafferty Court’s conclusion that insurers must include UIM property damage coverage was informed by the interplay of S.C. Code Ann. § 38- 77-160 and § 38-77-140. Section 38-77-161 “requires an automobile insurer to offer UIM coverage ‘up to the limits of the insured[‘s] liability coverage’” while “section 38-77-140 requires an insured to carry liability coverage in the minimum amount of $25,000 per person per accident for bodily injury; … $50,000 for bodily injury for all persons injured in an accident; and the minimum amount of $25,000 for property damage per accident.” Id. at 134-35, 886 S.E.2d at 224. The Court concluded that § 38-77-160 requires insurers to offer UIM coverage equal to the liability limits required under § 38-77-140, which expressly includes coverage for property damage. Furthermore, because the statutory definition of “damages” included “actual damages,” coverage cannot be limited to the insured’s “covered auto,” but must include all property owned by the insured. In Nationwide Affinity Insurance Company of America v. Green, the same question arose after the insured suffered alleged bodily injury and property damage from being struck by a motor vehicle while walking home from school. The policy in Green provided $25,000 in UIM property damage coverage with property damage being defined as “injury to or destruction of ‘your covered auto.’” The question in Green was whether the policy’s limitation of UIM property damage coverage to the insured’s covered auto was proper. Stating that its recent holding in Rafferty resolved the issue, the Court held that the limitation was not. While the Rafferty and Green decisions may not be surprising, in light of prior decisions by the Court of Appeals, they do serve as confirmation that § 38-77-160 requires UIM property damage coverage. Moving forward, insurers providing motor vehicle coverage in South Carolina should be aware that South Carolina’s statutory code requires them to offer UIM property damage coverage for all property owned by the insured of at least $25,000 per accident. In two cases, the South Carolina Supreme Court held that insurers must offer underinsured motorist coverage for property damage and cannot limit coverage to only property defined as “covered autos” in the applicable policy. USAA Casualty Ins. Co. v. Rafferty Nationwide Affinity Ins. Co. of America v. Green 439 S.C. 130, 886 S.E.2d 222 (2023) 439 S.C. 137, 886 S.E2d 225 (2023) Page 71

www.fmglaw.com © Freeman Mathis & Gary Denson v. Nat'l Cas. Co. After Garland Denson was killed in a car crash involving a drunk driver, his estate filed suit, alleging that the at-fault driver was overserved at a bar called Royal Lanes, which was insured by Defendant National Casualty Company under a general liability policy with no liquor liability endorsement. Liquor liability coverage is statutorily mandated in South Carolina, under S.C. Code Ann. § 61-2-145, for all persons licensed or permitted to sell alcoholic beverages for on-premises consumption after 5:00 p.m. This code section also codifies a responsibility on insurers who provide liquor liability coverage to such persons to notify the South Carolina Department of Revenue if such coverage lapses or is terminated. 439 S.C. 142, 886 S.E.2d 228 (2023) National Casualty had previously provided liquor liability coverage to Royal Lanes, but at the time of the car crash, that policy had lapsed. Consequently, the family surviving Denson filed a direct negligence action against National Casualty, arguing that because National Casualty did not notify the South Carolina Department of Revenue that Royal Lanes’s coverage had lapsed, it was liable to the decedent’s estate. The family asserted a theory of negligence per se based on the insurer’s violation of § 61-2-145(C). The District Court certified the question to the state Supreme Court. The Supreme Court held that § 61-2-145 does not create a private cause of action against an insurer because the statute lacks an express sanction for a direct action. The Court also held that negligence per se does not apply because the statute was not designed to protect against the harm suffered by the Denson. Indeed, while the Court noted other consequences that may result from a failure to report to the Department of Revenue, a private cause of action for negligence is not one of them. The South Carolina Supreme Court found that a plaintiff had no private right of action against an insurer for its failure to report an insured business’s lapse of liquor liability coverage to state regulators as required by statute. Page 72

www.fmglaw.com © Freeman Mathis & Gary Ballard v. Admiral Ins. Co. In this case, the attorney, Ballard, had been sued by the estate of a deceased former client in connection with her handling of a lump-sum buy-out of a trust of which the deceased client was the beneficiary. Ballard’s insurer, Admiral, wished to resolve the claim, but Ballard refused consent to settlement and instructed Admiral that it should not initiate settlement discussions or mediation. Admiral then non-renewed the policy, citing the insured’s failure to cooperate in settlement. The professional liability policy had provisions giving the insurer the right to engage in settlement conversations and requiring the insured’s cooperation in settlement. While the policy required that the insurer secure the insured’s consent before entering into any settlement, it also contained a “hammer clause” stating that if the insured refused consent, the insurer’s indemnity obligation would be capped at the amount by which the claim could have been settled and the duty to defend would end. 2023 WL 4218123 (S.C. Ct. App. June 28, 2023) Following the policy non-renewal, Ballard filed a declaratory judgment action, to which Admiral counterclaimed for a declaration that it had a right under the policy to engage in settlement negotiations, that Ballard had a duty to cooperate in the defense and settlement of the claim, and that the “hammer clause” was enforceable as written. The trial court granted Admiral judgment on the pleadings on each of these issues. On appeal, the Court of Appeals affirmed, rejecting Ballard’s contention that the hammer clause can be invoked only if the insured’s withholding of consent to settlement was “unreasonable.” The court noted that the word “unreasonable” did not appear anywhere in the policy language; to read such a requirement into the policy would be to rewrite the policy, which is not permitted. Accordingly, the court found that the hammer clause was unambiguous and enforceable, and that the insurer had a right under the policy to engage in settlement communications. The South Carolina Court of Appeals found that an insurer had properly invoked a so-called “hammer clause” in its professional liability policy after the insured attorney had failed to cooperate with its efforts to settle a malpractice case filed against the attorney. Page 73

www.fmglaw.com © Freeman Mathis & Gary Hood v. United Servs. Auto. Ass'n An insured, Therese Hood, filed suit against her insurer, USAA, alleging bad faith handling of her claim for underinsured motorist benefits. Along with her common law bad faith claim, she pleaded a cause of action for negligence. The jury returned a verdict in favor of USAA on the bad faith count, but found for the plaintiff on the negligence count. The trial court then entered a judgment notwithstanding the verdict (“JNOV”) in favor of USAA, finding that South Carolina does not recognize a separate negligence claim against insurers for their claim handling. Hood appealed. Whether insurers could be sued for negligence was an issue of first impression for South Carolina appellate courts. However, the issue had previously been addressed by the U.S. District Court for the District of South Carolina, which found that a negligence cause of action against insurers is not authorized under South Carolina law. See e.g., Skinner v. Horace Mann Insurance Company , 369 F. Supp. 3d 649, 654 (D.S.C. 2019). 2023 WL 155073 (S.C. Ct. App. Jan. 11, 2023) The Court of Appeals agreed with the reasoning of the prior federal court rulings and affirmed the trial court’s JNOV, finding no separate cause of action for negligence. Citing to Nichols v. State Farm Mutual Automobile Insurance Company , 279 S.C. 336, 306 S.E.2d 616 (1983), the Court noted that it is appropriate for a jury to consider an insurer’s negligence when deciding whether the insurer acted in bad faith. The Court concluded: “there is no tort against an insurance company for negligence that does not also cross the threshold of breaching the duty of good faith and fair dealing arising out of the insurance contract.” The insured’s negligence claim, therefore, was duplicative of her bad faith claim, and judgment as a matter of law in favor of USAA on this claim was proper. The South Carolina Court of Appeals held that insureds may not recover against their insurer on a negligence cause of action for the insurer’s claim handling. Page 74

www.fmglaw.com © Freeman Mathis & Gary Lorne Hiller Katie Morsman Prepared by: Tennessee Page 75

www.fmglaw.com © Freeman Mathis & Gary Tennessee Farmers Mutual Insurance Company, Inc. v. Linkous Ms. Linkous and her brother Mr. McCluskey owned a house in Clarkrange, Tennessee. The house, which was insured by Tennessee Farmers Mutual Insurance Company, was destroyed by a fire on April 12, 2019. After the fire, the Insureds filed a claim with Tennessee Farmers under the policy insuring their house. Although both Insureds were living in Florida at the time of the fire, they warranted that the house was their residence. The policy defined “residence” as “the one-family or two-family dwelling owned by you, described in the Declarations, and occupied by you.” The Policy defined “occupied” to mean “the regular use of the dwelling place by a person or persons to whom reference is made.” The policy further provided that it was automatically void if the Insureds, “after any loss or occurrence,” “[c]onceals or misrepresents any material fact or circumstance relating to this policy or loss; [m]akes false statements relating to this policy or loss; or [c]omits fraud relating to this policy or loss.” In the claim, Ms. Linkous alleged that she spent six to eight months of the year living at the house. However, it was later revealed that Ms. Linkous moved out of the house in 2011 and that the gas and water on the property had been shut off since 2014. Ms. Linkous also claimed that a myriad of her personal property in the home, $34,992.00 worth, was destroyed in the fire. Yet several fire investigators opined that there was little to no evidence of the claimed personal property left in the debris of the fire. Tennessee Farmers filed a declaratory judgment action requesting that the court declare that Tennessee Farmers was not liable for coverage of the Insureds’ house or any of their personal property. Tennessee Farmers alleged in the complaint that the Insureds “submitted a materially false and fraudulent property list of personal property located in the property and have presented a false and fraudulent claim.” The case went to trial in June of 2022. Through a series of witnesses, it was revealed that Ms. Linkous likely did not live in the house after 2011. It was also revealed that many of the claimed items lost in the fire did not exist. During her testimony, Ms. Linkous frequently provided contradictory statements and admitted that 35% to 40% of the inventory list of the items lost in the fire was incorrect. 2023 WL 4078693 (Tenn. Ct. App. June 20, 2023) The trial court found that the Insureds’ use of the house was not “occupation” under the Policy, and that Ms. Linkous was not a credible witness who “misrepresented material facts relating to [the] policy.” Therefore, the trial court held that Tennessee Farmers “properly denied the claim of Linda Linkous.” Ms. Linkous appealed the trial court’s ruling against her, claiming that the trial court erred in ruling (1) that the house was not “occupied” under the terms of policy and (2) that her claim was barred because she submitted materially false statements to Tennessee Farmers. The Court of Appeals affirmed the trial court’s ruling, and in doing so, analyzed the meaning of “occupied” in the Policy. The Policy defined “occupied” as “the regular use of a premises as a dwelling place.” The Court further defined “regular use” to mean “[a] use that is usual, normal, or customary, as opposed to an occasional, special, or incidental use.” The Court deferred to the trial court’s finding that Ms. Linkous’ testimony was not credible and that it appeared the Claimants use of the property was infrequent. Therefore, the Court held, the trial court did not err in finding that Claimants did not “occupy” the house as was required for coverage under the Policy. Ms. Linkous’ second argument on appeal was that the trial court erred in concluding that the Policy was void because Tennessee Farmers had not proven that “the purported misrepresentations were willfully and knowingly made with the intent to deceive or defraud the insurer.” Citing Tennessee precedent, the Court held that an insured’s false statement can be “knowingly” made if the insured “swears with disregard to the truth or swears to matters as true within his knowledge when in fact he knows little or nothing about them.” The Court noted that Ms. Linkous herself admitted that she misrepresented items on the inventory list and that the testimony of the fire investigators further threw Ms. Linkous’s claims into doubt. Based upon these findings, the Court held that the trial court did not err when it held that the Policy was void due to Ms. Linkous’ misrepresentations. The Court of Appeals of Tennessee affirmed the trial court’s finding that an insured’s claim was properly denied as the insured property was not “occupied” at the time of loss, and that her policy was properly voided because she made willful and knowing material misrepresentations with the intent to deceive the insurer when filing a claim. Page 76

www.fmglaw.com © Freeman Mathis & Gary Hayes Fam. P'ship v. Tennessee Farmers Mut. Ins. Co. Tennessee Farmers Mutual Insurance Company issued Hayes Family Partnership a policy of insurance that covered a commercial building in Jackson, Tennessee. In February of 2020, George Hardey drove his vehicle into the building, causing damage. Hardey was insured by Allstate under an auto policy with $25,000 in property damage liability coverage. Shortly after the accident, on March 5, 2020, Hayes reported the accident to Tennessee Farmers. On March 12, 2020, Hayes hired a company to repair the building and, without knowledge or consent by Tennessee Farmers, executed an assignment of its rights under the Tennessee Farmers policy to that company, transferring “all insurance rights, benefits, and causes of action under any applicable insurance policies.” On May 13, 2020, again without the knowledge or consent of Tennessee Farmers, Hayes then executed a release of all claims against Hardey and Allstate for the full $25,000 policy limits under the Allstate policy. One month later, Hayes sent a sworn statement in partial proof of loss to Tennessee Farmers for $207,928.70 needed to repair the building. On November 4, 2020, Hayes then demanded appraisal under the policy. On March 9, 2021, Tennessee Farmers notified Hayes that there was no coverage under the policy due to Hayes settlement of the claim against Hardey without Tennessee Farmers’ knowledge or consent and, therefore, Tennessee Farmers would not be participating in an appraisal. Tennessee Farmers’ refusal to participate in an appraisal resulted in Hayes’ commencement suit, filing a “Petition to Enforce Appraisal.” Among other motions, Tennessee Farmers filed a motion for a judgment on the pleadings based on Hayes’ release executed in favor of Hardey. Treating the motion as a motion for summary judgment, the trial court denied the motion. 2023 WL 4348870, at *1 (Tenn. Ct. App. July 5, 2023) Citing to the “made whole doctrine,” the trial court concluded that Hayes’ execution of the release in favor of Hardey “does not foreclose Hayes’ right to pursue recovery from Tennessee Farmers under the commercial policy,” and that “Tennessee Farmers may not avoid coverage for Hayes on the basis of breach of the insurance policy condition that its insured must do everything necessary to secure its rights and nothing to impair those rights, and Hayes’ release of Hardey.” The Court of Appeals took these issues up on interlocutory appeal, looking to the central question of whether extinguishment of Tennessee Farmers’ subrogation interest through Hayes’ release of Hardey forfeits coverage under the Tennessee Farmers policy. Looking to its prior holdings in Kentucky National Insurance Co. v. Gardner, Aetna Casualty & Surety Co. v. Tennessee Farmers Mutual Insurance Co., and Doss v. Tennessee Farmers Mutual Insurance Co., all bearing very similar fact patterns to Hayes’ actions, the Court of Appeals held that Hayes had “materially breached the policy of insurance by impairing Tennessee Farmers’ subrogation rights against Hardey and Allstate.” Therefore, the Court reversed the decision of the trial court, holding that Tennessee Farmers had no liability to Hayes and/or the repair company due to Hayes’ material breach of the policy. The Court of Appeals also dispensed with the trial court’s application of the “made whole doctrine,” finding that “the foregoing material breach of the Tennessee Farmers policy by Hayes constitutes a forfeiture of any and all rights Hayes may have had under the Tennessee Farmers policy.” In fact, the Court found that the made whole doctrine was inapplicable, as “Hayes forfeited any and all rights it may have had under the policy and because Tennessee Farmers ha[d] not remitted any payments to or for the benefit of Hayes and [wa]s not seeking to recover any damages from Hardey or his insurer.” The Court of Appeals of Tennessee overturned the trial court’s decision and found that an insured materially breached the terms of the insurance policy by releasing a third-party tortfeasor and his insurer from liability without the insurer’s consent. Page 77

www.fmglaw.com © Freeman Mathis & Gary Prepared by: Texas Marty Schexnayder Gabriel Canto Lance Felicien Page 78

www.fmglaw.com © Freeman Mathis & Gary Geovera Specialty Ins. Co. v. Mukhar Dog bite victim Mak-Lau brought suit in state court against tenant dog owners and the homeowners alleging negligence against the tenants for allowing their dog to leave their yard and against the owners for failure to install an effective fence. Mak-Lau claimed the dog bit him while roaming the neighborhood. In this separate federal action, the purported Insurer, Geovera Specialty Ins. Co., sought a declaratory judgment that it had no duty to defend the tenants and homeowners nor a duty to indemnify Mak-Lau in the store court claim. The policy at issue covered liability only for “‘bodily injury’ and ‘property damage’ that occur on the premises shown in the Declarations and arises out of the ownership, maintenance, occupancy or use of the premises.” Applying the “eight-corners rule,” the United States District Court for the Southern District of Texas held that the homeowner’s insurer had no duty to defend where the petition alleged the dog attack occurred while the dog was roaming freely in the neighborhood and did not allege the attack occurred on the premises of the home. No. 3:22-CV-206, 2023 WL 6371030, (S.D. Tex. Sept. 25, 2023) The District Court for the Southern District of Texas held that an insurer had no duty to defend or indemnify the insured for claims involving an off-premises dog bite. Under the eight-corners rule, a court compares the claimant’s allegations against the policy language without regard for the truth or falsity of the allegations and without reference for other facts known or proven. Under this simple analysis, the injury occurred beyond the covered premises and was not covered. The tenants/owners claimed MakLau’s petition did not explicitly negate the possibility that the attack occurred on the premises, but the Court held that was not a plausible reading of the petition taken as a whole. The duty to indemnify, on the other hand, is not “circumscribed” by the eight-corners rule, but rather depends on the facts actually established in the underlying case. However, applying Texas Supreme Court precedent, where the lack of duty to defend negates any possibility of a duty to indemnify, the lack of duty to defend negates a duty to indemnify. Here, the facts presented uncontrovertibly established that without a duty to defend, there could be no duty to indemnify. Ultimately, Mak-Lau’s admission the attack occurred off the premises negated both Geovera’s duty to the defend the underlying defendants and duty to indemnify MakLau. Page 79

www.fmglaw.com © Freeman Mathis & Gary Guzman v. Allstate Assurance Co. Plaintiff filed suit against Defendant Allstate Assurance Company (“Allstate”), regarding a life insurance policy issued to her husband, Saul Guzman. In his 2017 life insurance application, Mr. Guzman stated that he never used tobacco products, and as a result, he obtained a $250,000 policy at a “Standard No Tobacco” annual premium rate. Plaintiff filed a claim for life insurance benefits following the death of Mr. Guzman, but the claim was denied by Allstate after it received medical records in which Mr. Guzman represented himself as a smoker. The plaintiff sued Allstate for breach of contract, violation of the Texas Deceptive Trade PracticeConsumer Protection Act, and violation of § 542.003 of the Texas Insurance Code. No. 23-10267, 2023 WL 6807054 (5th Cir. Oct. 16, 2023) Allstate filed a counterclaim for declaratory judgment that Mr. Guzman’s policy was rightfully rescinded due to material misrepresentations made by Mr. Guzman in the application. The district court granted summary judgment in favor of Allstate. The district court explained that “Allstate satisfied all the elements for rescission on the grounds of misrepresentation and was therefore entitled to rescind Mr. Guzman's policy under § 705.051 of the Texas Insurance Code. On appeal, The Fifth Circuit found that the lower court’s conclusion that Mr. Guzman had intentionally acted to deceive the life insurer when he misrepresented his smoking history in the policy application was plausible based on evidence that 1) his medical records showed that he was a smoker, and 2) he knew that his status as a smoker would increase his premiums. Therefore, The Fifth Circuit affirmed the declaratory judgment that the life insurer had properly rescinded the policy due to Mr. Guzman’s material misrepresentation in the application. The United States Court of Appeals for the Fifth Circuit held that a life insurer properly rescinded a policy based on the insured's misrepresentation of his smoking history. Page 80

www.fmglaw.com © Freeman Mathis & Gary In re Liberty Cnty. Mut. Ins. Co. Plaintiff was involved in a vehicular accident in April 2017 with an uninsured driver. She filed a claim with Liberty County Mutual Insurance Company (“Liberty”) to recover damages in excess of $100,000 under the Uninsured motorist (“UIM”) provision in her policy, which Liberty denied. Plaintiff sued Liberty for violations of the Insurance Codeand sought a declaration of her entitlement to UIM benefits. Plaintiff testified in depositions that the accident in April 2017 had caused injuries to her “cervical spine (neck, including headaches and radiation of pain into her extremities—including her arm and shoulder), her thoracic spine (middle back), her lumbar spine (lower back, including radiation of pain into her extremities—including her right foot) and her right shoulder.” The record revealed that plaintiff had been involved in vehicular accidents before and after the accident at issue. No. 22-0321, 2023 WL 7930099, (Tex. Nov. 17, 2023) Liberty served two Notices of Intention to Take Deposition by Written Question (“DWQ”), each with a subpoena to the plaintiff’s primary care physician. One of the subpoenas sought all documents pertaining to the doctor's care, treatment, and examination of the plaintiff over a fifteen-year period from April 2007 to April 2022. Plaintiff moved to quash both DWQs, arguing that it was “on its face overly broad, not limited in scope, and is a mere fishing expedition” and that Liberty “has no legitimate need for these records as requested.” The trial court granted plaintiff's motion to quash. On Appeal, the Supreme Court of Texas ruled that the trial court had abused its discretion when it refused to allow the Liberty to obtain medical records held by plaintiff’s primary care physician because those records were relevant to whether the damages she was seeking in her UIM claim resulted from the accident at issue. The Supreme Court of Texas ruled in favor of the insurer on the discoverability of the insured's medical records in an uninsured motorist lawsuit. Page 81

www.fmglaw.com © Freeman Mathis & Gary Galina Jakobson Meredith Freidheim Mary Mead Prepared by: Washington Page 82

www.fmglaw.com © Freeman Mathis & Gary Hermanson Company, LLP v. Siriuspoint Specialty Insurance This case involves an insurance dispute arising from a professional liability policy provided by Siriuspoint as the insurer and Hermanson, a mechanical contractor, as the insured. In 2021, Anderson Construction, a general contractor, hired Hermanson to provide “design-build services for a mechanical system at the Puyallup Surgical Center’s remodeling project.” During the project, Hermanson “experienced design and engineering challenges,” and then incurred significant expense “to avoid or mitigate professional negligence claims.” After Anderson Construction made a claim against Hermanson for such challenges, Hermanson sought coverage under its professional liability policy with Siriuspoint under the “Contractor’s Professional Redress” provision (the “Tender”). However, prior to the Tender, Hermanson incurred $355,503.50 in an attempt to resolve the design and engineering issues of Anderson Construction’s underlying claim (the “Redress Expenses”). As a result, Siriuspoint denied coverage because “Hermanson had violated its insurance policy by incurring these costs” before the Tender. Hermanson responded to Siriuspoint’s denial of coverage by stating that an insurer can only escape liability for an otherwise covered claim on the grounds that the insured breached a policy condition “if the insurer can prove that the breach caused actual and substantial prejudice.” In March 2023, Hermanson filed suit against Siriuspoint, alleging that Siriuspoint (1) breached its insurance contract by failing to pay the full amount of policy benefits, (2) breached the covenant of good faith and fair dealing, (3) violated the Washington Unfair Claims Settlement Practices Act and the Washington Consumer Protection Act, and (4) violated the Insurance Fair Conduct Act.At the heart of Hermanson’s lawsuit, was interpreting the “Contractor’s Professional Redress Coverage” provision. Corp., 2023 WL 8701090 (W.D. Wash. Dec. 15, 2023) In pertinent part, the “Contractor’s Professional Redress Coverage” provision stated the following: The parties did not dispute that Hermanson violated the above notice condition, but rather disputed the consequences of such violation. Hermanson moved for partial summary judgment on the grounds that Siriuspoint did not establish actual and substantial prejudice as a result of Hermanson’s failure to comply with the notice condition of the policy. Washington case law establishes that, to deny coverage, an insurer must show actual and substantial prejudice when an insured has breached a notice clause “which excludes coverage if the insured fails to notify the insurer of accidents or occurrences in a timely manner.” Further, a claimsmade policy requires “that a claim be made against the insured and reported to the insurer during the policy period, no matter the date of the insured’s alleged wrongful conduct.” Therefore, despite violating the notice provision of the policy, the Court noted Hermanson made its claim within the time frame of its claims-made policy with Siriuspoint. In reach its decision, the Court relied on Safeco Title Ins. Company v. Gannon, where the Washington Supreme Court declined to apply the prejudice rule because the insured’s policy was a claims-made policy and the insured failed to make a claim within the dates of his policy. 54 Wash. App. 330, 331, 774 P.2d 30 (1989). Thus, Siriuspoint was required, yet failed, to show that it incurred actual and substantial prejudice as a result of Hermanson not complying with the policy’s notice condition. The Western District Court of Washington found that when an insured fails to comply with a “notice clause” under a claims-made policy the insurer must show that it suffered actual and substantial prejudice to deny coverage for a claim. The Company will indemnify the INSURED for REDRESS EXPENSE incurred to avoid or mitigate a CLAIM for PROFESSIONAL LOSS arising from a negligent act, error or omission with respect to the rendering of PROFESSIONAL SERVICES, provided that….prior to incurring such REDRESS EXPENSE, the INSURED demonstrates to the Company the reasonableness and necessity of such expenses in light of the protected avoidance or mitigation of a covered a CLAIM, and the Company consents in writing to such expense. Page 83

www.fmglaw.com © Freeman Mathis & Gary Lucky Vintage Brands, LLC and Peter Gissing v. Ohio Security Insurance Company Plaintiffs Lucky Vintage Brands and Peter Gissing, its managing member brought this action against Ohio Security Insurance Company for breach of contract, bad faith, and alleged violations of the Washington Consumer Protection Act (“CPA”) and the Washington Insurance Fair Conduct Act (“IFCA”). Notably, Defendant insured Plaintiffs under a commercial general liability policy. In February 2021, Matthew Pollitz, who operated X-Ray Auto, and Hazelwood, LLC, a cocktail lounge in Seattle, brought a putative class action suit against Plaintiffs for breach of contract and violation of the CPA. In that suit, Pollitz and Hazelwood alleged that they had entered into “Member Royalty Agreements” with Lucky Vintage whereby Pollitz and Hazelwood granted Lucky Vintage licenses to use their respective logos and art. In exchange, Lucky Vintage allegedly agreed to remit royalties from the sale of apparel displaying their logos and art, and to provide quarterly statements documenting Lucky Vintage’s sales numbers and internet traffic statistics. According to Pollitz and Hazelwood, Lucky Vintage never provided any royalties or quarterly statement as required under their respective contracts. Subsequently, Lucky Vintage and Gissing tendered the lawsuit to their carrier Ohio Security as a “personal and advertising injury” for defense and indemnity coverage under the policy. Ohio Security denied coverage by explaining that the lawsuit did not constitute a covered “personal and advertising injury” as defined in the policy, and the allegations against Lucky Vintage and Gissing were subject to the policy’s breach of contract exclusion. Lucky Vintage and Gissing then filed suit against Ohio Security. 2023 WL 3645306 (W.D. Wash. May 25, 2023) In the coverage action, the Court granted Ohio Security’s partial motion for summary judgment, holding that the policy did not conceivably cover allegations in the underlying lawsuit and therefore had no duty to defend Plaintiffs. In reaching its determination, the Court concluded that Lucky Vintage and Gissing did not allege a “personal and advertising injury” as defined in the policy. Specifically, the Court reasoned that the policy did not afford coverage because the underlying lawsuit did not meet the requisite causal connection between Lucky Vintage’s advertising activities and the purported harm. In other words, the injuries alleged in the underlying lawsuit were caused by Lucky Vintage’s failure to remit royalty payments and monthly sales reports, and not the actual use of Pollitz’s and Hazelwood’s logos and artwork. Thus, the Court found that coverage sought by Plaintiffs for the underlying lawsuit did not constitute a “personal and advertising injury” as defined in the policy. The Court further concluded that the policy’s breach of contract exclusion also provided Ohio Security with an independent basis to deny coverage for Lucky Vintage and Gissing because the Member Royalty Agreements were binding contracts. In particular, the Court noted that the CPA claim pleaded in the underlying complaint arose out of alleged breach of the Member Royalty Agreements, and that the existence of such agreements was cited as a common factual question supporting class certification. The Western District Court of Washington found that an insurer did not have a duty to defend its insured under a professional liability policy when the insured failed to show that an underlying claim constituted a personal and advertising injury. The court further found that the insured’s claim was precluded from coverage under the policy’s breach of contract exclusion. Page 84

www.fmglaw.com © Freeman Mathis & Gary Third Coast Ins. Co. v. Cojon, LLC This case involved an insurer denying coverage because of an applicable policy exclusion. Third Coast Company, the insurer, provided CGL coverage to Cojon LLC for work within its description of operations it had submitted to the insurer with its application. In the description of operations Cojon listed: “repair and remodel of commercial buildings, and repair/remodel additions to residential building or properties and project management on commercial and residential remodels.” Cojon also included Fab welding work but stated that it was done for “custom brackets for things like decks, shelves, and framing.” Cojon manufactured a fish skinning wheel for Pacific Seafood company. An employee of that company, Macpherson, was severely injured after using the fishing wheel. Macpherson sued Cojon for a defectively designed product. Cojon tendered the defense to Third Coast. Third Coast claimed that the fish skinning wheel was not covered by the CGL policy because Cojon did not disclose that it was the type of manufacturing machinery that they were using in its description of operations. 2023 WL 6904953 (W.D. Wash. 2023) Therefore, Third Coast disclaimed coverage because the manufacture of the fish skinning wheel did not fall within those classes of operations expressly specified in the application. Cojon argued that the insurance policy language should be construed liberally, and that under its listed “Fab Welding work”, the fish skinning wheel would be covered because “Fabrication” should include the manufacturing of the fishing wheel. In response, Third Coast argued that Washington law provides that insurance contracts should be given a “practical and reasonable” rather than a literal interpretation. Third Coast asserted that Cojon’s interpretation of “fabrication” was so overly broad that it would include manufacturing machinery entirely unrelated to its construction work. In granting Third Coast’s motion for summary judgment, the Court agreed that the reasonable interpretation of Fab Welding was to cover only the work listed in the operations section, “custom brackets for things like decks, shelves and framing.” The Court found there was no ambiguity in the operations section to include manufacturing of machinery unrelated to construction work. At no time did Cojon disclose that it would be manufacturing items completely unrelated to construction work, i.e. a fish skinning wheel. Accordingly, the Court found that Third Coast had no duty to defend or indemnify Cojon from Macpherson’s claims in the underlying lawsuit. The U.S. District Court of Washington found that a CGL policy excluding anything outside of a company’ description of operations properly excluded that work. As a result, there was no coverage for an underlying negligence claim against the company for performing manufacturing work not in its description of operations. Further, the exclusionary language was not ambiguous because according to a reasonable interpretation of the language, there was no coverage for manufacturing not included in the description of operations. The Third Coast policy provided: “this policy applies only to those operations of the Named Insured [Cojon] expressly specified in the application for insurance on file with the company and described under “DESCRIPTION OF OPERATIONS/CLASSIFICATION” section of the declarations of this policy for which a premium has been paid.” Page 85

www.fmglaw.com © Freeman Mathis & Gary Logg v. TIG Ins. Co. In an underlying construction defect lawsuit, multiple homeowners in the Vintage Hills housing development sued Highmark. TIG had issued contractor Highmark Homes 3 consecutive CGL policies between 2010 and 2013. The TIG policies contained an endorsement provision Condominium, Apartment, Townhouse, or Tract Housing Coverage Limitation Endorsement (“CATT exclusion”) that stated the insurance did not apply to “tract housing.” The policy definition of “tract housing” was “any housing project or development that includes, construction, repair, or remodel of 25 or more residential buildings by our insured in any or all phases of the project or development.” With respect to the Vintage Hills lawsuit, four homes were sold during TIG’s second policy period, and 21 homes were sold during TIG’s third policy period. Though defending Highmark during the construction defect lawsuit, TIG relied on the CATT exclusion for its decision to not indemnify Highmark for a stipulated entry of judgment entered into with the plaintiff homeowners. Pursuant to an assignment from Highmark, the homeowner Plaintiffs then sued TIG for breach of contract for failing to fully defend and indemnify Highmark, as well as various other claims including violations of the Washington Administrative Code, a claim of bad faith, and a violation of the consumer protection act. TIG argued that it had no duty to indemnify Highmark because over 25 homes were built. Therefore, Village Hills would be considered “tract housing” under the CATT exclusion. The Plaintiffs argued that because the 25 homes were not all built during the same policy period, coverage was not precluded. Plaintiffs focused on the word “phases” in the CATT exclusion, which they claim is contradictory to the fact that the policy periods were each for one year. 2023 WL 6060835 (W.D. Wash. 2023) Interpretation of the CATT provision was not completely novel. The CATT provision had been interpreted previously in Hay v. Am Safety Co., 752 Fed. Appx. 460 (9th Cir. 2018). In Hay, the federal Court of Appeals for the Ninth Circuit found that the plain language of the policy did not contain any time limits, and additionally excluded coverage “in any or all phases of development.” Despite the previous interpretation, the Plaintiffs believed that the term “phase” was contradictory and inconsistent with its one year policy periods, so it violated RCW 48.18.140(2), which requires that no insurance contract provision be inconsistent with any standard used, and that insurance policies contain standard provisions are a required by this code. The Plaintiffs further argued that the term “phase” in the exclusion is ambiguous. In granting TIG’s motion for summary judgment, the Court reasoned that the word “phase” is not to be read in isolation, but within context of the entire exclusion, which also refers to “any or all phases of development.” Since the exclusion does not contain any time of applicability, or a specific policy period when buildings are constructed, “phase” meant whether it was part of a single project or development. Therefore, the Court held that the CATT exclusion was applicable and that TIG had no duty to indemnify Highmark for the stipulated judgment with the homeowners. As to the Plaintiffs’ remaining claims, an insured may have a still have a bad faith investigation claim against its carrier even if the policy does not provide coverage. But, in this case, the Court also held that Plaintiffs’ bad faith claims failed because they failed to show any evidence that TIG had no “reasonable justification” for its coverage evaluation or that it was otherwise “unreasonable, frivolous, or unfounded.” Similarly, Plaintiffs’ Insurance Fair Conduct Act failed because they did not show that they were unreasonably denied coverage. A Federal District Court held that insurer TIG did not wrongfully deny indemnity coverage for its insured under a Condominium, Apartment, Townhouse, or Tract Housing Coverage Limitation (“CATT”) exclusion which precluded coverage for remodeling 25 or more houses in any or all “phases”. Holding that the term “phases” included remodeling in not just one policy, but all policy periods, the exclusion applied. Page 86

www.fmglaw.com © Freeman Mathis & Gary Jonathan Schwartz Prepared by: Wisconsin Page 87

www.fmglaw.com © Freeman Mathis & Gary Dostal v. Strand The mother of a decedent infant sued the father/insured for negligence and wrongful death after the father/insured was convicted by a jury of second-degree reckless homicide. The mother alleged, in pertinent part, that the decedent infant’s injuries were caused by the father/insured’s negligent supervision in failing to properly hold or secure the infant to prevent her from falling and also to promptly contact emergency services. The father/insured’s homeowner’s insurer intervened in the lawsuit and moved to bifurcate-and-stay the liability and coverage proceedings. The insurer also moved for summary judgment, arguing the infant’s injuries were not caused by an “occurrence,” i.e. , an “accident.” The insurer pointed to the father/insured’s conviction, which required a finding that the father/insured “created an unreasonable and substantial risk of death or great bodily harm and that he was aware of the risk.” The circuit court granted the insurer’s motion, and the Court of Appeals affirmed. 405 Wis. 2d 572 (2023) On appeal, the Supreme Court began by determining whether the accidental nature of the infant’s injuries was “actually litigated and determined in the prior proceeding by a valid judgment in a previous action and whether the determination was essential to the judgment.” The court then identified the nexus question as “whether being aware of the risk that something might happen necessarily means that when that thing happens, it is not an ‘accident.’” Given this framework, the court rejected the insurer’s contention, finding that a reckless act can, indeed, produce an unintended, or accidental, result. Accordingly, the jury’s verdict convicting the father/insured of second-degree reckless homicide did not conclusively determine that the infant’s death could not have been an “accident.” And in turn, the Supreme Court reversed and remanded the case for further proceedings consistent with its opinion. The Wisconsin Supreme Court held that the doctrine of issue preclusion did not bar an insured from arguing, following his criminal conviction, that the death of his child was the result of a potentially covered accident. Page 88

www.fmglaw.com © Freeman Mathis & Gary 5 Walworth, LLC v. Engerman Contracting, Inc. Here, the Court was reviewing the propriety of summary judgment granted in favor of three insurers. This case arose from damage allegedly caused by defective construction of an in-ground pool, which cracked and caused water to leak into surrounding soil. The general contractor had hired a subcontractor to construct a pool complex, including a main pool and children’s pool. The subcontractor then hired a sub-subcontractor to supply ready-mixed concrete used for pool construction, known as “shotcrete.” Soon after the project was finished, the property owner started noticing leaks from the pools. It commissioned a report, which found that the pool walls had cracked due to improper installation, moist conditions, and erroneous placement of steel reinforcing bars. The report also found soil from neighboring properties to be unsuitable due to excessive water infiltration. The property owner subsequently had the pool complex demolished and rebuilt by another contractor. The property owner sued the general contractor and subcontractor, which filed a third-party complaint against the shotcrete provider. In accordance with civil procedure particular to Wisconsin, the liability insurers for the contractors/subcontractors were made a part of the lawsuit, and they moved for summary judgment on coverage under their respective policies. The circuit court granted the insurers’ motions, citingPharmacal. The Court of Appeals reversed. The Wisconsin Supreme Court accepted the appeal and began its decision by noting that commercial general liability (“CGL”) policies are designed to protect insureds “against liability for damages the insured’s negligence causes to third parties.” It also explained that these policies are supposed to cover damage to property other than the insured’s own product or work. The Court cited with approvalAmerican Family Mutual Insurance Co. v. American Girl, Inc., 268 Wis.2d 16 (Wis. 2004), which also involved a faulty workmanship dispute. Nonetheless, the Court focused on the reasoning inAmerican Girlthat CGL policies’ limitation to damage to other property emanates from the policies’ “business risk exclusions” and not their insuring agreement. This is the source of the Court’s criticism ofPharmacal, where it had held that for a CGL policy to afford coverage for “property damage,” there must be damage to “other property.” 992 N.W.2d 31 (Wis. 2023) “Pointing to this holding, the Supreme Court characterizedPharmacalas “a departure from our well-established law” and a decision that “flatly contradicted,” among other precedent,American Girl. The Court emphasized that a CGL policy’s insuring agreement “ma[kes] no mention of an ‘other property’ requirement.” Based on this erroneous predicate, the Court identifiedPharmacal’s equally, if not more serious, error as the incorporation of tort law’s “integrated systems analysis,”i.e., an assessment of whether damage to a defective component of an integrated system constitutes damage to other property, into insurance law. According to the Court,Pharmacal“runs headlong into the fundamental principle running through our insurance cases that policy interpretation should focus on the language of the insurance policy.” Therefore, the Court expressly and affirmatively overturnedPharmacal’s incorporation of the integrated systems analysis into insurance policy disputes, as well as its grafting of an “other property” requirement onto the determination of whether there has been “property damage” caused by an “occurrence.” Based on its adherence toAmerican Girl, the Court concluded that the water leakage, cracks in the pool, and damage to surrounding soil may together constitute “property damage” caused by an “occurrence,” at least for purposes of evaluating the insurers’ duty to defend. The Court made a point to note that “faulty workmanship is not an occurrence, but faulty workmanship can lead to an occurrence that causes property damage.” Accordingly, since cracks in the pool (which were the product of, among other things, “less-than-optimal installation of the shotcrete and poor placement of steel reinforcing bars”) caused water to lead into the surrounding soil, damaging and destabilizing it, there were unexpected and unforeseen events caused by improper construction, which caused property damage and necessitated demolition and rebuilding of the pool complex. Therefore, the insurers were not entitled to summary judgment on the absence of “property damage” caused by an “occurrence.” The Wisconsin Supreme Courtoverturned Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., 367 Wis.2d 221 (Wis. 2016), admitting that the Court erred in “incorporating the integrated system into insurance policy disputes,” and specifically rejecting Pharmacal’s “incorporation of an ‘other property’ analysis into the initial determination of whether an occurrence has caused ‘property damage’ under an insurance policy.” Page 89

www.fmglaw.com © Freeman Mathis & Gary Riverback Farms, LLC v. Saukville Feed Supplies, Inc. The Wisconsin Court of Appeals reversed the circuit court’s grant of summary judgment in favor of an insurer. Riverback Farms, LLC (“Riverback”) had a longstanding relationship with Saukville Feed Supplies, Inc., (“Saukville”), purchasing feed mix for its cattle for over forty years. Riverback’s nutritionist recommended a change in the feed mix, suggesting the inclusion of Min-Ad for bio-available magnesium and calcium. However, Saukville added Fine Lime instead. Upon discovering Min-Ad was not included in the cattle mix, Riverback filed suit against Saukville and its insurer. Riverback asserted various contract claims and sought to recover $250,000 based on reduced production of butterfat during the period when Fine Lime was substituted for Min-Ad, as well as reimbursement for veterinary bills and hoof-trimming. The circuit court ruled in favor of the insurer, finding it had fulfilled its duty to defend or indemnify Saukville, as the claim for reduced butterfat content and lost profits was deemed not covered under the policy. Notably, the subject CGL policy defined occurrence as an “accident,” which under Wisconsin law, means “an event or condition occurring by chance or arising from unknown or remote causes” or “an event which takes place without one’s foresight or expectation.” 995 N.W.2d 257 (Wis. App. 2023) The appellate court concluded that Saukville’s intentional substitution of Fine Lime for Min-Ad did not yield an intended result of cows with magnesium deficiency. In turn, the alleged harm could have been the product of an accident, as Saukille “did not reasonably foresee or expect harm to [the cattle to] result from that substitution.” The court also considered whether there was damage to tangible property, a requirement for “property damage” coverage under Secura’s CGL policy. Wisconsin courts require that there must be physical alteration to the property, such as “an alteration in appearance, shape, color, or in other material dimension.” The court pointed to Saukville’s expert’s testimony that the cattle, as a result of the substitution of Fine Lime, suffered from ulcers caused by metabolic acidosis. As such, the physical injury to Riverback’s cattle constituted property damage. Finally, the court determined that Secura’s impaired property exclusion did not apply to bar coverage. The exclusion required that the impaired property “[could] be restored to use by repair, replacement, adjustment, or removal of the product,” and the court found no suggestion that the cattle mix could be so repaired, replaced, adjusted, or removed. According to the Wisconsin Court of Appeals, alleged harm to livestock caused by the insured’s decision to change feed instructions may be “property damage” caused by an “occurrence.” Page 90

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