INSURANCE LAW

General liability policies contain what are called “business risk” exclusions which generally exclude coverage for damage to: (1) “that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations”; and (2) “that particular part of any property that must be restored, repaired or replaced because Your Work was incorrectly performed on it.”  These exclusions have been interpreted by California courts to be an expression of a general principle of insurance law; that insurers are not warrantors of their insureds’ products.  (See, Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co.(1996) 45 Cal.App.4th 1, 110-111.)  Specifically, courts have repeatedly held that “the risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer.”  (Maryland Cas. Co. v. Reeder (1990) 221 Cal.App.3d 961, 972.)

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Commercial general liability policies commonly cover liability for damages “because of” bodily injury or property damage that happens during the policy period.  A key is that the coverage does not extend to liability “for,” “due to” or “resulting from” property damage.  Rather, the coverage is for liability because of property damage or bodily injury that takes place while the policy is in effect.

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Ever since the California Supreme Court rejected a “manifestation of damage” trigger for insurance coverage and replaced it with a “continuous trigger of damage” in Montrose Chem. Corp. of California v. Admiral Ins. Co., 10 Cal.4th 645, 655 (1995), insurers have attempted to endorse and amend their policies to avoid the holding in Montrose.

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In Attorneys Liability Protection Society, Inc. v. Ingaldson Fitzgerald, P.C. (Sept. 23, 2016) 2016 WL 5335036, Attorneys Liability Protection Society (ALPS), a risk retention group chartered in Montana, provided malpractice insurance coverage to an Alaskan law firm, Ingaldson Fitzgerald, P.C.  A former client sued Ingaldson relating to the withdrawing of fees and costs against a retainer, alleging claims for restitution, reimbursement, disgorgement and conversion.

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The United States Court of Appeals for the Ninth Circuit upheld a District Court’s entry of summary judgment in an advertising injury case based on an intellectual property exclusion.  The Ninth Circuit affirmed the ruling that an intellectual property exclusion precluded a defense obligation in a trademark infringement action even where the factual allegations were sufficient to support a potentially covered claim for implied disparagement.  Keating Dental Arts Inc. v. Hartford Cas. Ins. Co. (9th Cir., Dec. 24, 2015) 2015 WL 9460142.

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Summaries of the principles of the duty to defend lawsuits often note that the merits of the underlying action are irrelevant.[1]  The duty extends even to seemingly frivolous claims if they could potentially result in covered liability.  Example:  a cause of action barred on its face by the statute of limitations would still trigger a defense if it otherwise might be covered.  In that case, the insured still would be required to appear and raise the affirmative defense to secure a dismissal.  Accordingly, an insurer could not deny a defense on the ground that its investigation shows the plaintiff could not prove up the claim asserted.

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The following insurance issues are likely to be decided in 2016 by the California Supreme Court and the United States Court of Appeals for the Ninth Circuit.

Brandt Fees: In Nickerson v. Stonebridge Life Ins. Co., Case No. S213873, the California Supreme Court is considering the following issue: Is an award of attorney fees under Brandt v. Superior Court (1985) 37 Cal.3d 813 properly included as compensatory damages for purposes of calculating the ratio between punitive and compensatory damages where the fees are awarded by the jury, but excluded from compensatory damages when they are awarded by the trial court after the jury has rendered its verdict?

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