Case Notes

Pennsylvania Endorses First Manifestation Rule for Property Damage

The Supreme Court of Pennsylvania, applying Pennsylvania law, has held that coverage was triggered under the “first manifestation” rule when injury caused by a policyholder's negligence became “reasonably apparent” even where the cause of the injury was not discovered until a later policy period. Pennsylvania National Mutual Casualty Insurance Company v. John D. St. John, No. 86 MAP 2012 (Pa. Dec. 15, 2014). In reaching that result, the court also declined to apply a “multiple trigger” theory to continuous, progressive property damage, finding that the rule applied only in the context of asbestos bodily injury claims.

The policyholder, a plumbing company, was sued by co-owners of a dairy farm for negligent installation of a plumbing system that allegedly caused various health and reproductive problems with the claimants' dairy herd, arising from contamination to the cattle's water supply. The policyholder held four CGL policies that provided coverage for three successive years, the last of which included a CGL policy and umbrella policy. Following a jury award in favor of the claimants, the parties settled their claims for the limit of liability of one of the policies. Under the settlement agreement, the claimants retained the right to pursue the remainder of the judgment against the insurer under the policies.

The insurer filed a declaratory judgment action to determine its obligations under the policies. The state lower court found, as a matter of fact, that the initial manifestation of injury occurred during the first policy period when the effects of the policyholder's negligence became obvious, and that, as a result and under the “first manifestation” rule, the insurer was only liable to the claimants under the first policy. The claimants appealed, asserting that: 1) the manifestation of injury occurred when they discovered the contamination during the third policy period; and, in the alternative, 2) the gradual progression of various diseases to the herd, which allegedly took place across all policy periods, constituted multiple or continuous occurrences that triggered each policy at issue pursuant to the “multiple trigger” theory of liability insurance. In a divided opinion, the superior court affirmed the lower court's decision. The claimants renewed both arguments on appeal.

The Pennsylvania Supreme Court first considered the claimants' argument that the lower courts misapplied the “first manifestation” rule. In support, the claimants asserted that the rule “requires (a) recognition of injury, and (b) recognition that the injury is attributable to an outside causative force or agency.” Because the claimants asserted that they only became aware that the decline in milk production and the dairy herd's health problems were caused by the contaminated water supply arising from the policyholder's negligence during the third policy period, they argued that coverage was not triggered until that time. The claimants further asserted that manifestation did not occur in the first policy period because the only loss apparent during that period ' the decline in milk production ' constituted a “purely economic injury” and therefore could not have triggered coverage. Finally, the claimants argued that the trial court erred in finding as fact that the dairy herd sustained an increase in health problems during the first policy period.

The court rejected all three arguments. In denying the claimants' position that coverage was not triggered until the cause of injury became “known or reasonably discoverable,” the court relied on the plain language of the policies. Because the court found that the policies state that “coverage is triggered when 'bodily injury or property occurs during the policy period'” and “contain no language requiring the cause of injury to be identifiable before coverage is triggered,” the court confirmed Pennsylvania law under D'Auria v. Zurich Insurance Co., 507 A.2d 857 (Pa. Super. 1986), that an “occurrence happens when injury is reasonably apparent, not at the time the cause of injury occurs.”

In support of its conclusion, the Pennsylvania high court found that extending coverage without requiring the cause of injury to be discoverable would promote policy interests by: 1) protecting against “injured parties insuring themselves for injuries which have already taken place”; 2) adding “certainty and predictability to a trigger of coverage analysis”; and 3) making it more likely for an insured to obtain coverage in the event that an insurer becomes insolvent. The court affirmed the trial court's finding of fact that property damage to the dairy herd became “reasonably apparent” during the first policy period. That the claimants did not discover the cause of the property damage until the third policy period, the court found, had “no bearing” on its determination of which policy applied. Accordingly, the court affirmed that coverage was triggered under the first policy.

Next, the court rejected the claimants' invitation to adopt the “multiple trigger” theory to cases involving “continuous, progressive property damage over successive policy periods.” The claimants had relied on J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993), which adopted the rule in the context of asbestos bodily injury claims, and contended that the “multiple trigger” rule aligned with the “weight of authority from other jurisdictions.” The court disagreed. The court held that the “first manifestation” rule “better reflects the intent and effectuates the reasonable expectations of [the parties] at the time of contracting.” The court limited J.H. France to asbestos-related claims because it found the rationale behind that decision did not apply outside the asbestos or latent disease context. It said that ” J.H. France remains an exception” to the general rule that “the first manifestation rule governs a trigger of coverage analysis for policies containing standard CGL language.” Finally, finding authority from other jurisdictions unnecessary in light of clear policy provisions and “Pennsylvania case law directly on point,” the court rejected the invitation to extend the multiple trigger rule. ' Laura A. Foggan, Edward R. Brown and Frederick H. Schutt , Wiley Rein

'

Insurer Asks CT Court to Overturn $34 Million Verdict

The Hartford Fire Insurance Co. is asking the state Supreme Court to overturn a $34 million verdict against the insurer for allegedly scheming to fix rates it paid for auto body repairs.

More than 1,000 Connecticut auto body shops brought a class action against The Hartford, claiming that the insurer violated the Connecticut Unfair Trade Practices Act (CUTPA) by attempting to establish artificially low labor rates for auto body repair work.

The plaintiffs alleged that The Hartford used a group of preapproved “direct repair providers” who agreed to accept lower hourly rates in return for having a high volume of work sent their way. The lawsuit also alleged that The Hartford would not pay any body shop higher rates than those paid to the direct repair providers. In turn, according to the plaintiffs, independent appraisers who examined vehicles that had been in accidents were pressured into providing lower-than-market-value estimates for body repairs. If they did not do so, they reportedly did not get work.

The lawsuit was brought by body shops that were not direct repair providers and felt they were losing business because of The Hartford's policy. In November 2009, a jury returned a $14.7 million plaintiffs' verdict. Then in June 2013, Stamford Superior Court Judge Alfred Jennings added $20 million for punitive damages. It is believed to be the largest CUTPA verdict in Connecticut.

At the 2009 trial, the judge instructed the jury regarding what's called the “cigarette rule,” which grew out of cases challenging television advertisements for tobacco products. Under the rule, one of the following criteria must be met if a jury is to determine that a defendant engaged in an unfair trade practice: the practice, without necessarily having been previously considered unlawful, offends public policy established by statute or common law; the practice is immoral, unethical, oppressive or unscrupulous; or the practice causes substantial injury to consumers, competitors or other businesses.

The jury determined that The Hartford had violated the rule's first prong ' offending public policy. The jurors noted that a statute contained in the Regulations of Connecticut State Agencies provides that every insurance appraiser must make fair and impartial appraisals.

The Hartford filed a post-trial motion arguing that the Federal Trade Commission (FTC) has abandoned the cigarette rule and replaced it with the “substantial unjustified injury test.” That test focuses on the third prong of the cigarette rule, which means, according to The Hartford, that jurors should have been instructed to focus on whether the alleged CUTPA violation caused substantial injury to consumers, competitors or other businesspersons.

The defense also argued that even under the cigarette rule, there was insufficient evidence to support a finding of a CUTPA violation. The trial court denied the posttrial motions.

Judge Jennings noted that no specific statute needs to be violated for there to be a CUTPA violation. He wrote that plaintiffs can prove a blend of various measures of unfairness, or a “penumbra” of unfair acts. Defense attorneys have long protested that such vague definitions give them no clear picture of what actions violate the law.

A team of lawyers appealed the verdict on behalf of The Hartford and the Supreme Court agreed to hear the case. The justices will attempt to clear up the question of whether Connecticut should still follow all three prongs of the cigarette rule or just use the criteria now favored by the FTC.

In court documents, defense lawyers argue that the plaintiff body shops were trying to use the CUTPA action to drive up prices to levels their customers didn't want to pay. “Like any seller of goods or services, plaintiffs wanted to increase profits by charging more,” wrote the defense lawyers. “Unable to convince their customers, including the Hartford, to pay more, the auto body shops aimed to use CUTPA to force them to pay more ' at the expense of consumers and competition.”

The Hartford's lawyers further argued against the cigarette rule. “As it gained experience with the cigarette rule, the FTC learned that its overly broad and unfocused definition of unfairness gave too little guidance to businesses that wanted to act lawfully,” wrote the lawyers. “A business could do something that no court, statute or regulation had 'previously considered unlawful' thinking that it was acting lawfully. But after the fact, the FTC or a court could conclude that the conduct ran afoul of some unwritten and unspoken 'penumbra' of another legal norm. As a result, the business faced liability ' even if the conduct did not cause any substantial injury to consumers, competitors or other businesses.”

The plaintiffs' lawyer, David Slossberg, of Hurwitz, Sagarin, Slossberg & Knuff in Milford, describes efforts to eliminate the “well-settled” cigarette rule as “misguided.”

“The Hartford complains about supposed ambiguity and vagueness of the cigarette rule,” Slossberg writes in court documents. “It argues at the same time that this rule should be replaced by a test that requires, in every case, the balancing of unspecified harms and benefits produced by the practice challenged as unfair ' a test that is clearly more ambiguous and provides less guidance for businesses, consumers and creditors than the cigarette rule.”

Slossberg said there are very few decisions involving the FTC standard, while there are hundreds of rulings in Connecticut and Massachusetts alone that use the cigarette rule. “Abandoning the cigarette rule standard would eliminate the precedential value of almost all of these decisions, very few of which specifically address the balancing test set forth in the third cigarette rule criterion,” Slossberg wrote.

Two lawyers from Kirkland & Ellis in Washington, DC, submitted an amicus brief on behalf of two former high-ranking FTC officials.. The brief argues that the FTC criteria are better for Connecticut courts to follow going forward.' Christian Nolan, Connecticut Law Tribune

BIO HERE

Pennsylvania Endorses First Manifestation Rule for Property Damage

The Supreme Court of Pennsylvania, applying Pennsylvania law, has held that coverage was triggered under the “first manifestation” rule when injury caused by a policyholder's negligence became “reasonably apparent” even where the cause of the injury was not discovered until a later policy period. Pennsylvania National Mutual Casualty Insurance Company v. John D. St. John , No. 86 MAP 2012 (Pa. Dec. 15, 2014). In reaching that result, the court also declined to apply a “multiple trigger” theory to continuous, progressive property damage, finding that the rule applied only in the context of asbestos bodily injury claims.

The policyholder, a plumbing company, was sued by co-owners of a dairy farm for negligent installation of a plumbing system that allegedly caused various health and reproductive problems with the claimants' dairy herd, arising from contamination to the cattle's water supply. The policyholder held four CGL policies that provided coverage for three successive years, the last of which included a CGL policy and umbrella policy. Following a jury award in favor of the claimants, the parties settled their claims for the limit of liability of one of the policies. Under the settlement agreement, the claimants retained the right to pursue the remainder of the judgment against the insurer under the policies.

The insurer filed a declaratory judgment action to determine its obligations under the policies. The state lower court found, as a matter of fact, that the initial manifestation of injury occurred during the first policy period when the effects of the policyholder's negligence became obvious, and that, as a result and under the “first manifestation” rule, the insurer was only liable to the claimants under the first policy. The claimants appealed, asserting that: 1) the manifestation of injury occurred when they discovered the contamination during the third policy period; and, in the alternative, 2) the gradual progression of various diseases to the herd, which allegedly took place across all policy periods, constituted multiple or continuous occurrences that triggered each policy at issue pursuant to the “multiple trigger” theory of liability insurance. In a divided opinion, the superior court affirmed the lower court's decision. The claimants renewed both arguments on appeal.

The Pennsylvania Supreme Court first considered the claimants' argument that the lower courts misapplied the “first manifestation” rule. In support, the claimants asserted that the rule “requires (a) recognition of injury, and (b) recognition that the injury is attributable to an outside causative force or agency.” Because the claimants asserted that they only became aware that the decline in milk production and the dairy herd's health problems were caused by the contaminated water supply arising from the policyholder's negligence during the third policy period, they argued that coverage was not triggered until that time. The claimants further asserted that manifestation did not occur in the first policy period because the only loss apparent during that period ' the decline in milk production ' constituted a “purely economic injury” and therefore could not have triggered coverage. Finally, the claimants argued that the trial court erred in finding as fact that the dairy herd sustained an increase in health problems during the first policy period.

The court rejected all three arguments. In denying the claimants' position that coverage was not triggered until the cause of injury became “known or reasonably discoverable,” the court relied on the plain language of the policies. Because the court found that the policies state that “coverage is triggered when 'bodily injury or property occurs during the policy period'” and “contain no language requiring the cause of injury to be identifiable before coverage is triggered,” the court confirmed Pennsylvania law under D'Auria v. Zurich Insurance Co. , 507 A.2d 857 (Pa. Super. 1986), that an “occurrence happens when injury is reasonably apparent, not at the time the cause of injury occurs.”

In support of its conclusion, the Pennsylvania high court found that extending coverage without requiring the cause of injury to be discoverable would promote policy interests by: 1) protecting against “injured parties insuring themselves for injuries which have already taken place”; 2) adding “certainty and predictability to a trigger of coverage analysis”; and 3) making it more likely for an insured to obtain coverage in the event that an insurer becomes insolvent. The court affirmed the trial court's finding of fact that property damage to the dairy herd became “reasonably apparent” during the first policy period. That the claimants did not discover the cause of the property damage until the third policy period, the court found, had “no bearing” on its determination of which policy applied. Accordingly, the court affirmed that coverage was triggered under the first policy.

Next, the court rejected the claimants' invitation to adopt the “multiple trigger” theory to cases involving “continuous, progressive property damage over successive policy periods.” The claimants had relied on J.H. France Refractories Co. v. Allstate Ins. Co. , 626 A.2d 502 (Pa. 1993), which adopted the rule in the context of asbestos bodily injury claims, and contended that the “multiple trigger” rule aligned with the “weight of authority from other jurisdictions.” The court disagreed. The court held that the “first manifestation” rule “better reflects the intent and effectuates the reasonable expectations of [the parties] at the time of contracting.” The court limited J.H. France to asbestos-related claims because it found the rationale behind that decision did not apply outside the asbestos or latent disease context. It said that ” J.H. France remains an exception” to the general rule that “the first manifestation rule governs a trigger of coverage analysis for policies containing standard CGL language.” Finally, finding authority from other jurisdictions unnecessary in light of clear policy provisions and “Pennsylvania case law directly on point,” the court rejected the invitation to extend the multiple trigger rule. ' Laura A. Foggan, Edward R. Brown and Frederick H. Schutt , Wiley Rein

'

Insurer Asks CT Court to Overturn $34 Million Verdict

The Hartford Fire Insurance Co. is asking the state Supreme Court to overturn a $34 million verdict against the insurer for allegedly scheming to fix rates it paid for auto body repairs.

More than 1,000 Connecticut auto body shops brought a class action against The Hartford, claiming that the insurer violated the Connecticut Unfair Trade Practices Act (CUTPA) by attempting to establish artificially low labor rates for auto body repair work.

The plaintiffs alleged that The Hartford used a group of preapproved “direct repair providers” who agreed to accept lower hourly rates in return for having a high volume of work sent their way. The lawsuit also alleged that The Hartford would not pay any body shop higher rates than those paid to the direct repair providers. In turn, according to the plaintiffs, independent appraisers who examined vehicles that had been in accidents were pressured into providing lower-than-market-value estimates for body repairs. If they did not do so, they reportedly did not get work.

The lawsuit was brought by body shops that were not direct repair providers and felt they were losing business because of The Hartford's policy. In November 2009, a jury returned a $14.7 million plaintiffs' verdict. Then in June 2013, Stamford Superior Court Judge Alfred Jennings added $20 million for punitive damages. It is believed to be the largest CUTPA verdict in Connecticut.

At the 2009 trial, the judge instructed the jury regarding what's called the “cigarette rule,” which grew out of cases challenging television advertisements for tobacco products. Under the rule, one of the following criteria must be met if a jury is to determine that a defendant engaged in an unfair trade practice: the practice, without necessarily having been previously considered unlawful, offends public policy established by statute or common law; the practice is immoral, unethical, oppressive or unscrupulous; or the practice causes substantial injury to consumers, competitors or other businesses.

The jury determined that The Hartford had violated the rule's first prong ' offending public policy. The jurors noted that a statute contained in the Regulations of Connecticut State Agencies provides that every insurance appraiser must make fair and impartial appraisals.

The Hartford filed a post-trial motion arguing that the Federal Trade Commission (FTC) has abandoned the cigarette rule and replaced it with the “substantial unjustified injury test.” That test focuses on the third prong of the cigarette rule, which means, according to The Hartford, that jurors should have been instructed to focus on whether the alleged CUTPA violation caused substantial injury to consumers, competitors or other businesspersons.

The defense also argued that even under the cigarette rule, there was insufficient evidence to support a finding of a CUTPA violation. The trial court denied the posttrial motions.

Judge Jennings noted that no specific statute needs to be violated for there to be a CUTPA violation. He wrote that plaintiffs can prove a blend of various measures of unfairness, or a “penumbra” of unfair acts. Defense attorneys have long protested that such vague definitions give them no clear picture of what actions violate the law.

A team of lawyers appealed the verdict on behalf of The Hartford and the Supreme Court agreed to hear the case. The justices will attempt to clear up the question of whether Connecticut should still follow all three prongs of the cigarette rule or just use the criteria now favored by the FTC.

In court documents, defense lawyers argue that the plaintiff body shops were trying to use the CUTPA action to drive up prices to levels their customers didn't want to pay. “Like any seller of goods or services, plaintiffs wanted to increase profits by charging more,” wrote the defense lawyers. “Unable to convince their customers, including the Hartford, to pay more, the auto body shops aimed to use CUTPA to force them to pay more ' at the expense of consumers and competition.”

The Hartford's lawyers further argued against the cigarette rule. “As it gained experience with the cigarette rule, the FTC learned that its overly broad and unfocused definition of unfairness gave too little guidance to businesses that wanted to act lawfully,” wrote the lawyers. “A business could do something that no court, statute or regulation had 'previously considered unlawful' thinking that it was acting lawfully. But after the fact, the FTC or a court could conclude that the conduct ran afoul of some unwritten and unspoken 'penumbra' of another legal norm. As a result, the business faced liability ' even if the conduct did not cause any substantial injury to consumers, competitors or other businesses.”

The plaintiffs' lawyer, David Slossberg, of Hurwitz, Sagarin, Slossberg & Knuff in Milford, describes efforts to eliminate the “well-settled” cigarette rule as “misguided.”

“The Hartford complains about supposed ambiguity and vagueness of the cigarette rule,” Slossberg writes in court documents. “It argues at the same time that this rule should be replaced by a test that requires, in every case, the balancing of unspecified harms and benefits produced by the practice challenged as unfair ' a test that is clearly more ambiguous and provides less guidance for businesses, consumers and creditors than the cigarette rule.”

Slossberg said there are very few decisions involving the FTC standard, while there are hundreds of rulings in Connecticut and Massachusetts alone that use the cigarette rule. “Abandoning the cigarette rule standard would eliminate the precedential value of almost all of these decisions, very few of which specifically address the balancing test set forth in the third cigarette rule criterion,” Slossberg wrote.

Two lawyers from Kirkland & Ellis in Washington, DC, submitted an amicus brief on behalf of two former high-ranking FTC officials.. The brief argues that the FTC criteria are better for Connecticut courts to follow going forward.' Christian Nolan, Connecticut Law Tribune

BIO HERE