The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | September 15, 2013

Insurer Sues Over $30 Million Child Abuse Settlements

Everest National Insurance Co. filed suit against the Los Angeles Unified School District (LAUSD) and six other insurers seeking a court determination of each insurer’s responsibilities pursuant to an elementary school sex abuse scandal. Everest claims the school district has not met its self-insurance retention, and is also asking the court to determine “an apportionment of liability.”

“A judicial declaration is necessary and appropriate at this time under the circumstances so that Everest and the defendant insurers may ascertain their rights and duties under the policies they each issued to LAUSD with respect to the underlying claims,” according to the lawsuit filed in the Superior Court of California.

The district has been sued by about 200 individuals alleging they suffered from lewd conduct by teachers and/or other employees at Miramonte Elementary School between 1996 and 2012.

Mark Berndt, a former teacher who is awaiting trial on 23 counts of lewd conduct, is accused of blindfolding children and feeding them semen and semen-tainted cookies, as well as putting cockroaches on their faces.

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The school district, which fired the entire staff of the school after the allegations came to light, recently settled 58 lawsuits for $470,000 each, for a total of $30 million, according to the lawsuit.

Most of the remaining claims are being litigated in Los Angeles Superior Court, it said.

Everest had issued $10 million policies to the district for each year from 2006 to 2010, in excess of a self-insured retention of $3 million for each of those years. In addition, six other insurers provided the district primary and excess policies with limits between $5 million and $25 million, from 1998 to 2012, it said.

None of the other insurers — AIU Insurance Co.; Allied World National Assurance Co.; The Insurance Co. of the State of Pennsylvania; Lexington Insurance Co.; North American Specialty Insurance Co.; and Star Indemnity & Liability Co. — has yet agreed to defend or indemnify the district, it said.

Scorecard: A ruling will not occur any time soon, but the potential total cost to insurers is nearly $450 million.

Takeaway: The judicial determination will likely be an apportionment of what each insurer owes over the self-insured retention.

Demolition Work Excluded From Coverage

BRIDGE

A 16-HOUR demolition operation ended up taking 60 hours after workers botched the job.

An 8th Circuit U.S. Court of Appeals judge dismissed a lawsuit against Nautilus Insurance Co. that sought $232,300 following the faulty demolition of the Seneca Bridge in Illinois. In doing so, it upheld a lower court decision.

Spirtas Co., which had filed the original lawsuit and appeal, had subcontracted the blasting and demolition of the bridge’s longest span to Dykon Explosive Demolition Corp., according to the lawsuit.

Several explosive charges on the span were supposed to cause it to fall into the river below, where workers would separate the pieces and remove them by crane. The process, suspending barge traffic, was supposed to take 16 hours.

Instead, it took 60 hours after part of the span fell into the river “in a mangled mess and part remained connected to the abutting span,” according to the lawsuit.

Spirtas made a claim under its commercial general liability policy with Nautilus for its additional costs and the amount withheld by the company that hired it.

Nautilus denied the claim, offering up three exclusions that would bar coverage.

One excluded coverage for property damage to “the particular part of property being worked on.” The lower court rejected Spirtas’ argument that the property damage was primarily to the river, instead of, as the court ruled, to the river and the bridge span.

Another exclusion exempted property damage “arising out of inadvertent or mistaken demolition,” but the court ruled the demolition was intended. “The execution of the demolition may have been mistaken, but that is not addressed by the endorsement,” wrote Judge William Benton.

The third exclusion excluded property damage that needed to be repaired because “‘your work’ was incorrectly performed on it.” The court ruled that correcting the mangled main span constituted a repair.

Scorecard: Nautilus did not have to cover a claim for $232,300 following the faulty bridge demolition.

Takeaway: Courts look to plain and ordinary meanings of words in insurance contracts when interpreting policies, especially exclusion clauses.

Pollution Exclusion Applies to Carbon Monoxide

The Minnesota Supreme Court ruled in favor of Midwest Mutual Insurance Co., which had provided a general liability policy to a contractor who improperly installed a boiler in a vacation home that released carbon monoxide and injured the homeowners.

Charles E. Bartz had hired the contractor, Michael D. Wolters, to install an in-floor radiant heating system in a property near Pennington, Minn. Although he said he wanted a boiler that accepted propane fuel, the unit purchased was set up for natural gas only.

Nonetheless, Wolters connected the boiler to a liquid propane line. A carbon monoxide detector, installed by a subcontractor, was not operational, although Wolters claimed he had tested it, according to court documents.

In the early morning hours of Dec. 29, 2007, Catherine Brewster awoke feeling dazed, disoriented and nauseous. Bartz was unresponsive.

She slammed her head into a sliding glass door while trying to open it to get some fresh air into the house, suffering a deep laceration on the bridge of her nose, but was able to stumble into the kitchen where she dialed 911. The pair was taken to the hospital.

At issue in the case is whether the pollution exclusion in the CGL policy was limited to hazards traditionally associated with environmental pollution.

A lower court denied Midwest’s motion for summary judgment, ruling that it would be “inappropriate to rule as a matter of law” that the absolute pollution exclusion bars coverage.

The Minnesota Court of Appeals reversed that ruling, and the state’s high court agreed. It said a “non-technical, plain-meaning interpretation of the absolute pollution exclusion” would include carbon monoxide.

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It noted its decision was “regrettably harsh” since the homeowners suffered serious injuries and “it is undisputed that those injuries resulted from the negligent installation of the boiler.”

Scorecard: Midwest Mutual Insurance Co. is off the hook for any of the medical or property expenses caused by the contractor’s negligence.

Takeaway: U.S. courts are evenly split on the interpretation of the absolute pollution exclusion, with a slim majority limiting it to traditional environmental pollution. This ruling gives Minnesota a more expansive definition.

Court Rules Excess D&O Policies Weren’t Triggered

The 2nd U.S. Circuit Court of Appeals rejected a request by the former directors and officers of a defunct technology company who argued their liability obligations must reach the attachment point for excess insurance claims to be triggered.

Instead, in upholding a lower court decision, the federal court ruled that actual payment of underlying insurance coverage is necessary to trigger excess policy coverage.

The directors and officers of Commodore International Ltd., which ceased operation in 1994, had a $10 million primary liability insurance policy and successive excess policies to create a $50 million tower. The suit arose because two insurers (Reliance Insurance Co., which was the first excess carrier, providing $5 million of protection when coverage reached the $10 million attachment point; and the Home Insurance Co., which provided $5 million of coverage at the $20 million attachment point) ceased operations and liquidated their assets.

Federal Insurance Co., the second and fifth excess provider, filed suit, seeking a court ruling that it was not “required to ‘drop down’ to cover liability that would have otherwise been covered by Reliance and Home,” according to the court opinion.

Commodore’s directors filed a counterclaim against Federal and Travelers Casualty and Surety Co. of America, which was the seventh excess insurer. Their argument was that the coverage was triggered once the total amount of defense or indemnity “obligations” exceeded the limits of any policies “regardless of whether such amounts have actually been paid by those underlying insurance companies.”

“The plain language of the relevant excess insurance policies requires the ‘payment of losses’ — not merely the accrual of liability — in order to reach the relevant attachment points and trigger the excess coverage,” according to the ruling.

Scorecard: Federal Insurance Co. and Travelers were not required to pay their individual $5 million limit to the directors and officers of the defunct company.

Takeaway: Excess policies are not triggered unless there is payment of the underlying policies. Accrual of liability does not trigger coverage.

The late Anne Freedman is former managing editor of Risk & Insurance. Comments or questions about this article can be addressed to [email protected]

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The R&I Editorial Team can be reached at [email protected]