September 15, 2017 Practice Points

Insurer Duties and Continuous Triggers

Two new court decisions contain considerations for policyholders to note

by Jan Larson

Policyholders and insurers should take note of two recent decisions: one from the U.S. Court of Appeals for the Ninth Circuit in Teleflex Medical Inc. v. National Union Fire Insurance Company of Pittsburgh, PA, 851 F.3d 976 (9th Cir. 2017); and the Oregon Supreme Court in FountainCourt Homeowners’ Association v. FountainCourt Development, LLC, 380 P.3d 916 (Or. 2016).

In Teleflex, the Ninth Circuit applied California law to require an excess insurer, presented with a settlement of underlying claims against its policyholder, to choose between 1) accepting the settlement where it is reasonable and not the product of collusion, 2) rejecting the settlement but taking over the defense of the underlying claims, or 3) rejecting the settlement and refusing to take over the defense, and as a result, facing breach of contract and bad faith claims. Following a settlement in the underlying action conditioned on the receipt of insurance proceeds, the primary insurer, CNA, agreed to tender its full $1 million policy limit to the policyholder. The excess insurer, National Union, however, did not agree to contribute the relevant portion of its $14 million policy limit to fund the remainder of the conditional settlement. Instead, over the next few months National Union requested, and the policyholder provided, additional information regarding potential liability and damages in an effort to determine the reasonableness of the settlement.

The policyholder repeatedly asked National Union to assume the defense of the continued action if it would not consent to the settlement. National Union refused and the policyholder was forced to finalize the settlement without National Union’s consent. In the subsequent coverage action, the district court held, and the Ninth Circuit later affirmed, that the duty of good faith owed by an excess insurer to a primary insurer and a policyholder did not permit an excess insurer to arbitrarily veto a reasonable settlement and force a primary insurer to bear the continued costs of defending the action. Instead, an excess insurer must either accept the reasonable settlement and contribute its relevant limits or reject the settlement and assume the defense of the continued action.

The well-reasoned opinion examines multiple California state cases as well as universal policy considerations in support of its holding, offering significant guidance to policyholders and insurers facing similar disputes. While Teleflex is specific to California law, the policy considerations articulated by the Ninth Circuit may nonetheless offer a framework for any other jurisdictions whose law on these issues is unsettled. 

In FountainCourt, a construction defect case, the Oregon Supreme Court confronted the difficult issue of when property damage, caused by continuous water intrusion over a period of years, “occurred” for purposes of determining which insurance policy or policies, if any, would apply to provide coverage for the resulting loss. Determining the date on which a potentially insured injury occurred is central to the question of which insurance policy or policies may apply to provide coverage for the resulting loss. This is often referred to as the “trigger” of coverage—the date the injury or damage is deemed to have taken place. Analyzing the “trigger” of coverage can be complex for insurance claims involving injury or damage resulting in a loss that is cumulative and occurs over a period of time, and courts have built up a body of jurisprudence applying a “continuous trigger” rule to long-tail liability claims involving bodily injury or property damage in the environmental context.

Ultimately, the court in FountainCourt issued a ruling that supports an extension of the “continuous trigger” rule to certain construction defect claims. During the relevant period, the policyholder had been insured by two different insurers under three different non co-extensive policies. Both insurers accepted the policyholder’s tender of defense subject to a full reservation of rights, arguing that the water damage at issue was cumulative, and that it was not possible to determine how much water damage had occurred during each of the three separate policy periods. The policyholder argued, and the trial court agreed, that the policyholder had satisfied its prima facie burden of proving coverage under the policy, and that the insurers had failed to meet their burden of proving what portions, if any, of the judgment and damages were excluded by the policy. The appellate court later affirmed the trial court’s finding on the merits. The Oregon Supreme Court likewise affirmed the lower courts’ decisions and explained that “although the damage at issue . . . had begun to occur before the policies were in effect, and continued to occur after the policies were no longer in effect, coverage under those policies was nonetheless “triggered” because the damage was ongoing during the policy periods.”

While the “continuous trigger” rule has most frequently been applied to long-tail liability claims involving bodily injury or property damage in the environmental context, FountainCourt demonstrates that it may also be applied more broadly to certain types of construction defect claims. Where there is injury or damage resulting in a loss that is cumulative and occurs over a period of time in conjunction with uncertainty about when the injury or damage occurred, policyholders and insurers may wish to consider the potential application of the “continuous trigger” rule, which, if applied, would result in triggering all available insurance policies on the risk beginning at the time of first exposure and running through the date of manifestation.

Jan Larson is with Jenner & Block LLP, Washington, D.C.

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