Divided Court reverses judgment on the pleadings and rules that allegations of contamination by SARS-CoV-2 was sufficient to trigger coverage as “direct physical loss or damage to property” under a business interruption policy and to survive a Rule 12(c) motion.

Huntington Ingalls Industries, Inc. v. Ace American Insurance Co.,  2022 VT 45 (filed 9/23/2022)

EATON, J. Insured Huntington Ingalls Industries, Inc. and insurer Huntington Ingalls Industries Risk Management LLC seek a declaratory judgment stating there is coverage under a property insurance policy for certain losses incurred by Huntington Ingalls Industries due to the COVID-19 pandemic. The trial court concluded that the complaint did not allege facts that would trigger coverage under the policy and granted judgment on the pleadings in favor of reinsurers. We reverse.

In September 2020, insured and insurer sued reinsurers seeking a declaratory judgment that they are entitled to coverage under the policy for property damage, business interruption, and other losses suffered as a result of SARS-CoV-2, the pandemic, and civil authority orders. The complaint alleges the pandemic caused “direct physical loss or damage to property” when the virus adhered to surfaces for several days and lingered in the air for several hours at the shipbuilding yards. The alleged losses include disruption in orderly construction and repair of vessels, schedule impacts in the construction and repair of vessels, expenses—including increased labor and information technology costs—incurred to continue as near to normal operations as practicable, loss of profit.

Before any discovery, insured and reinsurers filed cross-motions for judgment on the pleadings pursuant to Vermont Rule of Civil Procedure 12(c). Reinsurers sought complete judgment on the pleadings, arguing that insured had not sufficiently alleged that “direct physical loss or damage to property” had occurred. Insured filed three motions for partial judgment on the pleadings. In the first motion, it argued that reinsurers’ affirmative defense that the presence of SARS-CoV-2 in or on property cannot constitute “direct physical loss or damage to property” was incorrect as a matter of law.The trial court granted reinsurers’ motion for judgment on the pleadings and consequently denied all of insured’s motions. The inquiry below focused on the meaning of “direct physical loss or damage to property” under the policy. The trial court t concluded that insured did not experience loss of property but instead suffered an uncovered loss of income because the shipbuilding yards remained in operation despite the presence of the virus.

On appeal, the overarching issue remains the same: how do we interpret “direct physical loss or damage to property” in this insurance policy?

The phrase “direct physical loss or damage to property” is unambiguous, and the common meaning of these terms therefore controls the interpretation of the property insurance policy in this case The phrase “direct physical loss or damage to property” includes two distinct components, either of which will trigger coverage unless an exclusion applies: “direct physical damage” and “direct physical loss.” “Direct physical damage” requires a distinct, demonstrable, physical change to property. “Direct physical loss” means persistent destruction or deprivation, in whole or in part, with a causal nexus to a physical event or condition. Purely economic harm will not meet either of these standards.

The complaint adequately allege that the virus physically altered property in insured’s shipyards when it adhered to surfaces. That the virus “adheres” to property, thus “altering and impairing” it in a tangible way, that provides reinsurers with notice of insured’s allegations for how the virus can cause “direct physical loss or damage to property.” This description of the process of how the virus causes damage to property also raises the complaint beyond the threshold of mere “conclusory allegation[s].” Colby, 2008 VT 20, ¶ 13. 

Insured’s complaint contains sufficient allegations to survive a Rule 12(c) motion for judgment on the pleadings under Vermont’s extremely liberal pleading standards. The losses it alleges are either “direct physical loss” or “direct physical damage” to property We therefore reverse the trial court’s grant of judgment on the pleadings in favor of reinsurers and the trial court’s denial of insured’s motion for partial judgment on the pleadings on the issue of reinsurers’ affirmative defense.

To be clear, this opinion does not state that what occurred in insured’s shipyards is “direct physical loss or damage to property” under the policy. We merely conclude that insured has alleged enough to survive a Rule 12(c) motion under our extremely liberal pleading standards. See Colby, 2008 VT 20, ¶ 5 n.1 (declining to adopt heightened federal pleading standard). Reinsurers may well be correct that insured’s losses were not caused by any “direct physical loss or damage to property,” but instead from the risks employees posed to each other or some other non-covered reason; however, we cannot agree that this is an “obvious fact” that undermines the various allegations in the complaint, which, at this stage, we must accept as true.

Reversed and remanded for further proceedings consistent with this opinion.

CARROLL, J., dissenting. As a matter of law, human-generated droplets containing SARS-CoV-2 cannot cause “direct physical loss or damage to property” under this insurance policy. No future litigation can change that reality. While I agree with the majority’s conclusion that the insurance contract term in dispute is unambiguous, I cannot agree that insured’s claim survives beyond the pleadings stage. Accordingly, I respectfully dissent

The gist of insured’s allegations on this point is that virus-infected droplets have continuously landed on surfaces in its facilities, and the presence of these droplets—known as “fomites” when they land on surfaces—renders the property incapable of functioning for its intended purpose. But a fomite cannot cause damage to property if damage is defined as a “distinct, demonstrable, physical change.” SARS-CoV-2 does not “alter the appearance, shape, color, structure, or other material dimension of the property.” No matter what verb insured uses, whether “adheres,” “attaches,” or even “on,” a fomite does not physically change property. Verveine Corp. v. Strathmore Ins. Co., 184 N.E.3d 1266, 1276 (Mass. 2022) (“Evanescent presence of a harmful airborne substance that will quickly 36 dissipate on its own, or surface-level contamination that can be removed by simple cleaning, does not physically alter or affect property. “)

To sum up, insured’s allegation that fomites cause physical damage to its property cannot be proven because fomites demonstrably have no effect on the tangible, physical dimension of insured’s property. No reasonable person in insured’s position would think otherwise. It is one thing to conclude that a disputed insurance policy term is ambiguous and permit litigation to proceed in a Rule 12(c) posture. It is quite another to conclude that one phrase—“direct physical damage”—is unambiguous and accept as true the implausible claim that human-generated, infectious droplets can damage property,. Accordingly, to save valuable time and energy for both the court and the parties from litigation with a preordained outcome, I would affirm the trial court’s order granting reinsurers’ motion for judgment on the pleadings and affirm the trial court’s order of dismissal.

I am authorized to state that Judge Bent joins this dissent.

How cited

SCOVT reinstates jury verdict for plaintiff repair shop, construing collision coverage as promise to pay the amount of money needed to repair an insured vehicle to preaccident condition, regardless of the amount the insurer deemed sufficient to do the repairs.

Parker's Classic Auto Works, Ltd. v. Nationwide Mutual Insurance Company, 2019 VT 46 [filed 6/28/2019]

CARROLL, J. Plaintiff appeals a judgment entered in favor of defendant following a trial in which a jury determined that defendant breached an insurance contract with plaintiff’s assignors. The jury awarded plaintiff $41,737.89 in damages. After the trial the superior court concluded that, as a matter of law, plaintiff could not show that his assignors were damaged by a breach of contract by defendant. We reverse this determination, vacate the judgment that was entered in favor of defendant, and remand with direction to the superior court to reinstate the jury’s verdict and its award of damages.

Over seventy insurance claims, which all arise under identical insurance policies, have been combined in this breach-of contract case. For each insurance claim plaintiff repaired a car belonging to an insured, restoring it to preaccident condition, and, after receiving a post-loss assignment from an insured, submitted itemized bills to defendant to recover for its services. In each instance, defendant paid less than what plaintiff had billed to complete the repair. The difference between the cost of repair billed by the repair shop and the amount paid by the insurance company—to whatever extent it is covered by the insurance policy—is called a short pay in the collision-repair industry.

The jury returned a verdict finding defendant liable for breach of the insurance policy and awarding plaintiff $41,737.89.  Defendant filed a renewed motion for judgment as a matter of law under Vermont Rule of Civil Procedure 50(b), which the court granted. The court reasoned that the insureds could not have sued defendant for sums that were entirely within defendant’s discretion to award.

The trial court interpreted the insurance policy, which was silent on the matter, to only 

How cited

Insurance. Proof of negligent claims-handling, short of knowing or reckless conduct required for a finding of bad faith, insufficient to support claim by policyholder against insurer for mold damage.

Murphy v. Patriot Insurance Company, 2014 VT 96, 106 A. 3d 911 (14-Aug-2014)

 DOOLEY, J.     Plaintiff Helena Murphy appeals from a superior court judgment in favor of defendant, Patriot Insurance Company, her homeowner’s insurer.  She contends that the trial court erred in dismissing claims for negligence and bad faith.  We affirm

Plaintiff added claims against Patriot for negligence “in inspecting and processing [the] claim and in retaining adjusters to investigate her claim,” and “bad faith” in denying the claims with “no reasonable basis.” Patriot moved for partial summary judgment on the additional claims, asserting that it owed no independent tort duty to plaintiff sounding in negligence; Patriot also argued that there was no basis to conclude that it had acted in violation of the covenant of good faith and fair dealing. The trial court granted Patriot’s motion. The court agreed that plaintiff had failed to “present[] a basis upon [which] to establish that [Patriot] owed a clear, non-contractual duty to her,” and further found on the facts alleged that Patriot “had a reasonable, if debatable, basis to deny [p]laintiff’s claims under the policy.” This appeal followed.

We agree with the trial court that plaintiff had failed “to establish that [Patriot] owed a clear, non-contractual duty to her” on the facts alleged. We rejected an independent tort duty on the part of the insurer’s agent in Hamill v. Pawtucket Mutual Insurance Company, 2005 VT 133, ¶¶ 2-3, 179 Vt. 250, 892 A.2d 226.in part on a recognition that the relationship between insurer and insured is fundamentally contractual, defined and governed by the coverage provisions in the insurance policy and the covenant of good faith and fair dealing implied therein. Id. ¶ 13. Indeed, the bad faith remedy would generally be superfluous if mere negligence in handling a claim would be sufficient for liability.

Most other courts have limited actions by insureds against their insurers to breach of contract or the implied covenant of good faith and fair dealing and have disallowed actions for negligence based upon an independent duty of care. We concur in the general view that,the insurance policy and the implied covenant of good faith and fair dealing defined plaintiff’s expectations for coverage and recovery in the event that benefits were wrongfully denied. Accordingly, we affirm the trial court’s dismissal of the negligence count.

“Bad faith,” is the general shorthand for breach of the covenant of good faith and fair dealing which the law implies in every insurance policy. Such a claim requires “more than negligence on the part of the insurer.” To establish bad faith, the plaintiff must show that: “(1) the insurance company had no reasonable basis to deny benefits of the policy, and (2) the company knew or recklessly disregarded the fact that no reasonable basis existed for denying the claim.” Where a claim is “fairly debatable,” the insurer is not guilty of bad faith even if it is ultimately determined to have been mistaken.

Measured against our bad faith standard, we find no basis to disturb the trial court’s ruling. At best, any claim that the adjuster’s failure to find that the true cause of the water infiltration was through the front chimney would fall well short of the knowing or reckless conduct required for a finding of bad faith

Insurance. Intentional act by “an insured” precludes coverage for innocent co-insured.

Co-operative Insurance Companies v. Woodward, 2012 VT 22  (Reiber, C.J.)

Father appeals the trial court’s declaration of no coverage for the claims made in the lawsuit filed against homeowner for negligent supervision and damages arising out of the abduction, assault, and death of his daughter. Homeowner was formerly married to uncle who is alleged to have kidnapped, sexually assaulted, and murdered  daughter. Homeowner’s insurer brought a declaratory judgment action asking the trial court to hold that its policy does not cover these claims.  The trial court decided the case on summary judgment, holding that the insurance policy excludes intentional acts by uncle, who was “an insured.” The court rejected father’s argument that the separate insureds, or severability, clause provides coverage for homeowner.  We affirm.

The policy exclusion states, the “ policy does not apply to:  …’bodily injury’ or ‘property damage’...  that is the result of an intentional and malicious act by or at the direction of an ‘insured’." A policy exclusion for intentional acts by “an insured” generally bars coverage for claims made by any insured under the same policy.  N. Sec. Ins. Co. v. Perron, 172 Vt. 204, 220 (2001).  If the exclusion precludes coverage for certain acts by “the insured,” however, noncoverage of one insured does not affect coverage for claims against other insureds.  Id. at 221-22. The alleged acts are inherently harmful and so certain to cause injury that we must conclude as a matter of law that uncle had intent to harm.  Therefore homeowner is barred from coverage because the policy at issue uses the collective term “an insured.”

Despite this result, father contends that the policy contains a severability clause which would allow homeowner to be covered since uncle, not homeowner, committed the intentional act.  We assume without deciding that the provision at issue is a severability clause. Because exclusions for “an insured” serve to collectively bar all insureds, and because of the weight of decisional authority, we conclude that the clause at issue does not create ambiguity and  has no effect on—and cannot override—the intentional-acts exclusion for certain acts committed by “an insured.”

Any UIM coverage in a corporate liability policy does not extend to, and is not required for, an executive riding a personally owned vehicle, not in the course of business.

Mayhew v. Alterra Excess and Surplus Insurance Co., Case No. 2:11-cv-190 (D. Vt., January 25, 2012)

In this dispute over insurance coverage, the parties  have cross-moved for summary judgment. At issue is whether Alterra must provide Uninsured/Underinsured Motorist ("UM/UIM") coverage to Mayhew as president of Mayhew Enterprises, Inc., under a policy issued to the corporation,  for injuries Mayhew sustained in an auto accident. For the reasons stated below, the Court holds that Mayhew is not a covered individual under the issued insurance policy. Additionally, because the Vermont Uninsured/Underinsured Motorist Statute, Vt. Stat. Ann. tit. 23, § 941, only applies to those insured under the policy in question, Alterra is not required to provide UM/UIM coverage to Mayhew.

The definition of an insured provided in the policy is unambiguous. The Mayhew Enterprises, Inc. policy specified that the policy excluded "any partner or executive officer with respect to any auto owned by such partner or officer or a member of her household." This exclusion, which eliminates coverage not only for family members of executives using private vehicles, but also the executive officers themselves, unambiguously excludes executive officers who are using their own vehicles not on company business. Based upon the plain meaning of the definition of an insured in the Endorsement, Mayhew is excluded from coverage under part as he was an executive officer riding his motorcycle, a personally owned vehicle, not in the course of business.

While UM/UIM is statutorily mandated and insurance provisions cannot reduce or eliminate UM/UIM coverage, "those protections extend only to those insured under the policy. " Norman v. King, 659 A.2d 1123, 1125 (1995). Thus, if a "plaintiff cannot show that she meets any of the definitions of `an insured' under the UIM section of the policy . . . by its terms the policy excludes plaintiff from UIM coverage." Canedy v. Liberty Mutual Ins. Co., 126 F.3d 100, 104 (2d Cir. 1997) (construing Vt. law).

Because Mayhew is not an insured under the Endorsement, Vt. Stat. Ann. tit. 23, § 941 does not compel Alterra to provide UM/UIM coverage to him under the CGL.

Insurance: medical malpractice by insured was not covered as concurrent cause, independent of excluded sexual misconduct.

ProSelect Insurance Co. v. Levy, 2011 VT 109 (mem.)

 ProSelect Insurance Company filed this declaratory relief action to determine its duty to indemnify its insured in a lawsuit alleging medical malpractice and sexual assault.   On summary judgment, the trial court construed a policy exclusion to bar coverage and entered judgment in favor of ProSelect.  Plaintiff in the underlying suit appeals from the judgment, asserting that the malpractice claims are covered under the concurrent causation doctrine. We affirm.

The trial court relied on a policy exclusion for “any damages, incidents, claims or suits . . . [w]hich, in whole or in part, arise out of or contain any allegations of any of … [s]exual intimacy, . . . exploitation, assault or undue familiarity.” (emphasis added.)

 Plaintiff relies on the “concurrent causation” doctrine and contends her malpractice claims are “wholly independent” of the sexual assault allegation. Under this doctrine, “coverage may not be denied merely because a separate excluded risk was an additional cause of the accident provided that the conduct on which coverage is premised is “somehow independent of the conduct excluded from the policy.”    State Farm Mutual Automobile Insurance Co. v. Roberts, 166 Vt. 452, 459, 463 697 A.2d 667, 671, 673-74.  (1997). Plaintiff alleged that the insured  negligently failed to properly diagnose her psychological disorder, prescribed harmful medications, encouraged her to pursue “unhealthy lifestyle choices,” failed to refer her to a community-based mental health program, and engaged in treatment “at variance with accepted professional protocols.”  In a separate count, plaintiff alleged that, “[i]n the course of . . .  treatment,” the insured doctor had committed sexual assault and battery. 

The short answer to plaintiff’s reliance on the concurrent causation doctrine is that it is misplaced.  Thee unambiguous policy language plainly excludes coverage where, as here, the claimant’s suit contains an allegation of sexual misconduct. 

In any event, we are not dealing here with independent and unrelated claims of non-sexual misconduct otherwise covered under the policy. This is a case where all of the claims essentially derive from the noncovered allegation of sexual misconduct. The evidence shows the insured doctor was intent on isolating plaintiff from other health care providers in order to preserve their improper sexual relationship, and that all alleged deviations from accepted medical norms were all designed to accomplish this end.  Thus, the malpractice and assault claims cannot be viewed as separate or independent causes.

Insurance. Environmental Cleanup: time- on-risk allocation upheld.

Bradford Oil Co., v. Stonington Insurance Co., 2011 VT 108 (Dooley, J. )

This case considers who should bear responsibility for the cost of cleaning up petroleum contamination caused by releases from a gas station’s underground storage tanks.  The controversy in this appeal is between the State of Vermont, which runs the Vermont Petroleum Cleanup Fund (VPCF) and Stonington Insurance Co. (Stonington), which insured Bradford Oil, the owner of the underground storage tanks, for approximately a three-and-a-half-year period.  The State appeals from the trial court’s judgment limiting Stonington’s liability to a 4/27 share of past and future cleanup costs.  On appeal, the State argues: (1) this Court’s application of time-on-the-risk allocation in Towns v. Northern Security Insurance Co., 2008 VT 98, 184 Vt. 322, 964 A.2d 1150, does not preclude joint and several liability under all standard occurrence-based policy language; (2) the circumstances here, including the reasonable expectations of the insured and the equity and policy considerations, support imposing joint and several liability on Stonington for all of the State’s VPCF expenditures; and (3) even if time-on-the-risk allocation would otherwise be appropriate, Stonington is not entitled to such allocation because it has failed to show sufficient facts to apply this allocation method in the present case. 

We conclude that Towns does control here, and we are unconvinced by the State’s reasonable expectations, equity, and policy arguments to distinguish this recent decision.  Accordingly, we affirm. 

Insurance coverage for sexual abuse by minor at a day care center, unless subjective intent to harm.

Northern Security Insurance Company, Inc. v. Stanhope et al. (2009-078) (08-Oct-2010) 2010 VT 92 (Burgess, J.)    

Northern Security Insurance Company (Northern), appeals from a superior court judgment that it owes a duty of coverage to Rose, Steven, and Kyle Perron, its insureds under a homeowner’s policy. We affirm.

The first appeal, Northern Sec. Ins. Co. v. Perron, 172 Vt. 204, 777 A.2d 151 (2001) (Northern I) held that the inferred intent rule was inapplicable to minors.  Id. at 226, 777 A.2d at 167.  The Court remanded the case to the trial court for a factual determination on whether Kyle intended or expected injury to occur, as well as a ruling on Northern’s additional claim that coverage was voided by Rose Perron’s alleged misrepresentations in her policy application

Northern first contends the trial court erred in applying the innocent co-insured doctrine to hold that Rose Perron’s misrepresentation did not void coverage for Steven or Kyle.  The court found that our decision in Fireman’s Fund Ins. Co. v. Knutsen, 132 Vt. 383, 324 A.2d 223 (1974) was controlling. We conclude that the trial court did not err in applying the innocent co-insured doctrine to preserve coverage for Steven and Kyle.

Northern next contends the trial court erred in declining to allocate to defendants the initial burden of proving an occurrence, defined under the policy as “an accident” neither expected or intended.  We considered and rejected the same claim in State v. CNA Ins. Cos., 172 Vt. 318, 331, 779 A.2d 662, 672 (2001). Accordingly, we find no error in the trial court’s decision to place the burden of proof on Northern to establish that the harm was “intended or expected”.

Northern finally claims that the trial court erred in rejecting its request for an instruction on the intentional-harm exclusion that would have incorporated an objective rather than a subjective standard.  The trial court had propounded an instruction explaining that “[w]hen we say expected in this context, what we mean is this:  Did Kyle know . . . that his sexual actions would harm Jesse and/or Gus.”  Northern proposed modifying the instruction to state as follows: “Did Kyle know or have reason to know that his actions” would cause harm.  (Emphasis added).  The trial court’s rejection of this request was correct.  An insured expects an injury if he or she is subjectively aware that injury is substantially certain to result.

This ruling did not prevent Northern from arguing that intent to harm could be inferred from all of the surrounding facts and circumstances, including evidence that Kyle knew the assaults were harmful and non-consensual.

Our  conclusion that a subjective standard governs whether a minor in these circumstances intended or expected harm to result has no impact on our earlier decisions holding that, when the perpetrator of the sexual assault or harassment is an adult, such intent must be inferred.  

Insurance: Personal injury coverage for “negligent defamation.” Where some claims are covered Insurer is liable for full judgment unless it intervenes in tort case to obtain special verdict showing part of verdict was based on uncovered claims. Insurer must fund appeals.

Pharmacists Mutual Insurance Co. v. Myer, 2010 VT 10, 993 A. 2d 413 (Reiber, C. J.)
Glenn A. Myer appeals from a summary judgment declaring that his insurer, Pharmacists Mutual Insurance Company, owed him no duty to indemnify or pay defense costs on appeal from a third-party defamation claim. We reverse the decision on the duty to defend and indemnify, and remand for further proceedings.

Myer tendered the complaint to Pharmacists, which had issued him a homeowner’s policy that included an endorsement providing liability coverage for “personal injury.” The policy defined the latter to include “misrepresentation, libel, slander [and] defamation of character,” but specifically excluded coverage for personal injury “caused by a publication or statement made by . . . an insured, if the insured knew or had reason to believe that the publication or statement was false.

Myer contends the court erred in concluding as a matter of law, based on the special verdict in the defamation case , that the statements which the jury found to have been made negligently were not covered. We agree. The jury was directed to consider separately the two categories of statements, and to return separate verdicts on each. We discern no basis to interpret the special verdict, as finding that all of the defamatory statements were made by Myer with knowledge of their falsity or reckless disregard thereof.

We reject Pharmacists’ claim that negligent statements necessaritly fall within the policy exclusion for defamatory statements which the insured knew or “had reason to believe . . . [were] false.” Courts and commentators routinely employ the phrase “knew or had reason to believe” as a shorthand for a state of mind equivalent to gross or willful misconduct or even actual malice. The exclusion does not apply to defamatory statements made negligently.

For purposes of judicial economy, we also consider the corollary issue, raised and briefed by the parties, as to how—if at all—to allocate the damage award in the event of a finding on remand that some of the defamatory statements were merely negligent and therefore within the policy coverage. As noted, the jury in the Cooper litigation rendered an undifferentiated award of $150,000 for defamation; it did not distinguish between covered and uncovered conduct. It is settled law in Vermont, however, that once an insured has demonstrated coverage under a policy, the burden falls “on the insurer to show that a third party’s claim against the insured is entirely excluded from coverage.” State v. CNA Ins. Cos., 172 Vt. 318, 324, 779 A.2d 662, 667 (2001) (emphasis added).

Thus, it was, and remains, Pharmacists’ burden to demonstrate that the award was based upon conduct entirely excluded from coverage, or to show how the jury allocated damages as between covered and uncovered conduct. To protect its interests and meet its burden it was incumbent upon Pharmacists to notify the trial court and the parties of the potential apportionment issue and of the need for special interrogatories allocating damages, to seek permission if necessary to attend the charge conference to propose such interrogatories, or even to intervene in the litigation if all else failed. Pharmacists failed to seek an allocated verdict on the defamation award and thus cannot meet its burden to demonstrate that the award was for statements entirely excluded from coverage under the policy. Pharmacists, therefore, would remain responsible for the defamation award in its entirety in the event that any of the statements are ultimately found to fall within the policy coverage.

Myer further claims that the trial court erred in concluding that Pharmacists had no duty to pay attorney’s fees and costs incurred in the appeal from the judgment in the Cooper litigation.. The ruling was unsound. The general rule is that an insurer under a general duty to defend is required to bring an appeal on its insured’s behalf “when there are reasonable grounds to believe that the insured’s interests might be served by an appeal.” As discussed, the underlying judgment here exposed Myer to both covered and uncovered damages; a reversal would plainly have served his interests; and the appeal raised at least reasonable—if ultimately unsuccessful—grounds for challenging the judgment. Accordingly, we hold that Myer was entitled to recover attorney’s fees and costs incurred in prosecuting the appeal in the Cooper litigation.

That portion of the summary judgment declaring that Pharmacists owed no duty to indemnify Myer for the $150,000 defamation award or to pay for attorney’s fees and costs incurred in his appeal from the underlying judgment in the Cooper litigation is reversed, and the matter remanded for further proceedings consistent with the views expressed herein.

Insurance. No coverage ruling affirmed: breach of warranty of habitability is not wrongful eviction or other “personal injury”; “reasonable expectations’ theory rejected; no decision whether there should be Chinese wall between coverage counsel and insurer-retained defense counsel.

Vermont Mutual Insurance Company v. Parsons Hill Partnership, Willard Group, Poulin Group and Fortin (2008-509) (04-Jun-2010) 2010 VT 44 (Dooley, J.)
Plaintiff insurance carrier sought a declaration that landlord’s liability insurance policies do not cover tenants’ claims for breach of an implied warranty of habitability, arising out of water contamination. The trial court granted insurance carrier’s motion for summary judgment .Defendants appeal. We affirm.

Coverage B provides coverage for “personal injury” defined as including wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor.” The trial court ruled there is no coverage because the underlying litigation does not involve damages for “personal injury” as that term is defined in the Policy. We conclude that this ruling was correct.

This type of coverage is a theory-based insurance coverage. It defines its coverage in terms of offenses, or theories of liability, not in terms of the injury sustained by the plaintiff. The court held that “[t]here was no constructive eviction here; . . . none of the tenants ever actually moved out, i.e., no involuntary ‘eviction,’ or loss of tenancy actually resulted” and “the toxic contamination of their drinking water [did not] materially invade, or compromise in any way their rights to exclusive possession of their leased premises.”

We agree with the trial court that tenants’ theory of landlord’s liability does not create coverage under Coverage B. As the trial court observed, the underlying claim does not involve eviction or wrongful entry. Thus, to claim an “offense” under Coverage B, the claim must involve an invasion of the tenants’ private right of occupancy. In our view, the breach-of-warranty claim does not involve an offense as that term is used in Coverage B. Construing a breach of warranty as an “invasion” stretches the language of the Policy beyond its plain and unambiguous meaning.

Defendants next argue that landlord had a reasonable expectation of coverage and that this expectation should trump any coverage limitations. Apart from circumstances where an agent of the insurance carrier promises specific coverage, we have not held that the expectations of an insured can control over unambiguous policy language. The standard policy provisions, particularly the provision of Coverage B at issue in this case, have been the subject of many court decisions, and their limitations can be readily determined. We cannot find any expectation of coverage under Coverage B to be reasonable given the unambiguous language of the policy.

Finally, defendants argue that we should reverse because insurance carrier’s coverage staff improperly used confidential information obtained by insurer-supplied defense counsel from his client, landlord, to deny coverage. The trial court found no facts from which it could infer that insurance carrier’s staff had improper access to confidential information “which would be of any use, or benefit at all in this coverage litigation.” We concur because the controlling coverage issue is purely one of law, and insurance carrier could not have obtained from defense counsel any information that could have any effect on whether coverage existed.

UIM insurance

Primary carrier pays nothing because primary carrier, not the excess carrier, gets to offset the full amount of the tortfeasor’s liability payment. Humphrey v. Vermont Mutual and State Farm, 2009 VT 53 (mem.)

Humphrey was injured when the car in which she was a passenger was struck by another car. State Farm insured the driver of the car in which Humphrey was a passenger. Humphrey had an automobile insurance policy with Vermont Mutual. She brought suit to enforce uninsured/underinsured motorist (UM/UIM) provisions in both the Vermont Mutual and the State Farm policies, because her damages exceeded the tortfeasor’s liability coverage. The superior court granted summary judgment to State Farm, ruling that the tortfeasor’s $100,000 liability payment nullifies State Farm’s primary UIM coverage of $50,000. We affirm.

State Farm Mutual Auto Insurance Co. v. Powers, 169 Vt. 230, 732 A.2d 730 (1999) endorsed the majority view that the offset applies first to the primary coverage. Id. at 240-41, 732 A.2d at 737-38. Vermont Mutual urges us instead to prorate the $100,000 credit. By their proposed allocation method, they would receive the proportion of the credit that their UIM coverage bears to the total UIM coverage, or roughly $86,000 of the $100,000 offset in this case. Vermont Mutual argues that our decision in Powers does not control and that public policy considerations favor pro rata allocation. We reject these arguments.

Powers decided that the insurer providing primary UM/UIM coverage is entitled to offset its coverage with any payment obtained from the tortfeasor. Vermont Mutual’s fairness argument—that it should be rewarded with a greater portion of the offset because it assumed a higher risk in issuing a higher limit policy—is without merit. The denial of any offset to the excess insurer is a logical corollary to the lack of risk it faces until the primary policy is exhausted.

In order to be fair, in this context, we need only be consistent. Consistency allows insurers to accurately assess the risk associated with the policies they issue. Our decision that the insurer who stands first in line to pay should also stand first in line to collect is consistent with Powers and with the majority of jurisdictions that have addressed the issue.

We explicitly hold today that primary UM/UIM insurers are entitled to offset their coverage by the full amount of a tortfeasor’s liability payment. Any remaining offset inures to the excess insurer’s benefit.