Faulty Construction Workmanship Not Covered Under Commercial and Umbrella Policies


PHILADELPHIA, March 23 – A federal judge in Philadelphia has ruled that Selective Way Insurance Co. need not defend nor indemnify an insured subcontractor from allegations in an underlying suit regarding faulty workmanship, whether the workmanship is cast as negligence or breach of a construction contract.

The Villas, a  condominium owner,  filed suit against the general contractor for defective work, including cracking and water damage, and Lenick Construction was added as an additional defendant in the litigation.  Lenick tendered its defense and indemnity to Selective under a commercial liability policy, and Selective provided a defense to Lenick under a reservation of rights.

After the underlying litigation was settled between The Villas and the general contractor, the general contractor assigned its rights against the subcontractors, including Lenick to the condominium owner.

Lenick sued Selective in the Philadelphia County Court of Common Pleas, seeking a declaration that the insurer had a duty to defend and indemnify it in the underlying lawsuit. Lenick asserted a claim for breach of contract and a bad faith claim . Selective removed the case to the U.S. District Court for the Eastern District of Pennsylvania, and the parties each moved for summary judgment.

Judge Cynthia M. Rufe granted summary judgment to Selective and denied Lenick’s motion, examining the underlying pleadings and finding that defective workmanship was alleged to be the cause of the water infiltration into condominium units.   She wrote:

With regard to Lenick’s argument that the underlying joinder complaint and the Third Amended Complaint did not only allege that Lenick’s own work was deficient, but that its defective work caused damage to the work of others, the Court agrees that this is a plausible reading of the underlying complaints. However, where liability is premised upon poor workmanship, the fact that nearby work was also damaged does not change the analysis, so long as such damage is reasonably foreseeable. It is foreseeable that windows and doors which are not watertight will cause water damage inside the unit, to parts of the unit other than the windows and doors. Accordingly, these additional allegations do not give rise to a duty to defend.

The judge found no facts whch would support a tort claim against Lenick, and which would potentially be covered under the Selective Way policy.

Judge Rufe also granted summary judgment for Selective on Lenick’s bad faith claim, observing that  Selective’s interpretation of the underlying  construction litigation pleadings was not unreasonable.

Lenick Construction v. Selective Way Ins. Co.., (E.D. Pa. March 23, 2006)



Demand For Cyberinsurance Widening, Marsh Says


NEW YORK, March 24 –   Purchases of cyberinsurance by customers of insurance brokerage Marsh has increased 27% since last year, according to a report published by the broker last week.  Manufacturing and technology companies are among the largest sectors of buyers of the coverage, according to the report.

Marsh attributes the growth in demand to simple evolution:   “In the face of an evolving risk landscape and an aggressive regulatory environment, organizations no longer treat cyber as a problem to be fixed, but rather as a risk to be managed,” the report says.

There is now developing a demand for cyberinsurance coverage  among infrastructure industries like healthcare and transportation insured, Marsh reports.  And new coverages for cyber losses are evolving to cover losses such as business interruption and disruption of control systems by service providers, such as power companies.

Coverage limits are increasing with the demand for such coverage, Marsh reports.  The current average limit of coverage in 2015 was  $16.9 million in 2015, up from $14.7 million in 2014, the brokerage said. The highest average business sector limit was in the technology/communication sector, at $86.7 million, according to the report.

Marsh also reported that no new major insurers entered the cyberinsurance market during the last quarter of 2015, but that this is likely to change going forward.

5th Circuit Finds No Coverage In Crane Collapse Case


GRETNA, LA., March 22 – The U.S.  Fifth Circuit Court of Appeals  has upheld a trial court determination  that the insurer of a Louisiana-based marine crane builder owed no coverage for a 2009 accident caused by poor welding. The Court ruled that the insurance policy did not apply because it covered only  vessel-related incidents and not incidents on land.

State National Insurance Co. insured Elevating Boats LLC, for losses payable for the liability of the policyholder, as the owner of a vessel, for any incident or loss arising out of ownership of the vessel.  In 2009 worker Larry Naquin Sr. had sued Elevating Boats for personal injuries on the theory negligent welding of the crane in question.  During a test Naquin was running on the crane, the crane separated from its base and fell over, killing one, and causing Naquin two broken feet and a hernia.  The accident occurred on land and nowhere near a vessel, according to the opinion:

“Naquin’s incident in no way arose out of EBI’s conduct as ‘owner of the vessel …Furthermore, the land-based crane did not break on or even in close proximity to a vessel. Thus, EBI’s attempts to craft a causal connection to a vessel are discharged, plainly and simply, by the underlying facts and Naquin’s holding.”

In May 2012 a Louisiana federal jury found that EBI was negligent in welding the crane to its platform and that it was therefore liable for Naquin’s injuries.  During those proceedings the trial judge granted State National’s motion for summary judgment, finding that the policy did not cover incidents on land. 

Naquin urged an interpretation of a  “blanket reading” of State National’s policy such that it would provide coverage for  “any casualty or occurrence,” but the Appeals Court found the argument “strained,” and contrary to common law which required a vessel- related loss in such circumstances.

The 5th Circuit Court concluded,  “Naquin’s incident in no way arose out of EBI’s conduct as ‘owner of the vessel.’”

Naquin v. Elevating Boats, et. al., (5th Cir., March 22, 2016)

Six Red Flag Indicators of Reverse Bad Faith



While the debate still goes on across jurisdictions  as to whether and how the reverse bad faith of an insured serves as a defense to an insurer in a bad faith case, that reverse bad faith has a place of some sort in bad faith litigation is much less open to doubt.  Most jurisdictions recognize a place for consideration of the conduct of the insured in bad faith litigation, largely because it is grossly inequitable to judge a two-party interaction by the conduct of only one of those parties.  Fundamental fairness would seem to require that if the light of scrutiny is to be placed on the handling of an insurance claim, it be placed on two parties, not one.

Reverse bad faith comes in all shapes, sizes and shades.  Sometimes it is overt;  other times it is more passive.  Here are six of the biggest red flags indicating the presence of the reverse bad faith of the insured in an insurance claim:

  1.  The Early-Onset Time Limit Settlement Demand – This is one of the most obvious signs that the insured may be looking to construct a bad faith claim where one may well not otherwise exist.  This tactic is designed to pressure the insurer to pay a claim before it has had the full and fair opportunity to investigate it, or risk being painted as failing to settle within the limits after it is too late.   It is also the subject of an earlier  post  on how to defend against them.
  2. Refusal to Reduce A Policy Limits Demand – An intractable policy limits demand by an insured can be the functional equivalent of a “low-ball” settlement offer from the insurer.   In Pennsylvania, for example, courts have held that a limits demand by an insured can be tantamount to expressing no interest in compromise, which in turn may relieve the insurer of settlement responsibility.  Zapille v. Amex Assurance,  2007 WL 1651271 (Pa. Super. 2007)  As a result, an insured’s failure to contribute to a settlement-conducive environment is relevant to bad faith analysis.
  3. Delay – This one is the easiest to spot among The Big Six,  and relatively easy to prove.   Most courts consider the insured’s responsibility for delaying the life span of an insurance claim in bad faith litigation. Some courts have gone so far as to say that an insurer has a reasonable expectation that information requested will be provided promptly and accurately.  Delay which may be considered reverse bad faith is not merely calendar delay occasioned by the insured’s failure to respond, it can also be delay cause by the insured’s giving false, misleading, or partial answers to questions or requests for information. See, e.g., Sadel v. Berkshire Life Insurance Company of America et al., No. 09-612, 2011 WL 292239 (E.D. Pa. Jan. 31, 2011).
  4. Failure To Cooperate In Investigation – this is a close cousin of delay.  Non-cooperation is often most seen in an insured’s failure to produce medical authorizations, requested medical, wage, and property records, or the failure to  submit to an examination under oath, or an independent medical examination.
  5. Inconsistent, Exaggerated, and Untruthful Information – If an insured presents answers for information at various times which conflict with each other, or are plainly exaggerated or not truthful, this is fairly reliable evidence of reverse bad faith.  At a minimum, it may justify the insurer’s denial of a claim, extension of investigation, or lower settlement offer.
  6. Is The Insured Represented? – While this red flag is not intended to paint all practitioners with  the same broad brush, it would be foolish not to identify this factor as a potential red flag in the ferreting out of reverse bad faith.  I have lost count of the number of depositions of insureds I have taken in which I receive only a blank stare in response to the questions, “Do you know what bad faith is?” or “Can you tell me how the insurer committed bad faith in the handling of your insurance claim?” Insureds in and of themselves are not prone to the advocacy which tends to present itself when a trained legal professional has a contingent interest in the outcome of an insurance claim.

If any of these six factors are present in an insurance claim, it could well be that there may be some conduct on the part of the insured which the fact finder should consider in the bad faith analysis.

For more information on identifying and defending against reverse bad faith in the claims process, reach me at chaddick@dmclaw.com or 717-731-4800.

Are You Getting Enough Extras From Your Outside Counsel?


For insurance company legal departments, the retention of outside counsel is now done very much in a buyer’s market, perhaps more so than any time in history, and  certainly more than any other time in the twenty five years I have practiced law.  Tasked by their management teams with delivering better results faster and for less, legal departments have become discerning and discriminating buyers.

Good outside law firms worthy of hiring do not rage against this development — they accept and embrace it, and craft what they offer to fit the needs of the clients they want to continue to serve. If your outside lawyers aren’t offering you the following services regularly, you are probably not taking advantage of the enormous buying power you now enjoy.  This buying power entitles you to things like:

  • regular courtesy calls from outside counsel to make sure the service they are delivering meets with your expectations of that service, including the billing process;
  • seamless access to your outside counsel via phone, email, text messaging so that you do not have to wait either to ask a question or make an assignment;
  • several hours per week of no-charge access and client support for quick legal questions, even a request for a minor bit of research or document review (any outside lawyer who does not recognize that this is the least he or she can do for a good client does not appreciate the value of your business).
  • regular offers to provide no-cost continuing education your legal departments and claims staff, either via in person lunch and learns, or  via webinar, whichever you, not they, prefer.
  • regular no-cost updates on significant legal rulings and industry developments, so that you can 1.) stay abreast of the legal landscape at no cost to you; and 2.)  ensure that your outside counsel is current as to the same landscape; and
  • regular offers to discuss and collaborate on alternative billing programs, so that legal departments can ensure they are getting outside counsel legal services in the most efficient manner possible.
  • ‘NO-CHARGE” invoice entries for  minor phone calls and emails on simple questions or requests –  your outside lawyers should encourage you to contact them, not discourage you.

As we said above, it is a buyers’ market for in-house legal departments.  Many outside firms who have enjoyed the comfort of the status quo for decades have been caught unaware, and have not responded to legal climate change .  But there are good outside law firms who are none too aware of the sea change in the marketplace, and who are crafting their representation to recognize that fact by providing no-cost extras to their clients.

For more information on providing your legal department the benefits of  extra services and client support at no additional cost , reach me at chaddick@dmclaw.com or 717-731-4800.


Alternative Fee Spotlight: The Outside General Counsel Arrangement


In the rapidly changing environment of the delivery of legal services to clients, including insurers, third party outside general counsel providers have begun to offer as-needed office of general counsel staffing to insurers and other businesses.  Insurers and businesses, however, can find the same benefit in the outside law firms they have been dealing with for years.  There is a way to have the best of both worlds.

The arrangements vary widely, from counsel actually occupying the physical space of the client on a full or part time basis, to a looser arrangement with outside counsel staying at her outside firm.  The arrangement offers the flexibility legal departments now require to meet their obligations as efficiently as possible.  The General Counsels’ offices get the benefit of the knowledge and experience of an outside lawyer but at a far greater control over the cost of such services.

Outside General Counsel arrangements generally involve fixed fees for a set amount of time based upon how much of the outside counsel’s workweek the insurer will utilize.  The outside lawyer’s time is utilized as the legal department sees fit.  In practice, it oftentimes involves outside counsel providing coverage opinions, and coverage and bad faith litigation support and representation , but the relationship can expand to such diverse matters as regulatory compliance, claims handling, and fraud investigation.   The duration of the arrangements can be short term, long term, month to month, or ad hoc — again, the beauty of the arrangement lies in its inherent flexibility.

The arrangement provides the additional benefit of outside counsel getting to know the procedures and operations of the legal department  to which she is deployed from a much closer vantage point than she would otherwise have.  Outside counsel even get a sense of the business and mission goals of the both the insurer and in-house legal department — benefits which can and will extend far beyond the duration of the outside general counsel arrangement.

For insurers with legal departments looking to stay flexible and to retain cost controls over the use of outside expertise, the outside general counsel option could be the puzzle piece needed to control legal spending, and ensure access to outside expertise and jurisdictional familiarity.

For more information on providing your legal department the benefits of an outside general counsel arrangement on shorter or longer term bases , reach me at chaddick@dmclaw.com or 717-731-4800.

NAIC Issues Draft Model Cybersecurity Law for Insurers


WASHINGTON, March 2 – The Cybersecurity Task Force of the  National Association of Insurance Commissioners’ (NAIC) has proposed a comprehensive  Model Law designed to regulate licensed insurers’ handling of electronic data and investigation of breaches in electronic data security.  Comments on the proposed model law are due by March 23.

Written Information Security Program

The Model Law requires licensed insurers to prepare written information security programs designed to protect personal information  collected by the insurer.  The plan, the Model Law suggests, should be proportional to the characteristics of the licensed insurer including the scope of the insurer’s activities, and the sensitivity of the consumer information collected.

Insurers are required to designate employees who can perform data risk assessment, i.e., identification of  potential threats as well as the potential for damage from these threats.  The Model Law suggests that insurers develop standards and methods from the Framework for Improving Critical Infrastructure Cybersecurity developed by the National Institute of Standards and Technology (NIST).

The Model Law requires the insurers’ board of directors to monitor security programs, and to receive reports at least annually to determine the status of the insurer’s security plan and compliance with the Model Law. Recognizing the involvement of third-party service providers, the Model Law mandates that insurers “select and retain third-party service providers that are capable of maintaining appropriate safeguards for the personal information at issue.” The law also mandates that the third party providers “implement and maintain appropriate safeguards for the personal information at issue” (including those described above under “Implementation of a Written Information Security Program”) and “allow licensee or its agents to perform cybersecurity audits.”

Consumer Rights

The Model Law requires that insurers disclose to consumers the types of personal information collected and stored by the insurer, and any third-party service providers involved.  Insurers must make the policy available on its website, and furnish hard copies of the policy on consumer requests.

After a security breach, the Model Law requires insurers to notify affected consumers no later than 60 days following notice of or identification of the breach.  In what may turn out to be a murky area, notification is not required if the data in question is encrypted or the breach is not reasonably likely to cause substantial harm or inconvenience.  Insurers are also required to offer to pay affected consumers for 12 months of identity theft protection.

There are additional notification requirements.  Insurers must advise without delay law enforcement organizations, the insurance commissioner, payment card networks and for certain breaches consumer reporting agencies.  Notice to the commissioner must take place within  five calendar days of discovering a breach.  The insurer is also required to provide the commissioner with any draft written communications to consumers regarding an identified breach.

The Model Law also requires insurers to investigate and remedy breaches in data security.

Oversight by Insurance Commissioners

If the insurance commissioner has reason to believe that an insurer has violated the Model law, the commissioner has hearing and subpoena power, and can make a finding whether insurer has engaged in conduct breaching the Model Law.  The commissioner also has power to issue cease and desist rulings based upon such findings, and may also order monetary penalties.

The Model law provides for a $500 penalty per violation up to a maximum aggregate of $10,000.00.  For violation of commissioners’ cease and desist orders, the Model law calls for a penalty of $10,000 for each violation and possible suspension and revocation of the insurer’s license.  The Model Law allows for penalties of $50,000 for violations which occur with such frequency as to be determined to be a business practice.


Presumably to encourage reporting under the Model Law, it provides that any information in the control or possession of a department of insurance furnished by a licensee shall be confidential and is not subject to open records  laws or subpoena, thereby protecting the confidentiality and privileged nature of consumer information.

Whether the Model Law Proceeds, and how it proceeds after the comment period, depends on whether the law receives majority support from within the NAIC following the comment period.

NAIC Cybersecurity Task Force Model Law

Property Value Admissible By Allstate To Prove Arson Fraud


SPRINGFIELD, Feb. 29 –  A federal judge in Missouri has denied an insured couple’s attempt to exclude expert evidence Allstate Insurance  intends to submit  in a declaratory judgment action in which it seeks to have its denial of a homeowners insurance coverage claim upheld.

In Allstate Indemnity Company v. Joseph Dixon, et al., No. 14-cv-03489-MDH. W.D. Mo.; 2016 U.S. Dist. LEXIS 24678, U.S. District Judge Douglas Harpool denied a motion to strike Allstate’s expert disclosures filed by Allstate insureds Joseph Dixon and his wife, ruling that the value of the couple’s home could be probative of the couples’  financial motive to commit arson fraud. The Court found that Allstate’s proposed testimony from a county assessor as to the value of the insured couple’s home would not prejudice the homeowners, although it reserved final judgment about the precise nature of the allowed testimony until later in the case.

Allstate  denied coverage for the April 2014 fire, claiming that the Dixons falsified material facts with regard to the claimed loss. A cause and origin and claims investigation by Allstate revealed that the fire was intentionally set.  The Dixons contended in their motion to strike expert disclosures that the value of their home was not in dispute, and that expert testimony concerning the value of the property would be confusing to the jury as well as irrelevant, cumulative and prejudicial.

In denying the motion, Judge Harpool cited to an Eighth Circuit U.S. Court of Appeals’ ruling which discussed proper evidence of motive in arson fraud cases,  Gen. Cas. Ins. Companies v. Holst Radiator Co. (88 F.3d 670, 672 [8th Cir. 1996]).

Allstate v. Dixon (W.D. Mo. 2016)

Pennsylvania Asbestos Reinsurance Dispute Stayed Under First Filed Rule


PHILADELPHIA, March 3 — A federal judge has granted a motion filed by R&Q Reinsurance Company to stay a reinsurance coverage suit filed by St. Paul Insurance arising out of more than $10 million in asbestos – related payments made by St. Paul on behalf of an insured.  St. Paul sought reimbursement  from R&Q pursuant to a reinsurance treaty with INA Reinsurance, to which R&Q has become a successor in interest.

The case  has now been stayed pending the outcome of a previous case filed by R&Q in United States District Court in Illinois in 2015. That case is captioned R&Q Reinsurance Company, f/k/a Ace American Reinsurance Company, f/k/a Cigna Reinsurance Company, f/k/a INA Reinsurance Company v. St. Paul Fire & Marine Insurance Company (No. 15-cv-07784, U.S.  N.D. Ill.).

U.S. District Judge Judge Joel H. Slomsky originally denied the motion to stay in the Pennsylvania action  on Dec. 18, but vacated that ruling as part of a decision he rendered on a motion to dismiss subsequently filed by R&Q in Pennsylvania .  R&Q sought dismissal or stay in Pennsylvania  pursuant to the first filed rule, citing to the Illinois litigation filed in 2015.

St. Paul had already filed and fully briefed a motion to transfer venue in the Illinois proceeding.  Judge Slomsky stayed the Pa. proceeding pending rulingson jurisdictional motions in the Illinois action.

St. Paul Fire and Marine Insurance Company v. R&Q Reinsurance Company, No. 15-cv-5528, E.D. Pa. March 3, 2016.


Bad Faith Expert Permitted To Testify Against Progressive, Judge Rules


KANSAS CITY, Kan., March 9 – A Kansas federal judge has ruled that an expert may testify on Plaintiff’s behalf in a bad faith case against Progressive Insurance, and that the expert can criticize Progressive’s handling of a third party auto liability claim.

In Grant M. Nelson v. Progressive Northwestern Insurance Co., No. 15-7454, D. Kan.; 2016 U.S. Dist. LEXIS 28952, District Judge John W. Lungstrom denied Progressive’s motion to preclude the Plaintiff’s expert from testifying.  Nelson sued Progressive for bad faith in the handling of his third party claim after suing and obtaining an excess verdict against a Progressive insured for personal injuries sustained in a car accident.

Progressive’s insured, Hardacre, had a $50,000 policy limit.  Following non jury trial of the personal injury case, a   state court awarded Nelson more than $530,000.  During the underlying case, Progressive offered the policy limit on Hardacre’s behalf, but Nelson declined to accept it, demanding $1 million.  Hardacre also assigned his rights against Progressive to Nelson in exchange for Nelson’s agreement not to collect against Nelson.

Nelson sued Progressive for bad faith in state court, and Progressive removed to federal court.   In the case, Progressive sought to bar opinion evidence from Plaintiff’s expert Jim Leatzow.  Judge Lungstrum rejected Progressive’s claim that Leatzow was unqualified because he had no specific auto claims handling experience.  He also rejected Progressive’s contention that Leatzow, in opining that Progressive’s investigation was insufficient, did not consider all relevant material in the claims investigation.  The judge wrote:

“Mr. Leatzow’s failure to find fault with every investigative step actually taken by Progressive is not remarkable and does not provide a basis for exclusion. Progressive will be free to cross-examine Mr. Leatzow at trial concerning the weight he gave to particular facts in forming his opinions, and the Court will assign only such weight to those opinions as warranted by the evidence. The Court denies Progressive’s motion to strike.”

While conceding the Plaintiff’s bad faith case was weak, the judge also denied Progressive’s motion for summary judgment in the bad faith case on the merits:

“there is at least some evidence that could support a finding that some percentage of fault would have been apportioned to Ms. Hardacre… the seriousness of plaintiff’s injury meant that even a small allocation of fault to Ms. Hardacre could have exhausted the policy limit of $50,000, leaving the possibility of an excess judgment. Thus, viewing the evidence in the light most favorable to plaintiff, the Court concludes that a question of fact remains concerning whether Progressive acted negligently or in bad faith in handling the claim and in failing to attempt to secure a settlement for the policy limit to protect the interest of its insured.”

The judge also ruled that Progressive’s tender of the limit did not moot the bad faith claims made by Nelson.

Grant M. Nelson v. Progressive Northwestern Insurance Co., No. 15-7454, D. Kan.; 2016 U.S. Dist. LEXIS 28952


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