October 2007

Pollution Exclusion

Excess Carrier - Follow Form Policy

Uninsured Coverage - Governmental Unit Exclusion

OCTOBER 2007 - POLLUTION EXCLUSION

The Supreme Judicial Court has held that the pollution exclusion in a commercial general liability policy negated coverage for a claim arising out of a home heating oil spill.  See McGregor v. Allamerica Insurance Co.,  449 Mass. 400 (2007)

In the underlying case, the Staeckers alleged that McGregor’s negligence caused an oil leak on their property.  Six years after McGregor installed a furnace in the Staeckers’ home, a leak developed in the supply line that resulted in oil draining in the ground beneath the house.  Allamerica issued a commercial general liability policy to McGregor’s business that included a total pollution exclusion. The provision negated coverage for:

1) ‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants'

“2) Any loss, cost, or expense arising out of any:

a) Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, ‘pollutants'....”

The policy defined “pollutant” as:

any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

The court concluded that the oil was a pollutant within the meaning of the policy. The court reasoned that “spilled oil is a classic example of pollution, and a reasonable insured would understand oil leaking into the ground to be a pollutant.”  Furthermore, the oil was still a pollutant even though the spill occurred at a residential property, as opposed to an industrial site.  As a result, the exclusion applied and Allamerica had no duty to defend or indemnify McGregor.

OCTOBER 2007 - EXCESS CARRIER - FOLLOW FORM POLICY

The Supreme Judicial Court has held that an excess carrier that issues a follow form policy is not bound by the settlements or coverage decisions reached by the primary carrier.  See Allamerica Financial Corporation v. Certain Underwriters at Lloyd’s London, 449 Mass. 621 (2007).

Allamerica Financial Corporation and its affiliated companies (“Allamerica”) settled a class action suit alleging that it used misleading tactics in selling life insurance policies. In particular, the plaintiffs alleged that Allamerica had “engaged in improper practices by making misleading sales presentations using the ‘vanishing premium’ concept, by inducing the systematic and unnecessary purchase of insurance policies using cash value in earlier policies (known as ‘churning’), by improperly marketing its policies as a savings or investment vehicle, and by using policy illustrations and other sales materials that promised that policies would have a certain cash value after a period of time.”   Allamerica’s primary carrier agreed to pay its primary policy limits toward the settlement. Lloyd’s issued an excess policy that followed the form of the primary carrier.  Lloyd’s, however, denied that its coverage applied and refused to contribute to the settlement.

The Supreme Judicial Court held that the excess carrier was not bound by the determinations of the primary carrier, even though the excess policy followed form.  The excess policy was independent and the excess carrier was free to make its own determinations.

The court also held that Lloyds was not entitled to summary judgment on its argument that the prior claims exclusion applied.  That exclusion negated coverage for:

b. based upon, directly or indirectly arising out of, or in any way involving:

“(1) any Wrongful Act or any matter, fact, circumstance, situation, transaction or event   which has been the subject of any Claim made against the Allmerica Financial Insureds prior to the Original Effective Date as stated in Item 8. of the Declarations; or

“(2) any other Wrongful Act whenever occurring, which, together with a Wrongful Act   which has been the subject of such Claim, would constitute Interrelated Wrongful Acts

Lloyds invoked the exclusion because there had been a prior case involving misrepresentations regarding the value of policies sold.  The court held that Lloyds had not shown that the exclusion applied, considering that the alleged wrongdoing “took place at different times and locations, and involved different policyholders, different sales agents, and separate transactions.”

The court also held that the known loss doctrine did not apply.  Under that rule, an insured cannot obtain coverage if, when it purchases a policy, it knows that  “that there is a substantial probability that it will suffer or has already suffered a loss.” In this case, although Allamerica knew of other vanishing premium claims when it obtained the policy, it had not admitted liability, nor had it been found liable.

The court also held that there was an unresolved question regarding the future performance exclusion of the policy.  That exclusion negated coverage for claims relating to “a representation about the past performance or future value of an insurance product.”  The exclusion had an exception that preserved coverage for claims based on unauthorized representations made “in conjunction with [Allamerica's] authorized marketing materials.”  In this case, Lloyd’s had not shown that the exclusion applied because it was possible that agents made misrepresentations while “acting independent of Allamerica and not at its direction.”

OCTOBER 2007 - UNINSURED COVERAGE GOVERNMENTAL UNIT EXCLUSION

The Supreme Judicial Court has held that the governmental unit exclusion in the uninsured part of a Massachusetts auto policy was invalid where the government had coverage with an insurer that became insolvent.  See Massachusetts Insurers Insolvency Fund v. Premier Insurance Company, 449 Mass. 422 (2007).  In two consolidated cases, the claimants alleged that operators of municipal vehicles were legally responsible for accidents.  Both municipalities were insured with Legion Insurance Company which became insolvent.  The insolvency fund assumed responsibility for insuring the municipalities.  The claimants all sought uninsured benefits pursuant to Massachusetts automobile policies but the insurers denied coverage based on a provision which stated that a vehicle owned by a government was not to be considered uninsured.  On appeal, the Supreme Judicial Court held that the exclusion was invalid because it conflicted with the purposes of the statutes governing uninsured motorist coverage and insolvent insurers.  

Under the insolvency fund statute, the insolvency fund pays only if all other available coverage has been exhausted. As a result, the carriers providing uninsured coverage had to exhaust that coverage before the insolvency fund had to pay.

The court’s holding applied only if the government had purchased insurance from an insurer that became insolvent; it did not apply if the municipality was legally self insured.  Another provision of the policy states that a self insured vehicle is not considered an uninsured vehicle, and the court did not invalidate that provision.

JUNE 2007 - SEXUAL MOLESTATION EXCLUSION

In Hingham Mutual Insurance Co. v. Smith, 69 Mass. App. Ct. 1 (2007), the Appeals Court held that a sexual molestation exclusion in a homeowners’ policy negated coverage for several claims arising out sexual abuse allegedly committed by the named insured’s son. In 2003, the Smiths sued Karen and Frank Allen and their son Thomas, alleging that Thomas had sexually abused their minor children. They asserted several claims: indecent assault and battery against Thomas; loss of consortium against Thomas and his parents; intentional infliction of emotional distress against all the defendants, and negligence against Karen and Frank Allen.

The bodily injury coverage of the homeowners’ policy defined “bodily injury” as follows:

The court concluded that this definition negated coverage for all of the claims asserted by the Smiths, including the negligence and consortium claims. The phrase “arises out of” would be read broadly so that it negated coverage for any claims that would not have occurred but for the molestation. Since all of the Smith’s claims arose out of the son’s molestation, the basic part of the homeowners’ policy did not provide coverage for any of those claims.

The policy had a personal injury endorsement that added coverage for “damages for which an insured is legally liable caused by ... misrepresentation.” The Smiths argued that this provision applied to the intentional infliction of emotional distress count because that count alleged that the Smiths had made misrepresentations regarding their son. The court disagreed, reasoning that “without the alleged underlying sexual molestation, there would not have been any alleged personal injuries and no basis for the lawsuit.”

Finally, the court concluded that the umbrella endorsement of the policy did not apply. The umbrella part had a severability clause which stated that “[t]he insurance provided by this endorsement applies separately to each ‘insured’ against whom a claim is made. But including more than one ‘insured’ will not increase our limit of liability.” The endorsement, however, also had an exclusion which negated coverage for “ ‘bodily injury’ or ‘personal injury’ arising out of sexual molestation, corporal punishment or physical or mental abuse.” The court held that the exclusion negated coverage for all of the claims asserted in this case.

January 2007 - ASSAULT AND BATTERY EXCLUSION NEGATES COVERAGE FOR RAPE AND KIDNAPPING CLAIMS

The Supreme Judicial Court has held that an assault and battery exclusion in a general liability policy negated coverage for a negligent security claim that arose out of an incident in which an assailant assaulted, raped and kidnapped a visitor to the insured’s apartment building. See Fuller v. First Financial Insurance Company, 448 Mass. 1 (2006). The policy had an exclusion that stated:

The victim sued the insured alleging negligent security, and the parties to that case executed a settlement that allocated half of the settlement to the physical beating, stabbing and attempted murder of the plaintiff, and half to the rape and kidnapping. The issue was whether the assault and battery exclusion applied to the portion of the settlement attributable to the rape and kidnapping. The court held that the exclusion did apply, reasoning that the rape and kidnapping would not have occurred but for the initial assault.

December 2006 - INSURER’S LIABILITY FOR ATTORNEYS’ FEES

The Supreme Judicial Court has held that an insurer is not liable for the attorneys’ fees that an insured incurs establishing that the insurer had a duty to indemnify the insured. See Wilkinson v. Citation Insurance Company Mass., 447 Mass. 663 (2006).

In previous cases, the court had held that an insured could recover from the insurer the attorneys’ fees that the insured incurred establishing that the insurer had a duty to defend. See e.g. Preferred Mut. Ins.Co. v. Gamache, 426 Mass. 93 (2006). The Gamache rule was an exception to the “American rule” followed in Massachusetts which makes each party responsible for its own attorneys’ fees, absent a contract provision or an applicable statute such as G.L. c. 93A.

In Wilkinson, the parties disputed whether a $3,000 limit on business property in a homeowners’ policy applied to the loss of the insureds’ son’s race car equipment. The court ruled in favor of the insureds, holding that the race car equipment was not used for a business purpose because the son’s car racing was not “an activity engaged in for the purpose of gain or profit.”

Relying on cases involving the Gamache exception, the insureds sought to recover the attorneys’ fees they incurred in their litigation with the insurer. Rejecting this argument, the Supreme Judicial Court held that the Gamache exception only applied to cases involving an insurer’s duty to defend the insured. Where, as in this case, the dispute related only to a duty to indemnify, the Gamache exception did not apply and the insureds could not recover their attorneys’ fees.

May 2006 - INSURER NOT REQUIRED TO ARBITRATE 93A CLAIM RELATING TO UNINSURED CLAIM

The Appeals Court has held that an insurer is not required to arbitrate a 93A claim that arose of out of the plaintiff’s uninsured motorist claim. See White v. Safety Insurance Company, 65 Mass. App. Ct. 607 (2006). The plaintiff alleged that she was injured in an accident involving an unidentified motorist. She filed a claim for uninsured motorist benefits with Safety and subsequently alleged that Safety committed unfair claims settlement practices in handling her claim.

She sought to compel arbitration of the 93A claim, relying on the following provision of the policy:

The determination as to whether an injured person is legally entitled to recover damages from the legally responsible owner or operator will be by agreement between us and the injured person. The amount of the damages, if any, will be determined in the same way. Arbitration will be used if no agreement can be reached.

The court held that the arbitration clause did not apply to the 93A claim. Instead, it only required the parties to arbitrate the issues of (1) whether the uninsured motorist was liable; and (2) the extent of the plaintiff’s damages.

may 2006 - POLLUTION LIABILITY ENDORSEMENT

The Supreme Judicial Court has held that a pollution liability endorsement in a commercial automobile insurance policy provided coverage when oil leaked from the insured’s truck while it was parked overnight. See City Fuel Corp. v. National Fire Insurance Co. of Hartford, 446 Mass. 638 (2006). The endorsement provided coverage for:

Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants':

"a. That are, or that are contained in any property that is:

"(1) Being transported or towed by, handled, or handled for movement into, onto or from, the covered ‘auto’;

"(2) Otherwise in the course of transit by or on behalf of the ‘insured.' (Emphasis added).

City Fuel delivers oil to residential customers. Its trucks are loaded at Sprague’s Energy terminal, and City Fuel employees then deliver the oil to customers. At the end of the day, the employees park the trucks overnight at the terminal. The oil leak in question occurred while a truck was parked overnight at a terminal.

The court concluded that the language of the endorsement was broad enough to cover this loss. "[T]he oil was ‘in the course of transit,’ within the meaning of the indorsement, once it had been picked up for delivery and had begun to travel to its destination, and that it remained in transit until it was delivered to City Fuel's customers, even though there may have been ordinary delays and stoppages along the way." In other words, "a release of the oil would be covered from the time the oil is loaded onto its trucks until the time it is delivered to the customer, at least in the ordinary course."