Insurance Coverage Exclusions for Known Loss, Prior Knowledge, …media.straffordpub.com/products/insurance-coverage... · 2019-02-12 · of any notice given under any policy” for

Insurance Coverage Exclusions for Known

Loss, Prior Knowledge, and Prior Notice:

Evolving Judicial StandardsAdvocating Scope of the Exclusions From the Policyholder and Insurer Perspectives

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WEDNESDAY, FEBRUARY 13, 2019

Presenting a live 90-minute webinar with interactive Q&A

Jane M. Byrne, Partner, Quinn Emanuel Urquhart & Sullivan, New York

Danielle L. Gilmore, Partner, Quinn Emanuel Urquhart & Sullivan, Los Angeles

Paul S. White, Partner, Wilson Elser Moskowitz Edelman & Dicker, Los Angeles

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Insurance Coverage Exclusions for Known Loss,

Prior Knowledge, and Prior Notice:

Evolving Judicial Standards

.

Paul S. White

Jane M. Byrne

Danielle L. Gilmore

February 13, 2019

5

INTRODUCTION

• Liability Policies typically contain exclusions to preclude coverage for

liabilities or potential liabilities known to the insured.

• Considerations:

– Underwriting Materials

– Who was the applicant / who is the insured?

– Related claim?

– Misrepresentation in application?

– Rescission?

– See, White, “Issues Involving Prior Knowledge Exclusions—With Multi-State Chart,”

New Appleman On Insurance: Current Critical issues in Insurance Law (LexisNexis Summer 2009)

6

Prior Knowledge Exclusion

THIS POLICY DOES NOT APPLY: ...

(D) to any CLAIM arising out of any act, error, or omission occurring prior

to the effective date of this policy if any INSURED at the effective date

knew or could have reasonably foreseen that such act, error or omission

might be expected to be the basis of a CLAIM or suit.

Coregis Ins. Co. v. Camico Mut. Ins. Co., 959 F. Supp. 1213, 1221 (C.D. Cal. 1997)

.7

Prior Notice Exclusion

Policy excludes coverage for any claim:

“based upon, arising from, or in consequence of any fact, circumstance,

situation, transaction, event or Wrongful Act” that had been “the subject

of any notice given under any policy” for which the insurance policy was

“a direct or indirect renewal or replacement.”

Genesis Ins. Co. v. MAGMA Design Automation v. National Union Fire Ins. Co. and Executive

Risk Indemnity, Inc., No. 11-15800, D.C. No. 5:06-cv-05526-JW (9th Cir. CA 2013)

8

Establishing Prior Knowledge, Prior Notice

• Claim investigation: such as receipt of information, correspondence

or documents from the insured;

• Discovery: written interrogatories, document productions, Admissions,

deposition testimony;

• Third Parties: by way of subpoena, investigation, or interviews;

• Government agencies;

• Other insurers;

• Insurers must be careful to not seek information solely for the purpose

of denying coverage and must give at least as much consideration to

the insured’s interests as to its own interests.

9

Examination of the Underwriting File / Application

• Claims and underwriting are usually separated

– Agent Broker

– Managing General Agent

– Third Party Administrator

• A typical question often asked on insurance applications:

“Is the applicant aware of any fact, circumstance or situation that gives the

applicant reason to believe that it might result in any future claim under the

insurance for which this application is made?”

10

Examination of the Underwriting File / Application

• Answer is NO:

– If the representation is false and was material to the risk, the insurer may also

want to evaluate whether the rescission laws apply.

• Answer is YES:

1. Did the insured provided details of such facts or circumstances;

2. If details were provided, whether they were accurate;

3. What steps the insurer took in response to the insured’s disclosure of

information, if any; and

4. Whether the insurer’s underwriters took such facts or circumstances into

consideration in binding coverage and issuing the policy.

5. What precise questions were asked and were the responses truthful?

11

Who Completed the Application?

• The law varies among jurisdictions with respect to whether the

knowledge of an individual preparing an application for insurance is

imputed to the insured as a whole or whether there are limitations on

such knowledge being imputed.

© 2019 Wilson Elser. All rights reserved.12

Imputation of Knowledge to the Insured

The district court refused to impute the knowledge of a non-lawyer

employee to the law firm insured and, consequently, found that the prior

knowledge exclusion did not apply.

“However, the argument made by TIG that her status as an employee makes her an

agent of the Law Firm and therefore her receipt of the letter is imputed to the

professional staff so as to deny coverage, requires more leaps and jumps than I am

willing to make.”

Petersen v. TIG Ins.Co., 2002 U.S. Dist. LEXIS 20801 (D. Neb. Oct. 28, 2002)

13

IMPUTATION TO THE INSURED: SEVERABILITY CLAUSES

• Two types:

• Severability of exclusions: protects coverage for innocent insureds despite malfeasance of other

insureds.

• Severability of application: protects insureds for misrepresentations in the application process made

by other insureds

• Result: Misrepresentations by one policyholder will result in rescission only for the party with actual

knowledge of the misrepresentation

– Protects innocent insureds from misrepresentations or bad conduct of other insureds.

14

Imputation to the Insured: Non-Rescindable

• Policies May Also Contain Provisions Rendering The Policy Non-

Rescindable

– prohibits insurer from seeking to rescind the policy

– provides insureds with more protection than severability clauses

15

What is a Related/Interrelated Claim?

• Claims excluded “alleging, based upon, arising out of, attributable to, directly or indirectly

resulting from, in consequence of, or in any way involving any other Wrongful Act, whenever

occurring, which together with a Wrongful Act constitute Interrelated Wrongful Acts.”

• “Interrelated Wrongful Acts means all Wrongful Acts that have as a common nexus any fact,

circumstance, situation, event, transaction, cause or series of facts, circumstances,

situations, events, transactions or causes.”

• Under the terms of most professional liability and D&O policies, multiple claims that arise

out of interrelated wrongful acts are treated as a single claim first made at the time the first

related claims was made against the insured.

16

What Is a Related Claim?

• Courts consider general factors:

1. Identity of claimants: same party or parties weighs in favor of relatedness

2. Number of underlying causes: same act or acts weighs in favor of relatedness

3. Number of underlying results: separate wrongful acts each contribute to the same ultimate

harm weighs in favor of relatedness.

W.C. and A.N. Miller Development Co. v. Continental Cas. Co., No. GJH-14-00425, 2014 WL 5812316 (D. Md. Nov 7, 2014) (court drew

distinction between claims that were related due to a common scheme from claims that were unrelated by a mere common motive).

17

Majority Rule on Related Claim

• Majority rule requires a logical or causal connection:

• See, e.g.: Cont’l Cas. Co. v. Wendt, 205 F.3d 1258, 1263 (11th Cir.

2000) (per curiam) (where insured attorney’s course of conduct was

designed to promote investment, two suits by investors were “related”

even though attorney’s “acts resulted in a number of different harms to

different persons, who may have different types of causes of action

against” attorney, because attorney’s acts “were aimed at a single

particular goal.”) (Florida law).

18

Minority Rule

• Minority rule: Efficient and predominating cause

– Emmis Commc’n Corp. v. Illinois Nat’l Ins. Co., 2018 WL 1410191 (S.D. Ind. Mar. 21,

2018) (under Indiana law, phrase “arising out of” means “that one thing must be the

‘efficient and predominating’ cause of something else” and the suit at issue must have

been brought “because of” the prior lawsuit; simply because two matters have shared

facts is not dispositive of relatedness)

– Beale v. American National Lawyers Ins. Reciprocal, 379 Md. 643, 666–667, 843 A.2d

78, 92–93 (Md. Ct. App. 2004) (claims of each of five children for legal malpractice based

on attorney’s failure to properly pursue lead paint claims were not “related,” because

each child suffered different lead-related injuries and because attorney owed duty to

each child).

19

What is a Related Claim?

• The California Supreme Court held that the two claims for malpractice

regarding a single debt collection for a single client asserted in the

same suit constituted a single claim, subject to a single claim limit.

Bay Cities was not asserting two causes of action. Bay Cities had a single injury and thus

a single cause of action against its attorney. California has consistently applied the

“primary rights” theory, under which the invasion of one primary right gives rise to a single

cause of action. Bay Cities had one primary right— the right to be free of negligence by its

attorney in connection with the particular debt collection for which he was retained. He

allegedly breached that right in two ways, but it nevertheless remained a single right. Bay

Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 5 Cal. 4th 854 (1993).

20

What is a Related Claim?

• Recent New York Supreme Court Case (Sherwood, J.) held that an investigation and SEC

and criminal actions were unrelated to bribery allegations from an earlier investigation.

• Freedom Specialty Ins. Co., v. Platinum Mgt (NY) LLC, 2018 Slip Op 32233 (U) (September 18, 2018)

• The Court required the insurer to show:

• 1. An investigation existed prior to the prior and pending litigation date

• 2. There was a common “fact, circumstance, situation, transaction or event” between that

investigation and the SEC and criminal actions

• 3. This common “fact, circumstance, situation, transaction or event” was one that was

“underlying” the prior investigation under a strict and narrow interpretation of that term.

Justice Sherwood was concerned that an expansive interpretation of the relatedness of claims

would render future coverage illusory.

• Takeaway: General allegations of wrongdoing by Insured probably not enough to

result on Interrelated claims

•

21

Exclusionary Clauses

• Insuring grants: interpreted broadly—insured’s burden

• Exclusions: interpreted narrowly against insurer—insurer’s burden

• Ambiguities or uncertainties are to be interpreted against the insurer

• Insurers may select the risks they insured and those they will not—

clear exclusions are to be respected

• However, insurers may not rewrite their policies after the fact to exclude

coverage. The time to exclude coverage is when the contract is drafted. KF Dairies Inc. v. Fireman’s Fund Ins. Co., 224 F.3d 992, 997 n. 5 (9th Cir. 2000)

© 222

The Prior Knowledge / Prior Notice Exclusions

THIS POLICY DOES NOT APPLY:...

(D) to any CLAIM arising out of any act, error, or omission occurring prior to the effective date

of this policy if any INSURED at the effective date knew or could have reasonably foreseen that

such act, error or omission might be expected to be the basis of a CLAIM or suit.

Coregis Ins. Co. v. Camico Mut. Ins. Co., 959 F. Supp. 1213, 1221 (C.D. Cal. 1997)

Policy excludes coverage for any claim:

“based upon, arising from, or in consequence of any fact, circumstance, situation, transaction,

event or Wrongful Act” that had been “the subject of any notice given under any policy” for

which the insurance policy was “a direct or indirect renewal or replacement.”

Genesis Ins. Co. v. MAGMA Design Automation v. National Union Fire Ins. Co. and Executive

Risk Indemnity, Inc., No. 11-15800, D.C. No. 5:06-cv-05526-JW (9th Cir. CA 2013

23


• Prior Notice Exclusion found to be Clear and Unambiguous

– Coregis Ins. Co. v. Camico Mut. Ins. Co., 959 F. Supp. 1213, 1221 (C.D. Cal. 1997)

“First, the Court notes that none of Camico’s papers filed in connection with this matter

even raise the possibility that the Prior Notice Exclusion is ambiguous. Second, the

Court on its own reading of the exclusion, finds that the language is perfectly clear as

to what is excluded. And third, the Court notes that the same policy language

appearing as a condition precedent for coverage has been deemed to be

unambiguous by a California court.”

• Prior Notice Exclusion found to be Ambiguous

• Acosta v. Potts, 2017 WL 4418579 (S.D. Ohio 2017)

Prior knowledge language found to be ambiguous because “[t]wo minds can reasonably differ on

what is reasonably foreseeable.”

24


• Generally, fact-based determination:

• Sigma Fin. Corp. v. Am. Int’l Specialty Lines Ins. Co. 200 F. Supp. 2d 697 (E.D. Mich. 2001)

(where shareholder suits arise from similar facts, prior notice exclusion applies where there

is sufficient factual nexus between two lawsuits)

• North American Specialty Ins. Co. v. Correctional Med. Services, Inc., No. 4:04CV798 CDP

(E.D. Mo. Jan. 26, 2006) (prior notice, prior litigation, and prior demand exclusions all

preclude coverage for claim arising from medical treatment where provided with notice of

circumstances leading to multiple suits before effective date of policy).

• Stratford School Dist. v. Employers Reinsurance Corp., 105 F.3d 45 (1st Cir. 1997)

(insured’s receipt of subpoena from teacher who had been employed ten years earlier and

who was being investigated for sexual misconduct in another school district was not

sufficient to put insured on notice of probability of claim against insured; thus, exclusion that

eliminated coverage if insured was aware of event that could result in claim against the

insured did not preclude coverage).

•

25

Third Circuit: Two-Step Analysis

The Third Circuit Court of Appeals adopted a “mixed” two-step analysis for

circumstances in which an insured “could reasonably have foreseen” that its prior

acts could lead to a claim against it.

“First, it must be shown that the insured knew of certain facts. Second, in order to

determine whether the knowledge actually possessed by the insured was sufficient to

create a “basis to believe,” it must be determined that a reasonable lawyer in possession

of such facts would have had a basis to believe that the insured had breached a

professional duty.”

Selko v. Home Ins. Co., 139 F.3d 146 (3d Cir. 1998).



Insured Possessed Knowledge: A determination of whether an insured “knew”

that a claim would be made against it is relatively straightforward and is often

proven in the form of letters, memoranda, admissions, or concessions.

Insured Could Reasonably Foreseen: When the insured “could reasonably have

foreseen” that its actions would lead to a claim against it is not as easily determined

and often leads to a debate as to whether such an analysis should be subjective or

objective.



Selko v. Home Ins. Co., 139 F.3d 146 (3d Cir. 1998)

•Query: whether an attorney could have reasonably foreseen that his conduct of investing

client funds in real estate ventures in which he was personally involved, without appropriate

disclosures to the client and in violation of fiduciary and legal duties, could result in a claim

against him.

–Step One: Satisfied because the attorney had knowledge of the facts concerning the investments.

–Step Two: Applying an “objective” analysis standard, the court held that the insured could have

foreseen that a claim against him would be made.

–Thus, the court found that the claim was excluded under the policy.

28


Selko v. Home Ins. Co., 139 F.3d 146 (3d Cir. 1998)

•The court expressly rejected the insured’s argument for the application of a subjective

standard under the second prong of the analysis and, in particular, his argument that he did

not have subjective knowledge concerning the breach of fiduciary duty.

•The court reasoned that “the insured may not successfully defend on the ground that he was

uniquely unaware of ethical and fiduciary principles that all lawyers would know or that he did

not understand the implications of conduct and events that any reasonable lawyer would have

grasped.”


Variations on Selko’s Two-Step Analysis

1. Condition Precedent to Coverage

2. Absence of Knowledge

3. Insured’s Knowledge Does Not Usually Require A Specific

Complaint or Threatened Claim

4. Subjective Belief as to Viability of a Claim or as to Relevant

Facts

5. Fraud




• Coregis applies a “reasonable person” standard to the assessment of

whether an insured knew or should have known something, or some

action, would eventually result in a claim such that disclosure to the

insurance carrier would be required.

• Coregis impliedly adopts the holding of one California state court

decision that holds that disclosure of any known or reasonably

foreseeable fact or circumstance that may give rise to a claim is a

“condition precedent” to coverage.




• Phoenix Ins. Co. v. Sukut Constr. Co., Inc., 136 Cal. App. 3d 673 (1982)

• The policy requires that the insured “‘at the effective date of the insurance did not know or

could not have reasonably foreseen that such acts or omissions might be expected to the

basis of a claim or suit.’ ”

• Attorney executed a lien for his client, the construction company, but during a foreclosure

action, the company discovered that the lien could be inadequate to protect its interests.

Subsequently, the company met with the attorney and asked him to work without pay to

correct the problem with the lien. The attorney agreed.

• Meeting took place before policy incepted, but malpractice demand letter was sent during

policy period.

• Court applied “prior knowledge” as condition precedent to preclude coverage even though

written notice was during the policy period.



2. Absence of Knowledge• National Steel Corp. v. Golden Eagle Ins. Co., 121 F.3d 496 (9th Cir. 1997).

• 1989: National Steel provides written intent to pursue claim on the bond. Broker testified

that he did not recall this letter even though it was sent certified and was signed by his

secretary.

• 1989: National Steel informed the broker that the carrier was bankrupt and it intended to

pursue the claims against the broker. Broker testified he did not receive the letter.

• August 1990: Golden Eagle insures performance bond insurance broker

• The court found Golden Eagle breached its duty to defend, holding that although the facts

would create an inference that something was wrong with the bond, “they do not establish

definitively that [the broker] should have reasonably foreseen that National Steel would

bring a claim against them for negligence in placing the bond. There was still a possibility

that the claim would be covered by the Golden Eagle Insurance policy.”

.33


3. Insured’s Knowledge Does Not Usually Require A Specific Complaint or Threatened

Claim

Grayson, Givner, Booke, Silver, Wolfe v. Old Republic Ins. Co., 1998 U.S. App. LEXIS 13654 (9th Cir.

June 23, 1998) (unpublished).

• Old Republic sought to apply prior notice exclusion and to rescind on the basis of material

misrepresentations in the application for coverage.

• Prior to applying for the policy, Grayson had drafted a memorandum detailing its knowledge that

certain legal advice it had given to Redman was “improper” and “could have severe consequences for

Redman.”

3. The court agreed with Old Republic (“looking at the totality of the circumstances, the issue is whether

a reasonable insured would have reason to suspect that a claim might be brought against it”).

4. See also, Low v. Golden Eagle Ins. Co. (“City of Palm Springs”) 2001 Cal. App. Unpub. LEXIS 165

(Cal. Ct. App. Oct. 4, 2001) (unpublished) (“[i]t is not necessary that an actual lawsuit be filed prior to

the policy’s inception. A claim is merely a demand for something as a right.”).

e34


4. Subjective Belief as to Viability of a Claim or as to Relevant Facts

Colliers Lanard & Axilbund v. Lloyds of London, 458 F.3d 231, 234 (3d Cir. 2006)

• In July 2000, after noticing mistakes in tenant leases, Colliers sent letters to the tenants

stating that there had been a mutual mistake. But the tenants denied there was a mutual

mistake and indicated that any future discussions regarding the matter should be directed at

their attorneys.

• In August 2000, Lloyds provided Colliers with claims made professional liability insurance

with a retroactive date to November 4, 1992.

• In January 2001, Colliers was sued relative to alleged mistakes in its preparation of leases.

Lloyd’s denied coverage on the basis that Colliers was “aware of issues or circumstances

which ‘might reasonably be expected to result in a claim or suit as of the date of signing the

application for this insurance.’”




Colliers Lanard & Axilbund v. Lloyds of London, 458 F.3d 231, 234 (3d Cir. 2006)

• Court held under New Jersey law, exclusion was clear and unambiguous.

• First: subjectively, insured had knowledge—”actual knowledge, or subjective awareness.”

• Second: objectively, a reasonable professional in the insured’s position might expect a claim

or suit to result.

• Court noted this combined inquiry limits the moral hazard for those who attempt to

disingenuously convince a court that they were not aware that a claim could result from their

errors.




• When an insured attorney knowingly fails to respond to the opposition’s preliminary objections.

Ehrgood v. Hoover, 59 F. Supp. 2d 438 (M.D. Pa. 1998);

• When an insured attorney receives a copy of a motion for post-verdict relief alleging ineffective

assistance of counsel. Washko v. Westport Ins. Co., No. 01-4026, 2002 U.S. Dist. LEXIS 13822 (E.D.

Pa. July 24, 2002);

• When an insured attorney receives a letter from a client stating dissatisfaction with the attorney’s

representation. Coregis Ins. Co. v. Barata & Fenerty, Ltd., 264 F. 3d 302 (3d Cir. 2001); Low v. Golden

Eagle Ins. Co., No. A094961, 2002 Cal. App. Unpub LEXIS 4549 (Jan. 25, 2002)

• When an insured received a copy of a letter of complaint sent to bar counsel. Maynard v. Westport Ins.

Co., 208 F. Supp. 2d 568 (D. Md. 2002), aff’d, 55 Fed. Appx. 667 (4th Cir. 2003).

• When the insured sought coverage for lawsuits filed against it, the insurer requested documents that

the insured refused to produce due to the attorney-client privilege. The court ordered production

reasoning that since the policy defined an excluded claim in terms of the general counsel’s knowledge,

the insurer was entitled to the documents so as to be able to determine what counsel knew on the

effective date of the policy. Sharp v. Trans Union LLC, 845 N.E.2d 719, 724 (Ill. App. Ct. 2006).© 2019 Wilson Elser. All rights reserved.37



Other courts disagree:

• When an insured under a malpractice policy issued to a title company did not disclose that an

employee was secretly diverting money from funds intended to pay off mortgages for personal benefit,

the court in American Guar. & Liab. Ins. Co. v. Perrone, 284 B.R. 315 (Bankr. D. Mass. 2002) found

that the relevant exclusion was not applicable because the insured lacked knowledge of the relevant

act.




A minority apply a purely subjective test that examines what facts the insured knew and

whether the insured subjectively believed a claim would result:

• In American Guar. & Liab. Ins. Co. v. Fojanini, 90 F. Supp. 2d 615, 620 (E.D. Pa. 2000), the

federal district court applied a “purely subjective standard of proof, requiring evidence of

actual knowledge on the part of a company official that a claim or lawsuit could arise.” The

court held that even though the corporate official had received a letter accusing his

company of making misrepresentations and breaching agreements, because there was no

indication that a lawsuit would be filed, the insurer was not entitled to summary judgment.

• Distinguishable from many prior knowledge exclusion cases as the court was construing

policy language that did not include the “reasonably have foreseen” language commonly

found in prior knowledge exclusions.




A minority apply a purely subjective test that examines what facts the insured knew and

whether the insured subjectively believed a claim would result:

General Ins. Co. of America v. Rhoades, 196 F.R.D. 620 (2000) has also determined that

specific facts must be known to an insured in order for an insurer to preclude coverage based

on the insured’s knowledge of facts prior to the effective date of a policy that could result in a

claim during the policy:

“The court rejects Plaintiff’s approach, which would exclude coverage whenever an insured has been threatened

with a claim, no matter how idly. An attorney who has no idea he or she has done anything wrong, and knows no

facts indicating any performance has been substandard, is generally not expected to anticipate that a disappointed

client will actually file a malpractice claim.”



5. Fraud

• James River Ins. Co. v. Hebert Schenk, P.C., 2006 U.S. Dist. LEXIS 8523 (D. Ariz. Feb. 27,

2006) (unpublished):

• April 19, 2004: “any circumstances, allegations, Tolling Agreements or contentions as to any

incident which may result in a claim being made against the Applicant.” Nine potential

claims identified.

• April 27, 2004: Client terminates and requests all fees be written off due to failure to

communicate.

• June 7, 2004: Insurance quote, requires updated applications and statement whether

applicant knew of any other incidents that might result in claims. Applicant confirms no

known claims since time of the application.

• Defendant’s failure to include this information in response to James River’s request for

additional information constituted legal fraud.


Prior Notice Caveat

• Alstrin v. St. Paul Mercury Ins. Co., 179 F. Supp. 2d 376 (2002) (prior

notice exclusion did not apply since it was only applicable where policy

was a renewal, replacement, or successor policy and excess policy did

not qualify as either).


Rescission

• An Application for insurance will ask about:

– “claims management”

– “incident reporting”

– “tracking and trending of incidents at the facility level”

– Whether the applicant is aware of any fact, circumstance or situation that gives

the applicant reason to believe that it might result in any future claim under the

insurance for which this application is made.

43

Rescission

• Many jurisdictions allow for the rescission of a policy when the insured

has made material misrepresentations or has concealed material facts

in the application for coverage.

• California law provides that “[e]ach party to a contract of insurance

shall communicate to the other, in good faith, all facts within his

knowledge which are or which he believes to be material to the

contract.” Cal. Ins. Code§ 332

• Concealment, which is defined as the “[n]eglect to communicate that

which a party knows, and ought to communicate,” permits an “injured

party to rescind insurance.” Cal. Ins. Code§ 331; LA Sound USA,

Inc., 156 Cal. App. 4th at 1266.


Rescission

• “If a representation is false in a material point ... the injured party is entitled to rescind the contract from

the time the representation becomes false.” Cal. Ins. Code§ 359.

• “A rescission effectively renders the policy totally unenforceable from the outset so that there was

never any coverage and no benefits are payable.” Imperial Cas. & Indem. Co. v. Sogomonian, 198 Cal.

App. 3d 169, 182 (1988).

• The materiality of a misrepresentation or concealment is determined “solely by the probable and

reasonable influence of the facts upon the party to whom the communication is due, in forming his

estimate of the disadvantages of the proposed contract, or in making his inquiries.” (Ins. Code, §334; see also § 360.) This is a subjective test viewed from the insurer’s perspective. (Imperial

Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 181.)

• ““Materiality is determined solely by the probable and reasonable effect which truthful answers would

have had upon the insurer. [Citations.] The fact that the insurer has demanded answers to specific

questions in an application for insurance is in itself usually sufficient to establish materiality as a matter

of law.” Thompson v. Occidental Life Ins. Co. (1973) 9 Cal.3d 904, 916.


Anti-Montrose Language

• Montrose Chemical Corp. of Calif. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 669-670

(“Montrose II”) adopted a continuous injury trigger which held that “property damage” under

a commercial general liability policy continues over the years as long as the damage

continues.

• GL policy language provided the insurer would “‘pay on behalf of the insured all sums which

the insured shall become legally obligated to pay as damages because of ... bodily injury, or

... property damage to which this insurance applies, caused by an occurrence.’” Id. at p.

656.

• “Property damage” was defined as “‘(1) physical injury to or destruction of tangible property

which occurs during the policy period, including the loss of use thereof at any time resulting

there from....’” Id. at p. 668.

• The policy defined “occurrence” as “ ‘an accident, including continuous or repeated

exposure to conditions, which results in bodily injury or property damage neither expected

nor intended from the standpoint of the insured.’: Id. at p. 656.



The policy provided coverage so long as some bodily injury or property damage took place

within the policy period, regardless of when the injury or damage began. Id. at p. 675.

The court held:

“The timing of the accident, event, or conditions causing the bodily injury or property damage, e.g., an insured's

negligent act, is largely immaterial to establishing coverage; it can occur before or during the policy period. Neither

is the date of discovery of the damage or injury controlling: it might or might not be contemporaneous with the

causal event. It is only the effect-the occurrence of bodily injury or property damage during the policy period,

resulting from a sudden accidental event or the 'continuous or repeated exposure to conditions'-that triggers

potential liability coverage.”

Montrose II, supra, 10 Cal.4th at p. 675.

47


• General liability insurers have sought to preclude coverage where

damages pre-exists policy inception:

• Anti-Montrose Exclusions

– Prior Injury Endorsements

– “Continuous or Progressive Injury or Damage Exclusion”

– “Pre-existing Injury or Damage” Exclusion

• Known Damage Limitation

.48


• Known Damage Limitation (ISO)

Prior to the policy period, no insured listed under Paragraph 1. of Section II - Who Is An Insured and no “employee”

authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property

damage” had occurred, in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy

period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such

“bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the

policy period.

“Bodily injury” or “property damage” will be deemed to have been known to have occurred at the earliest time when

any insured listed under Paragraph 1. of Section II - Who Is An Insured or any “employee” authorized by you to give

or receive notice of an “occurrence” or claim:

(1) Reports all, or any part, of the “bodily injury” or “property damage” to us or any other insurer;

(2) Receives a written or verbal demand or claim for damages because of the “bodily injury” or “property

damage”, or

(3) Becomes aware by any other means that “bodily injury” or “property damage” has occurred or has begun

to occur.

d.49


• Known Damage Limitation

– Trinity Universal Ins. Co. v. Northland Ins. Co., No. C07-0884-JCC (W.D. Wash. Sept. 23, 2008) (construing

Washington law, upheld similar Known Damage language in the insuring grant of the policy to deny coverage

because insured had notice of the water intrusion problems on the project before the Northfield policy was

issued);

– Quanta Indemnity Co. v. David Homes, LLC, 606 F.Supp.2d 941 (2009) (construing Indiana law, applied a

similar Known Damage Insuring Agreement to preclude coverage for “bodily injury” where the insured was

aware of “bodily injury,” prior to the inception of the policy);

– Essex Ins. Co. v. H&H Land Dev. Corp., 525 F. Supp. 2d 1344 (M.D. Ga. 2007) (applying Georgia law did not

apply the Known Damage language to preclude coverage because the facts did not satisfy the “strict sameness”

test because later damage was not “same” as prior damage);

– Travelers Cas. & Sur. Co. of Am. v. Netherlands Ins. Co., 312 Conn. 714, 95 A.3d 1031 (2014) (construing

Connecticut law, court held the Known Injury or Damage provision did not bar coverage because extrinsic

evidence of when the insured was placed on notice could not be used and the underlying complaint did not

“specify exactly” when the insured was first placed on notice of the problem);

– Pennsylvania General Insurance Co. v. American Safety Indemnity Co., 185 Cal. App. 4th 1515 (2010) in

construing a “pre-existing casual conduct” exclusion, court found a duty to defend because the exclusion,

together with the definition of “occurrence” rendered the language susceptible to different triggers).

50


• Anti-Montrose Exclusions: check language / check law

– Does Not Apply: Endorsement modifying the definition of the term “occurrence” was

ambiguous because it did not clearly specify whether the causal act or the resulting

damage was the operative act triggering potential coverage. Pennsylvania Gen. Ins. Co.

v. American Safety Indem. Co., 185 Cal. App. 4th 1515 (2010).

– Applies: “Therefore, regardless of when the damage resulting from that work first

existed or was alleged to have first existed, the CP exclusion automatically deems that

damage to have first existed prior to the policy inception, and excludes coverage unless

the damage was “sudden and accidental.”” Saarman Constr., Ltd v. Ironshore Specialty

Ins. Co., No. 15-CV-03548-JST, 2017 WL 412343, at *9–11 (N.D. Cal. Jan. 31, 2017).

Distinguished Pennsylvania General, as “the language in Ironshore's CP exclusion

endorsement clearly and unambiguously excludes coverage for property damage

resulting from work performed by the insured prior to policy inception.”


Conclusion

Thank You


Contact

Paul S. White

Partner, Wilson Elser

Los Angeles, CA

213.330.8818

[email protected]

Jane M. Byrne

Partner, Quinn Emanuel

New York, NY

212.849.7315

[email protected]

© 2019 Wilson Elser. All rights reserved.

Danielle L. Gilmore

Partner, Quinn Emanuel

Los Angeles, CA

213.443.3206

[email protected]

53

Documents

Insurance Coverage Exclusions for Known Loss, Prior Knowledge, …media.straffordpub.com/products/insurance-coverage... · 2019-02-12 · of any notice given under any policy” for