A federal court has ruled in Catlin Specialty Ins. Co. v. J.J. White, Inc., that settlement of an underlying third-party lawsuit involving covered and uncovered claims requires consideration of two principles of proof. First, the factfinder must assume that the insured was actually liable in the underlying case. Second, the factfinder must resolve all factual issues necessary to deciding coverage. A copy of the decision can be found here; and a copy of a related summary-judgment opinion can be found here.

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J.J. White, Inc. maintains and services refineries for Sunoco, Inc. As a condition of J.J. White’s agreement with Sunoco, J.J. White was required to maintain certain insurance policies and name Sunoco as an insured on those policies. To this end, J.J. White bought pollution-liability coverage from Catlin Specialty Insurance Company (“Catlin”). The policy generally covered pollution loss that occurred on or after the retroactive date (April 30, 2002).

George Gans worked for J.J. White from 1986 until he died of leukemia in 2010, after which his family brought a wrongful death action against Sunoco, alleging that toxic chemicals at the refineries caused Mr. Gans’ death. Sunoco sought defense and indemnification from J.J. White, which, in turn, tendered the claim to Catlin. Though Catlin provided a defense at first, it later withdrew its defense and denied coverage after concluding during discovery that Mr. Gans’ death was caused by a lifetime of smoking or resulted from his family history of cancer or toxic chemical exposure occurring before the retroactive date.

After Catlin withdrew, J.J. White settled with Gans’ estate, while still denying all liability. J.J. White then sought indemnification from Catlin, which denied coverage and sought a declaratory judgment in the Eastern District of Pennsylvania. J.J. White counterclaimed, alleging that Catlin breached its duty to defend and owed a duty to indemnify. And Sunoco intervened, alleging that it was an additional insured and was thus entitled to a defense.

On cross-motions for summary judgment, the parties disputed whether Catlin breached its duty to defend when it denied coverage on the basis that the exposures that allegedly caused Mr. Gans’ death occurred before the retroactive date. They also fought over whether Catlin had a duty to indemnify. In support of its position, Catlin argued that the retroactive date barred coverage if Mr. Gans was exposed to any Pollution Condition before that date, even if that exposure did not cause his death. J.J. White and Sunoco, in contrast, argued that the retroactive date only barred coverage if Mr. Gans was exposed to a Pollution Condition that actually caused his death before the retroactive date.

The parties also sought summary judgment on whether the retroactive date was an exclusion, thus placing the burden of proof on the insurer, and whether Sunoco qualified as an additional insured under a policy provision that extended coverage to “any client of [J.J. White] that [J.J. White] has agreed by written contract to name as an additional insured on [the Pollution] Policy.”

The court held that the retroactive date was not an exclusion under New York law but was instead part of the initial grant of coverage, and thus declined to construe the provision against the insurer. The court nevertheless held that Catlin had a duty to defend, finding that the retroactive date barred coverage only if Mr. Gans was exposed to a Pollution Condition that caused his death before the retroactive date. Since there was a genuine dispute over which pollution exposures caused Mr. Gans’ death (and when those exposures occurred), the court held that Catlin had a duty to defend. It also denied summary judgment on the duty to indemnify for the same reason and because, under New York law, a breach of the duty to defend does not automatically establish a duty to indemnify a reasonable settlement. Instead, the court held that J.J. White could prove its right to indemnification at trial.

Finally, the court held that Sunoco was an additional insured under the policy since the additional insured provision unambiguously grants coverage to any party that J.J. White has agreed by written contract to name as an additional insured.

Several months later, the court clarified what J.J. White must prove at trial to establish its right to indemnification. Analyzing New York law, the court determined that when seeking indemnification for a settled case involving both covered and uncovered claims, the insured need not show actual liability to the underlying plaintiff. See Luria Bros. & Co. v. Alliance Assurance Company, 780 F.2d 1082 (2d Cir. 1986) (holding that to obtain indemnity for settlement from its insurer, an insured “need not establish actual liability to the party with whom it has settled so long as a potential liability on the facts known to the insured is shown to exist, culminating in a settlement in an amount reasonable in view of the size of possible recovery and degree of probability of claimant’s success against the insured” (internal quotations and citation omitted)).

Rather, after considering competing approaches, the court followed the approach taken by the Minnesota Supreme Court, which requires that the factfinder “assume that the insured was actually liable in the underlying case, and then determine—based on that assumption—the remaining factual questions necessary to establish coverage.” This meant that the factfinder would be required to assume that J.J. White was responsible for Mr. Gans’ death—i.e., that toxic chemicals at the refineries (not cigarette smoke or family history) caused Mr. Gans’ leukemia—and then consider whether the fatal exposures occurred on or after the retroactive date of April 30, 2002, since that was a fact “necessary to establish coverage,” per the court’s earlier ruling.

This case has significant implications for policyholders. First, the finding that the policy’s retroactive date does not function as an exclusion or limitation on coverage is a warning to policyholders that they may not get the benefit of a pro-coverage construction of that provision, as is typically the case with coverage exclusions and limitations. Second, the decision confirms the broad effect of a liability policy’s additional insured by contract provision, extending additional insured coverage to Sunoco by virtue of its written agreement with J.J. White and reminding companies to consider whether coverage may be available under the policies of those with whom they are conducting business. Finally, the decision is a reminder that while a defense will be owed based on the mere allegations, an insurer’s duty to indemnify still requires a showing of facts sufficient to establish coverage even where the claim against the insured is settled before adjudication. The decision is thus a good reminder to consider whether the facts necessary to establish coverage are available at the time the claim is resolved.