Insurer’s Duty to Defend

Generally

An insurer’s duty to defend arises when a lawsuit has been filed. Chief Indus. Inc. v. Great N. Ins. Co., 683 N.W.2d 374, 382 (Neb. 2004). “An insurer’s duty to defend an action against the insured must, in the first instance, be measured by the allegations of the petition against the insured” Peterson v. Ohio Cas. Group, 272 Neb. 700, 709 (Neb. 2006) (quoting Millard Warehouse, Inc. v. Hartford Fire Ins. Co., 204 Neb. 518 (1979)).

An insurer is obligated to defend whenever the insurer ascertains facts which give rise to the potential for liability under the policy. Mapes Industries, Inc. v. United States Fidelity and Guar. Co., 252 Neb. 154, 158 (Neb. 1997). More specifically, an insurer is obligated to defend if (1) the allegations of the complaint, if true, would obligate the insurer to indemnify, or (2) a reasonable investigation of the actual facts by the insurer would or does disclose facts that would obligate the insurer to indemnify. John Markel Ford v. Auto-Owners Ins. Co., 249 Neb. 286, 295 (Neb. 1996).

A carrier has both a right to defend and a corresponding duty to do so. Allstate Ins. Co. v. Novak, 210 Neb. 184, 187-188 (Neb. 1981). The carrier has a duty to defend even though the suit is “groundless, false, or fraudulent. Id.

Consideration of Extrinsic Evidence

In determining its duty to defend, an insurer must not only look to the petition or complaint filed against its insured, but must also investigate and ascertain the relevant facts from all available sources. Neff Towing Serv. V. United States Fire Ins. Co., 264 Neb. 846 (Neb. 2002).

Occurrence Requirement

General Rule

The Nebraska Supreme Court has stated that “an accident within the meaning of liability insurance contracts includes any event which takes place without the foresight or expectation of the person acted upon or affected thereby.” Farr v. Designer Phsosphate & Premix Internat., 253 Neb. 201, 206 (Neb. 1997). See also Sullivan v. Great Plains Ins. Co., 210 Neb. 846, 851 (Neb. 1982) (accident is “‘an unexpected happening without intention or design,’” quoting 45 C.J.S. Insurance § 829 (1946)).

Faulty workmanship and construction defect claims

Faulty workmanship, standing alone, is not an “occurrence” and, therefore, is not covered under a standard commercial general liability (CGL) insurance policy because it is not a fortuitous event. However, an accident caused by faulty workmanship is a covered occurrence. Auto-Owners Ins. Co. v. Home Pride Companies, Inc., 268 Neb. 528, 535 (Neb. 2004).

Bodily Injury Requirement

Evidence of concurrent physical injury is not required to prove a claim of negligent infliction of emotional distress. James v. Lieb, 221 Neb. 47, 58 (Neb. 1985). This principle of Nebraska tort law does not mean, however, that an insurance policy definition of “bodily injury” necessarily encompasses purely emotional injuries. Farm Bureau Ins. Co. of Nebraska v. Martinsen, 265 Neb. 770, 777 (Neb. 2003).

Property Damage Requirement

Purely economic loss

Commercial General Liability policies are intended to cover an insured’s tort liability for physical injury or property damage, not economic losses due to business risks. Drake-Williams Steel, Inc. v. Continental Casualty Company, 294 Neb. 386, 395 (Neb. 2016) (Court held that economic loss due to defective or unsuitable products is not what was bargained for as part of general liability coverage; it is a business risk within the insured’s control and generally excluded from coverage).

Loss of use

Coverage has been excluded where loss of use was not the result of a sudden and accidental physical injury. Mapes Industries, Inc. v. United States Fidelity and Guar. Co., 252 Neb. 154, (Neb. 1997), see also Columbia Nat. Ins. V. Pacesetter Homes, Inc., 248 Neb. 1, 13 (Neb. 1995) (Court held that intentional misrepresentation by seller of property resulting in alleged loss of use of trees on property was not caused by an accident and therefore not covered).

Trigger of Coverage for Latent Injury

The Nebraska Supreme Court has held that a latent accidental injury subsequently resulting in a progressive disease and disability occurs when its true nature is first discovered by him or when the diseased condition is known to have culminated in a compensable disability. Clary v. R.S. Proudfit Co., 247 N.W. 417, 219 (Neb. 1933). Failure to file such a claim or bring suit within the specified time does not defeat the insured’s right to compensation where injury is latent, provided that notice is given and the action commenced within the statutory period after the employee has knowledge that compensable injury has resulted. Astuto v. V. Ray Gould Co., 242 N.W.375, 376 (Neb. 1932).

Trigger of Coverage for Non-Latent Injury

“[W]hen there is an ongoing process of property damage or bodily injury, every policy period in effect during the ongoing damage/injury process provides coverage. The burden should be on the insured to prove that there was, in fact, such injury/damage during the policy period.” Kaapa Ethanol, L.L.C. v. Affiliated FM Insurance, Co., No. 7:05CV5010, 2008 WL 2986277, *33 (D. Neb. July 29, 2008), report and recommendation adopted in part, rejected in part sub nom. KAAPA Ethanol, LLC v. Affiliated FM Ins. Co., No. 7:05CV5010, 2008 WL 4790997 (D. Neb. Oct. 30, 2008) (rejecting manifestation in a first party property case and noting that “the same rule should be applied in interpreting similar policy language, whether the claim is for first party or third party coverage.”).

Duty to Defend Covered and Uncovered Claims

If, according to the facts alleged in a pleading and ascertained by an insurer, the insurer has no potential liability to its insured under the insurance agreement, then the insurer may properly refuse to defend its insured. Mortgage Exp., Inc. v. Tudor Ins. Co., 278 Neb. 449, 460 (Neb. 2009). Further, although an insurer is obligated to defend all suits against the insured, even if groundless, false, or fraudulent, the insurer is not bound to defend a suit based on a claim outside the coverage of the policy. Id. See also Section 1.1, supra

Duty to Defend Contractual Indemnity and Common Law Indemnity Claims

Nebraska has adopted the majority view that the contractual liability exclusion will apply only where the insured has contractually assumed the liability of a third party, as in an indemnification or hold harmless agreement. Continental Cas. Co. v. Greater Omaha Packing Co., Inc., 2015 WL 3852772 (D. Neb. 2015). Therefore, in a suit by the indemnitee for damages arising out of the indemnitor’s liability for its own conduct and not for the assumption of the indemnitee’s liability, the exclusion did not apply. Id.

Is there an anti-indemnification statute?

Yes. Neb. Rev. St. § 25-21,187(1). See also Kuhn v. Wells Fargo Bank of Nebraska, N.A., 278 Neb. 428, 444 (Neb. 2009) (“Statutes like § 25-21,187(1) are . . . generally applied to construction contracts. The purpose of such statutes is to prohibit avoidance by parties to construction contracts of all risks created by their own fault associated with contract performance, to require employers to provide employees with a safe place to work, and to preclude delegating to subcontractors such duty.”)

Insurer’s Wrongful Refusal to Defend

Reliance on coverage defenses to deny indemnity

Coverage under an insurance policy or contract is generally understood to consist of two separate and distinct obligations: (1) the duty to defend any suit filed against the insured party and (2) the duty to pay, on behalf of the insured, sums for which the insured shall become legally obligated to pay because of injury caused to a third party by acts of the insured. Dutton-Lainson Co. v. Continental Ins. Co., 271 Neb. 810, 825 (Neb. 2006). As a general rule, an insurer’s duty to defend is broader than the duty to indemnify. Merrick v. Fischer, Rounds & Associates, Inc., 205 Neb. 230 (Neb. 2020).

An insurer can properly deny a duty to defend when there is a reasonable or arguable basis for denying the benefits of the insurance policy. Berkley Regional Specialty Insurance Company v. Performance Roofing & Sheet Metal, Inc., 2018 WL 10228385 at 4 (D. Neb. 2018). Whether a claim is fairly debatable is decided by the court as a matter of law and the determination is based on the information available to the insurer at the time the demand is presented. Id.

Conditions of Coverage

Late notice

Although both occurrence and claims-made liability insurance policies require the insured to promptly notify insurer of possible covered losses, with a claims-made policy, that notice is not simply part of the insured’s duty to cooperate; it defines the limits of the insurer’s obligation¬—if there is no timely notice, there is no coverage.Topp’s Mechanical, Inc. v. Kinsale Insurance Company, 968 F.3d 854 (8th Cir. 2020), see also Countryside Co-op v. Harry A. Koch Co., 280 Neb. 795 (Neb. 2010) (“Where an insurance policy. . . requires that a claim be made and reported during the policy period . . . in order for the loss to be treated as falling within the coverage of the policy, failure to comply with the reporting requirement is sufficient to defeat coverage . . .”).

Prejudice requirement

A liability insurer is required to show that it was prejudiced in order to escape liability or the duty to defend on account of an insured’s unreasonable and unexcused delay in giving notice of a claim. Dutton-Lainson Co. v. Continental Ins. Co., 271 Neb. 810, 828 (Neb. 2006); Herman Bros v. Great West Cas. Co., 255 Neb. 88 (Neb. 1998). Prejudice is established by examining whether the insurer received notice in time to meaningfully protect its interests. Dutton-Lainson Co., 271 Neb. at 828. See also Mefferd v. Sieler and Co., Inc., 267 Neb. 532, 540 (Neb. 2004) (Insurance company was prejudiced by insured’s failure to timely notify when insurer did not have the opportunity to defend itself at hearing on motion for default judgement).

Meaning of “arising out of”

Coverage grants/agreements

The Nebraska Supreme Court has interpreted the term “arising out of” in liability policies as very broad and comprehensive; ordinarily understood to mean “originating from”, “growing out of”, or “flowing from” and requiring only a “but for” causal connection between the occurrence and the conduct or activity specified in the policy. Federated Service Ins. Co. v. Alliance Const., LLC, 282 Neb. 638, 649-650 (Neb. 2011).

Additional Insureds

When considering additional insured endorsements to CGL policies, Nebraska interprets the phrase “arising out of” broadly and requires only a “but for” causal connection to the principal insured’s operations. Federated Service Ins. Co., 282 Neb. at 650.

Coverage for Punitive Damages

Insurable?

Nebraska does not recognize punitive damages in any form and considers them in contravention of the state constitution. See Neb. Const. Art. VII § 5; See also Distinctive Printing and Packaging Co. v. Cox, 232 Neb. 846, 857 (Neb. 1989). But see Gilliam v. Omaha, 331 F.Supp. 4 (D. Neb. 1971) (Court held that where there is an action grounded on a federal constitutional right, and is brought in federal court, it may not violate Nebraska public policy to award punitive damages).

Additional Insured Endorsement

Analysis and factors considered for liability arising out of/caused by named insured’s work

See Section 4.1, supra. In Federated Service Ins. Co.¸ the Nebraska Supreme Court held that, because an employee of the subcontractor would not have been insured but for performing work for the subcontractors operations, there was enough of simple causal relationship to the principal insured’s operations to trigger coverage under an additional insured endorsement.

Coverage B – Personal and Advertising Injury

Personal Injury

Slander will not create a cause of action under an endorsement for personal injury unless the slander disparages an individual’s tangible good or product rather an intangible like title to real estate, which is not akin to a good or product. Mortgage Exp., Inc. v. Tudor Ins. Co., 279 Neb. 449, 463 (Neb. 2009).

Diminution in value and loss of enjoyment as it relates to real property do not create an action under an endorsement for personal injury or advertising injury. Columbia Nat. Ins. v. Pacesetter Homes, Inc., 248 Neb. 1, 15 (Neb. 1995). Additionally, allegations that noise, dust, lighting, and other construction activities constitute a physical invasion of property do not create a cause of action under an endorsement for personal injury. Id. See also Columbia Nat. Ins. v. Pacesetter Homes, 248 Neb. 1 (Neb. 1995) (Court held that “noise, dust, ground vibration, diminution in the value of their property, loss of trees, and increased traffic volume” did not constitute “wrongful entry or eviction or other invasion of the right of private occupancy” as defined in the insurance policy, therefore insurer had no duty to defend).

Advertising Injury

See Columbia Nat. Ins. v. Pacesetter Homes, Inc., supra at 7.1. See also Union Ins. Co. v. Land and Sky, Inc., 247 Neb. 696 (Neb. 1995) (Court held that patent infringement is an advertising injury and an insurer had a duty to defend even though the insured was merely potentially liable for inducing or contributing to a patent infringement due to its advertising activities and not directly infringing upon the patent of another); John Markel Ford, Inc. v. Auto-Owners Ins. Co., 249 Neb. 286 (Neb. 1996) (Court held that the term “unfair competition” did not refer to conduct prohibited by unfair business practice statutes which the Markel was alleged to have violated, therefore not encompassed by advertising offense liability endorsement and not an advertising injury claim that insurer had a duty to defend).