Richard D. Williams

The Policyholders’ “All Sums”; Argument: Sound and Fury Signifying Nothing

In recent years, policyholders have formulated a liability theory of coverage predicated upon the “all sums”; language commonly found in Comprehensive General Liability policy insuring agreements. The increasing reliance on this theory by policyholders has led to some particularly unusual results in the environmental litigation context. This article discusses the legal underpinnings of the “all sums”; position and examines its continued viability in the wake of growing opposition from courts across the country.

The Midnight Ride of Paul Revere

It is a sad fact of life for insurers in California that they are exposed to “bad faith” liability—whether warranted or not—any time a claim is denied and the denial is subsequently found to be erroneous. The “bad faith” standard for evaluating an insurer’s denial decision is supposedly expressed in the elusive concept of “reasonableness.” Numerous California courts have held that an insurer does not act in bad faith if its refusal to pay policy benefits was reasonable. But the converse also finds support in the case law—an insurer that denies benefit unreasonably will be found to be in breach of the implied covenant of good faith and fair dealing. So the core questions remain—what is reasonable conduct, and who decides the issue? A comerstone defense in any insurer bad faith case involving coverage denial is the “genuine dispute” doctrine. Where a bona fide dispute in the law exists concerning the legal issue of coverage, an insurer should properly be shielded from bad faith liability. If the dispute involves a legal issue regarding application of a policy provision (for example, a total pollution exclusion), the insurer should not face bad faith exposure in a circumstance where different courts have reached different outcomes about how the policy provision should properly be applied. Indeed, where a split exists in the applicable legal authority, a coverage denial decision by an insurer should be considered reasonable as a matter of law. Difficulty arises for some courts from the fact that “reasonableness” is typically viewed as the quintessential issue of fact for the jury. A court might ask how it can make a reasonableness determination as a matter of law where the issue itself is so often described as an issue of fact? But this question was answered in California in Morris v. Paul Revere Life Ins. Co. (2003) 109 Cal.App.4th 966, 135 Cal.Rptr.2d 718. In Paul Revere, a California Court of Appeal concluded as follows at 109 Cal.App.4th 973 n.1:

Recovery of Emotional Distress Damages in California “Bad Faith” Actions

Insureds in California often seek recovery of emotional distress damages in insurance “bad faith” actions. But is there a principled basis for such damages claims? “Bad faith” recovery is predicated upon “unreasonable” conduct by an insurer. Something more than a mere breach of contract is required. Moreover, California courts have historically viewed emotional distress claims with caution—particularly where the alleged emotional distress is not severe, the tort conduct is not egregious, and the alleged distress is not accompanied by other bodily injury. California courts have faced difficulty in properly interpreting these emotional distress concepts in the insurance bad faith context. We consider these difficulties in this article.

The Triapartite Relationship of Insurer, Insured and Defense Counsel — Some Observations on California Law

In the typical insurance defense case, a tripartite relationship exists between the insurer, the insured and the attorney. The “triangular aspect” of the representation has been described as a “coalition for a common purpose — a favorable disposition of the claim — with the attorney owing fiduciary duties to both clients.” Purdy v. Pacific Auto. Ins. Co. (1984) 157 Cal.App.3d 59, 76; Gafcon, Inc. v. Ponsor & Assocs. (2002) 98 Cal.App.4th 1388, 1406. With the exception of Cumis counsel situations which are addressed separately below, the insurer and insured are typically deemed joint clients of the retained defense counsel for purposes of the attorney-client privilege. “In the absence of a conflict of interest between the insurer and the insured that would preclude an attorney from representing both, the attorney has a dual attorney-client relationship with insurer and insured.” State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co. (1999) 72 Cal.App.4th 1422, 1429; Lysick v. Walcom (1968) 258 Cal.App.2d 136, 146. 1 In non-Cumis situations, the insurer and the insured are entitled to disclosure of confidences from one another. In addition, neither one of them may assert the privilege if such communication is offered in litigation between them; waiver by one does not bar its asser-

Breach of the Duty to Defend: What are the Consequences? (Part I)

In this column, I analyze the legal and conceptual framework that the courts have created for analyzing the consequences that flow from a breach by an insurer of its duty to defend. Despite numerous California Supreme Court and Court of Appeal decisions, California law (and the law of many other states) remains unsettled on this subject. In the next issue of the Environmental Claims Journal, I will include Part II of this article, which analyzes the remedies that are potentially available to an insured when an insurer breaches its duty to defend, and will set forth some practical guidelines that might properly be drawn from the cases that have considered this subject. California law is unsettled on the measure of damages for breach of duty to defend. Accordingly, in this article I discuss relevant cases that are both positive and negative on the issue. California law does not necessarily or conclusively estop an insurer from asserting coverage defenses in a circumstance where the insurer has breached its duty to defend. However, California courts have, on occasion, held insurers liable for uncovered losses and other consequential damages where the duty to defend has been breached. Courts considering the issue have drawn distinctions between circumstances involving settlements by the insured and circumstances involving entry of judgment against the insured in the underlying case. Distinctions have also been drawn depending upon whether the insured proceeded to defend the underlying action, as opposed to having a default judgment entered against it. Finally, and perhaps most importantly, distinctions have been drawn depending upon the nature of the insurer breach, with more serious consequences flowing where the court perceives a wrongful or bad faith breach of the duty to defend.

INSURANCE AND THE PAYMENT OF RESTITUTION: IS THERE COVERAGE?

Environmental insurance coverage issues have evolved far beyond the early questions about application of the pollution exclusion and occurrence definition. Environmental exposures can extend into the corporate boardroom and implicate aspects of coverage that have not previously been considered by the courts in the traditional environmental context. If a company’s directors and officers or outside professionals are sued, public policy issues involving preclusion of coverage for payments not constituting “damages” can take on special insurance significance. In this article, we examine California law on the subject of insurance coverage for payments in the nature of restitution. The California Supreme Court addressed the issue in AIU Insurance Co. v. FMC Corp., 51 Cal.3d 807 (1990), a key environmental insurance law decision. AIU established the analytical framework. However, more recent decisions make clear that the distinction between compensable damages and uninsurable restitution is a difficult line to draw.

Claims against corporate directors and officers for negligent misrepresentation: Is there coverage?

Abstract Environmental liabilities often give rise to corporate disclosure obligations by directors and officers in 10‐Ks, 10‐Qs, annual reports, and other financial reporting documents. What happens if an environmental disclosure ultimately proves to be wrong? Where litigation results from an inadequate or misleading disclosure, directors and officers will turn to their director‐ and officer‐liability insurance policies for defense and indemnity. After all, the very purpose of DO it is excluded under the express provisions of the insurance contract and is subject to a public policy bar of coverage under the law of most states. But what about negligent misrepresentation by corporate directors or officers in reporting on environmental liabilities? Negligent misrepresentation is not fraud. Surely coverage exists for negligence in the disclosure context, directors and officers may think, but they may be in for an un...

Recent California development: The impact of the Aerojet case on the policyholder “all sums” argument

In the Winter 1998 edition of the Environmental Claims Journal, Richard D. Williams and Robert A. Rosen argued in the lead article that the “all sums”; argument asserted by policyholders in insurance coverage cases has no applicability in the context of excess coverage, and that horizontal exhaustion is the law in California. See Williams and Rosen, “The Policyholders’ ‘All Sums’ Argument: Sound and Fury Signifying Nothing,”; 10 Envtl. Claims J. No. 2 at 3 (Winter 1998). Following publication of the article, the California Supreme Court issued its opinion in Aerojet‐General Corporation v. Transport Indemnity Company, No. S054501 (December 29, 1997) 97 Daily J. D.A.R. 15551. This follow up article examines the impact of Aerojet and the current status of California law on the “all sums”; issue.

The personal injury endorsement: An insurer reply to the misguided policyholder lawyer

This article is a reply to Kirk Pasichs article, “Personal Injury Coverage for Environmental Claims: A Response to ‘Another Invasion!’,” 5 Environmental Claims Journal 509 (Summer 1993), which in turn was a response to Mr. Williamss article, “Another Invasion! Environmental Insurance Coverage Claims Based on the Personal Injury Endorsement,” 5 Environmental Claims Journal 391 (Spring 1993)