Damages Limited to Policy Limits? Not Quite.

When a defendant dies before suit is filed, a California plaintiff can sue by naming the estate as defendant but serving the decedent’s insurer. The plaintiff cannot recover damages from the insurer beyond the policy limits. (Cal. Prob. Code, §§ 550-555.)

In a recent case brought under these statutes, the insurer ended up paying more than policy limits. Meleski v. Estate of Albert Hotlen. How did this happen?

Plaintiff made an offer of judgment (like rule 68 offers in Federal rules-based jurisdictions) for one dollar below policy limits. California’s section 998 (much like rule 68 offers in Federal rules-based jurisdictions), allows a party that makes an offer the other side does not accept to recover costs, including expert fees, if the party that does not accept the offer does not achieve a more favorable result at trial. (Cal. Code Civ. Proc., § 998.) The insurer did not accept, and the jury returned a verdict above policy limits. In Meleski, costs amounted to two thirds of the policy limit. Plaintiff accordingly sought payment of costs under section 998.

The insurer argued that the offer of judgment statute applied only to parties and that the insurer was not a named party. The court of appeal rejected this argument, holding that the insurer was, though not named, nevertheless a de facto. The court reasoned that the insurer had “complete control of the litigation of this matter, it also was the only entity opposing Plaintiff that risked losing money in the litigation.” The court concluded by stating that “it is a legal fiction that the estate is the party. In actuality, [the insurance company] is the party litigating the case, inasmuch as it alone is at risk of loss and it alone controls the litigation.” Although a personal representative of the estate can be joined to the litigation, one was not in this case.

The court then ruled that the statutory limitation of damages to policy limits did not limit an award under section 998. The Probate Code limit applies to damages, but a section 998 award is of costs incurred for litigation after denial of the offer, not damages.

This decision gives 998 offers their full weight in circumstances where insurers might have thought the policy limit is the worst case scenario. As the court of appeal stated, recoveries under 998 are not damages, but rather are costs and therefore recoverable in addition to and despite the statutory limitation.

Georgia Supreme Court Denies Coverage for Lead-Based Paint Injuries Based on the Pollution Exclusion

In a matter of first impression, the Georgia Supreme Court recently held that personal injury claims arising from lead poisoning due to lead-based paint ingestion were excluded from coverage under an absolute pollution exclusion in a commercial general liability insurance policy covering residential rental property.  The decision in Ga. Farm Bureau Mut. Ins. Co. v. Smith, S15G1177, 2016 Ga. LEXIS 245 (Ga. Mar. 21, 2016) is significant for insurers since it expressly rejects the notion that a pollution exclusion clause is limited to traditional environmental pollution.leadpainthork

The facts are straightforward.  Amy Smith (“Smith”), individually and as next friend of her daughter Tyasia Brown (“Brown”), sued her landlord, Bobby Chupp (“Chupp”), for injuries Brown allegedly sustained as a result of ingesting lead from deteriorating lead-based paint at the house Smith rented from Chupp.  Georgia Farm Bureau Mutual Insurance Company (“GFB”) insured the house under a CGL policy issued to Chupp.  Chupp tendered Smith’s claims to GFB,  and the insurer filed a declaratory judgment action against Smith and Chupp seeking a determination that Brown’s injuries were not covered under the policy and that it had no duty do defend Chupp against Smith’s claims.

GFB contended, among other things, that Brown’s injuries from lead poisoning were excepted from coverage by the policy’s pollution exclusion, which defined “Pollution” as “‘[b]odily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ . . . .”  The policy defined “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

In granting summary judgment to GFB, the trial court relied on the Georgia Supreme Court’s decision in Reed v. Auto-Owners Ins. Co., 284 Ga. 286 (2008), which addressed the proper construction of an identical pollution exclusion in a CGL policy insuring residential rental property wherein a tenant sued her landlord for carbon monoxide poisoning.  Although not explicitly listed in the policy as a pollutant, the Reed Court held that carbon monoxide gas fell within the policy’s definition of a pollutant and concluded that all of the plaintiff’s injuries arising therefrom were excluded from coverage under the pollution exclusion.

lead-paint-epa-dangerOn appeal, the Georgia Court of Appeals reversed the trial court’s grant of summary judgment to GFB.  The Court of Appeals observed that the specific issue of whether lead-based paint should be considered a “pollutant” under the pollution exclusion clause was one of first impression in Georgia, and noted that a conflict existed among other jurisdictions on this issue.  The Court of Appeals sided with those foreign courts holding that a pollution exclusion similar to the instant one did not bar coverage for injuries arising out of the ingestion or inhalation of lead-based paint. The Court of Appeals rejected the trial court’s interpretation of Reed, finding that while a straightforward reading of the pollution exclusion in Reed compelled the conclusion that carbon monoxide gas was a pollutant, it was unclear whether identical language in the instant policy was expansive enough to unambiguously include lead, lead-based paint or paint as a pollutant.

In its analysis, the Georgia Supreme Court found that GFB’s CGL policy contained an absolute pollution exclusion that precludes recovery for bodily injury or property damage resulting from exposure to any pollutants.  Overviewing the genesis and development of the absolute pollution exclusion, the Court highlighted the litany of Georgia decisions, including Reed, that have repeatedly applied such clauses outside the context of traditional environmental pollution.  Further, the Court rejected the notion that the pollutant at issue must be explicitly named in the policy to be enforceable.

In reversing the Court of Appeals, the Georgia Supreme Court followed Reed and found that GFB’s CGL policy unambiguously governed the factual scenario.  Simply put, the Court of Appeals failed to apply the plain language of the contract.  Accordingly, the Georgia Supreme Court held that lead present in paint unambiguously qualifies as a pollutant and that the plain language of the policy’s pollution exclusion excluded Smith’s claims against Chupp from coverage.

*** On March 3, 2016, this author published a related blog article on a recent Vermont Supreme Court decision holding that the plain language interpretation of a pollution exclusion in a homeowner policy barred coverage for property damage to a home rendered uninhabitable by an over-application of a bed bug pesticide.

California: Insurers Must Cover “Long Tail” Claims Regardless of Corporate Reorganization During Intervening Years

Many insurance policies contain provisions barring assignment of the insured’s rights without the insurer’s consent, which have been interpreted to include “assignments” via merger or corporate reorganization. Last week, in Fluor Corp. v. Superior Court (Hartford Accid. & Indem. Co.), the California Supreme Court ruled that such restrictions do not apply after the event triggering coverage has occurred. Instead, the law “bars an insurer from refusing to honor an insured’s assignment of policy coverage regarding injuries that predate the assignment.”

The decision is likely to have particular resonance in the environmental and toxic tort area. Many such claims are notoriously “long-tail” – the injuries do not manifest, or clean-up responsibilities do not mature, until decades after the “occurrence” of exposure, with more time, and often more reason, for corporate reorganization. The California decision follows a recent New Jersey decision to the same effect, and both states are venues for many environmental and toxic tort claims.

The California Supreme Court held that this result was compelled by a little-known statute. “An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.” (Ins. Code, § 520.) “Under that provision, after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer — and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement.”

The decision distinguished assignments of policy rights before and after the triggering event, which it somewhat imprecisely referred to as the difference between assigning a risk and assigning a loss. “The insurer has a right to know, and an interest in knowing, for whom he stands as insurer. He may be willing to insure one person and unwilling to insure another … But these considerations have no application to the assignee of [a claim for coverage under] the policy, for it makes no difference to the insurer to whom he pays the insurance in case of a loss.” A “postloss assignment generally does not ‘increase the risk to the insurer associated with an undesirable assignee.’” Further, the court reasoned, not allowing an insured to assign policy benefits after the coverage-triggering event would provide “an insurer … the windfall of not having to insure an occurrence that it received premiums for covering.”

Fluor is a corporation with many subsidiaries, all covered under CGL insurance policies with Hartford. Insurer Hartford assumed defense and indemnity of many claims, including many personal injury and wrongful death claims related to asbestos. After the relevant exposures, Fluor created a new entity (Fluor II) into which it put assets and operations, including those related to the asbestos activities. Hartford sued for declaratory relief that this was an invalid assignment under standard consent-to-assignment provision in the CGL policies.  Fluor moved for summary adjudication on the issue and lost. Fluor thereupon filed a writ petition, which the Court of Appeal denied twice (once summarily and once after full briefing), before the Supreme Court granted review, reversed and remanded.

“[P]recluding an insurer, after a loss has occurred, from refusing to honor an insured’s assignment of the right to invoke policy coverage for such a loss,” said the court, has the beneficial effect of “facilitating the productive transformation of corporate entities, and thereby fostering economic activity.” Although the decision arose in the context of a big corporation’s complex reorganization, the principle should be no less applicable in reorganizations of smaller operations as well. After Fluor, an insurer may have a hard time arguing that its permission is necessary when an insured small LLC turns into an S corporation with the same participants, or vice versa.

The decision is contrary to, and expressly disapproves, the earlier California Supreme Court decision of Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, 945 [“an assignment is subject to consent by the insurer unless ‘the benefit has been reduced to a claim for money due or to become due.’”]) The rationale for departing from precedent is that section 520 was neither briefed nor addressed in the earlier case. “We now recognize that [Henkel’s] determination, reached without consideration or analysis of section 520, conflicts with the rule prescribed by that statute.”

New Jersey Appellate Court Rules That Insurance Rights May Be Transferred Without Consent of Carrier After The Events That Trigger Coverage

In Givaudan Fragrances Corporation v. Aetna, the Appellate Division of the New Jersey Court held that an assignee was permitted to pursue coverage on policies that were written to a different insured. The Appellate Division’s decision will certainly help companies, or individuals, who are successors in interest to a policy holder to obtain coverage for events that happened during the policy period, years or even decades ago, even if they themselves were not named insureds under the policy.

In this case, the policies were issued in 1964 – 1986 to Givaudan Corporation. Due to contamination at a Clifton, NJ facility in 1987 and 1988, Givaudan Corporation entered into Administrative Consent Orders with the New Jersey Department of Environmental Protection which provided for remediation. Thereafter, there were numerous corporate reorganizations that resulted in the creation of Givaudan Fragrances Corporation (GFC), which inherited various assets and liabilities, including the environmental liabilities associated with the Clifton facility.

In the 2000s, US EPA and the NJDEP commenced administrative proceedings and litigation against GFC relating to the Clifton property and alleged discharges from the property to the Passaic River. The dredge remedy for the Passaic River is expected to cost from $500 million to $1.7 billion, a new record for a Superfund cleanup.

GFC sought insurance coverage under the policies issued to Givaudan Corporation with regard to the USEPA and NJDEP actions. The carriers declined to provide coverage because GFC was not a named insured and the policies required consent of the carriers (which was neither sought nor given) to effectuate an assignment. GFC commenced a suit for coverage, and a year later, Givaudan Corporation (then called Givaudan Flavors) assigned its “insurance rights” to GFC.

GFC and the carriers sought summary judgment on the question of whether there had been an effective assignment, i.e., was GFC an insured. The trial court granted the carriers’ motion and dismissed the complaint, finding that the assignment was not merely a transfer of a limited claim but was, in effect, a transfer of the policy without carrier approval.

The Appellate Division reversed, reinstated the complaint and granted GFC’s motion for partial summary judgment, explaining that for occurrence-based policies, “the peril insured is the occurrence itself.” Therefore, “[o]nce the occurrence takes place, coverage attaches even though the claim may not be made for some time thereafter.” So, although a policy cannot be assigned, once a loss occurs, an insured’s claim under a policy may be assigned without the insurer’s consent. This is because the carrier’s risk has not been enlarged by the assignment. Instead, an assignment merely alters the identity of the claimant. The carriers’ “obligation to provide coverage to the party deemed to be an insured under the policies arose at the time of the loss. Although the precise amount of defendants’ liability may not be known, defendants’ obligation to insure the risk in accordance with their respective policies was not altered by the assignment.”

Clearly, this case will pave the way for the transfer of “insurance rights” after the occurrence of events giving rise to coverage, without the need for insurer approval.

N.B.: The California Supreme Court just last week reached the same conclusion in a case involving asbestos claims. A post will follow on the specifics of that decision.