CLAIM DENIED A Publication of the Lowenstein Sandler PC Insurance - - PDF document

CLAIM DENIED

A Publication of the Lowenstein Sandler PC Insurance Law Practice Group October 2006

Demonstrating the trend toward a very broad definition of “bodily injury,” the United States District Court for the Northern District of Texas recently held that allegations of biological or cellular damage, in the form of exposure to radio frequency radiation (“RFR”) from the use of wireless handheld phones (“WHHP”), triggered an insurer’s duty to defend under a commercial general liability policy. Ericsson, Inc. v. St. Paul Fire and Marine Insurance Company, 423 F. Supp. 2d 587 (N.D. Tex. 2006). Underlying Ericsson were several class action suits claiming that usage of WHHPs had exposed the class plaintiffs to RFR, presenting a health risk and causing current and possibly future bodily injury. Specifically, the plaintiffs alleged bodily injury in the form of, among other things, (1) exposure to RFR, which increased their “risk of damage, injury to their health and well-being, and unexpected changes to their physiology” ; (2) exposure to health risks including cellular damage; (3) exposure to RFR’s biological effects and risks to human health; and (4) increased risk of biological injury. The plaintiffs sought relief including WHHP headsets or funds to buy headsets.

• St. Paul denied any obligation to

defend on the basis that its policies provided coverage when an “occur- rence” causes a “bodily injury” which results in “damage.” According to St. Paul, allegations of “health risks” did not constitute bodily injury; and even if they did, the damages sought did not result from a bodily injury. St. Paul also argued that the policy exclusion relating to “expected or intended” injuries precluded coverage. The Court held that St. Paul was required to defend Ericsson in the class actions “because the allegations potentially stated a cause of action within the coverage of the policies.” The Court determined that although it was unclear from the class plaintiffs’ allegations whether they currently suf- fered adverse health effects or merely had an increased risk of future injury, they had alleged a present injury of biological and/or cellular effects, which in turn constituted “bodily injury” within the policies’ definitions. Additionally, the Court found that, due to an ambiguity in the policy, the plaintiffs’ sought-after damages — headsets or their monetary equivalent — qualified as “damages resulting from bodily injury.” The policies provided that “damages because of ‘bodily injury’ include damages claimed by any person or organization for care, loss of services or death resulting at any time from the ‘bodily injury’” but gave no instruction as to whether the headsets would meet that definition. Quoting the Ninth Circuit Court of Appeals’ decision Voicestream Wireless Corp. v. Federal Insurance Company, 112 Fed.

• Appx. 553 (9th Cir. 2004), the Court

held “[t]o the extent that seeking damages, in part, in the form of a headset neither clearly falls within a policy provision, nor is clearly excluded by the text of the policy, the policies are ambiguous.” Finally, the Court summarily disposed of

• St. Paul’s argument that the “expected
• r intended injury” exclusion precluded

its duty to defend. Although the class plaintiffs alleged that Ericsson knew or expected the resulting damages, the plaintiffs also alleged negligence by Ericsson, which the Court held is not a basis for precluding claims under the exclusion. ■

COURT BROADLY CONSTRUES “BODILY INJURY” IN CELLULAR PHONE CASE

By Jennifer J. McGruther, Esq.

The New Jersey Appellate Division recently affirmed that in terms of insurance coverage, an incident where two policemen were hit with a total of three gunshots constitutes one

• ccurrence.

In the case Bomba v. State Farm Fire and Cas. Co., 379 N.J. Super. 589 (App. Div. 2005), the victims brought suit against the parents of the lone gunman, as well as against the parents’ insurer, seeking a declaration of the breadth of coverage offered by the applicable homeowners’ policy. Earlier, the victims had sued the parents, alleging that they had negligently supervised their son by, among other things, permitting him access to the weapon used in the crime. The Court reasoned that “the fact that there were two victims

• r several injuries when the

homeowners’ son fired his gun multiple times is not relevant, for coverage purposes...” The policy at issue featured a $100,000 per-occurrence limit and defined “occurrence,” in pertinent part, as “ … an accident, including exposure to conditions, which results in … bodily injury; or … property damage during the policy period.” The definition also stated that “[r]epeated or continuous exposure to the same general conditions is considered to be one occurrence.” Based on this language, the victims argued that each gunshot should be considered a separate occurrence, thus entitling them to a total of $300,000. The defendant insurer did not dispute coverage, but took the position that there was only one occurrence in the case — the parents’ negligent supervision of their son. The Appellate Division began its analysis by noting that for purposes

• f determining the number of occur-

rences, “ … the term must be construed from the point of view of the cause or causes of the accident rather than its effect.” Applied to the facts before it, this test resulted in there being only one

• ccurrence — the parents’ negligent

supervision of their son. The Court reasoned that “the fact that there were two victims or several injuries when the homeowners’ son fired his gun multiple times is not relevant, for coverage purposes, for determining the cause

• f for identifying the covered event.”

While the effect of its holding was harsh, the Court noted that acceptance

• f the victims’ argument that the

gunshots were the “cause” of the injuries would result in coverage being barred by the policy’s criminal acts

• exclusion. By instead construing the

parents’ negligence as the “cause”

• f the officers’ injuries, the Appellate

Division permitted the victims the only recovery possible under the policy, albeit one-third of the total amount that they sought. ■

CLAIM DENIED

APPELLATE DIVISION FINDS MULTIPLE- GUNSHOT SHOOTING OF POLICE OFFICERS CONSTITUTES ONE OCCURRENCE FOR INSURANCE PURPOSES

INSIDE THIS ISSUE

OCTOBER 2006

Appellate Division Finds That Multiple-Gunshot ... Court Denies Coverage for Damage from Faulty Computer Chips

Mitchell J. Decter, Esq.

Ericsson, Inc. v.

• St. Paul Fire ...

Jennifer J. McGruther, Esq.

When Signing Applicant Knows of Material Misrepresentations ... Appellate Division Expands Definition of Physical Damages …

David G. Tomeo, Esq.

In Atmel Corp. v. St. Paul Fire & Marine Ins. Co., 430 F. Supp. 2d 989 (N.D. Cal. 2006), Atmel Corporation sought coverage for a lawsuit against it seeking damages caused by its defective computer chips. Atmel’s insurer, St. Paul, argued that the underlying action brought against Atmel did not seek damages covered under the CGL and umbrella policies because Atmel’s chips did not cause “property damage” as defined in the CGL policies. In granting St. Paul’s motion for partial summary judgment, the Court held that the insured had failed to demonstrate that its product had actually caused damage to a third party’s property. The underlying action alleged that Atmel’s chips were defective and caused Seagate’s disk drives to fail. Seagate further alleged that it had sold customers millions of disk drives that it had manufactured with Atmel’s defective chips and, as a result, it had to address customers’ complaints and concerns by repairing or replacing defective disk

• drives. Seagate conceded that it was

not pursuing a claim for damages based on customer complaints, nor was it seeking any recovery for lost sales. Seagate was pursuing damages for the following costs incurred as a result of the incorporation of defective Atmel chips in its products: (1) the repair and replacement of drives containing defective Atmel chips; (2) costs for the shipment of repaired drives to the customers who had returned the drives for repairs; (3) screening drives for Atmel chips at customer locations where the disks were installed; (4) employee salary and travel expenses associated with investigation of the Atmel chip failures; (5) maintenance

• f a reserve fund to cover Seagate’s

potential liability to its customers as a result of the problems arising from defective Atmel chips in Seagate drives; and (6) accommodations to Seagate customers in response to their complaints

• f drive failures. The underlying action

was ultimately settled when Atmel agreed to pay Seagate $5,900,000. The policy issued by St. Paul defined “property damage,” in part, as the “loss of use of tangible property of

• thers that isn’t physically damaged.”
• St. Paul argued that pursuant to this

definition, none of the damages claimed by Seagate were for “loss of use” because Seagate did not seek to place a value on any harm that might have been sustained from the inability to use drives that stopped working after the Atmel chips failed. Instead, Seagate’s claimed damages related solely to the cost of repairing the

• drives. Conversely, Atmel argued that

since Seagate’s customers lost the use

• f the disk drives because of failures
• f Atmel chips, all of the damages

claimed were damages flowing from its customers’ lost use of the devices. In denying coverage, the Court found that the damages alleged by Seagate were too attenuated from a “loss of use” and that a more direct connection was required between the damages

COURT DENIES COVERAGE FOR DAMAGE FROM FAULTY COMPUTER CHIPS

By Mitchell J. Decter, Esq.

claimed and the loss of use of the property in order to establish property

• damage. The Court refused to charac-

terize the costs incurred by Seagate as the result of the loss of use of the

• drives. Rather, the Court found that the

damages primarily consisted of costs associated with repairing and replacing Atmel’s own product. Despite the fact that these damages would not have been incurred but for the failure of Atmel’s chips, the Court was unwilling to find that these damages were “loss of use” damages. In denying coverage, the Court found that the damages alleged by Seagate were too attenuated from a “loss of use” and that a more direct connection was required between the damages claimed and the loss of use

• f the property, in order to

establish property damage. General liability insurance policies are designed to provide coverage not for the insured’s own product, but for damage that the insured’s product causes to third-parties. The Atmel case is one of a number of recent cases demonstrating that first party damage and third-party damage are not separated by a bright line, but rather are heavily dependent

• n the facts of the instant case. ■

A California Court of Appeals granted an insurer’s motion for summary judgment in an action seeking rescission of an insured’s D&O policy. In TIG Insurance Company of Michigan

• v. Homestore, Inc., 137 Cal. App. 4th

749 (March 13, 2006), TIG filed a complaint alleging it was entitled to rescind a D&O policy issued to Homestore because Homestore’s chief financial

• fficer, who signed the insurance policy

application, knew that the application contained material misrepresentations regarding the company’s revenues and financial statements. The policy language at issue stated, in relevant part: “In the event that the Application, including materials submitted therewith, contains misrepresenta- tions made with the actual intent to deceive, or contains misrepre- sentations which materially affect either the acceptance of the risk or the hazard assumed by the Insurer under this Policy, no coverage shall be afforded under this Policy … for any Director or Officer who did not sign the Application but who knew on the inception date of this Policy the facts that were so misrepresented, and this Policy in its entirety shall be void and of no effect whatsoever if such misrepre- sentations were known to be untrue

• n the inception date of the Policy

by one or more of the individuals who signed the Application.” Homestore argued that the above language is reasonably subject to the interpretation that a misrepresentation known by any of the individuals who signed the application renders the policy voidable only as to the signers, but not as to any innocent non-signers. However, in finding for the insurer, the Court of Appeals noted that under California’s Insurance Code, an insurer is entitled to rescind a policy when the insured has misrepresented or concealed material information and that such rescission “shall apply to all insureds under the contract, including additional insureds, unless the contract provides otherwise” (Ins. Code §§ 331, 650). The Court of Appeals found that the policy language is consistent with an insurer’s statutory right to rescind the policy notwithstanding that non- signatories were unaware of the false information included in the application. The Court noted that a finding that the policy was rescinded did not offend public policy because: (1) the Insurance Code permitted such rescissions and (2) there are policies available that contain severability provisions that would protect innocent non-signatories from misrepresentations made by

• signatories. That Homestore decided

not to purchase such a policy, according to the Court, does not mean that the policy language granting broad rescission powers to a carrier offends public policy. There is an important lesson to draw from Homestore. Namely, all corporate policyholders should carefully evaluate their policies to determine whether the policies contain severability provisions, i.e., provisions that ensure that misrepresentations or nondisclosures in the insurance application are not imputed from one officer or director to

• another. Corporate policyholders should

retain the services of a knowledgeable broker who is capable of securing favorable wording and advising about the best and broadest coverage available in the D&O market. ■

WHEN SIGNING APPLICANT KNOWS OF MATERIAL MISREPRESENTATIONS, D&O POLICY IS SUBJECT TO RESCISSION AS TO ALL NON-SIGNING INSUREDS

LESSON LEARNED

From the TIG Insurance Company of Michigan v. Homestore, Inc. case

There is an important lesson to draw from Homestore. Namely, all corporate policyholders should carefully evaluate their policies to determine whether the policies contain severability provisions, i.e., provisions that ensure that misrepresentations or nondisclosures in the insurance application are not imputed from one officer or director to another.

meant that the property was physically damaged and thus came within the coverage afforded by the policy. According to the Court, “[i]t is sufficient under the circumstances of this case involving the unmerchantability

• f beverage products that the product’s

function and value have been seriously impaired, such that the product cannot be sold.” The Appellate Division ruled that “neither the fact that the product was not rendered unfit for human consumption, nor the fact that the product’s unmerchantability may have gone undetected initially” did not mean that Pepsico had not suffered a physical

• loss. Additionally, the Appellate Division

affirmed the ruling of the trial court that the proper measure of damages, pursuant to the policy, was the regular cash selling price of the insured manu- factured beverages as final product. “There very well may be cover- age for damage to property no matter how the damage is caused, its origins or results.” In reaching this decision, the Court did not rely on any prior New York cases. In fact, all the cases cited by the Court are

• ut-of-state decisions. In this regard,

the ruling of the Court represents an expansion of current New York law. The lessons from Pepsico are several. Insureds should carefully review the language in property insurance policies to determine what, if any, definition is given to physical damage and what limitations, if any, are put on coverage as a result of damage to property. Additionally, regardless of the language used in the policy, there very well may be coverage for damage to property no matter how the damage is caused, its The Supreme Court of New York, Appellate Division, has decided that, in order to prove physical damage under an all-risk first party property insurance policy, an insured need not demonstrate that there has been a distinct alteration

• f the physical structure of

the property. Rather, it is sufficient that the property at issue be rendered unmerchantable or unfit for human consumption to allow for coverage under the policy. In this regard, the decision in Pepsico, Inc. v. Winterthur International American Insurance Company, 205 NY Slip Op 10110, expands New York law in this area and makes it easier for an insured to claim coverage under a first party property policy. The facts in Pepsico are relatively

• uncomplicated. Pepsico, which makes

soft drinks, used faulty raw ingredients supplied by third-party suppliers in the manufacture of various soft drinks. The faulty ingredients resulted in the finished product having a different taste. The soft drinks were not harmful to consumers but, in their current state, could not be sold and had to be destroyed, resulting in significant economic losses to Pepsico. Thereafter, Pepsico sought coverage for its losses under a first-party all-risk property insurance policy issued by

• Winterthur. Winterthur denied coverage

causing Pepsico to file suit. Winterthur first sought to dismiss the case based

• n the “seepage and/or pollution and/or

contamination” exclusion contained in the policy. This argument, however, was soundly rejected by the trial court as well as the Appellate Division in an

• pinion reported at 13 A.D. 3d 599

(App. Div. 2004). The Court indicated that, under New York law, pollution exclusions must be read in a common- sense, rather than a literal, fashion. In reviewing the exclusion before it, the Court noted that the policy spoke of decontamination and debris removal in the context of removing pollutants from the land and water. “Such language, and the references to governmental fines, unmistakably is directed to environmental pollution, and not product contamina- tion.” The Court ruled that there being at least two reasonable interpretations of the term “contamination,” the exclusion was ambiguous and thus, under New York law, had to be construed in favor

• f the insured.

Undaunted, Winterthur filed another motion to dismiss the complaint based

• n an exclusion that provided that
• nly physically damaged property was

entitled to coverage. Winterthur took the position that, in order for Pepsico to show “physical damage” and thus come within the coverage afforded by the policy, Pepsico had to show that there was a “distinct demonstrable alteration of [a] physical structure [of the plaintiff’s products] by an external force …” The Appellate Division dis- agreed and held that the fact that the product was rendered unfit for human consumption and that the property’s merchantability was adversely affected

APPELLATE DIVISION EXPANDS DEFINITION OF PHYSICAL DAMAGES UNDER FIRST PROPERTY INSURANCE POLICY

by David G. Tomeo, Esq.*

Continues on back cover.

INSURANCE OUTPOST

Publication

Recent Case Law Clarifies Ways Third Parties May Participate in Environmental Permitting Decisions — Stephen W. Smithson, The Metropolitan Corporate Counsel, April 2006

Recent Outpost Legal Highlights

• 1. United States Supreme Court Decides Role of Court and Arbitrators in

Challenges to Validity of Contracts Containing Arbitration Clauses

• 2. New Jersey Supreme Court Clarifies Rights of Third Parties

to Adjudicatory Hearings If you have not received the Claim Handling Handbook, please contact one of the following attorneys for a copy. Members Robert D. Chesler David G. Tomeo Robert D. Towey Counsel Stefan B. Kalina Stephen W. Smithson

Visit us online at www.insurance-lowenstein.com.

This document is published by Lowenstein Sandler PC to keep clients informed about current

• issues. It is intended to provide general information only.

CLAIM DENIED

A Publication of the Lowenstein Sandler PC Insurance Law Practice Group 65 Livingston Avenue 1251 Avenue of the Americas Roseland, NJ 07068 New York, NY 10020 www.lowenstein.com 973 597 2500 212 262 6700 Lowenstein Sandler PC

• rigin or results. Under Pepsico, and

cases that will likely follow in its wake, property damage is not limited to tangible damage but extends to “damage” from a commonsense business standpoint. * David G. Tomeo, a member of Lowenstein Sandler PC, Roseland, New Jersey, is Chair of the firm’s Litigation Department ADR Practice Area and a Member of the Insurance Coverage Group. He concentrates his practice in alternate dispute resolution and complex commercial litigation, with emphasis on insurance coverage disputes, telecommunications law, franchise practice matters, public contracting matters and casino law. ■

Associates Mitchell J. Decter Jennifer J. McGruther Jennifer L. Nasta Tonia Ann Patterson Jeffrey L. Schulman Carlyne Beatrice Turner-Beverly