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Take A Vacation

VIEWS: 201 PAGES: 38

									August 19, 2010                                                                                    Issue 7

                                                   From the Editor
Case Search Database Link
                                                   I wish I had good words of summer wisdom to
DRI Resources                                      impart, but frankly I don't think a better message
                                                   could be had than the one provided by Tony Zelle,
                                                   our Vice Chair. I urge you to read the Vice Chair
                                                   Notes for this edition. But more importantly, I urge
                                                   you to then actually follow his advice. Best wishes
                                                   to all of our readers in truly enjoying the balance of
                                                   your summer.


                                                   Brian H. Sande
                                                   Bassford Remele, A Professional Association
                                                   Minneapolis, Minnesota

                                                   Jonathan L. Schwartz
                                                   Lewis Brisbois Bisgaard & Smith, LLP
                                                   Chicago, Illinois

                                                   Bryan M. Weiss
                                                   Murchison & Cumming, LLP
                                                   Los Angeles, California

                                                    From the Vice Chair
In Covered Events
                                                    Take A Vacation
Take A Vacation
                                                    by Anthony R. Zelle
Stopping the End Around: Enforcing the Reporting
Requirement in a Claim-Made Policy and the
Continuous Coverage Theory                                        As defense lawyers committed to
                                                                  the zealous representation of our
                                                                  clients, we work hard. The effort
THIRD CIRCUIT                                                     and attitude we bring to our clients
FIFTH CIRCUIT                                                     is usually rewarded with success in
SIXTH CIRCUIT                                                     the resolution of our cases, whether
                                                    by settlement, motion or trial. With client
                                                    satisfaction, our business grows, as does our
EIGHTH CIRCUIT                                      commitment to continue to work diligently to
NINTH CIRCUIT                                       meet our clients' demands. The cycle is
                                       predictable: as our success grows, so do our
                                       clients expectations. The growth cycle is
DELAWARE                               encouraged by financial reward. However, the
FLORIDA                                necessary increase in time and attention
                                       expected by our clients and the potential for
                                       greater financial reward requires a well-
                                       considered response.
INDIANA                                I have heard it a hundred times, with ever
                                       increasing frequency – where did the summer
                                       go? As professionals committed to success
                                       through hard work, committed to developing
MASSACHUSETTS                          business and client relationships, committed to
MICHIGAN                               our partners and our firms, committed to pro
                                       bono work, committed to the DRI, the SDLO's,
                                       and other professional organizations we belong
                                       to, it is easy to forget that the importance of
NEW YORK                               bringing an equal commitment to "the other
NORTH CAROLINA                         things in life." The adages are numerous: "all
                                       work and no play makes Jack a dull boy," "the
                                       key to happiness is a balanced life," "family
                                       first," "life is too short . . . ." Nonetheless, as a
RHODE ISLAND                           profession, lawyers waste more vacation time
TEXAS                                  than any other profession.
                                       It does not require a high level of mental health
                                       awareness to recognize the importance of
                                       vacation time to our professional success. For
           Committee Leadership
                                       ourselves, our partners, and our associates, it is
             Committee Chair           critical to take some time off and to invest the
             Lee Craig
                                       same effort and commitment to our vacation
             Butler Pappas
             (813) 281-1900            time as we due to our billable time. Time off
      rejuvenates us physically, mentally and perhaps
                                       most importantly, emotionally. Spending time
             Committee Vice Chair
             Anthony R. Zelle          with family, friends, even professional
             Zelle McDonough & Cohen   colleagues (without discussing work), should be
             (617) 742-6520            as important to lawyers and law firms, to our
            profession as a whole, as is the zealous
                                       representation of our clients.

                                       As I write these notes, I am in the midst of
                                       preparing proposed findings of fact and
                                       conclusions of law following a three week trial,
                                       which followed three months of depositions,
                                       which followed six months of discovery, motion
                                       practice and case assessment, which followed a
                                       four week trial last summer. Six months ago, I
                                       planned a two week vacation in mid-August,
                                       knowing that it would be as important as every
                                       hour I would spend on my clients, my firm and
                                       my professional development over that period of
                                       time. I will not think about work, I will not
                                       obsessively check my emails, I will trust my
                                       partners, my associates and my support staff to
             Publications Chair
             Matthew S. Foy                    attend to deadlines and to keep things in order. I
             Gordon & Rees                     will also trust my clients to understand that for
             (415) 986-5900                    two weeks they can rely on my partners,
                  associates and support staff, and on
                                               themselves, to handle whatever new matter or
             Co-Editor                         unanticipated problem may arise.
             Brian H. Sande
             Bassford Remele                   It is difficult to sacrifice plans in our personal
                  lives to our professional commitments, but most
                                               of us do it frequently. It has become even more
                                               difficult to sacrifice our professional time to our
             Co-Editor                         personal lives, but we have to do – for
             Jonathan L. Schwartz              ourselves, for our clients, for our firms, and for
             Lewis Brisbois Bisgaard & Smith   our profession.
                                               In addition to my two weeks in August, I also
                                               have four days of vacation planned in October,
             Bryan M. Weiss                    just before the five days I will spend in San
             Murchison & Cumming               Diego at the DRI Annual Meeting beginning on
              October 20 . (Register at
                                               Our Insurance Law Committee will be
   Assistant Editors                           presenting one of the blockbuster programs for
   Tiffany M. Brown                            the entire DRI membership, The Financial
   Meagher & Geer                              Crisis—Its Origins, The Lawsuits, And The
   (612) 371-1324                              Impact On The Insurance Industry. In addition,                          our Insurance Law Committee Program, A New
                                               Decade's Headaches - What Keeps Insurance
   Brian A. O'Connell
                                               Executives Awake at Night, will keep us attuned
   Zizik Powers O'Connell
   (781) 320-5402                              to the cutting edge issues in the area of                   insurance law. While not the same as a
                                               vacation, the Annual Meeting will provide some
   Elaine Murphy Pohl                          time out of the office to connect with friends and
   Plunkett Cooney                             colleagues, to make new acquaintances, to
   (248) 901-4000                              enjoy the educational programs being offered,                    and to get involved with the ILC. And since it will
                                               be in San Diego, where there is always summer
                                               weather, it will remind you of the vacation I hope
   Click to view entire Leadership
                                               you are taking.

              DRI Publications

                       Insurance and
                       Law Issues

Feature Article
Stopping the End Around: Enforcing the Reporting Requirement in a Claim-
Made Policy and the Continuous Coverage Theory
by Mark E. Cohen

The vast majority of professional liability policies are written on a claims-made basis. Further, most
claims-made policies require the claim to be reported during the policy period or shortly thereafter
(typically within 30 or 60 days after the policy period).

Courts have widely found that the reporting provisions in claims-made and reported policies are
essential to the coverage provided by the policy. The purpose of claims-made insurance is to limit or
eliminate tail coverage, make premium setting more predictable and therefore make professional
liability policies more readily available and affordable. E.g., Oregon Sch. Activities Ass'n v. Nat'l Union
Fire Ins. Co. of Pittsburgh, 279 F. App'x 494, 495 (9th Cir. 2008) (With claims-made and reported
policies, timely notice "is what actually creates coverage in the first instance."); LaForge v. Am. Cas.
Co. of Reading, Pa., 37 F.3d 580, 583 (10th Cir. 1994) (Claims-made policies "allow an insurer to
'close its books' on a policy at the expiration date and thus 'attain a level of predictability unattainable
under standard occurrence policies.'") (citation omitted); KPFF, Inc. v. Cal. Union Ins. Co., 66 Cal. Rptr.
2d 36, 41 (Cal. Ct. App. 1997) (Claims-made policies "aid in making insurance more available and less
expensive than occurrence policies."); Pac. Employers Ins. Co. v. Superior Court, 270 Cal. Rptr. 779,
785 (Cal. Ct. App. 1990) ("The social utility of claims-made policies has been well
documented. Underwriters, secure in the fact that claims will not arise under the subject policy after its
expiration or termination can underwrite a risk and compute premiums with greater certainty. … There
are benefits to the insured as well. Among other things, 'claims-made' policies aid in making insurance
more available and less expensive than occurrence policies.") (citations omitted); Hasbrouck v. St. Paul
Fire & Marine Ins. Co., 511 N.W.2d 364, 367 (Iowa 1993) (policyholders benefit from claims-made and
reported policies by getting reduced premiums and coverage for acts occurring prior to the inception of
the policy period); Chas. T. Main, Inc. v. Fireman's Fund Ins. Co., 551 N.E.2d 28, 30 (Mass. 1990)
("The closer in time that the insured event and the insurer's payoff are, the more predictable the
amount of the payment will be, and the more likely it is that rates will fairly reflect the risks taken by the
insurer."); Stine v. Cont'l Cas. Co., 349 N.W.2d 127, 131 (Mich. 1984) ("Since the insurer can limit the
duration of its exposure to the term of the policy currently in force, the more precise actuarial data
available enable it to charge a lower premium than would be necessary for an occurrence policy.");
AOK Lands, Inc. v. Shand, Morahan & Co., 860 P.2d 924, 927 (Utah 1993) (A claims-made
policyholder "receives the countervailing benefit of lower premiums than would be necessary for
occurrence policies"); Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Willis, 296 F.3d 336, 343 (5th Cir.
2002) ("The purpose of claims-made policies, unlike occurrence policies, is to provide exact notice
periods that limit liability to a fixed period of time 'after which an insurer knows it is no longer liable
under the policy, and for this reason such reporting requirements are strictly construed.' Allowing
coverage beyond that period would be to grant the insured more coverage than that which was
bargained for, and to require insurers to provide coverage for risks not assumed.") (citations omitted).

Therefore, courts have found that claims-made policies must be strictly construed. E.g., Gen. Accident
Ins. Co. of Am. v. Gibraltar Cas. Co., 67 F.3d 306 (9th Cir. 1995) ("The courts may not rewrite a claims-
made policy to extend coverage the insured has not bargained for."); F.D.I.C. v. Barham, 995 F.2d 600,
605, n.9 (5th Cir. 1993) ("Because notice of a claim or potential claim defines coverage under a claims-
made policy, we think that the notice provisions of such a policy should be strictly construed."); Nat'l
Union Fire Ins. Co. v. Talcott, 931 F.2d 166, 168-69 (1st Cir. 1991) (strict adherence to notice provision
in claims-made policy required); Esmailzadeh v. Johnson & Speakman, 869 F.2d 422, 424 (8th Cir.
1989) ("Excusing a delay in notice beyond the policy period would alter a basic term of the insurance
contract."); 4th Street Investors LLC v. Dowdell, Civ. A. No. 06-536, 2008 WL 163052, at *8 (W.D. Pa.
Jan. 15, 2008); S.N.J. Rail Group, LLC v. Lumbermens Mut. Cas. Co., No. 06 Civ. 4946(LAK)(AJP),
2007 WL 2296506, at *10 (S.D.N.Y. Aug. 13, 2007); Rodriguez Quiñones v. Jimenez & Ruiz, S.E., 261
F. Supp. 2d 87, 90, 91 (D.P.R. 2003); Maynard v. Westport Ins. Corp., 208 F. Supp. 2d 568, 575 (D.
Md. 2002); Gebhardt v. Allspect, Inc., 177 F. Supp. 2d 267, 275 (S.D.N.Y. 2001) (extension of notice
period in claims-made policy would improperly expose insurer to risk greater than bargained for); Nat'l
Union Fire Ins. Co. of Pittsburgh, Pa. v. Willis, 139 F. Supp. 2d 827, 832 (S.D. Tex. 2001) ("Courts
strictly interpret notice provisions in a 'claims-made' policy."); Nat'l Union Ins. Co. of Pittsburgh v.
Holmes & Graven, 23 F. Supp. 2d 1057, 1072 (D. Minn. 1998) (Claims-made policy's reporting
requirements should not be disregarded to create "open-ended tail coverage" and thereby "vitiate the
principal distinction between 'claims-made' and an 'occurrence' policy."); Zuckerman v. Nat'l Union Fire
Ins., 495 A.2d 395, 399-406 (N.J. 1985) (enforcing claims-made provision because extension of notice
provisions would result in unfair increase in coverage without any increased premium).

Accordingly, courts have widely held that an insurer does not have to prove it was prejudiced by the
insured's failure to timely report a claim under a claims-made and reported policy. E.g., Oregon Sch.
Activities Ass'n v. Nat'l Union Fire Ins. Co. of Pittsburgh, 279 F. App'x 494, 494-96 (9th Cir. 2008);
Janjer Enters., Inc. v. Executive Risk Indem., Inc., 97 F. App'x 410, 414-15 (4th Cir. 2004); Burns v. Int'l
Ins. Co., 929 F.2d 1422, 1424-25 (9th Cir. 2002) ("To apply the notice-prejudice rule to a claims-made
policy would be to rewrite the policy, extending the policy's coverage at no cost to the insured.");
Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653, 659 (5th Cir. 1999) (Texas
law); Lexington Ins. Co. v. St. Louis Univ., 88 F.3d 632, 634-35 (8th Cir. 1996) (Missouri law); DiLuglio
v. New Eng. Ins. Co., 959 F.2d 355, 358 (1st Cir. 1992) (imposition of notice-prejudice requirement
would "force significantly higher premiums"); Nat'l Union Fire Ins. Co. v. Talcott, 931 F.2d 166, 168 (1st
Cir. 1991); United States v. A.C. Strip, 868 F. 2d 181 (6th Cir. 1989); Esmailzadeh v. Johnson &
Speakman, 869 F.2d 422, 424 (8th Cir. 1989) (Minnesota law); World Health & Educ. Found. v.
Carolina Cas. Ins. Co., 612 F. Supp. 2d 1089, 1096 (N.D. Cal. 2009); Manufactured Hous.
Communities of Wash. v. St. Paul Mercury Ins. Co., 660 F. Supp. 2d 1208, 1213-14 (W.D. Wash.
2009); Williams v. Synergy Care, Inc., Civ. A. No. 07-0137, 2008 WL 2945918 (W.D. La. July 29,
2008); Wendy's Int'l, Inc. v. Ill. Union Ins. Co., No. 2:05-cv-803, 2007 WL 710242 (S.D. Ohio Mar. 6,
2007); Trek Bicycle Corp. v. Mitsui Sumitomo Ins. Co., Civ. A. No. 5:05CV-44-R, 2006 WL 1642298, at
*2-3 (W.D. Ky. June 7, 2006); Salt Lake Toyota Dealers Assoc. v. St. Paul Mercury Ins. Co., No. 2:05-
CV-497 TS, 2006 WL 1547996 (D. Utah June 6, 2006); Women's Christian Alliance v. Executive Risk
Indem. Inc., No. Civ. A. 02-2594, 2003 WL 21961434, at *5 (E.D. Pa. July 3, 2003) ("Courts have
consistently declined to extend this so-called 'notice-prejudice' rule to claims-made policies."); St. Paul
Reinsurance Co. v. Williams & Montgomery, Ltd., No. 00 C 5037, 2001 WL 1242891, at *3, 4 (N.D. Ill.
Oct. 17, 2001); Simundson v. United Coastal Ins. Co., 951 F. Supp. 165, 167 (D.N.D. 1997) (requiring
showing of actual prejudice in order to deny coverage would effectively treat "claims-made" policy as
occurrence-type policy); Borish v. Britamco Underwriters, Inc., 869 F. Supp. 316, 319-20 (E.D. Pa.
1994); Calocerinos & Spina Consulting Eng'rs, P.C. v. Prudential Reinsurance Co., 856 F. Supp. 775,
779 (W.D.N.Y. 1994) (claims-made policy must be applied according to its terms); Civic Assocs., Inc. v.
Sec. Ins. Co. of Hartford, 749 F. Supp. 1076, 1082 (D. Kan. 1990); City of Harrisburg v. Int'l Surplus
Lines Ins. Co., 596 F. Supp. 954, 960-62 (M.D. Pa. 1984); Thoracic Cardiovascular Assocs., Ltd. v. St.
Paul Fire & Marine Ins. Co., 891 P.2d 916, 921 (Ariz. Ct. App. 1994); Sletten v. St. Paul Fire & Marine
Ins. Co., 780 P.2d 428, 430 (Ariz. Ct. App. 1989); Campbell & Co. v. Utica Mut. Ins. Co., 820 S.W.2d
284, 288 (Ark. Ct. App. 1991); Pac. Employers Ins. Co. v. Superior Court, 270 Cal. Rptr. 779 (Cal. Ct.
App. 1990); Homsey Architects, Inc. v. Harry David Zutz Ins., Inc., No. Civ. A. 96C-06-082-JOH, 2000
WL 973285, at *13 (Del. Super. Ct. May 25, 2005); Cont'l Cas. Co. v. Cuda, 715 N.E.2d 663, 669 (Ill.
App. Ct. 1999); Hasbrouck v. St. Paul Fire & Marine Ins. Co., 511 N.W. 2d 364, 368 (Iowa 1993);
Jefferson Guar. Bank v. Westbank-Marrero Cab Co., 570 So. 2d 498, 500 (La. Ct. App. 1990); Chas. T.
Main, Inc. v. Fireman's Fund Ins. Co., 551 N.E.2d 28, 30 (Mass. 1990) ("The likely result [of imposing a
notice-prejudice requirement] would be that claims-made policies, which offer substantial benefits to
purchasers of insurance as well as insurance companies, would vanish from the scene."); Ins.
Placements, Inc. v. Utica Mut. Ins. Co., 917 S.W.2d 592, 597 (Mo. Ct. App. 1996) ("Because the
reporting requirement helps define the scope of coverage under a claims-made policy, to excuse a
delay in notice beyond the policy period would alter a basic term of the insurance contract"); Cont'l Cas.
Co. v. Maxwell, 799 S.W.2d 882, 887 (Mo. Ct. App. 1990); Zuckerman v. Nat'l Union Fire Ins. Co., 495
A.2d 395, 405-06 (N.J. 1985); Crawford v. Indem. Underwriters Ins. Co., 943 P.2d 1099, 1101 (Okla.
Civ. App. 1997); Ace Am. Ins. Co. v. Underwriters at Lloyds & Cos., 939 A.2d 935, 940-41 (Pa. Super.
Ct. 2007); Hirsch v. Tex. Lawyers' Ins. Exch., 808 S.W.2d 561, 565 (Tex. App. 1991); Safeco Title Ins.
Co. v. Gannon, 774 P.2d 30, 35-36 (Wash. Ct. App. 1989); See also L. Russ & T. Segalla, Couch on
Insurance, 186:13 (3d ed. 1999) (The requirement to give notice under a claims-made policy "is not
simply part of [the] insured's duty to cooperate, but defines the limits of the insurer's obligation, and if
there is no timely notice, there is no coverage.").

Nonetheless, insureds sometimes argue that the court should not enforce a reporting requirement in a
claims-made and reported policy when the insured renews the policy that was in effect when the claim
was first made and the claim is reported when a later policy issued by the same insurer is in effect. This
argument, which has sometimes been referred to as the "continuous coverage" theory, has been flatly
rejected by the overwhelming majority of courts that have considered it. See Charles Dunn Co., Inc. v.
Tudor Ins. Co., No. 07-56525, 2009 WL 117868, at *2 (9th Cir. Jan. 14, 2009) (argument that claim can
be reported during renewal policy period fails because renewal policy is a "separate and distinct
contract for the period of time covered by the renewal and is not a continuous contract unless there is
clear and unambiguous language showing that the parties intended to enter into one continuous
contract."); DiLuglio v. New England Ins. Co., 959 F.2d 355, 360 (1st Cir. 1992) (finding continuous
coverage theory "untenable") (Rhode Island law); Nat'l Union Fire Ins. Co. v. Talcott, 931 F.2d 166,
168-69 (1st Cir. 1991) (continuous coverage "immaterial" to whether insured timely reported claim);
World Health & Educ. Found. v. Carolina Cas. Co., 612 F. Supp. 2d 1089, 1096 (N.D. Cal. 2009); Old
Republic Ins. Co. v. Ness, Motley, Loadholt, Richardson & Poole, P.A., No. 03 V 5238, 2006 WL
88666, at *14 (N.D. Ill. Jan 11, 2006) (Rejecting insured's contention "that the time period for reporting
was extended because Old Republic extended its [f]irst [p]olicy for a second year," and explaining that
the renewal of the policy does not create a single policy for claim reporting purposes.); Executive Risk
Indem., Inc. v. Chartered Benefit Servs., Inc., No. 03 C 3224, 2005 WL 1838433, at *9-10 (N.D. Ill. July
29, 2005) (finding no merit to continuous coverage theory; insured reported the claim four months after
the policy period in which the claim was first made and during the renewal period); Rodriguez Quiñones
v. Jimenez & Ruiz, S.E., 261 F. Supp. 2d 87, 90-91 (D.P.R. 2003); Westport Ins. Corp. v. Mirsky, No.
CIV.A. 00-4367, 2002 WL 31018554, at *11 (E.D. Pa. Sept. 10, 2002); Napolitano v. Coregis Ins. Co.,
No. 3:01-CV-34 EBB, 2002 WL 34159094, at *4 (D. Conn. Aug. 27, 2002); Pantropic Power Prods.,
Inc. v. Fireman's Fund Ins. Co., 141 F. Supp. 2d 1366, 1370-71 (S.D. Fla. 2001); Checkrite Ltd., Inc. v.
Ill. Nat'l Ins. Co., 95 F. Supp. 2d 180, 192 (S.D.N.Y. 2000) (continuous coverage "argument strains the
language of the policy and does not render ambiguous the policy's otherwise unambiguous terms.");
Ehrgood v. Coregis Ins. Co., 59 F. Supp. 2d 438, 445 (M.D. Pa. 1998); Nat'l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Bauman, No. 90 C 0304, 1992 WL 1738, at *10 (N.D. Ill. Jan. 2, 1992) ("[T]he
language of the policy, the case law and the well established rationale behind claims-made coverage
demonstrates that renewal of the policy did not create a single policy period for reporting purposes.");
Alpine Home Inspection, LLC v. Underwriter's at Lloyd's London, 2008 WL 4963518, at *3 (N.J. App.
Div. Nov. 24, 2008); Goings & Goings, Inc. v. U.S. Risk, Inc., No. G034008, 2005 WL 3320863 (Cal Ct.
App. Dec. 8, 2005); Chapman v. Minn. Lawyers Mut. Ins. Co., No. A08-1153, 2009 WL 1851901, at *6
(Minn. Ct. App. June 30, 2009) (no coverage when claim was made during one policy period and
reported during the renewal policy period, because a contrary interpretation "would likely negate the
entire nature of claims-made insurance"); Asp v. Ohio Med. Transp., Inc., No. 00AP-958, 2001 WL
721854, at *3-4 (Ohio Ct. App. June 28, 2001); Yancey v. Floyd West & Co., 755 S.W.2d 914, 921
(Tex. Ct. App. 1988) (The insured's "claim of 'continuous coverage' also is not persuasive. As
previously recognized, the transition from policy to policy creates a potential gap in coverage. … We
find that there were two separate insurance policies under which the appellant had separate and
different coverage …"). See also HSB Group, Inc. v. SVB Underwriting, Ltd., 664 F. Supp. 2d 158, 192
(D. Conn. 2009) (noting in dicta that "the overwhelming majority of courts to have considered the issue
have rejected the 'continuous coverage' theory as an excuse for the insured's failure to comply with the
claims-made policy terms").

In Goings & Goings, the claim was made one month before the end of earlier policy period and the
claim was reported during the renewal policy period. The first policy only gave the insured the option to
purchase an extended reporting period provision if there was a cancellation or refusal to renew. This
policy also provided the insured with a 30 day grace period after the policy's expiration to report
claims. The insured failed to report the claim to the insurer until more than ten days after the time for
reporting the claim had expired. The court expressly rejected the insured's contention that "the fact of
continuous coverage [can] excuse an unambiguous requirement to report claims within one-year policy
periods. The policies themselves are clear enough: Coverage is written on a policy period (year-by-
year) basis, and the claim and the report must be made within the same policy period." Goings &
Goings, Inc. v. U.S. Risk, Inc., 2005 WL 3320863, at *5.

In World Health, the insurer issued consecutive claims-made and reported policies; the claim was
made during the first policy period and it was reported during the later policy period. The insured
contended that because it "renewed its policy with defendant for another policy period … without a gap
in coverage, [it] reasonably expected it would be covered under this policy period." Rejecting this
contention, the court stated that the renewal did not extend the period to report the claim. The court
emphasized that "if a claim is not timely reported during a policy period, the insured is not covered
simply because it has a subsequent policy." World Health & Educ. Found. v. Carolina Cas. Co., 612 F.
Supp. 2d 1089, 1096 (N.D. Cal. 2009).

The insured in Pantropic Power reported the claim 16 days after the grace period for the policy in effect
when the claim was made. Although the insured renewed the policy, the court found that the insured's
"characterization of the second policy as a renewal is of no legal import." Pantropic Power Prods., Inc.
v. Fireman's Fund Ins. Co., 141 F. Supp. 2d 1366, 1370 (S.D. Fla. 2001).

In addition to the numerous cases that have expressly rejected the continuous coverage theory,
numerous other cases, while not expressly mentioning the continuous coverage theory, have found
that reporting requirements in claims-made policies must be strictly enforced even though the policy
was renewed. E.g., Janjer Enters., Inc. v. Executive Risk Indem., Inc., 97 F. App'x 410 (4th Cir. 2004);
S & L Oil, Inc. v. Zurich Am. Ins. Co., No. 2:07-cv-01883-MCE-KJM, 2009 WL 2050489 (E.D. Cal. July
10, 2009); State Bar of Mich. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., No. 07-12599, 2008 WL
4901108 (E.D. Mich. Nov. 10, 2008); Wendy's Int'l, Inc. v. Ill. Union Ins. Co., No. 2:05-cv-803, 2007 WL
710242 (S.D. Ohio Mar. 6, 2007); Emcode Reimbursement Solutions, Inc. v. Nutmeg Ins. Co., 512 F.
Supp. 2d 603 (N.D. Tex. 2007); Butcher v. Gulf Ins. Co., No. C 03-3553 PJH, 2005 WL 1514086 (N.D.
Cal. June 15, 2005); Pizzini v. Am. Int'l Specialty Lines Ins. Co., 210 F. Supp. 2d 658 (E.D. Pa. 2002);
Van G. Miller & Assocs. v. Gulf Ins. Co., No. C00-2051, 2001 WL 1165135 (N.D. Iowa Aug. 8, 2001);
Westrec Marina Mgmt., Inc. v. Arrowood Indem. Co., 78 Cal. Rptr. 3d 264 (Cal. Ct. App. 2008).

In contrast to the numerous cases rejecting the continuous coverage theory, only a few cases have
given any weight to this theory. These cases, however, have involved unique factual circumstances.

The issue in Professionals Direct Insurance Co. v. Wiles, Boyle, Burkholder & Brin-Gardner Co., No.
2:06-CV-240, 2009 WL 4281263 (S.D. Ohio Nov. 24, 2009), was whether the insurer was entitled to
summary judgment on the ground that the prior knowledge provision in the later policy prevented
coverage because the insured knew about a potential claim before the policy period. In dicta, the court
suggested that because the policies referred to "a period of continuous coverage," the first policy and
the renewal could be considered one policy. Professionals Direct, 2009 WL 4281263, at *20.

The court in Helberg v. National Union Fire Insurance Co., 657 N.E.2d 832 (Ohio Ct. App. 1995), was
influenced by the fact that the policy did not provide any grace period for reporting claims (the claim
was reported less than sixty days after the initial policy expired) and because the earlier and renewal
policies referred to the policies being "continuously renewed." Id. at 834. The court claimed that "[t]his
language indicates that the parties expected the coverage to be continuous if the policy was renewed
at each successive policy expiration." Id. Moreover, the extended reporting period provision in the
policy at issue in Helberg, did not state that the extended reporting period coverage only applied to
claims first made after the policy period nor did it state that it only applied if the insured stopped
purchasing similar claims-made insurance.

In Asp v. Ohio Med. Transp., Inc., No. 00AP-958, 2001 WL 721854, at *4 (Ohio Ct. App. June 28,
2001), an Ohio Court of Appeals decision decided after Helberg, rejected the continuous coverage
theory and distinguished Helberg. The court in Asp said the "critical distinction" between the policies at
issue in Helberg and in Asp was that the policy in Helberg stated that "a renewal operates as an
extension in coverage [while] merely renewing a claims-made policy does not extend the policy period."

Dissenting and concurring opinions in AIG Domestic Claims, Inc. v. Tussey, No. 2008-CA-001248-MR,
2009 WL 2633605 (Ky. Ct. App. Aug. 28, 2009) expressed some sympathy for the continuous
coverage theory.The dissent said there was a fact issue as to whether the claim was reported on
time. But the dissent was concerned about "a situation in which the insured is made aware of a claim
during the last minute of the last hour of the policy period. I dare say anyone would argue that it is
practical to report such a claim before the clock strikes midnight and the carriage which provides
comfort to the insured collapses." Id. at *6.

In Tussey, the underlying claim was made in the earlier National Union policy period and was reported
to National Union during the following policy period. The court said that the policy clearly and
unambiguously required the insured to report the claim during the same policy period in which it is
made and rejected the insured's argument that an extended reporting period provision extended the
time for the insured to report the claim as long as the policy is renewed. While noting that "at first blush
. . . it may seem odd" that an insured that renews its policy is not entitled to an extended reporting
period, while an insured that cancels or renews has the right to purchase an extended reporting period
provision," the court explained that "there is a rationale for providing this option only in the case of
cancellation or renewal. An insured who cancels or does not renew faces the risk of coverage gaps that
can result from switching [from a claims-made] to an occurrence policy or to another claims-made
policy." Id. at *3 (internal citations and punctuation omitted). The court in Tussey held:

It is important to remember that the reporting period is what defines coverage under claims-made
policies of insurance. It is this very requirement which distinguishes claims-made policies from
occurrence-based policies. Indeed, to read an inherent extended reporting period into a renewal policy
would create a long (and unbargained-for) tail of liability exposure, the avoidance of which forms the
conceptual framework" for claims-based coverage in the first place. Accordingly, we choose to follow
the majority rule of other jurisdictions that failure to notify an insurer of a claim under a claims-based
policy within the policy period will defeat coverage. . . . If a court were to allow an extension of reporting
time after the end of the policy period, such [would be] tantamount to an extension of coverage to the
insured gratis, something for which the insure[d] has not bargained. This extension of coverage, by the
court, so very different from a mere condition of the policy, in effect rewrites the contract between the
two parties. This we cannot and will not do.

Id. at *4 (internal citations and punctuation omitted).

In Cast Steel Products, Inc. v. Admiral Insurance Co., 348 F.3d 1298 (11th Cir. 2003), the claim was
reported to the insurer the day after the earlier policy expired. The policy at issue in Cast Steel did not
provide any grace period for the insured to report claims after the policy period, a distinction the court
found to be critically important. The court found this to be a "somewhat alarming scenario." Because
the policy was renewed, no grace period applied. The court contrasted the policy at issue in Cast Steel
without a grace period, with the policy at issue in Ehrgood which provided the insured with a 60 day
grace period. Id. at 1302 n.5.

Notwithstanding the Cast Steel decision, the overwhelming majority of courts have strictly enforced
reporting provisions in claims-made policies when the claim was made very near the end of one policy
period and/or was reported at the beginning of the next policy period, even when the policy did not
provide the insured with a grace period. E.g., Charles Dunn Co., Inc. v. Tudor Ins. Co., 308 F. App'x
149, 151 (9th Cir. 2009) (rejecting continuous coverage theory when claim was made nine days before
initial policy expired and was reported a little more than three months after policy period); Pizzini v. Am.
Int'l Specialty Lines Ins. Co., 210 F. Supp. 2d 658 (E.D. Pa. 2002) (claim reported 17 days after end of
policy period untimely); United Nat'l Ins. Co. v. Jacobs, 754 F. Supp. 865, 868-69 (M.D. Fla. 1990)
(claim reported 24 hours after the policy period expired was untimely); Gulf Ins. Co. v. Dolan, Fertig &
Curtis, 433 So. 2d 512 (Fla. 1983) (Insured received notice of a claim the day before Gulf's policy
expired. The insured reported the claim to its new carrier the next day. The later carrier declined
coverage because the claim had been made prior to its policy period. The insured then reported the
claim to Gulf, which denied coverage because the claim was reported late. The court strictly enforced
the reporting requirement and said a contrary finding would be "tantamount to an extension of coverage
to the insured gratis, something for which the insurer has not bargained.") (emphasis added); Catholic
Med. Ctr. v. Executive Risk Indem., Inc., 867 A.2d 453, 459 (N.H. 2005) (Notice of the claim was
received the day the policy expired. Instead of e-mailing or faxing the claim notice, the notice was sent
by overnight mail and was received by the insurer the next day, nine hours after the policy expired. The
court ruled that the policy's unambiguous language had to be enforced, precluding coverage.).

Although noting it was "sympathetic" to the reasoning of cases rejecting the continuing coverage theory
and strictly enforcing reporting provisions in claims-made and reported policies, the court in Cast Steel
found it would be inequitable to enforce the reporting requirement under the circumstances. The court
in Cast Steel emphasized that the claim was reported "mere hours after expiration of the" policy
period." Id. at 1304. The court also found it notable that the insurer agreed that the renewal policy was
not a "separate and distinct policy." Id. at 1304 n.7.

In summary, regardless of whether a claims-made and reported policy is renewed, the overwhelming
majority of courts have strictly construed reporting requirements in claims-made and reported
policies. Those few courts that have embraced the continuous coverage theory have done so when
there were extenuating circumstances, such as when the claim was made at the very end of one policy
period and reported at the very beginning of the next policy period and the policy did not provide a
grace period for reporting claims; or when the policy language indicated that coverage would be

Mark E. Cohen
Zelle McDonough & Cohen LLP
101 Federal Street -- 14th Floor
Boston, Ma. 02110
617-742-6520 ext. 245

Regional Circuit Reports
SECOND CIRCUIT – D&O/"Insured v. Insured" Exclusion (CT/VA)

The Second Circuit has ruled in Macey v. Carolina Cas. Ins. Co., No. 08-6067 (2nd Cir. June 30, 2010)
that a Connecticut District Court erred in granting summary judgment to a D&O carrier as, under
Virginia law, the "insured versus insured exclusion in the policy was ambiguous since the entity in
question did not come into existence until after the issuance of the documents and stock transactions
that formed the basis for the underlying claim."

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
Mail to:
THIRD CIRCUIT – Absolute Pollution Exclusion (Virgin Islands)

The Third Circuit has affirmed a ruling of the U.S. District Court for the Virgin Islands that an absolute
pollution exclusion precluded coverage for claims arising out of discharges of dust from an airport that
allegedly contaminated the plaintiff's drinking water and caused breathing disorders. In Devcon
International Corp. v. Reliance Ins. Co., No. 07-4602 (3rd Cir. June 8, 2010), the court observed that
courts that have limited similar exclusions to "traditional" environmental contamination have ignored the
wording of the contracts and have instead focused on claimed inequities and concerns that "bad results"
would otherwise occur. For similar reasons, the court refused to find that the insured had any
reasonable expectation of coverage absent ambiguity.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
Mail to:

THIRD CIRCUIT – Choice of Laws/"Occurrence"/Construction (PA)

In a lengthy reconsideration of Pennsylvania choice of law principles, the Third Circuit has ruled that the
location of the underlying litigation is not a determining factor and that a court's principal emphasis
should be on the location of the negotiation and issuance of the subject policy. In Specialty Surfaces Int'
v. Continental Cas. Co., No. 09-2773 (3rd Cir. June 8, 2010),the court concluded that Pennsylvania law
should apply to claims brought against it for splits in the synthetic turf that it had installed in high school
football fields in California as the policies were negotiated, issued and delivered in
Pennsylvania. Applying Pennsylvania law, the court ruled that the alleged property damage was caused
by water leaks that were the entirely foreseeable, if not predictable, result of the insured's failure to
supply a proper impermeable liner or drainage system.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
Mail to:

THIRD CIRCUIT – Professional Liability (PA)

Delta Fin. Corp. v. Westchester Surplus Ins. Co., May 5, 2010
Purchase of Securities Exclusion Bars Coverage
The policyholder and its directors and officers were sued for allegedly overvaluing excess cash flow
certificates. They sought coverage under a directors and officers' policy. The insurer denied coverage,
citing a policy exclusion precluding coverage for any loss or claim based upon the "actual or proposed
payment by the company of allegedly inadequate consideration in connection with the company's
purchase of securities issued by any company." The Third Circuit noted that the bankruptcy court's
reliance on a dictionary to determine the plain meaning of the term in the exclusion was proper. In
addition, the court stated that the exclusion at issue was not ambiguous. In comparing the exclusion and
the underlying complaint, the court concluded that the claim fell completely within the exclusion and the
insurer properly denied coverage.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

FIFTH CIRCUIT – Hearing Loss/WC/"Accident" (LA)

 The Fifth Circuit has issued an unpublished opinion in Bridgestone North American Tire LLC v. Liberty
Mutual Ins. Co., No. 09-30422 (5 Cir. June 17, 2010) that hearing loss suffered by tire workers as a
result of long-term exposure to noise in the insured's manufacturing plants was not the result of an
"accident" and therefore did not trigger worker's compensation coverage. Owing to the fact that the suit
had been brought more than three years after the policies terminated, the insured was precluded from
seeking coverage for "bodily injury from disease." Consistent with its 2005 opinion in Riverwood v.
Wausau, the Fifth Circuit held that Louisiana requires that "accident" in the context of worker's
compensation claims requires a sudden or abrupt event and therefore did not extend coverage to
gradually developing injuries.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
Mail to:

SIXTH CIRCUIT – Pollution Exclusion/Debris Removal (OH)

 Whitt Machine, Inc. v. Essex Ins. Co., May 13, 2010
Court Denied Policyholder Claims for Additional Insurance Coverage for Debris Removal and
Pollution Clean-up
The insurer paid the policy proceeds for the direct loss of the building by fire, however, policyholder
refused insurer's offer to pay an additional coverage amount under the debris removal coverage
provision of the policy as the actual costs exceeded the offered amount. The policyholder also claimed
that the policy provided additional coverage for pollutant and clean-up and removal. The court held that
the limits of insurance applied to debris and the pollution exclusion applied to the claims for pollutant

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

SEVENTH CIRCUIT – Cooperation Clause (IN)

Medical Assurance Co. v. Hellman, No. 08-2887, June 21, 2010.
Medical Assurance Company advanced a declaratory judgment action against an insured, Dr. Mark
Weinberger, who faced more than 350 medical malpractice claims. The bulk of these medical
malpractice claims were initiated after Weinberger had "vanished in September 2004". The district court
had stayed the declaratory judgment proceeding to allow the underlying state court cases against Dr.
Weinberger to proceed. The Seventh Circuit Court of Appeals recognized that, under Indiana law, an
insurer cannot prevail on a theory that the insured had failed to cooperate as required under the policy's
cooperation clause unless the insurer can establish that the insured's breach resulted in actual
prejudice. The insured's absence alone is not sufficient to establish prejudice; to prove actual prejudice,
the insurer must show that the outcome of an underlying case would have been altered by the insured's
cooperation. The district court had concluded it would be impossible for Medical Assurance to show
actual prejudice without improperly interfering with the state court processes in the underlying
litigation. However, the Seventh Circuit disagreed, noting it could "imagine ways in which Medical
Assurance might try to establish actual prejudice that would unacceptably intrude on the state court
cases, but other ways might not run that risk." The Seventh Circuit observed that Medical Assurance
had "not had the opportunity to develop its position or even to discover the facts that would support
it." The Seventh Circuit was not willing to assume "that the only way Medical Assurance can prove its
case is through an excursion into factual questions that the state courts have been, or will be, asked to
address." Accordingly, the court vacated the stay of the declaratory judgment action.

Dean R. Brackenridge
Frost Brown Todd LLC
Indianapolis, IN
Mail to:

SEVENTH CIRCUIT – Duty to Defend/Advertising Injury/Allocation (IL)
Santa's Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., July 1, 2010, United States Court of Appeals
for the Seventh Circuit
Applying Illinois Law – An Insurer's Duty to Defend.
The underlying action arises out of a license for twinkling Christmas lights. JLJ, Inc. and its licensee
Inliten, LLC. [collectively "JLJ"] sued Santa's Best Craft, LLC ["SBC"] over its marketing of "Stay-On"
lights. JLJ alleged that SBC copied JLJ's "Stay Lit" lights packaging design and that SBC sold Stay-On
lights using false and deceptive language. The suit filed against SBC in federal court in the southern
district of Ohio alleged causes of action based on Lanham Act trademark infringement, false designation
of origin, false advertising, trademark dilution and deceptive trade practices. SBC sought defense and
indemnification from St. Paul. St. Paul claimed that false representation claims were not covered by the
policy under the insuring clause and that two policy exclusions, relating to intellectual property and
material previously made known or used, meant that it owed no defense for the remaining claims. SBC
filed its declaratory judgment action to compel St. Paul to provide a defense. St. Paul counterclaimed for
a declaratory judgment that it had no duty to defend.

The Seventh Circuit agreed with the district court that the St. Paul CGL policy required St. Paul to
defend the plaintiffs. It held that the insurer owed a duty to defend because the allegation may
potentially give rise to a claim for unauthorized use of a slogan. St. Paul argued that JLJ had no
ownership or exclusive right to the slogans on the packages and, therefore, cannot have asserted
unauthorized use/infringement of slogan claim. The court pointed out that the JLJ complaints contain
allegations that SBC copied certain JLJ slogans, suggesting the JLJ had some claim of ownership over
them thereby triggering the duty to defend.

St. Paul then argued that coverage was precluded by the intellectual property exclusion which disallows
coverage for "injury or damage . . . that results from any actual or alleged infringement or violation of any
of the following rights or laws: . . . trade dress, trademark, other intellectual property rights or laws." The
exclusion contained an exception for "unauthorized use of . . . trademarked slogan . . . of others in your
advertising." It was St. Paul's position that because the conduct the plaintiffs identify as making out a
claim for infringement of slogan is all conduct that, in the language of St. Paul's policy, "results from" a
trade dress claim the intellectual property exclusion precludes coverage.

The court held that unless a slogan infringement claim would not have arisen but for the trade dress
violation claim, which it found it did not, it could not find that the exclusion for trade dress claims excuses
St. Paul from a duty to defend the underlying action. The court also agreed with the finding of the district
court that even if the intellectual property exclusion did apply, the trade mark exception would require St.
Paul to defend the action given the uncertainty whether the court in the underlying action would have
decided the slogan qualified as trade-markable.

St. Paul also claimed that its "material previously made known or used" exclusion applies to defeat a
duty to defend with respect to one policy period. The district court disagreed holding that St. Paul was
obligated to defend because coverage was triggered for another policy period and the insurer must
defend if even one allegation of liability falls within the policy's coverage. The Seventh Circuit held that
St. Paul did have a duty to defend but not indemnify under the policy period where the exclusion

An issue also arose as to whether St. Paul breached its duty to defend. The district court held that
because St. Paul timely filed a cross-motion and a counter-claim seeking a declaration that it did not
have a duty to defend there was no breach of its duty to defend. Under Illinois law, an insurer has three
options if it contests its duty to defend: (1) seek a declaratory judgment regarding its obligations before
trial of the underlying action; (2) defend the insured under a reservation of rights; or (3) refuse either to
defend or to seek a declaratory judgment at the insurer's peril that it might later be found to have
breached its duty to defend and estopped from asserting defenses as to payment based on non-
coverage. Illinois courts also have three tests to measure timeliness of the declaratory action. It must
be filed: (1) before the underlying action is resolved; (2) before settlement or trial is imminent; and (3)
within a reasonable time of being notified of the underlying suit. The court held that St. Paul satisfied all
the timeliness tests.
Finally, the court held that St. Paul may need to reimburse the JLJ settlement payment. St. Paul argued,
as held the district court that the plaintiffs failed to designate which of the claims addressed by the
settlement were covered by St. Paul CGL policy and therefore, St. Paul properly declined to reimburse
the settlement. The plaintiffs argue that they have no burden to allocate.

The Seventh Circuit decided that consisted with Illinois policy that a coverage action should not require
the insureds to conclusively establish their own liability in the interest of promoting settlement, the
proper inquiry is whether the claims were not even potentially covered by the insurance policy. Since
this issue had not been previously decided in the Illinois court, the Seventh Circuit predicted that Illinois
court, in cases in which it is possible that none of the settlement was attributable to the dismissal of
claims for damage covered by the insurer, would evaluate whether a "primary focus" of the claims that
were settled was a potentially covered loss (burden on the insured). Conversely, if it can be established
that the claims were not even potentially covered (burden on the insurer), then the insurer is not
required to reimburse the settlement. The court held that because in this case the parties contest
whether the settlement was made in anticipation of covered claims, the burden should be on the insured
to prove coverage of the settlement in the first place and then on the insurer to prove the existence of
exclusions barring coverage. The court remanded to allow the district court to consider the record
evidence of whether a primary focus of the underlying action was a covered loss.

Katherine A. Fijal
Hurwitz & Fine, P.C.
Buffalo, NY 14202
Mail to:

EIGHTH CIRCUIT – Criminal Act Exclusion/Guilty Plea

 Progressive N. Ins. Co. v. McDonough, No. 09-2520, 2010 WL 2557402 (8th Cir. June 28, 2010).
In Progressive Northern Insurance Company v. McDonough, the Eighth Circuit Court of Appeals held
that a guilty plea conclusively placed liability for injuries on the insured and that intent was irrelevant
because the insurance policy expressly contained a criminal-act exclusion.

After a night of drinking in August 2007, Defendant drove off the road and struck a man, badly injuring
him. During Defendant's initial interviews with police he said he had been looking for a cell phone on the
floorboard when he ran off the road. Upon entering a guilty plea, however, Defendant admitted to
intentionally driving off the road into a group of people. After he was sued by the injured party, his
insurer ("Plaintiff") filed a declaratory judgment seeking a declaration that the policy did not cover the
liability due to the criminal-act exclusion. During a deposition the Defendant said he had not intentionally
hit the man, but that he had lied during his plea hearing upon advice from his attorney. Ultimately, the
district court granted Plaintiff's motion for summary judgment on the declaratory judgment action finding
that Defendant's guilty plea had triggered the criminal-act exclusion, precluding coverage.

The Eighth Circuit Court of Appeals affirmed the district court's determination, concluding that
Defendant's guilty plea was binding and, therefore, excluded him from coverage. In so concluding, the
court reasoned that no genuine issue of material fact is created when a party's earlier statements under
oath—admitting intent—are later contradicted by a party's testimony. Moreover, the court held that even
if Defendant's contradictory testimony were admissible, Plaintiff need not prove intent for the criminal-act
exclusion to apply because the plain language of the policy contained no intent requirement. Therefore,
Defendant's guilty plea conclusively placed liability for the injuries on himself and precluded coverage
pursuant to the criminal-act exclusion.

Brian H. Sande
Bassford Remele, A Professional Association
Minneapolis, MN 55402
Mail to:
EIGHTH CIRCUIT – Denial of Benefits/SPD/Discretionary Authority (NY)

Eric S. Ringwald v. Prudential Insurance Company,June 21, 2010, United States Court of Appeals for
the Eighth Circuit
District Court Applies Improper Standard of Review
Reviewing Prudential's decision for an abuse of discretion, the district court upheld Prudential's denial of
benefits. Claimant Ringwald contends the district court should have reviewed Prudential's decision to
deny benefits under a de novo standard of review because the plan did not grant Prudential
discretionary authority to determine eligibility of benefits. The long term disability plan was governed by
the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§1001-1461. The Eight
Circuit agreed with claimant.

Prudential was both the insurer who pays claims as well as the claims administrator who makes
eligibility decisions.

On April 8, 2004, Ringwald became unable to work as a game table dealer at Harrah's Casino in the St.
Louis area due to HIV, depression and fatigue. His employment was terminated on April 16, 2004. He
later applied for and received short term disability benefits for a period of 24 months. Ringwald also
made a claim for long-term disability benefits under the plant. Prudential denied the claim, relying on a
mental illness exclusion in the plan which places a lifetime cap of 24 months on disability benefits due in
whole or in part to mental illness.

Ringwald appealed the denial of long-term benefits through various administrative levels. The
administrative appeal focused on whether Ringwald could be considered disabled based solely on his
physical condition (HIV), rather than in part on his mental illness (depression). Prudential determined
Ringwald's disability stemmed in part from mental illness and triggered the plan's lifetime cap on such
disabilities. Prudential maintained its position and denied the claim.

Ringwald then brought an action in federal district court. Prudential then filed a motion for summary
judgment. Prudential urged the district court to review its decision to deny benefits for an abuse of
discretion because the Summary Plan Description ("SPD") granted Prudential as the claims
administrator the sole discretion to interpret the terms of the Group Contract, to make factual findings,
and to determine eligibility for benefits. The district court reviewed Prudential's decision under an abuse
of discretion standard, relying on Eighth Circuit precedent indicating "SPDs are considered part of the
ERISA plan documents. Under the abuse of discretion standard, the district court upheld Prudential's
decision to deny long-term disability benefits. Ringwald timely appealed arguing, among other things,
that the district court should have reviewed Prudential's decision under a de novo standard of review
rather than an abuse of discretion.

In reversing the district court's decision the Eighth Circuit relied on Jobe v. Medical Life Ins. Co. which
squarely addressed whether an SPD can grant the plan administrator discretion to determine eligibility
for benefits when the plan itself does not. The court noted that the Jobe decision was in line with other
circuits which held that "a grant of discretion to the plan administrator, appearing only in a summary plan
description, does not vest the administrator with discretion where the policy provides a mechanism for
amendment and disclaims the power of the summary plan description to alter the plan." A purported
grant of discretion appearing only in the SPD could not be viewed as a procedurally proper amendment
of the policy.

In the plan administered by Prudential there were no terms which would allow it to be amended by
inserting into the SPD such critical provisions as the administrator's discretionary authority to interpret
the plan or to determine eligibility benefits. The Court noted that in fact, the plan wholly failed to comply
with §1102(b)(3)'s requirement to include a procedure governing amendment of the plan. As a result
there was no basis for concluding that the purported grant of discretion in the SPD is a procedurally
proper amendment of the policy, and therefore "the policy's failure to grant discretions results in the
default de novo standard." Accordingly, the district court should not have reviewed the administrator's
decision for abuse of discretion but, rather, should have reviewed it de novo. The district court's failure
to apply the correct standard of review made it necessary for the Eighth Circuit to remand the case
because the district court was the proper forum to conduct the appropriate de novo standard of review.

Katherine A. Fijal
Hurwitz & Fine, P.C.
Buffalo, NY 14202
Mail to:

NINTH CIRCUIT – Professional Liability/Prior Claims (CA)

Hilb Rogal & Hobbs Ins. Serv. v. Indian Harbor Ins., May 17, 2010
Prior Claims Provision Bars Coverage for Malpractice Action
The court held that the policy precluded coverage for all claims "arising out of any…litigation…pending
on or resolved prior to the date of the inception of the policy…." The policyholder argued that the court
improperly applied a "but for" test to determine whether the prior claim provision applied. In a short
opinion, the court disagreed stating that it held that the claim was not covered because it arose out of an
act alleged in a prior litigation.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

ELEVENTH CIRCUIT – Other Insurance/Auto (FL)

 Brice Bldg. Co. v. Clarendon Am. Ins. Co., May 6, 2010,
Parked Vehicle was "In Use" for Purposes of Other Insurance Clause
The court was asked to address whether a two-car collision involving a parked vehicle constituted "use"
of the parked vehicle for purposes of interpreting the "other insurance" clause in the owner of the parked
vehicle's insurance policy. The court held that the accident arose from the vehicle's use and, therefore,
that the "other insurance" clause in the owner's policy, which provided that the policy was excess if the
loss arose from the "maintenance or use of aircraft, autos, or watercraft," rendered the policy
primary. Since the owner was an additional insured on a subcontractor's policy that also provided
primary coverage, the court held that the "other insurance" clauses were mutually repugnant and that
both insurers should share the loss on a pro rate basis in accordance with their policy limits.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

Recent Case Law Updates
ARKANSAS – Duty to Defend/Management Practices Act

Yocum v. St. Paul Mercury Ins. Co., May 27, 2010, E.D.Ar.
No Duty to Defend Where Dual Capacity Claims Specifically Excluded Under Management
Practices Act
If actions taken in a dual capacity mandated by a policyholder company are not a Management
Practices Act, it would be inconsistent with the terms of the policy to find that actions taken in a
voluntary dual capacity are a Management Practices Act. Because the directors were acting in a dual
capacity, their actions did not qualify as a Management Practices Act and the insurer had no duty to

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

ARKANSAS – Duty to Defend/Intentional Conduct/Fraud

Ashley v. Valley Forge Insurance Company, May 11, 2010, E.D.Ar.
Intentional Conduct Cannot Be Pled as Fraudulent
If the factual allegations of a complaint reflect intentional conduct by the policyholder, couching the
claims for relief as negligence or fraudulent does not transform the character of an action and create a
duty to defend.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

CALIFORNIA – Coverage B/ "Advertising"

The California Court of Appeal has ruled in SBCC, Inc. v. St. Paul Fire & Marine Ins. Co., H034211 (Cal.
App. June 11, 2010) that claims for misappropriation of trade secrets, interference with prospective
economic advantage, common law unfair competition and violations of Business and Professions Code
Section 17200 did not involve "advertising," nor did they involve the use of an "advertising idea" or
"advertising materials" within the scope of the St. Paul "advertising injury" coverage. The court ruled
that no unauthorized use of an advertising idea was implicated when the insured merely used lists of
existing customers in an effort to take their business. Such claims were in any event subject to an
exclusion for "information used to identify or record customers or supporters. . . ." Further, the court
refused to find that the theft of this confidential information involved the personal injury offense of
"making known to any person or organization covered material that violates a person's right of privacy."

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
Mail to:

CALIFORNIA – "Intentional Acts" Exclusion/Ambiguity

On a certified question from the Ninth Circuit, the California Supreme Court has ruled in Minker v.
Safeco Ins. Co. of America, S174016 (Cal. June 17, 2010) that allegations that the insured parents
negligently supervised their son, allowing him to sexually molest a neighbor's child, were not excluded
from coverage since the intentional acts exclusion contained in Safeco's policies must be applied
separately to each insured. The court acknowledged that its past opinions have held that, viewed in
isolation, a clause excluding coverage for particular conduct by "an" or "any" insured will be applied
collectively to all insureds under the policy. In this case, however, the court found that language in the
"Conditions" provision of the policy stating that the insurance "applies separately to each insured" could
not be reconciled with such an interpretation, nor did the history of severability clauses serve to
eliminate the facial ambiguity presented by the perceived conflict between the exclusion and this

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
Mail to:

DELAWARE – D&O/Prior Acts Exclusion

The Delaware Supreme Court has sustained the effect of a prior notice exclusion in a D&O policy. In
Axis Reinsurance Corp. v. HLTH Corp., No. 565, 2009 (Del. May 10, 2010), the insured sought
coverage for an investigation of allegations that it deliberately inflated company earnings and laundered
money. There was evidence that the insured had put its earlier D&O carriers on notice of these claims
prior to the issuance of the third "tower." The insured responded that it had given notice to a different
line of coverage so the prior notice exclusions should not apply. Despite the insured's argument that the
prior notice exclusion only applied to renewal or replacement policies, the Supreme Court pointed out
that the exclusion applied to losses reported by any insured and referred to notice under "any policy."

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
Mail to:

FLORIDA – Duty to Defend/Occurrence/Injunctive Relief

 MJCM, Inc. v. Hartford Casualty Ins. Co., May 14, 2010, M.D.Fla.
No Duty to Defend Claim for Injunctive Relief
Injunctive relief is not a suit within the scope of coverage of an insurance policy. Therefore, where the
only claim in the underlying action is for injunctive relief, there is no occurrence and no duty to defend.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

FLORIDA – Assignee/Policy Conditions/EUO

Shaw v. State Farm Fire & Cas. Co., May 7, 2010, Fla. 5th Dist.
Assignee of No-Fault Claims Does Not Require to Submit to EUO
Under Florida law the assignment of a contract right does not entail the transfer of any duty to the
assignee, unless the assignee assents to assume the duty. The plaintiff, as the assignee of the right of
the policyholder to payment under the policy, had no duty to perform any covenant under the policy
because he never agreed to do so. It also held that the insurer, to the extent that its policy did not do so,
could not unilaterally attach conditions to the policyholder's right of assignment and could not bind the
plaintiff, as assignee, to any performance under the contract unless the assignee had agreed to it.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
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GEORGIA – Pollution Exclusion/Natural Gas
Barrett v. National Union Fire Ins. Co. of Pittsburgh, May 11, 2010, GA. App.
Natural Gas Is Not an Irritant, Contaminant or Pollutant
Plaintiff suffered a brain injury when natural gas escaped while he was assisting with the installation of
gas lines and service meters. The court reversed summary judgment for the insurer. The lower court
erred in holding that: (i) natural gas constitutes a "pollutant" as that term is defined in the policy; and (ii)
that plaintiff's injuries "arose out of" the release or dispersal of natural gas, as opposed to the negligence
of a contractor's workers on the job.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

GEORGIA – Fraud/Occurrence

Allstate Insurance Company v. Harkleroad, May 24, 2010, S.D.Ga.
Allegations of Fraud Cannot be Construed as an Occurrence
Allegations of fraud must be based upon a representation or concealment which was made for the
purpose of deception. Such allegations by their nature preclude classification as an
occurrence. Therefore, the claim of alleging concealment and fraud is not covered under the insurance
policy and insurer has no duty to defend.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

HAWAII – Duty to Defend/Occurrence/Absolute Pollution Exclusion

 Allstate Ins. Co. v. Leong, 2010 U.S. Dist. LEXIS 46277 (D. Haw. May 11, 2010)
No Coverage for Diminution in Value or Clean Up of Raw Sewage
The roots from trees defendants planted on their property over municipal sewer lines damaged the lines,
causing an underground leak damaging a neighbor's property. The court held that defendants'
homeowner's insurer has a duty to defend and possibly to indemnify defendants from claims pertaining
to property damage, but has no duty to defend or indemnify with respect to claims for diminution in value
or with respect to claims for clean up of raw sewage.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
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HAWAII – "Occurrence"/Negligent Failure to Repair/Duty to Defend

State Farm Fire & Cas. Co. v. Thompson, 2010 U.S. Dist. LEXIS 49977 (D. Haw. May 20, 2010)
No Duty to Defend Where There is No Occurrence
Generally, a breach of contract claim does not give rise to an occurrence and are not covered under an
insurance policy. In determining whether or not a complaint has allegations triggering the duty to defend,
however, the complaint should be construed in the light most favorable to the party seeking coverage. If
it is unclear whether or not there is an assertion that would fall under coverage, there is a duty to

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

ILLINOIS – Auto/Permissive Users

 The Illinois Supreme Court has ruled in several consolidated cases that the Appellate Court erred in
finding ambiguity in an auto policy exclusion precluding coverage for individuals who operate a vehicle
with the knowledge that they are not authorized to do so. In Founders Ins. Co. v. Munoz, No. 108605 (Ill.
May 20, 2010), the court ruled that language in the standard auto form defining the "named insured" as
including "any other person using such automobile with the permission of the named insured, providing
the actual use thereof is within the scope of such permission" was both unambiguous and clearly
precluded coverage in instances where the so-called permissive user did not have a valid driver's
license. Under the circumstances, the Supreme Court agreed that the operators could not have had a
reasonable belief that they were entitled to drive the vehicle.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
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ILLINOIS – "Occurrence"/Property Damage/Construction

The Appellate Court has ruled in West Bend Mutual Ins. Co. v. The People of the State of Illinois, No. 1-
08-1693 (Ill. App. May 27, 2010) that an endorsement to a CGL policy adding $10,000 in coverage for
"improper home repair and remodeling" did not extend to a lawsuit brought by the State of Illinois
alleging violations of the Consumer Fraud and Deceptive Businesses Practice Act based upon the
insured's intentional violation of building codes that prompted several homeowners to file individual
actions for consumer fraud and breach of contract due to faulty workmanship in their homes. As had the
trial court, the Appellate Court ruled that the policy's requirement of "occurrence" extended to the home
repair and remodeling endorsement and thus precluded coverage for the State's suit, which solely
sought to impose liability on the basis of intentional misconduct and fraud. For similar reasons, the court
held that the policy's requirement of "property damage" was incorporated into the endorsement and
therefore precluded coverage for the private claims, which solely sought reimbursement for costs
associated with repairing or replacing the insured's defective work.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
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INDIANA UIM/Substitution

 Howard v. American Family Mut. Ins. Co., No. 87A01-0910-CV-512 (Ind.Ct.App. June 17, 2010).
An insured initially advanced an underinsured motorist claim against American Family Mutual Insurance
Company in the same proceeding in Kentucky state court in which it pursued its tort claim against the
underinsured driver. At American Family's request, the insured dismissed its underinsured motorist
claim against American Family without prejudice, with leave to refile in an Indiana court. American
Family did not attempt to step into the shoes of and defend the tortfeasor. When informed by its insured
of a policy limits settlement offer from the underinsured driver, American Family also opted not to
preserve its subrogation interest under I.C. § 27-7-5-6 and did not advance payment to its
insured. Instead, American Family asked its insured to settle the tort claim against the underinsured
motorist for the underinsured motorist's policy limits. The Indiana Court of Appeals held that Indiana law
does not permit the underinsured driver's substitution for an insurer as the sole named defendant in a
later contract case seeking recovery of underinsured motorist benefits, where the insurer had requested
that its insured settle with the underinsured motorist for policy limits. American Family had chosen to
treat the underinsured claim as a separate, first-party claim for contract enforcement and the court
refused American Family's request to substitute the underinsured driver as the named defendant at

Dean R. Brackenridge
Frost Brown Todd LLC
Indianapolis, IN
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INDIANA Umbrella Coverage/Underlying Insurance

Adkins v. Vigilant Ins. Co., No. 06A01-0911-CV-530 (Ind.Ct.App. May 17, 2010).
The Indiana Court of Appeals held that a homeowner's excess umbrella policy did not provide coverage
where neither of the insured homeowner's underlying insurance policies afforded coverage. A
groundskeeper for an insured homeowner had been injured when the tractor he was riding was struck
by a motor vehicle. Neither of the homeowner's primary policies provided underinsured motorist
coverage for the groundskeeper, who was operating a tractor (which was not an insured vehicle). The
excess umbrella policy provided, in part: "We cover those damages in excess of the underlying
insurance or the Required Primary Underlying Insurance, whichever is greater, if they are caused by an
occurrence during the policy period, unless otherwise stated." The Indiana Court of Appeals held that
the excess umbrella policy, when read as a whole, "clearly states that it provides excess coverage only
after the loss exceeds the insured's relevant underlying insurance policy." The court found that the
insurers' use of the disjunctive in the passage indicating that the insurance covers damages "in excess
of the underlying insurance or the Required Primary Underlying Insurance" does not allow the court to
treat the excess umbrella policy as constituting "underlying insurance".

Dean R. Brackenridge
Frost Brown Todd LLC
Indianapolis, IN
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KENTUCKY – Underinsured Motorist/Notice

 Ky. Farm Bureau Mut. Ins. Co. v. Young, May 20, 2010
Inaccurate Notice of Proposed Settlement Relieves UIM Carrier's Duties
The notice provided by the injured claimant to the UIM insurer was defective since it inaccurately listed
the proposed settlement as $100,000 instead of $75,000. The insurer, aware that the notice conflicted
with notice from other litigants as to the amount of the settlement, objected to the defective notice by
sending a letter to the claimant's attorney seeking clarification as to the amount. The attorney failed to
correct the notice before finalizing the settlement and eliminating the UIM insurer's subrogation
rights. The court held that implicit in the statutory procedure is the requirement that the UIM insurer be
informed of the amount of the contemplated settlement so it knows how much it will be required to pay
to the injured party to protect its subrogation rights, as it is only required to pay the amount of the
settlement offer. Therefore, the found that the UIM insurer was not obligated to provide UIM benefits to
the injured claimant.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
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LOUISIANA – Uninsured/Declaration Page Ambiguity

Moniz v. Daverede, May 20, 2010, La. Ct. of App.
Plaintiff's Name on the Declarations Page Creates an Ambiguity
The plaintiff submitted a claim for uninsured motorist ("UM") coverage under a policy on which her name
appeared under that of the named insured and on which she was listed as a "driver and household
resident." The plaintiff admitted that while she and the named insured shared a common residence she
was not related to her. It was also undisputed that none of the vehicles involved in the accident were
listed as "covered vehicles" on the policy. However, the plaintiff made a detrimental reliance argument,
contending that because her name appeared on the declarations page of the policy under the category
of "Drivers and household residents," she was reasonably led to believe that she was covered. The
court, asking itself why the plaintiff's name was shown on the declarations page of the policy if she was
to be treated as a "third party stranger" to the policy, and finding nothing to explain why, and the insurer
having offered no explanation, including an answer to the allegation that the premium was based, in
part, on the fact that the plaintiff would be a driver under the policy in addition to the named insured,
found that the appearance of the plaintiff's name on the declarations page in created an ambiguity on
the face of the record.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
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LOUISIANA – Underinsured Motorist/Per Person Limit

Smith v. Hampshire, May 5, 2010, La. Ct. of App.
Per Person Limit Applies
The parents of a child killed in an auto accident sought separate UIM limits for the child's survival action
and their own wrongful death claim. The policy defined "bodily injury to one person" to include all injury
and damages to others resulting from this bodily injury. The trial court found that State Farm's policy
language improperly restricted UIM coverage because it referred to "physical bodily injury" rather than
"bodily injury" as provided in Louisiana's UIM coverage statute. The Court of Appeals disagreed,
observing that while the statute provided that UIM coverage must not be less than the underlying liability
policy, it did not purport to define "bodily injury" for all policies and that the policy language had been
approved by the highest court in Louisiana. Thus, the court found that the parents were entitled only to
the single person policy limit of $25,000.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
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MASSACHUSETTS – Attorney Client Privilege/At Issue Waiver

Global Investors Agent Corp. et al. v. National Fire Insurance Company of Hartford, 2010 Mass. App.
LEXIS 663 (May 28, 2010).
The Plaintiffs waived their attorney client privilege in the underlying action when they placed at
issue in the pending action their attorney's valuation of the merits and value of their case in that
underlying action.
The Appeals Court of Massachusetts ruled in a May 28, 2010 decision that the Plaintiffs in an action
against their insurer had made a limited "at issue" waiver of the attorney client privilege in the underlying
action. In the Complaint, which Plaintiffs filed against the insurer, they alleged that the Plaintiffs had
decided to settle the underlying action, "even though Plaintiffs felt that the terms of settlement were
inadequate and unfair." Plaintiffs claimed that they had settled the underlying action because the insurer
had failed to agree to provide a defense and the Plaintiffs had settled "in light of the likely costs of
defense". Page 4.
The Court cited Darius v. Boston, 433 Mass. 274, 277, 280 (2001)ruling that such a waiver of the
privilege is limited to "what has been put at issue" and only if "it is shown that the privileged information
sought to be discovered is not available from any other source." Page 3. As a result, the Court permitted
the deposition of the attorney who had represented the Plaintiffs in the underlying action.

Philip M. Howe
Lecomte, Emanuelson and Doyle
Quincy, MA 02169
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MASSACHUSETTS – Duty to Defend/Sudden and Accidental Pollution Exclusion

House of Clean Inc. v. St. Paul Fire and Marine Insurance Co. et al., 2010 U.S. District LEXIS 33159
(U.S.D.C. MA, 2010).
There Was a Duty To Defend An Action For Pollution of Ground Water Allegedly Due To Sudden
and Accidental Discharge of PCE Chemicals.
The Plaintiff had operated a dry cleaning business and had used perchloroethylene ("PCE") as its
primary cleaning agent. Some PCE "made its way into the ground during rare, heavy rain storms". Page
2. The Policy excluded property damage arising out of discharge of contaminants. The Policy went on to
state, "…but, this exclusion does not apply if such discharge…[or] release… is sudden and accidental."
Page 2.
The Court relied on Essex Insurance Company v. BloomSouth Flooring Corp., 562 F 3d 399, 403 ((1
Cir. 2009) for its definition of the duty to defend. "In general, if the allegations against an insured are
'reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the policy
terms, the insurer must undertake the defense.' " Page 4. The Court went on to write that the duty to
defend has limits. Citing Nascimento v. Preferred Mutual Ins. Co., 513 F 3d 273, 277 (1 Cir. 2008), the
Court wrote,"If the allegations in the underlying complaint lie expressly outside the policy, there is no
duty to defend."

The Court further wrote that the term "sudden" carries a "temporal element requiring an abrupt, non-
gradual release. As a result, there is no duty to defend where the complaints arise out of routine
business practices or activities." Lumbermans Mutual Casualty Co. v. Belleville Industries, Inc., 407
Mass. 675, 555 N.E. 2d 568, 572 (Mass. 1990). Page 4. However, the Court found that the insurer had a
duty to defend the action against the insured for the damage due to the pollution. The Court ruled that,
"…the standard for imposing a duty to defend is broad and the claims against [the insured] are at least
reasonably susceptible to an interpretation that they are covered…The duty to defend depends upon
facts alleged in the underlying complaints and facts which are known or readily knowable to the insurer
when the question arises." Page 5. The insured Plaintiff claimed that the pollutants "accidentally and
suddenly discharged into storm drains on the occasion of heavy rainfalls." As such there was a duty to
defend despite the fact, as the Court noted, that the insured "may not be ultimately indemnified because
of a possible finding that the PCE release(s) were not 'sudden and accidental'… " Page 5.

Philip M. Howe
Lecomte, Emanuelson and Doyle
Quincy, MA 02169
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MASSACHUSETTS – Financial Institution Bonds/Employee Dishonesty

In a bizarre case where the salaries of the company's President and CEO were erroneously directly
deposited into a low level employee's bank account, who then quit the company but continued to receive
direct deposit for months later, a federal district court has ruled in Fundquest, Inc. v. Travelers Cas. &
Sur. Co., No. 09-11471 (D. Mass. June 4, 2010) that Travelers' obligations pursuant to a Financial
Institution Bond were not limited to monies that were paid out during the term of employment. In
requiring Travelers to reimburse Fun Quest for direct deposits issued after the employee left the
company, the District Court held that the policy's coverage for "employee dishonesty or employee theft
claims" was triggered since the cause of the loss occurred entirely as the result of acts committed during
the term of employment and were in no way caused or contributed to by anything that the ex-employee
did after he left. The court ruled that his "dishonest passivity" began while employed by the insured and
simply continued uninterrupted after he left. In any event, Judge Stearns found that the post-
employment payments were part of a unitary loss in light of language in the Bond describing a "single
loss" as involving related acts or omissions. Indeed, the court noted that Travelers itself had treated all
of the payments during the term of employment as a "single loss."

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
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MASSACHUSETTS – Misrepresentation/Homeowners/Dogs

Vermont Mutual Insurance Company v. Robert Eldridge et al., 2010 Mass. App. Unpub. LEXIS 361
(April 2, 2010).
The Homeowners Policy May Be Rescinded Where the Insured Concealed in the Application That
He Kept Two Bull Mastiff Dogs. The Application Was Not Ambiguous.
The Application asked, "Are there any animals or exotic pets kept on the premises?" The Insured
answered, "No." The Court ruled that the Application question was not ambiguous and the Insured
should have disclosed the two bull mastiffs. The Court cited Lumberman's Mut. Cas. Co. v. Offices
Unlimited, Inc. 419 Mass. 462, 466, 645 NE 2d 1165 (1995), "A term is ambiguous only if it is
susceptible of more than one meaning and reasonably intelligent persons would differ as to which
meaning is the proper one."

The Court went on to rule that the misrepresentation was "material", as required to G.L. c. 175, Section
186, because measured by an "objective standard, [a material fact] is one which would naturally
influence the judgment of an underwriter in making the contract at all, or in estimating the degree and
character of the risk." The Court also noted that, as soon as the insurer subsequently learned of the
dogs concealed in the application, the insurer proceeded immediately to terminate coverage prior to
notification by the Insured that there was an underlying claim against the insured for injuries inflicted on
a third party by the dogs.

Philip M. Howe
Lecomte, Emanuelson and Doyle
Quincy, MA 02169
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MICHIGAN – No-Fault/Un-Employed Lost Wages Benefits

Sparks v. Citizens Ins. Co. of Am., May 25, 2010, Mich. Ct. App.
Unemployment No-Fault Claimant Entitled to Work Loss Benefits
The issue before Court of Appeals of Michigan was whether a person who is unemployed at the time of
an accident may be able to prove that she would have earned wages but for the injury. The Court held
that she may recover such benefits, and clarified that a claimant's entitlement to work-loss benefits is not
dependent on being employed at the time of the accident, but rather whether she can prove that, but for
the accident, she would have been employed and, as a consequence, would have suffered actual loss
of earnings.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
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MINNESOTA – Professional Services Exclusion

 W. Nat'l Mut. Ins. Co v. Structural Restoration, Inc.
2010 WL 1753336 (Minn. Ct. App. 2010)
In an unpublished opinion, the Minnesota Court of Appeals affirmed the trial court's declaratory
judgment that Western National had no duty to defend its insured in the underlying litigation. Western
National issued a commercial-general-liability (CGL) and umbrella policies to Structural Restoration. The
terms of the insurance policies excluded professional services, and the court held that Structural
Restoration's silo inspection was an unambiguous instance of "provid[ing] professional services within
the meaning of the policies' professional-services exclusions. Structural Restoration, Inc. at *7.

While the court agreed Appellant did not waive its argument that the policies were ambiguous, it
concluded that viewing and providing an opinion as to the need for repair and maintenance work on a
silo is clearly a professional service within the meaning of the exclusion. Id. The court rejected Western
National's contention that its duty to defend should be exclusively determined by comparing the
allegations contained within the four corners of the underlying complaint with the insurance policy, and
instead concluded that determination of whether a duty to defend exists "must at least consider both
parties' pleadings in the underlying action." Id. at *4. The court stated that Appellant's defense to the
underlying action (namely, that Structural Restoration did not furnish professional services to plaintiff in
underlying litigation) is related to its argument for insurance coverage "to the extent that it maintains that
it did not and was not asked to inspect the grain silo." Id.

However, the court concluded the policies' exclusions negated a duty to defend because the actions of
the underlying litigation were clearly and unambiguously "professional services" according to the
phrase's core definition in similar insurance policies. Id. at *5. A review of dictionary definitions and case
law holdings indicated the plain and ordinary meaning of "professional services" is "the exercise of
advanced or specialized knowledge." Id. at *6. Since Appellant performed a service requiring mental skill
(as opposed to physical skill) and advanced or specialized knowledge (if a layman could make this
determination, there would have been no need to consult Appellant), the court concluded that "[u]nder
any plausible definition in the absence of a contrary contractual provision, this constitutes a professional
service." Id.

Brian H. Sande
Bassford Remele A Professional Association
Minneapolis, MN
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MINNESOTA – Bad Faith Statute/"Proceeds Awarded"

Fahey v. R&L Carriers, Inc., 2010 WL 1753250 (D. Minn. 2010)
Procedurally, Fahey v. R&L Carriers, Inc. is a typical federal court opinion that grants a motion to
remand to state court. However, when reading between the lines, the court believes "proceeds awarded"
is limited to the policy limit amount, as opposed to any amount a jury might award an insured. This
interpretation of Minnesota's bad faith insurance statute has the potential to influence future
interpretations of the bad faith statute.

The pivotal issue on whether to remand was if the matter could possibly meet the requisite $75,000
amount in controversy to stay in federal court. Plaintiff/insured cited Minnesota Statutes § 604.18,
commonly known as the Bad Faith Statute, that states an insured who proves an insurer knew they had
no reasonable basis for denying his claim is limited to an award "(1) an amount equal to one-half of the
proceeds awarded that are in excess of an amount offered by the insurer at least ten days before the
trial begins or $250,000, whichever is less; and (2) reasonable attorney fees actually incurred to
establish the insurer's violation of this section." Fahey at *1 (citing Minn. Stat. § 604.18 subdivs. 2(a),
Resolution of the issue depended on whether the ambiguous term "proceeds awarded" meant any
amount a jury awards the insured, or simply the policy limit. Both sides agreed the policy limit was
$25,000; if the latter interpretation was applied, the most Plaintiff could recover is $12,500. Because it is
unlikely attorney's fees would exceed $37,500 in this claim, a policy limit interpretation barred removal to
federal court. Id. at *2.

Ironically, to meet the $75,000 amount in controversy to stay in federal court, the insurers had the
burden to prove that "proceeds awarded" was not limited to the policy limit of $25,000. Id. Their failure to
prove this may be a victory for the insurance industry in the long run. Additionally, Judge Doty stated in
a footnote at the end of the opinion that comity also favored remand "to allow Minnesota courts to
interpret and develop the issues of state law presented by this action." Id.

Brian H. Sande
Bassford Remele A Professional Association
Minneapolis, MN
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MINNESOTA – Duty to Defend/Class Action Not An "Organization"

Hometown America v. Liberty Insurance Corporation, June 16, 2010 (2010 WL 2485983 Minn. Ct. App.)
In Hometown America LLC v. Liberty Insurance Corp., the Minnesota Court of Appeals affirmed a grant
of summary judgment to Liberty Insurance, finding that the insurer did not have a duty to defend or
indemnify Hometown under a commercial general liability policy because the underlying class action
lawsuit against the policyholder did not involve an injury sustained by an organization.

Hometown owned and operated a manufactured-home community and was sued by its residents in a
class action lawsuit for breaching the terms of its lease agreements. Hometown later sued Liberty
Insurance for refusing to defend or indemnify it in that suit. The policy stated Liberty Insurance was
obliged to defend and indemnify Hometown for any "[i]njury to intangible property sustained by any
organization arising out of . . . [w]rongful entry." The crux of the declaratory litigation was whether the
class of residents that had sued Hometown was tantamount to an "injured organization." The Court
found that because the plain language of the policy articulated a distinction between an injured
organization and injured natural persons, interpreting the class as an "injured organization" would have
rendered certain policy provisions meaningless. The Court held that the policy language was
unambiguous, and that a group of residents as class plaintiffs did not constitute an injured organization
as contemplated by the policy. Therefore, because the underlying lawsuit did not involve an injury
sustained by an organization, Liberty Insurance did not have a duty to defend or indemnify Hometown.

Brian H. Sande
Bassford Remele A Professional Association
Minneapolis, MN
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MINNESOTA – Miller-Schugart/Release

United Nat'l Ins. Co. v. Gunderson, Inc., No. 08-0678 (MJD/JJK), 2010 WL 1924453, at *1 (D. Minn. May
12, 2010).
The Federal District Court of Minnesota ruled a Settlement Agreement at issue was a satisfactory Miller-
Schugart settlement when it released only the insured's personal liability, and not the entire Judgment in
the Underlying Action. No. 08-0678 (MJD/JJK), 2010 WL 1924453, at *2 (D. Minn. May 12, 2010). The
decision denied United National's summary judgment motion that argued the insured's settlement
agreement with Gunderson was not a Miller-Schugart agreement because it discharged the entire
underlying judgment, and held United National's obligation to indemnify the insured against Gunderson
remained. Id.
Gunderson had been awarded over $1.3 million in damages in an underlying action from the insured, a
paint manufacturer, but entered into a Settlement Agreement with the insured in an effort to avoid the
insured's bankruptcy. Id. at *1. The Agreement arguably included a Miller-Shugart clause that released
Gunderson's claims against the insured and stipulated that beyond $175,000 in settlement payments,
Gunderson would pursue the insured's insurance proceeds due from United National. Id. The insured
was covered by United National under commercial general and commercial umbrella policies. Id.

United National argued the Settlement Agreement failed to meet the Miller-Shugart standard because it
lacked a promise by the plaintiff to not execute on the judgment against the insured, and that a personal
release from liability is not an adequate substitute for the covenant not to execute. Id. at *3. Chief Judge
Davis held in favor of the insured, concluding that "a release of the insured's personal liability is
consistent with Minnesota Miller-Shugart law," and commenting that the insurer did not provide any case
law supporting its argument that a Miller-Shugart agreement requires a covenant not to execute as
opposed to a personal release. Id.Reading the settlement agreement as a whole, the Court found the
insurer's interpretation would "render the majority of the provisions in the contract unnecessary and
obsolete," and held the agreement released the insured from personal liability consistent with a Miller-
Shugart agreement.

Brian H. Sande
Bassford Remele A Professional Association
Minneapolis, MN
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MINNESOTA – Definition of Insurance/Contractual Indemnity Program

Allen v. Burnet Realty, LLC, No. A09-1963, 2010 WL 2572569 (Minn. Ct. App. June 29, 2010).
In Allen v. Burnet Realty, LLC, The Minnesota Court of Appeals recently considered the issue of
whether a company's indemnification plan constitutes insurance as contemplated by Minn. Stat. §
60K.47. The court ultimately held that indemnification is not insurance when it (1) apportions risk and
responsibilities between the parties, (2) is related to the principle purpose of the parties' relationship,
and (2) indemnifies for risk of losses over which the indemnitor exercises some control.

Plaintiff worked for the Defendant as a part-time real estate sales associate. As part of his employee
contract as a sales associate, Plaintiff elected to pay an annual fee to participate in the Legal Assistance
Program (LA Program)—an indemnification program hosted by his employer, the Defendant. While
Defendant did carry excess liability errors-and-omissions insurance for its sales associates, the LA
Program served as an internal risk management system for liability claims under the excess coverage
amount. All revenue generated by payment into the LA Program was deposited into Defendant's general
accounts and aided in sustaining company profitability. Plaintiff sued Defendant and sought class
certification on behalf of former and current sales associates, alleging that Defendant unlawfully sold
insurance through the LA Program in violation of Minn. Stat. § 60K.47—which precludes the
unauthorized sale of insurance—and various other statutes related to the alleged insurance
violation. The district court granted summary judgment in favor of Defendant after the Commissioner of
the Department of Commerce had opined that the LA Program was not subject to insurance regulation.

The Minnesota Court of Appeals affirmed the district court's grant of summary judgment, holding that the
LA Program did not constitute insurance. In reaching this conclusion the court noted there was no
definitive precedent on the issue and so relied on basic principles of insurance law to make its
determination. The court ultimately based its decision on the "principal object and purpose" of the LA
Program in relation to the employee's contract (of which the LA Program was a part). The court found
that the LA Program functioned less as a traditional insurance program and more as an arrangement to
share potential risk, and that the 'principal object and purpose" of the LA Program was to sell real
estate—not to sell insurance. In concluding that the LA Program was not insurance and therefore not an
unauthorized means for sharing risk, the district court's decision was affirmed and Plaintiff's case
Brian H. Sande
Bassford Remele A Professional Association
Minneapolis, MN
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MINNESOTA – Loan Receipt/Equitable Contribution for Defense Costs

Cargill, Inc. vs. Ace American Ins. Co., (Minn. 2010).
Loan Receipt Not Needed for Insurer to Pursue Contribution for Other Carriers
Overruling Iowa National's requirement that an insurer needs a loan receipt to pursue contribution from
other insurers, the Minnesota Supreme Court held that a primary insurer that has a duty to defend, and
whose policy is triggered for defense purposes, has an equitable right to seek contribution for defense
costs from any other insurer who also has a duty to defend the insured, and whose policy has been
triggered for defense purposes. The right to equitable contribution for defense costs exists, unless the
insurer has breached an obligation to defend its insured.

Tiffany M. Brown
Meagher & Geer, PLLP
Minneapolis, MN 55402
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MINNESOTA – Named Insured/Owner d/b/a Corporation

State Auto Property and Cas. Ins. Co. v. Meyer, June 22, 2010
Owner Not a Named Insured on Policy Issued to "DBA" Operating As Corporation

Tim Pearson was the owner, director and CEO of a funeral home and purchased workers' compensation
insurance identifying the named insured "TIM PEARSON DBA ... Park Rapids Funeral Home" and the
"entity of insured" as a "Close Corporation." Pearson was also the sole proprietor of a 530-acre cattle
farm/ranch. An employee who worked at both the ranch and funeral home (but whose wages were paid
by funeral home) was injured while working at the ranch and workers compensation coverage was
sought under the policy issued to the funeral home. The court held that Pearson was not a named
insured and therefore the policy did not provide workers' compensation coverage for Pearson's ranch
employees. The fact that the "entity of the insured" was a corporation was critical and the court observed
that the result would have been different if the funeral business was a sole proprietorship, in which case
Pearson would have qualified as a named insured.

Tiffany M. Brown
Meagher & Geer, PLLP
Minneapolis, MN 55402
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NEW JERSEY – Duty to Defend/"Arising Out of" Narrow Interpretation

 In a case where the plaintiff's injuries were attributable both to an excluded cause (illegal drugs) and
others that might be covered (giving the victim drugs when she was visibly intoxicated as well as the
failure to get quick medical assistance), the New Jersey Supreme Court has applied a concurrent cause
approach, ruling in Flomerfelt v. Pennsylvania General Ins. Co., No. A-04-09 (N.J. July 7, 2010) that the
words "arising out of" require proof of more than that the injuries were "incident to" an excluded
cause. In finding a heretofore unsuspected ambiguity with respect to the meaning of "arising out of," the
court ruled that the homeowner's insurer had a duty to defend allegations that the insured failed to
prevent a drug overdose at a party hosted by her son notwithstanding an exclusion for injuries arising
out of the use of possession of dangerous controlled substances.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
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NEW YORK – Additional Insured/"Arising Out Of" and Whether Fault Required

Hunter Roberts Construction Group, LLC v. Arch Insurance, July 1, 2010, Appellate Division, First
Additional Insured Status Established When Insured/Subcontractor's Employee Injured on Job;
Various Defenses to Coverage Fail
Hunter was construction manager for the Bear Stearns Fit Out project and subcontracted with Petrocelli,
an electrical contractor. The subcontract required Petrocelli to defend and indemnify Hunter against all
claims "which arise out of" or "are connected" with Petrocelli's work and to provide Hunter with
In March 2007, Chevola, a Petrocelli employee, tripped over a hole and fell while retrieving a can of
spray paint. Petrocelli was insured with Arch and the policy added any person or organization for whom
it was performing operations, so long as there was a written contract requiring AI status and so long as
the liability arose out of "your work at the location designated"
Chevola sued Hunter in November and Hunter notified Petrocelli and Arch of their lawsuit in January.
Zurich, Hunter's carrier, also notified Arch in January.

It took four months for Arch to deny coverage asserting that (1) the subcontract was not an "insured
contract"; (2) Hunter breached the duty to cooperate by failing to provide statements "that would clarify
certain details regarding the timeliness of [Hunter's] notice to Arch and the circumstances of the
incident"; (3) Hunter failed to notify Arch "as soon as practicable" of the occurrence in that the accident
occurred on March 13, 2007 and notice was given 10 months later; and (4) Chevola's injury did not
"arise out of" Petrocelli's work.

Where, as here, the loss involves an employee of the named insured, who is injured while performing
the named insured's work under the subcontract, there is a sufficient connection to trigger the additional
insured "arising out of" operations' endorsement and fault is immaterial. On the subject of the late notice
defense, Arch waited four months before it raised it, so it waived its right to complain. The disclaimer on
failure to cooperation fails because Arch did not establish the heavy burden necessary to establish non-
cooperation by offering proof of three unreturned calls. Arch did not carry its "very heavy burden" of
demonstrating that it acted diligently in seeking to bring about the insured's cooperation, that its efforts
were reasonably calculated to obtain the insured's cooperation and that the attitude of the insured, after
his cooperation was sought, was one of willful and avowed obstruction.

Dan D. Kohane
Hurwitz & Fine, P.C.
Buffalo, NY 14202
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NEW YORK – Bad Faith

Doherty v. Merchants Mutual Insurance Company, June 11, 2010; Appellate Division, Fourth
In One of the Rare Bad Faith Cases Reaching an Appellate Court in New York, a Split Court
Dismisses a Bad Faith Case in an Excess Verdict Situation. Read the Majority Opinion and
Dissent in This Case
It is rare that we get to report on a bad faith case in New York. In the last three years, not a single bad
faith verdict against a carrier has been affirmed by a New York appellate court and few have been

Doherty had sued Fitzpatrick in an auto accident case claiming that the car Fitzpatrick was operating
rear-ended hers. There was a verdict in excess of the liability limits of the policy issued to Fitzpatrick by
Merchants Mutual. Doherty took an assignment of Fitzpatrick's bad faith claim against Merchants and
sued the carrier as assignee, seeking the amount of damages in excess of the Merchants' policy. In a 3-
2 decision, the Fourth Department affirmed the judgment dismissing the bad faith claim, setting the
stage for a review by the Court of Appeals.

To prevail in a bad faith case in New York, the plaintiff must establish that the insured lost an actual
opportunity to settle the action at a time when all serious doubts about liability were removed and that
the carrier acted with gross disregard for the insured's interests, i.e. that the insurer "engaged in a
pattern of behavior evincing a conscious or knowing indifference to the probability that the insured would
be held personally accountable for a large judgment if a settlement offer within the policy limits were not

The majority concluded that Merchants established that it did not lose an actual opportunity to settle the
claim when all serious doubts about his liability were removed and it was clear that the potential
recovery far exceeded the insurance coverage and thus that it did not act with gross disregard for
Fitzpatrick's interests. Two justices dissented holding that there was a question of fact on whether the
insurer's good faith obligation has been met. Proof of bad faith, the dissent argued, "requires the careful
and collective evaluation of a confluence of factors and inferences uniquely within the province of a
jury". The dissenting justices note that the verdict against the defendant Fitzpatrick was $740,000 and
defendant's highest settlement offer was $55,000.

Dan D. Kohane
Hurwitz & Fine, P.C.
Buffalo, NY 14202
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NEW YORK – Exclusions/Criminal Negligence

Gruninger v. Nationwide Mutual Insurance Company, June 11, 2010, Appellate Division, Fourth
A Plea to a Charge of Criminal Negligence Sufficient to Invoke Criminal Acts Exclusion
Harmer (could you ask for a better name for a defendant) was insured under a Nationwide homeowners
policy. Gruninger was shot by Harmer while they were deer hunting. Nationwide disclaimed coverage to
Harmer based on a criminal acts exclusion: "caused by or resulting from an act or omission [that] is
criminal in nature and committed by an insured" as Harmer had pleaded guilt to Assault in the Third

The Fourth Department agrees that the shooting incident falls within the criminal act exclusion in the
homeowners' policy and such an exclusion is not barred by public policy. In an earlier case, Slayko the
court left open the possibility that a broad criminal activity exclusion might someday work an injustice
when the prohibited act involves little culpability or seems minor relative to the consequent forfeiture of
coverage. While that may be so, this one does not fall within the scope of triviality. This was a plea to a
crime of criminal negligence.

Dan D. Kohane
Hurwitz & Fine, P.C.
Buffalo, NY 14202
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NEW YORK – Auto/Furnished or Available for Use

Konstantinou v. Phoenix Insurance Company, June 11, 2010, Appellate Division, Fourth Department
No Coverage Available for Vehicle Owned by College-Based Daughter of the Insured, Particularly
When It Was Furnished or Available for Insured's Son's Use
David was driving a Chevrolet owned and insured by his sister Tynette. The car crashed into a vehicle
operated by Stavros Konstantinou and killed Lorin Konstantinou, a passenger. Stavros, suing for his
own injuries and as administrator of Lorin's estate sued David and Tynette and their mother Brenda
Henderson. Stavros took judgment and sought to enforce that amount in excess of Tynette's coverage
from the Phoenix, Brenda's insurer. .

Under the Phoenix policy, coverage is extended to both "your car" and "non-owned" cars. The policy
listed Henderson as the only insured and a different Chevrolet as "your car". Thus the vehicle David was
operating was not "your car" under the Phoenix policy.

The policy also defined a "non-owned car" as one not owned by or furnished or available for the regular
use of you or a relative." The policy further explained that "You and your mean the person [listed as the
named insured on the declarations page, i.e., Henderson] . . . Relative means your relative, residing in
your household."

The court found that the Thurston siblings were Henderson's relatives and that they resided in her
household. A person is a resident of a household for insurance purposes if he or she " lives in the
household with a certain degree of permanency and intention to remain' " Although Tynette Thurston
lived at college at the time of the accident, defendant submitted evidence in support of the motion
establishing that she was a resident of the household inasmuch as she lived with Henderson during the
summers, received mail at Henderson's house, stayed there every other weekend, and listed that
address on the Celebrity's title and insurance.

Not only that , even if Tynette was not a relative, David had unrestricted access to the Chevrolet he was
driving at the time of the accident and that was another reason the car he was using was not a 'non-
owned car".

Finally, since the issue before the court dealt with the grant of coverage, and not an exclusion or policy
condition, a late disclaimer does adversely impact the carrier's right to deny coverage. Coverage cannot
be created by a late disclaimer.

Dan D. Kohane
Hurwitz & Fine, P.C.
Buffalo, NY 14202
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NEW YORK – Certificate of Insurance/Agency/Estoppel

Sevenson Environmental Services v. Sirius America Ins. Co., June 11, 2010, Appellate Division,
Fourth Department
Questions of Fact About Insured Status and Agent's Power to Bind Company by Certificate of
Insurance Under Theory of Coverage by Estoppel
Sevenson and Goodyear commenced this action seeking a declaration that Sirius was obligated to
defend them in an underlying personal injury action. In a prior appeal the court determined that Sirius
validly disclaimed coverage for defendant Thomas Johnson, Inc. (TJI) in the underlying action based on
TJI's late notice of the construction accident.

On this appeal there were several related issues. First, there was a question as to whether Sevenson
and Goodyear were actually insured by Sirius. Sevenson and Goodyear established that their names
appeared on a certificate of insurance and there was also an additional insured endorsement naming
persons or organizations "as on file with company." In opposition to the motion, Sirius raised an issue of
fact by submitting an affidavit from an employee of its third-party claims administrator, UTC who averred
that TJI's underwriting file did not contain any request or notice to name plaintiffs as additional insureds
on the policy.

However, since there was still an issue of whether Sirus' file possessed such documentation, there is an
issue of fact to be resolved by the court below. As to the Certificate of Insurance, it cannot create
coverage. However, the Fourth Department held that a carrier may be estopped from denying coverage
to that party where the party reasonably relies on the certificate of insurance to its detriment IF the
certificate is issued by the company itself or its authorized agent.

In this case, the plaintiffs did not establish that the Certificate, issued by Overdorf, TJI's insurance
broker, was issued by Sirius' agent. Overdorf claimed that North Island, a company it described as an
agent of Sirius, authorized it to issue the certificate. However, testimony by Overdorf's employee cannot
be used to establish that it is an agent of Sirius or that North Island was an agent. However, Sirius did
not sufficiently prove the lack of agency to justify summary judgment in its favor. Without having
established themselves as insureds of Sirius, and not having a judgment against the Sirius insured, TJI,
Sevenson and Goodyear do not have standing to challenge the timeliness of Sirius' disclaimer at this

Dan D. Kohane
Hurwitz & Fine, P.C.
Buffalo, NY 14202
Mail to:

NEW YORK – Homeowners/Valuable Articles/Forgery

Flaum v. Great Northern Ins. Co., June 24, 2010, Supreme Court, Westchester County
Discovery that Renoir Painting Was a Forgery Is Not a Loss Under a Valuable Articles
Endorsement to a Homeowners Policy
In 1979, plaintiff purchased a "Renoir" painting for $50,000. As of 2005, the painting was insured by a
rider to the plaintiff's homeowner's insurance policy issued by defendants under a "Valuable Articles"

In 2008, plaintiff sought to sell the painting at Christie's auction house only to be told that it was a
forgery. Plaintiff then placed a claim with defendants for the "loss" of value of the painting. Defendants
denied the claim.

In considering this issue, the court determined that plaintiff did not conclusively establish that the
painting was in fact a forgery. Thus, according to the court, it was not even clear that a loss had
occurred. Further, even assuming it was a forgery, according to the court, plaintiff failed to show how
their loss was covered under the terms of the policy. Plaintiff did not sustain a physical loss as the
"Renoir" painting still hung in the plaintiff's personal residence in substantially the same condition as
when it was purchased. Additionally, there was no claim that the "Renoir" has been lost, damaged, or
destroyed. Lastly, the court noted that if a loss had actually occurred it would have occurred in 1979 on
the date of purchase and prior to the policy at issued here.

Jennifer A. Ehman
Hurwitz & Fine, P.C.
Buffalo, NY 14202
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NEW YORK – AI Status/Commercial Property Policy

SUS, Inc. v St. Paul Travelers Group, July 1, 2010, Appellate Division, Third Department
AI Status Under a CGL Does NOT Translate to AI Status Under the Commercial Property Policy
The Third Department dismissed plaintiff's claims against every Travelers' subsidiary under the sun
except for the actual underwriting company that issued the policy. In so holding, the Court noted that a
principal/parent carrier will not be liable for the acts of a subsidiary underwriting company unless they
exercise some direct intervention in the claim.

Second, the Court ruled that just because the landlord/owner qualify as an additional insured under the
tenant's liability coverage does not mean that the same status of additional insured transfers over to the
tenant's first party property policy. The two, as you might imagine, are apples and oranges.
Finally, pursuant to the "plain and unambiguous terms of the policy" the subject premises was not
insured. Rather, by the terms of the policy, the insured was only covered for business personal property
and the building (but only if the building was identified in the Declarations). Where the Declarations
sheet was blank with respect to premises coverage, the Third Department concluded that no such
coverage existed.

Steven E. Peiper
Hurwitz & Fine, P.C.
Buffalo, NY 14202
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NEW YORK – Breach of Contract to Procure Insurance

Carlson v Rockefeller Center North, Inc., June 17, 2010, Appellate Division, First Department
Breach of an Oral Contract to Procure Insurance Is Actionable Against the Non-Procuring Party
The main party action commenced by Mr. Carlson arises from an incident that occurred when he fell
from a scaffold while in the course of his employment with David Schuldiner, Inc. ("Schuldiner"). As a
result of injuries sustained due to the fall, Mr. Carlson commenced a labor law claim against
Rockefeller. Rockefeller, in turn, commenced a third-party action seeking insurance from Schuldiner. As
set forth in the third-party complaint, Rockefeller alleges that Schuldiner had previously agreed to
procure insurance coverage on behalf of Rockefeller, and that Schuldiner had previously provided a
number of certificates of insurance which appeared to indicate said coverage had been procured.

We note that there appears to have been a long-standing relationship between Rockefeller and
Schuldiner wherein Schuldiner performed maintenance work at the Rockefeller premises. However, the
contract between the entities had expired well before the incident giving rise to the current lawsuit. As
there was no written contract in effect at the time of the incident, accordingly, Rockefeller did not qualify
as an additional insured under Schuldiner's policy. Not to be defeated, Rockefeller argued that
Schuldiner had breached an oral contract whereby Schuldiner agreed to procure coverage on behalf of
Rockefeller. The certificates of insurance were viewed by the First Department as evidence of the
existence of the oral contract. Further, the fact that Schuldiner provided copies of the requested
certificates of insurance bolstered the claim that Schuldiner knew, and accepted, the terms of the oral

Steven E. Peiper
Hurwitz & Fine, P.C.
Buffalo, NY 14202
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NEW YORK – Untimely Notice

Bandow Co. Inc. v. Burlington Ins. Co.,June 10, 2010, Supreme Court, New York County
No Reasonable Excuse for Plaintiff's Delay in Notifying Insurer where Letter from Injured Party
Requested Such Action
This action arises out of a December 18, 2007 trip and fall on a sidewalk where plaintiff was performing
repairs. By letter dated January 30, 2008, the injured party's attorney notified plaintiff of a possible claim
and asked that plaintiff forward a copy of the letter to its insurance carrier. After receiving no response,
the injured party's attorney tried again by letter dated March 5, 2008. Soon thereafter, plaintiff forwarded
the second letter to his attorney and then, in reply, wrote a letter to the injured party's attorney denying
liability for the accident. On July 7, 2008, nearly seven months after the initial accident, the injured party
commenced suit. By facsimile transmission, dated August 14, 2008, plaintiff's broker sent defendant a
notice of claim. Fifteen days later, defendant disclaimed coverage citing late notice.

Plaintiff then brought this action and defendant moved for summary judgment. In its motion, defendant
pointed to discovery materials in which plaintiff admitted that the first notice it received of the accident
was the March 5, 2008 letter. Plaintiff also later conceded that it received the January letter too. In
opposition to defendant's motion for summary judgment, plaintiff argued that it was a resident of North
Carolina. Accordingly, North Carolina's law, which has a prejudice requirement, governs. It also asserted
a good faith belief in nonliability.

The court held that as plaintiff's principal place of business was in New York, New York insurance law
applies. Additionally, the court held that neither party disputed that notice was untimely therefore it was
only required to determine whether plaintiff's excuse for delay was reasonable. Thus, in light of the fact
that the letter sent by the injured party advised plaintiff of the accident and asked it to notify its insurer,
there was no reasonable excuse for plaintiff's delay.

Jennifer A. Ehman
Hurwitz & Fine, P.C.
Buffalo, NY 14202
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NORTH CAROLINA – Duty to Defend/Assault and Battery Exclusion

Great Divide Ins. Co. v. Midnight Rodeo, Inc., May 24, 2010, E.D.N.C.
If Negligence Claim Arise From an Underlying Assault and Batter, Insurer Has No Duty to Defend
Although there are no cases applying North Carolina law that are directly on point with the facts of this
case, many other jurisdictions have alleviated an insurer's duty to defend when an assault or battery
exclusion exists, and the plaintiff's claims of negligence would not arise but for the underlying assault
and battery. In other words, when injuries arise from assault and battery of an individual, whether at the
direction or omission of the policyholder, those claims are excludable from coverage because those
injuries, and not the negligence of the policyholder gave rise to the suit. Therefore, there is no
occurrence and no duty to defend.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

OHIO – Attorneys Fees Covered Damages/Punitive Damages Exclusion

Neal-Pettit v. Lahman, et al., No. 2009-0325 (Ohio May 4, 2010).
The Ohio Supreme Court found that an insurance company was obligated to pay a third-party claimant's
attorney fees after those fees were awarded as part of a judgment against the company's insured based
on the insured's malicious underlying conduct. Kimberly Neal-Pettit filed a Complaint against an Allstate
Insurance Company insured, Linda Lahman, for damages sustained in an automobile accident. The jury
awarded Neal-Pettit $113,800 in compensatory damages and $75,000 in punitive damages. In addition
to the punitive damages, and based on a finding that the insured's conduct (drunk driving) was
malicious, Neal-Pettit was also entitled to recover attorney fees from Lahman. Allstate paid Neal-Pettit
the amount awarded as compensatory damages, but denied any obligation to pay the punitive damages
and attorney fee awards. Allstate contended the attorney fee award (1) did not constitute damages owed
due to "bodily injury"; (2) was excluded from coverage as a "punitive or exemplary damage, fine or
penalty"; and (3) was excluded from coverage pursuant to Ohio public policy. The Ohio Supreme Court
affirmed the Court of Appeals' decision, holding that (1) an award for attorney fees based on malicious
conduct giving rise to bodily injury is a result of "bodily injury"; (2) there is a distinction between attorney
fees and "punitive or exemplary damages," such that a "punitive or exemplary damages" exclusion must
be narrowly construed to permit recovery of attorney fee awards; and (3) Ohio public policy precludes
coverage for "punitive damages," but does not preclude coverage for attorney fee awards, even if the
attorney fees are awarded "solely as a result of an award for punitive damages." According to the court,
while an attorney fee award "may stem from an award of punitive damages, the attorney fee award itself
is not an element of the punitive-damage award."
Dean R. Brackenridge
Frost Brown Todd LLC
Indiana×Ohio×Kentucky×Tennessee×West Virginia
Indianapolis, IN
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PENNSYLVANIA – Duty to Defend/Occurrence/Intentional Acts

Colony Ins. Co. v. Mid-Atlantic Youth Services Corp., May 24, 2010, M.D.Pa.
Where the Underlying Complaint Alleges Intentional Acts and Not Negligence, There is no
Occurrence and No Duty to Defend
The underlying complaints alleged that the policyholders committed intentional acts, not
negligence. Thus, the allegations in the underlying complaints were not the result of an occurrence as
defined by the policy at bar or the case law in this circuit. Therefore, the insurer does not have a duty to
defend its policyholder in this instance.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

PENNSYLVANIA – Professional Liability/"Investment Opportunity"

Minn. Lawyers Mut. Ins. Co. v. Ahrens, May18, 2010, M.D.Pa.
Policy Does Not Provide Coverage for Losses Arising From "Investment Opportunity'
The court stated that it was not bound by the plaintiff's "draftsmanship" if, in substance, the allegations
describe activity falling within the scope of the exclusion. Regardless of whether the plaintiffs
characterized the activity of "providing funds" or "making a loan," they did expect to receive a return on
the money they gave. Accordingly, this makes their transactions an "investment," as the word is
commonly understood, rendering the exclusion applicable.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

RHODE ISLAND – Work-Product/Attorney Client Privilege/Documents Produced to State

 U.S. Real Estate Limited Partnership v. Colonial American Casualty & Surety Company, May 11, 2010,
Work-Product or Attorney-Client Privileges Not Waived by Producing Privileged Documents to a
State Fraud Investigation Unit
In a Rhode Island litigation, the plaintiffs sought production of documents produced in a New Hampshire
fraud investigation. The court held that New Hampshire statutes protect from disclosure documents and
communications exchanged by insurance company and the Insurance Fraud Investigation Unit of the
New Hampshire Department of Insurance.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;
RHODE ISLAND – Other Insurance/Auto

Buttie v. Norfolk & Dedham, May 12, 2010
"Other Insurance" Clauses Must be Construed to Reach "Rational" Result
The policyholder was injured while riding as a passenger in a vehicle he owned. Two other passengers
in the vehicle were also injured. After the tortfeasor's liability policy was exhausted, the policyholder and
injured passengers sought UM coverage under their respective policies. An arbitrator found that,
pursuant to the "other insurance" clauses, the vehicle owner's policy was primary and provided
coverage first to the passengers who did not own the vehicle, leaving the owner's damages award
unsatisfied. On appeal, the Rhode Island Supreme Court held that the arbitrator's award was irrational
because it afforded the vehicle passengers greater coverage under the owner's policy than the owner
himself. The court held that, taken together, the "other insurance" clauses and the fact that the
passengers were covered under the owner's policy but the owner was not covered under the
passengers' policy, the proper result was to allow the owner and passengers to recover under the
owner's policy under a pro rata distribution in proportion to each claimant's relative damages and allow
the passengers to recover the balance of their damages under their own policy.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

TEXAS – Contractual Liability Exclusion

 In an opinion that appears to backtrack from its 2007 decision in Lamar Homes, the Texas Supreme
Court had declared that contractual liability exclusion in the CGL policy extends to all claims based
solely on contractual liability and is not limited to "hold harmless" claims. In Gilbert Texas Construction
LP v. Underwriters at Lloyds, London, No. 08-0246 (Tex. June 8, 2010), a contractor was sued in tort
and contract for property damage arising out of heavy rains that damaged a building adjacent to a
Dallas Area Rapid Transit authority construction project. However, as the original tort claims had all
been dismissed and that all that remained was an allegation that the insured had breached its
contractual obligations to DART, the court held that the remaining claims were an obligation that the
insured had assumed by contract and were therefore excluded. The court acknowledged that its
analysis was contrary to the manner in which a majority of other courts have interpreted this ISO
exclusion but disagreed with the holding of these courts that the language of the exclusion was limited to
indemnity or hold harmless agreements. Further, the court declined to find that its holding was in conflict
with Lamar Homes, noting that the contractual liability exclusion was not at issue in Lamar Homes. The
court also found that the insured's claim was not saved by an exception to the exclusion for damages
that the insured would have had in the absence of the contract or agreement, as in this case. The court
also refused to find that Lloyd's was estopped to raise these issues concluding, as had the court below,
that Lloyd's, as an excess insurer, had only had a right to associate in the insured's defense and had
never actually assumed control over it, nor was the insured prejudiced by underwriters' actions in regard
to the case. Although Lloyd's had urged the insured to seek summary judgment on governmental
immunity grounds, which had resulted in the dismissal of the underlying tort claims with detrimental
impact to the insured's coverage position, the court refused to find that it had improperly coerced the
insured and counsel with respect to this issue, nor had it acted outside of its contractual rights in
associating in the insured's defense in demanding the insured's cooperation in asserting viable

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
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TEXAS – First Party/Mold
The Supreme Court of Texas has ruled in State Farm Lloyd's v. Page, No. 08-0799 (Tex. June 11, 2010)
that a first party mold exclusion bars coverage for damage to the insured's dwelling but not to his or her
personal property. In seeking to reconcile its 2006 opinion in Fiess, which had precluded coverage for
mold damage to the insured's dwelling and Balandran, which considered the effect of such exclusions in
light of a subsequent repeal provision, the court found that the repeal provision only had application to
damage to personal property and could not be interpreted as voiding the exclusion altogether.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
Mail to:

VIRGINIA – Chinese Drywall/Direct Physical Loss

 Travco Ins. Co. v. Ward, June 3, 2010, E.D.Va.
Court Grants Insurer Summary Judgment on Policyholder's Chinese Drywall Claims
In a coverage dispute relating to Chinese Drywall, the insurer argued that the policy did not provide
coverage for the cost of removing the Chinese Drywall, because "the Drywall has not sustained a 'direct
physical loss,' and therefore does not fall within the grant of coverage in the Policy." The insurer further
argued that even if there had been a direct physical loss to the Drywall, the loss would be excluded from
coverage under either the latent defect or faulty material exclusions, and the pollution exclusion. The
Court held that the policyholder's residence and its components suffered a "direct physical loss" within
the meaning of the policy. However, the Court also concluded that four separate exclusions applied to
the damage claimed. Specifically, the claimed losses were found to be excluded by the Policy's latent
defect, faulty materials, corrosion, and pollutant exclusions.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

VIRGINIA – Professional Liability/Notice of Claim

Minn. Lawyers Mut. Ins. Co. v. Batzli, May 19, 2010, E.D.Va.
Despite Error in Drafting Agreement, Attorney Did Not Have Notice of Claim
The parties conducted a two-day trial resulting in a verdict for the policyholder. The insurer sought to set
aside the verdict, maintaining that a jury could not have reasonably concluded that the policyholder did
not have notice of the potential claim by his client. The court stated that throughout the trial, the
policyholder provided a reasonable justification as to why he lacked the objective knowledge of facts
that could support notice of a potential claim or a potential demand for damages. Accordingly, the court
declined to set aside the jury's decision.

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
Mail to:;

WISCONSIN – Bad Faith/Failure to Settle

In a lengthy opinion tracing the evolution of Wisconsin bad faith jurisprudence since 1916, the state
Supreme Court has ruled in Roehl Trucking Co. v. Liberty Mutual Ins. Co., 2010 WI 49 (Wis. June 22,
2010) that Wisconsin will recognize a cause of action in cases where an insurer's failure to settle results
in a judgment within policy limits but nonetheless causes financial harm to the insured because the
policy contained a $500,000 self-insured retention. Having recognized such a cause of action, the court
rejected Liberty Mutual's argument that there was no credible evidence presented at trial that the case
could have settled for less than $500,000. The Supreme Court also overturned the trial court's ruling that
Roehl was not entitled to its attorney's fees, since it had presented this claim through a post-trial motion
and had not presented evidence of its fees to the jury. The court rejected Liberty Mutual's argument that
it had the right to a jury finding on the fee claim, holding that the circuit court can determine the amount
of fee damages as a matter of law and that involving the jury in this process could complicate and
confuse the process of trial. The Supreme Court did rule that the circuit court properly declined to submit
the issue of punitive damages to the jury, as the evidence did not support any suggestion of malicious
purpose or intentional disregard of the insured's rights as required to support such an award.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
Mail to:

WISCONSIN – Duty to Defend/Occurrence/Construction Defect

Mantz Automation, Inc. v. Navigators Ins. Co., May 12, 2010, Wis. Ct. of App.
No Duty to Defend Where There is no Occurrence
A common general liability policy does not cover faulty workmanship, only faulty workmanship that
causes damage to other property. Here the only alleged property damage is to the floor itself, which was
a result of the faulty workmanship. There is no contention that these potential instances of faulty
workmanship caused an accident that caused subsequent property damage. Because faulty
workmanship in itself does not constitute an occurrence, there is no grant of coverage in the first

Richard J. Cohen
Daniel W. Gerber
Goldberg Segalla LLP
Buffalo, New York
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WISCONSIN – Excess/Drop Down Duty to Defend

The Wisconsin Supreme Court has ruled that a second level excess insurer had a direct duty to defend
pollution liability claims after the primary insurer refused to do so. In a tortuously reasoned opinion, the
majority declared in Johnson Controls, Inc. v. London Market, 2010 WI 52 (Wis. June 24, 2010) that
even though the London policy did not contain any duty to defend language, a defense obligation was
imported from the underlying Travelers umbrella policy by reason of the excess policy's follow form
language, since nothing "otherwise provided herein" was inconsistent with this result. (Unlike most
umbrella forms, the Travelers policy had standard CGL "right and duty to defend"
language). Furthermore, despite the arguments of London and numerous excess intervenors that an
excess insurer's defense duties did not arise until the underlying limits of coverage were actually
exhausted, the majority held that it arose immediately upon the refusal of the underlying insurers to
defend, pointing to non-standard language in the Travelers stating that if "the insurer affording other
insurance to the named insured denies primary liability under its policy, [Travelers] will respond under
this policy as though such other insurance were not available…" Although the majority denied that their
holding was intended to create a broadly-applicable rule that would require excess insurers to defend in
most cases or that would encourage primary insurers to try to avoid their defend obligations, three
dissenting justices predicted that just such a result is likely to come to pass, with dire consequences for
the future cost of excess insurance in Wisconsin. The dissenters contended that the London policy was
a pure indemnity contract and that the majority's analysis had improperly conflated the rules governing
insurers' duties to defend and indemnity. As a result, they argued that the London Market's duty to pay
defense costs did not arise until the policy as a whole was triggered by the exhaustion of the underlying
policies' limits.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
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WISCONSIN – Pollution

A divided panel of the Court of Appeals has affirmed a lower court's declaration of excess coverage for
the cost of cleaning up PCB contamination in the Lower Fox River and Green Bay. In Westport Ins.
Corp. v. Appleton Papers, Inc., 2009 AP 286 (Wis. App. June 8, 2010), District I refused to find that API
had voluntarily undertaken liability for the clean up by entering into a consent judgment with NCR
without notice to the carriers. The court found that API's liability derived from a Section 106
administrative order that made no reference to the earlier agreements. The Court of Appeals also
refused to hold that API was required to horizontally exhaust lower layers, observing that horizontal
exhaustion was akin to pro rata allocation that was rejected by the Wisconsin Supreme Court in
Plenco. As a result, the court held an insured may select a policy year and works its way up that tower
of coverage before moving on to another year. Writing in dissent, Judge Fine argued that the majority
had erred in barring the API insurers from contesting coverage for liabilities voluntarily assumed by
Appleton Papers that were properly the responsibility of NCR.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
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WISCONSIN – Pollution/Agent/Malpractice

The Wisconsin Court of Appeals has ruled that a tire recycler cannot pursue a malpractice action
against its agent for buying coverage from ACE with an absolute pollution exclusion that precluded
coverage for cleaning up pollution from a fire at its facility, as the claim would have been excluded, in
any event, as involving damage to the insured's own property. In Watertown Tire Recyclers, LLC v.
Nortman, 2009 AP 2465 (Wis. App. June 17, 2010), the court found that no reasonable jury could
conclude that the agent's actions with respect to the pollution exclusion were a substantial cause of the
loss of coverage because there was no coverage to start with.

Michael F. Aylward
Morrison Mahoney LLP
Boston, MA 02210
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