IMPORTANT APPELLATE DECISIONS ON EMPLOYERS’ EXCLUSION AND RESERVATION OF RIGHTS LETTERS

IMPORTANT APPELLATE DECISIONS ON EMPLOYERS’ EXCLUSION AND RESERVATION OF RIGHTS LETTERS

June 2, 2015

1. PENNSYLVANIA SUPREME COURT CHANGES DIRECTION ON EMPLOYERS’  LIABILITY EXCLUSION AFTER 48 YEARS

Pennsylvania’s Supreme Court has effectively overruled its 48 year old decision in Pennsylvania Manufacturers’ Association Insurance Co. v. AETNA Casualty & Surety Insurance Co. (PMA), at least in the context of commercial insurance policies.  Mutual Benefit Insurance Company v. Politsopoulos (May 26, 2015).

PMA held that an employers’ liability exclusion limiting claims brought by an employee of “the” insured applied to every insured, even where a specific insured did not employ the claimant.  In Politsopoulos, the Supreme Court overruled PMA, at least in certain contexts: “Upon consideration of the broader range of authorities and the reasoning which they provide — which were not overtly considered in PMA — we decline to extend PMA’s expansive construction of the term ‘the insured’ to an instance in which a commercial general liability policy variously makes use of the terms ‘the insured’ and ‘any insured.’”  The Court added: “we are persuaded that, at least where a commercial general liability policy makes varied use of the definite and indefinite articles, this, as a general rule, creates an ambiguity relative to the former, such that ‘the insured’ may be reasonably taken as signifying the particular insured against whom a claim is asserted.”

The Opinion concludes: “In summary, we conclude that the employer’s liability exclusion in the umbrella policy is ambiguous. Application of governing principles of insurance policy construction yields the understanding that the ambiguous exclusionary language pertains only to claims asserted by employees of ‘the insured’ against whom the claim is directed, which understanding gains further support by reference to the policy’s separation-of-insureds provision.” Despite the last reference to the separation-of-insureds provision, the majority earlier made clear that its ruling was based upon its interpretation of the employers’ liability exclusion language alone.  Thus, the separation of insureds provisions plays the role of supporting actor, but not co-star.
Finally, while the Court did not have the issue in front of it, it did comment on the language of those employers’ liability exclusions that exclude claims brought by the employee of “any” insured, rather than “the” insured.  It noted:  “Parenthetically, in terms of ‘any insured’ exclusions, the main controversy appears to center, not on whether the term unambiguously implicates any or all insureds, but upon whether such meaning should be narrowed to the insured against whom a claim is asserted in light of a separation-of-insureds clause. …. The great majority of courts, however, merely apply the rule that a separation-of-insureds clause does not negate the effect of a plainly worded exclusion.”  The Court also noted authority for the proposition that “as applied even independently to each insured, an ‘any insured’ exclusion unambiguously eliminates coverage for each and every insured.”

Thus, using the methodology of interpreting the plain language of the employers’ liability exclusion itself in the first instance, independent of the separation of insureds provision, the Court indicates that an exclusion as to the employee of “any” insured will apply to all insureds, whether they are the actual employer or not.

2. INSURER MUST SEND RESERVATION OF RIGHTS LETTER TO ADDITIONAL  INSURED, AND MUST GIVE ALL INSURERS TIMELY ROR LETTERS SO  INSURED CAN MAKE MEANINGFUL CHOICE ABOUT CONSENTING TO  DEFENSE

In Erie Insurance Company v. Lobenthal (Pa. Super. Ct. April 15, 2015), the adult daughter of the named insureds on a homeowners’ policy was sued for negligence.  She allegedly provided a controlled substance to a man, at the parents’ home, who was later involved in a motor vehicle accident resulting in injury to the underlying plaintiff.  The injured woman brought action against the driver, the adult daughter, and the parents.  The parents’ insurer sent reservation of rights letters to both parents and the underlying defense counsel, but not to the adult daughter, who was also an insured under the policy.  The reservation of rights letters did not mention the daughter.

The Superior Court held that the insurer failed to reserve its rights as to the daughter. The appellate court would not impute notice based on the fact the letter was copied to her defense counsel where the letter was addressed to her parents and made no reference whatsoever to the daughter; nor would it attribute notice to her because she was living with her parents. There was no evidence that she actually read the letter, and as the defendant, it should have been addressed to her.

The court further found a reservation of rights letter referencing the controlled substance exclusion untimely, as it was written over 7 months after the complaint was filed, and 3 months after the court ruled on preliminary objections that the controlled substance based claims were the only claims that would be allowed to go forward.  There was a clear controlled substance exclusion on the policy. The insurer knew this was an issue at the time the complaint was filed. It was only after the controlled substance claim was the sole remaining claim, however, that the insurer stated its reservation of rights based upon that clear exclusion.
The appellate court stated that had the daughter been informed of the insurer’s “intention to deny coverage when the suit was filed, she could have engaged separate counsel and managed her own defense.” The court rejected the insurer’s arguments that appointed defense counsel had been zealously defending her, and trial was some time off, rather finding “where an insurer fails to clearly communicate a reservation of rights to an insured, prejudice may be fairly presumed….”  Specifically, the Superior Court (1) accepted the notion that knowledge that there is likely no coverage is inherently prejudicial because of human nature; and (2) that an insured needs to be given an opportunity to make her own decision about hiring separate counsel, because “’[a]nalyzing how a case might have gone differently for an insured if [the insured] had been aware of a reservation of rights is an inherently speculative undertaking.’”  The Superior Court relied upon its earlier decision in Babcock & Wilcox v. American Nuclear Insurers (Pa. Super. Ct. 2013), to support the ideas that an insured in this posture needs to be fully informed, so that she has the opportunity to consent to the defense, or to choose separate counsel, or even to appear pro se.  The Babcock & Wilcox opinion is now pending for decision on appeal to Pennsylvania’s Supreme Court (2 WAP 2014).

Finally, we observe the Superior Court’s position that: “When an insurance company or its representative is notified of loss occurring under an indemnity policy, it becomes its duty immediately to investigate all the facts in connection with the supposed loss as well as any possible defense on the policy. It cannot play fast and loose, taking a chance in the hope of winning, and, if the results are adverse, take advantage of a defect in the policy. The insured loses substantial rights when he surrenders, as he must, to the insurance carrier the conduct of the case.”