COURT DECISIONS

Rough Notes, Jul 2007

INSURANCE-RELATED COURT CASES

Digested from case reports published in Westlaw, West Publishing Co., St. Paul, MN

Rail crossing fatalities trigger coverage dispute

Union Pacific Railroad Company hired Tri-State Traffic Control, Inc., to provide traffic control services at its railroad crossings. The contract between the two organizations became effective June 1, 1998, and expired on June 2, 2000. Under the terms of the contract, work was to be performed on an asneeded basis whenever maintenance work caused road closings or changes to traffic patterns at road closings. TriState was also obligated to obtain and maintain general liability insurance and to name Union Pacific as an additional insured. Accordingly, Tri-State purchased from Ohio Casualty Insurance Company a $1 million commercial general liability policy and a $2 million commercial umbrella excess liability policy. Both policies had policy periods from January 22, 2000, to January 22, 2001.

Union Pacific was not a named insured on either ofTri-State's policies. The $1 million primary policy contained an additional insured endorsement that included as an "insured" any person or organization "whom you are required to name as an additional insured on this policy under a written contract or agreement." The written contract or agreement had to be "(a) currently in effect or becoming effective during the term of this policy; and (b) executed prior to the 'bodily injury,' 'property damage,"personal and advertising injury.'" Coverage provided to an additional insured was limited to liability "arising out of" the insured's work for the additional insured. The $2 million umbrella policy contained a similar endorsement. This endorsement included as an "insured" "(1) an organization insured under an underlying insurance policy for damages that are covered under the umbrella policy and the underlying policy as well as (2) an organization 'for whom [the insured has] agreed in writing prior to injury to provide insurance such as is afforded by this policy but only with respect to operations performed by [the insured] or on [the insured's] behalf."

The agreement between Union Pacific and Tri-State expired on June 2, 2000. The organizations agreed, however, that Tri-State would continue to provide traffic control services for Union Pacific pursuant to the terms of their agreement. Tivo months later, on August 7, 2000, a train collided with a vehicle at a railroad crossing in Arkansas. The driver of the car, Joseph Johnson, was seriously injured, and his wife and daughter were killed. On that day, Union Pacific employees were upgrading the warning devices at the crossing. TriState had provided traffic control flaggers at the work site, but at the time of the accident the Union Pacific and Tri-State employees were on their lunch break.

Johnson filed suit against Union Pacific. Ohio Casualty defended Union Pacific in the action under a reservation of rights. The lawsuit was ultimately settled for $12.5 million. Ohio Casualty contributed $3 million to the settlement and reserved its right to deny coverage. The insurer then filed an action alleging it had no duty to defend or indemnify Union Pacific and seeking return of its $3 million along with attorney fees and costs. The district court found in favor of Ohio Casualty and entered a judgment of $3,034,565.76. Union Pacific appealed.

On appeal, Ohio Casualty argued that Union Pacific was not an additional insured because the written Tri-State contract was not in effect on the date of the accident. It also argued that the evidence did not show that there was a causal connection between Tri-State's work and the accident. Finally, Ohio Casualty argued that a finding in favor of Union Pacific would violate the "known loss doctrine." (Under the "known loss doctrine," an insurer is not required to insure against a loss that is known or apparent to an insured prior to the policy's effective date.)

Applying Arkansas law, the United States Court of Appeals, Eighth Circuit, rejected all three of Ohio Casualty's arguments. First, the court found that it was not necessary for a written contract between Union Pacific and Tri-State to be in effect at the time of the accident. The parties' continued mutual performance in accordance with the terms of the contract and the insurance policies' existence through the date of the accident was enough. The phrase "currently in effect" as used in the additional insured endorsement unambiguously meant in effect on the date the policy was issued. The court also noted that if Ohio Casualty intended the additional insured endorsement to require that the written contract or agreement be in effect on the date of an occurrence, it could have expressly limited additional insured status to the duration of the written contract as opposed to the policy period.

The court quickly discarded Ohio Casualty's argument that the "known loss doctrine" had been violated. According to the court, the known loss doctrine was not applicable to the facts of the case because the Johnson accident occurred seven months after the policy took effect.