Hunton Insurance Recovery Blog

This summer, in Yacullo v. AIG Property Casualty Company, the United States District Court for the Southern District of California held that an insurer’s violations of the state’s insurance regulations “is a factor that may be considered by a jury” in determining whether the insurer acted in bad faith. The case should serve as an important reminder to policyholders to carefully consider state-specific insurance regulations when asserting a bad faith insurance coverage claim against their insurers.

California law has become more favorable toward companies facing liabilities based on alleged events spanning multiple years. Previously, California intermediate appellate decisions favored “horizontal exhaustion,” which means that in cases involving a continuous loss, a first-level excess policy that sat over a primary policy could not be accessed until the applicable limits of any other underlying collectible insurance had been exhausted.

But now the California Supreme Court has ruled that vertical exhaustion applies to determine how a policyholder can access its excess insurance policies. Truck Ins. Exch. v. Kaiser Cement, 16 Cal.5th 67 (2024) (“Kaiser”). This means that the excess policy for a policy period can be accessed as soon as the underlying primary policy for that same period is exhausted. There is no need to wait for other years’ policies to be exhausted.

In a recent article published in PropertyCasualty360, Hunton attorneys Syed S. Ahmad, Scott P. DeVries and Yosef Itkin examined the Kaiser decision in more detail. In short, the court found support for its decision relying on the language of the excess policies, along with the policyholder’s reasonable expectations and the history of “other insurance” provisions.

The Los Angeles Superior Court recently gave the production companies that produced the Netflix series “House of Cards” their “maybe” by allowing the plaintiffs’ coverage suit against Firemans Fund Insurance Company to proceed. The court held that allegations in the third amended complaint facially satisfied the policy’s insuring agreement by alleging that House of Cards’ lead actor, Kevin Spacey, was “necessarily prevented” from continuing or completing his duties under his contract and that his sickness was the direct and sole cause of the plaintiffs’ claimed loss. The court dismissed the plaintiffs’ bad faith claim, effectively ending the plaintiffs’ campaign to recover punitive damages.

Policyholders purchase insurance policies as a safety net, promising financial protection in times of need. However, that safety net can disappear when an insurer rescinds a policy—a devastating consequence for potentially innocent policyholders. We recently published a post following a Fourth Circuit decision addressing this issue. The Ninth Circuit has also addressed this issue, most recently in the decision discussed below.

The Hawaii Supreme Court emphatically rejected insurer efforts to seek reimbursement of defense costs absent a provision in the policy providing for such reimbursement in St. Paul Fire & Marine Insurance Company v. Bodell Construction Company, No. SCCQ-22-0000658, 2023 WL 7517083, (Haw. Nov. 14, 2023). The state high court’s well-reasoned decision rests on bedrock law regarding insurance policy construction and application, follows the nationwide trend of courts compelling insurers to satisfy their contractual obligations in full, and should carry great weight as other jurisdictions continue to debate the same issue.

Extreme weather events—such as heat waves, wildfires, hurricanes, and tornadoes—may create major protection gaps for insureds. In California, rising temperatures and massive heat waves have led the California Department of Insurance (the “Department”) to rethink risk solutions and insurance programs that protect the state’s communities from the risks associated with extreme heat. While the Department’s proposed solution applies only to coverage for local governments, Tribes, and public health agencies, it is a “hot” topic among many Californians, as insurance professionals and policyholders debate the Department’s proposed approval of parametric insurance.

An insurer for University of Southern California recently filed suit in California federal court against the university and a former gynecologist at USC’s Student Health Center seeking to rescind USC’s insurance policy.  The dispute concerns North American Capacity Insurance Company’s coverage obligations for hundreds of sexual abuse-based lawsuits brought against USC.  NACIC seeks, among other things, to rescind a policy it sold to USC based on alleged failures by USC to disclose material facts during the policy application process.  NACIC is also seeking to avoid its coverage obligations under the policy’s “Prior Known Acts” exclusion.

On February 6, 2023, The Claims Journal highlighted a letter by members of Hunton’s insurance team, submitted on behalf of United Policyholders, to the California Supreme Court, which alerts the Court to the fundamental infirmities in the “standard” expounded by the insurance industry in COVID-19 business interruption litigations nationwide. The letter was issued to assist the Court in addressing a question certified from the US Court of Appeals for the Ninth Circuit, in Another Planet Entertainment, LLC v. Vigilant Insurance Co, asking whether the actual or potential presence of the COVID-19 virus on an insured’s premises “constitute direct physical loss or damage to property” for purposes of coverage under a commercial property insurance policy.

One of the threshold issues in COVID-19 insurance coverage cases that have been brought across the country is whether the policyholder’s allegations meet the applicable pleading standard in alleging that the virus caused physical loss or damage. In many cases, the courts have gotten it wrong, effectively holding policyholders to a higher standard than required. But recently, a California federal judge righted those wrongs by acknowledging the correct pleading standard in that case, which is whether the allegations state a plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). The Court, here, correctly recognized that the policyholder, the Los Angeles Lakers, met that pleading standard when it alleged that the COVID-19 virus can cause physical loss or damage by physically altering property.

From IRS rulings that “virtual currency” is taxed as “property” to an SEC lawsuit claiming that digital assets are “securities” under federal law, meteoric growth of the largely unregulated crypto industry has raised numerous questions about whether crypto-related risks are covered by insurance. In the latest example of the intersection of crypto and insurance, a California federal court recently held that cryptocurrency stolen from a Coinbase account did not constitute a covered loss under a homeowner’s insurance policy. The fundamental issue was whether the stolen crypto met the policy’s requirement for “direct physical loss to property” and, more specifically, whether the losses were “physical” in nature. The court ruled against coverage, reasoning that lost control of cryptocurrency is not a direct physical loss as a matter of California law.

Recently, the Ninth Circuit dealt with a case involving a scenario that is becoming all too common. In Ernst & Haas Mgmt. Co., Inc. v. Hiscox, Inc., 23 F.4th 1195 (9th Cir. 2022), a property management company’s accounts payable clerk received several e-mails from her supervisor instructing her to pay some invoices. Unbeknownst to the clerk, these e-mails did not originate with her supervisor, but were actually part of a fraudulent scheme to elicit fraudulent bank transfers. The clerk paid off hundreds of thousands of dollars in “invoices” before becoming suspicious but, by then, it was too late and the damage was done.

Court dockets, both in the state and federal court systems, have seen a massive influx of COVID-19 business interruption insurance cases since the pandemic began in March of 2020.  More recently, cases have been moving more expeditiously through the federal courts, and the circuit courts are starting to issue decisions. Most recently, the Ninth Circuit has spoken and its decisions provide important guidance for policyholders with pending COVID-19 coverage cases in California federal courts.