Pennsylvania Courts continue to interpret the scope of the term “occurrence” in the CGL policy narrowly. Recently, in Berkley Specialty Ins Co vs. Masterforce Construction Corporation, (3rd Circ., No. 21-1287, May 11, 2023), in a non-precedential opinion, the US Court of Appeals for the 3rd Circuit affirmed a judgment in favor of an insurer seeking a declaration that it did not owe its insured defense or indemnity for property damage claims arising out of a defective work product.
In Berkley, the insurer issued CGL policies to Masterforce in 2012 and 2013. The CGL policies limited coverage to property damage caused by an “occurrence”. The policies in question defined occurrence in part as “an accident including continuous or repeated exposure to substantially the same general, harmful conditions.”
Customers of Masterforce, the Brandts, brought claims against Berkley’s insured for faulty roof panel installation which caused property damage. The U.S. District Court for the Middle District of PA granted Berkley’s motion for summary judgment, finding that it did not owe a duty of defense or indemnity to Masterforce under a long line of Pennsylvania case law which holds that claims relating to faulty or defective workmanship do not constitute a fortuitous occurrence under the CGL policy.
In affirming the District Court’s ruling, the Third Circuit Court of Appeals provided a succinct yet comprehensive review of Pennsylvania case law beginning with Kvaerner Metals vs. Commercial Union Insurance Company and a line of case which followed and expanded upon Kvaerner.
The Appeals Court noted that claims for property damage arising out of defective or faulty workmanship were not fortuitous under the definition of “occurrence” because damage arising from faulty workmanship was foreseeable. The Court specifically rejected the Brandts’ argument that it should distinguish between damage to the work product performed by the contractor and damage to other property. The Court noted that this was a distinction without a difference, pointing to prior precedent, that property damage arising from faulty workmanship including damage to property other than the work itself was too foreseeable to be considered an accident.
While the Berkley Specialty opinion is non-precedential, the opinion itself contains citations to a number of precedential opinions which exclude claims of faulty workmanship from the definition of occurrence under the CGL policy, whether that workmanship caused damage to the work itself or to other property.
Insurers can and should continue to take advantage of the narrow definition of “occurrence” in CGL policies given it by Pennsylvania courts. For a copy of the Berkley Specialty opinion, or for additional information about how insurers can effectively handle defective workmanship claims and coverage disputes, contact me at email@example.com or 717-731-4800.
I’ve always thought “bad” behavior was as good a teacher, if not a better one, than good behavior. This is no less true in the world of insurance coverage analysis than in other endeavors. With that in mind, here are five things insurers DO NOT want from their outside coverage counsel. They are instructive guideposts for insurers on what to avoid when working with outside coverage counsel.
Starting With An Answer And Working Backwards
This should be as self-evident as it is lethal — insurers are looking for what coverage counsel thinks, not what coverage counsel thinks the insurer wants them to think. Insurance coverage lawyers are sought out for coverage analysis because they are knowledgeable, trusted, and above all else, independent advisors. Insurers look to coverage lawyers who produce deliverables which are the product of thoughtful analysis of the policy language, the claims investigation and the facts, and the applicable jurisdictional statutory and/or common law.
I am grateful that in three decades of practice I have never had an insurance company client ever tell me, or even hint at, what they wanted me to conclude. This is not to say that I, and they, never have very early “gut reactions” or hunches as to what the answer to a coverage question might be. It is to say, however, that such early hunches have no place directing or determining the final work product. A “hunch” is fine, as long as it is kept in its place, and put through rigorous analysis and research which results in a final opinion. A hunch might be right, and it might not. What is important is that it is not exalted to the status of an answer without the necessary legwork and toil which tests and challenges it.
The “answer” to a coverage question should always be the result of coverage analysis, never the cause or the governor of it. Enough said.
The fog and smoke and fast pace of the insurance claims business makes for considerable uncertainly and unpredictability in terms of when insurance coverage questions might even arise, and, more importantly, when answers to those questions might be required. An insurer, for example, may be under the gun to make a decision to enter a defense of an insured, and to get a pleading filed ahead of a deadline.
Because of that, it is important that the insurer and coverage counsel be on the same page from the initial consult about when an answer to a coverage question is required. It may be a matter of days, or it may be a matter of weeks. What is important is that both the insurer and coverage counsel are working off of the same timetable as to when the final work product needs to be furnished.
Can unforeseen circumstances impact the delivery date of a coverage opinion? Of course they can (see fog, smoke, and unpredictability above). As soon as such difficulties arise, however, the insurer must be advised. Extensions to file answers to pleadings in underlying litigation, for example, can be secured, to provide some additional breathing room.
Insurers want to know when they will have an answer to a coverage question, and they don’t want to have to harangue coverage counsel for an overdue work product. The “when” of a coverage analysis must be the product of initial, and ongoing consultation between the insurer and coverage counsel.
I have never had an insurer thank me for bad news. However, I have had insurers thank me a number of times for delivering bad news as early and as clearly as possible, along with suggestions and options which might lessen the impact of “bad” news relating to a coverage opinion. There is a lesson here, for certain.
Whenever possible, I like to schedule a quick status call with a client halfway between when a coverage opinion is requested, and when it is to be delivered. This provides a built-in early warning mechanism if a coverage question might be heading in a direction not originally anticipated, or if some development in claims investigation necessitates an answer which is not what might have originally been expected. (Better still, it is also a great opportunity to advise the insurer that there are as of yet no surprises).
Time is a gift. Coverage counsel should strive to give as much of it as possible to the insurer, especially if there is unexpected news. Almost by definition, the earlier a surprise is delivered to the insurer, the less of a surprise it becomes.
Incidentally, this proposition is equally true if unforeseen circumstances may require additional expense to the insurer, such as additional claims file or investigative materials which need to be reviewed before the final work product is provided. Insurers want to know sooner rather than later, and their first notice of unexpected expense should never, ever, be on an invoice.
If an insurer wanted to hear an overly general “maybe/maybe not” or excessive hedging on a coverage opinion, it could have saved itself the cost of an outside coverage opinion altogether and come to the same conclusion itself for free. It is true, of course, that coverage analysis is not an exact science. However, insurers do not want murkiness or generalities in the coverage opinions they request and obtain. They want guidance. And the art of guidance requires as much clarity as possible.
How is murkiness in coverage analysis to be avoided? Thoroughness is the first touchstone: A thorough analysis is much more likely to move coverage counsel off of the dreaded 50/50 opinion on outcome than is a cursory one. A complete and detailed review of the claims facts, the policy, and applicable law (including law from other jurisdictions if there is no law directly on point in the jurisdiction of assignment) is far more likely to get experienced coverage counsel to an expression of one likelihood versus another.
Likelihood and probability are far more useful to an insurer than a coin flip. At the end of the day, coverage counsel is expected to express a coverage opinion, not a coverage coin flip. A position must be taken, even if that position expresses probabilities, ranges of probabilities, and identifies “known unknowns” and even “unknown unknowns” which could affect the assessment. Follow up or supplemental coverage opinions can be provided, which leads us to our last black flag.
Lack of Follow Up / Follow Through
A coverage opinion is oftentimes non-static. That is, there may be variables which might not yet be filled in by the current claims investigation or facts not yet known which could have an impact on coverage counsel’s opinion. I never finish a coverage opinion without reminding/inviting the insurer for whom I am working to reach back out and advise if any additional facts have come to light which may change the coverage opinion in some way.
I also typically make at least one follow up call to my insurance company clients following the coverage opinion for this purpose, and also to make sure that there is nothing else they might require. For example, would they like some guidance as to a declination or reservation of rights letter? Should an examination under oath on a pivotal issue be taken? Would the insurer like guidance on the possible plusses and minuses of pursuing a declaratory judgment? In addition to being good business, such follow up is, more importantly, good client service.
In the final episode of the 1994 season of Seinfeld called “The Opposite,” the hapless yet somehow lovable George Costanza stumbles upon unfamiliar success by rejecting every instinct he has, and doing the opposite of what those instincts tell him. Insurers who seek out the opposites of the five black flags identified above from their coverage counsel will secure greater value in the coverage advice they obtain.
For additional guidance to insurers on getting better, bulletproof coverage opinions, look here and here.
For additional guidance to insurers on whether to file declaratory judgment actions, look here.
I recently had an insured’s attorney tell me, with a straight face (I’m assuming it was straight — it was hard to tell on the phone) that the insurance company I represented on a coverage matter could not withdraw a defense to his client because, counsel claimed, the insurer had already agreed to provide a defense under a reservation of rights, and the insurer “can’t change its mind.”
In fairness, this claim can, under certain very limited circumstances, actually be true! But the set of circumstances under which it can be true is dwarfed by the set of circumstances under which it is likely not true. And so, without further delay, a quick refresher on how an insurer can properly and lawfully withdraw a defense after initially agreeing to provide one pursuant to a reservation of rights.
The majority of this post assumes that the defense which the insurer would like to withdraw is being provided pursuant to a reservation or rights. After all, why would an insurer reserve rights in the first place if it did not, on occasion, intend to lawfully exercise those rights? This post further assumes some development has occurred which justifies the insurer’s change in position. A common example of this is when covered counts in a complaint against an insured are dismissed from an action, leaving only claims which are not covered by the policy in question.
Reserving rights before a defense is withdrawn is the better practice by far. But there is some authority suggesting that a predicate reservation of the right to withdraw a defense is not strictly required in order to subsequently withdraw that defense if the circumstances justify it, and the insurer is not contractually obligated to defend or indemnify. See, e.g., Windt, Allan. 1 Insurance Claims and Disputes § 4:29 (6th ed.). The theory behind this proposition is that the insuring agreement either requires defense and indemnity or it does not. Did I mention, however, that reserving rights is the better practice by far? I did? Good.
Some insurers will ask from time to time whether a declaratory judgment action should be filed in a given case in order to properly withdraw a defense. Generally, and in Pennsylvania, for example, a declaratory judgment action is not a prerequisite to withdrawing a defense. See, Selective Way Ins. Co. v. Hosp. Grp. Servs., Inc., 2015 Pa. Super. 146, 119 A.3d 1035, 1052 (2015). While doing so may be advisable in certain cases, it is not a black letter requirement. (I recently addressed the subject of when and why to file declaratory judgment actions here).
So how is withdrawal done in a way to avoid or minimize both the hassle, and the cost and expense of not doing so properly? Here are a few important basics.
The Golden Rule
Everybody knows, or should know, this one. It is the Alpha and the Omega of deciding whether, when, and how to withdraw a defense which had been provided under a reservation of rights. A few observations are, however, in order.
Prejudice must most often be actual and demonstrable — there must be some harm occasioned to the insured which would make withdrawing improper. And in the vast majority of cases, claims of prejudice are tied to when in a civil proceeding the defense is withdrawn. A simple guideline: the later in a case a defense is withdrawn, the bigger the risk of prejudice to the insured, and the more dangerous a withdrawal can be for the insurer.
The underlying case may reach a point of such progress, however, that prejudice will be presumed, and an insurer will be estopped from withdrawing a defense. The clearest example of this is an insurer’s attempt to withdraw a defense after it has defended the insured to verdict. This, to use a legal term, is a “big no-no,” and my eloquent legal advice on this subject is, “don’t do that.” See, e.g., Treadways LLC v. Travelers Indem. Co., 467 Fed. Appx, 143, 148 (3d Cir. 2012).
There are several miscellaneous points to make as part of the prejudice discussion. First, the naked claim that an insured is prejudiced by a withdrawal of a defense because it must now pay for its own defense is not sufficient justification to prevent an insurer from withdrawing. This is no more a justification to obligate an insurer to defend than is the reverse claim by the insurer to relieve itself of the duty to defend. Legal fees are not sufficient justification in and of themselves to carry the day, for the insured or the insurer.
A second lesser, but still important, point is that insurers can reduce their exposure to prejudice claims after deciding to withdraw a defense by assisting the insured with a soft landing and transition. An insurer can offer to make insurance defense counsel available, at the insurer’s expense, to the insured’s personal counsel for a window of 30 to 45 days, for example, to assist personal counsel with the assumption of the insured’s defense. It can also and should also ensure that the insured’s litigation file, electronic and/or hard copy is properly transferred to new counsel. Nothing, I advise insurers, evaporates prejudice claims better than actively working to prevent even the appearance of prejudice after the decision to withdraw.
There can never be any guarantees that insurers won’t face claims of “you can’t change your mind” by disgruntled insureds, or their lawyers, once the decision to withdraw a defense has been taken. However, as one Court has observed, “There is no principle of Pennsylvania law that the duty to defend automatically attaches at the outset of the litigation and cannot afterwards terminate.” Com. Union Ins. Co. v. Pittsburgh Corning Corp., 789 F.2d 214, 217–18 (3d Cir. 1986).
Withdrawing a defense following a reservation of rights can be done without adverse consequence or penalty. It just has to be done properly.
Insurance coverage counsel, take heart. In the most recent issue of his Coverage Opinions newsletter , Attorney Randy Maniloff published the results of an insurance coverage exam he recently administered to the ChatGPT AI engine. The results of the five question exam? “ChatGPt got 4 out of 5 wrong,” wrote Maniloff, “but not just wrong — dead wrong.”
ChatGPT, Esquire managed to answer only one question correctly concerning the non -insurability of punitive damages under Oklahoma law. The Bot botched the four remaining questions regarding aspects of the duty to defend, the pollution exclusion, and the insurer’s obligation to pay pre-tender defense costs.
Maniloff mercifully gave ChatGPT a bonus question which it also answered correctly. It is bad faith for an insurer to make a coverage determination using a Magic 8 ball, ChatGPT said. In three decades of practice, however, I’ve thankfully never been asked for a legal opinion on that particular question.
I caught up briefly with Randy after enjoying his piece, which like all of his writing, came with ample amounts of both wit and insight. “ChatGPT may – and that’s a may – have some value for general discussion of the law concerning a coverage issue,” Maniloff told me. “But coverage determinations are not made based on general discussions of legal issues,” he added.
The amusing exercise does offer a serious take-away. The analysis of insurance coverage questions requires highly specialized insight, and the ability to not only understand the import of policy provisions, but the nuance of the facts to which those provisions are applied. While AI might progress to some levels of further competence on the subject, it is not there currently.
On a weekly basis, I confer with insurance company claims executives and in-house lawyers about whether taking the affirmative step of filing a declaratory judgment action in a coverage dispute is the best course of action. Sometimes, the answer is clear. Mostly, however, it is not.
As the title suggests, the decision to file an action seeking a declaratory relief is oftentimes far more art than science. The art of this decision should be based on consideration of a number of factors, including the following:
Facts – Do the facts of the claim present a genuine question of coverage? More importantly, do the facts suggest, more likely than not, that an exclusion or coverage limitation likely applies? Are there clear indications from the claims investigation that a coverage exclusion, limitation, or other provision are implicated?
Law – Does the jurisdiction in which we find ourselves have established precedent on the coverage question under consideration? Has the policy language in question been previously interpreted by the courts? Does that precedent tend to support a reasonable question of coverage, or, even better, support the likely conclusion that coverage under the circumstances is excluded or limited?
Cost/Value/Scale – Insurance companies rarely want to spend money on even the most guaranteed-to-win declaratory judgment action if the costs of doing so dwarf the amount of money involved in the claim. It is sometimes in the best interest of both the insurer and the insured to cost-effectively resolve the underlying dispute if the dollars involved do not justify not only the expense, but the time involved in declaratory judgment litigation.
There is more to the decision to file declaratory judgment action than the mere existence of a coverage question, or an underlying insurance claim. A number of important factors should be weighed before a declaratory judgment complaint is prepared and filed. It could well be that there are more efficient and cost – effective ways to closing a disputed claim. If not, then declaratory judgment is always an option.
Declaratory judgment actions are an important tool in resolving insurance coverage issues, but like all tools, they are not right for all circumstances. The decision to proceed with a declaratory judgment action should be the product of careful consideration of all factors involved.
I recently sat down with Bob Oltmanns of the DMC Report to discuss recent developments in Pennsylvania and nationally regarding Covid-19 business interruption insurance coverage claims. Soundcloud link provided below.
Pittsburgh, July 12th. A federal judge in the Western District of Pennsylvania recently granted summary Judgment to an auto insurer in a coverage and bad faith case, ruling that in the presence of a valid UM/UIM rejection by the insured, subsequent non-compliance with the renewal notice requirements of the Pa.M.V.F.R.L. neither provided the basis for policy reformation, nor a bad faith claim.
In a ruling by Magistrate Judge Kelly, adopted by Judge Hornak, the court found that the insurer’s failure to include a proper renewal notice regarding the rejection of UIM coverage was a violation of the MVFRL. It also found, however that such violations do not allow private civil remedy, beyond administrative review, and such a violation could neither form the basis of reformation of the policy, or of a bad faith cause of action
The court also found that since there had been a prior valid rejection of UM/UIM coverage by the insured, the claims adjuster’s denial of a claim for such benefits was objectively reasonable.
COVID-19 has accelerated the need for remote claims handling processes, which are greatly affecting today’s claims environment. A panel of insurance and legal professionals examine the recent evolution of the claims process and how virtual engagements, technological advancement, insurance fraud and other factors are impacting today’s landscape.
Charles “C.J.” Haddick, Jr., Shareholder, Dickie, McCamey & Chilcote, P.C.
The COVID-19 pandemic and related shutdowns have opened up uncharted territory for insurance organizations and claims professionals. Beyond policy language, insurers must deal with timeliness, access, new workers’ compensation exposures, facility and workplace risks, and more. A panel of insurance claims professionals will examine the legal and logistical issues confronting the claims sector, how insurers are responding, and developments shaping the post-COVID-19 era.
Charles E. (“C.J.”) Haddick, Jr.; Shareholder; Dickie, McCamey & Chilcote, P.C.
Frank A. Zacherl; Partner; Shutts & Bowen LLP
Randolph (“Randy”) Brause; Attorney; Leitner Tort DeFazio & Brause, P.C.
Bryan G. Baumann; Shareholder; Knox McLaughlin Gornall & Sennett, P.C.
For registration, contact John Czuba, Managing Editor – Best’s Insurance Professional Resources, at John.Czuba@ambest.com.
In this month’s episode of Bests’ Insurance Law Podcast, John Czuba and I discuss COVID-19 and Business Interruption Coverage, along with early trends seen in the first wave of insurance coverage litigation involving COVID-19 claims. You can listen to the podcast via the link below: