BAD FAITH – DISCOVERY
Eddy v. Farmers Prop. Cas. Ins. Co., 2026 Ohio LEXIS 450 (Ohio, Feb. 26, 2026)
Ohio Supreme Court clarifies that attorney-client privileged communications in an insurer’s claim file are discoverable only upon a prima facie showing of “bad faith” and a determination by the trial court, following an in-camera inspection, that the communications “are related to the attorney’s aiding or furthering an ongoing or future commission of bad faith by the client” under Ohio Rev. Code § 2317.02(A)(2).* It explained that § 2317.02(A), as amended in 2007, “provides a comprehensive framework for resolving privilege issues in the context of insurer-bad-faith claims” and abrogated Boone v. Vanliner Ins. Co., 744 N.E.2d 154 (Ohio 2001), which held that, in an action alleging “bad faith” denial of coverage, the insured is entitled to discover claim file materials containing attorney-client communications related to the issue of coverage that were created prior to the denial of coverage. In addition, the court concluded that, although § 2317.02(A)(2) does not deal with the work product doctrine, Ohio Rule of Civil Procedure 26(b)(4) separately permits discovery of materials prepared in anticipation of litigation only if “good cause” is shown.**
* Section 2317.02(A)(2) states that an attorney “shall not testify . . . concerning a communication made to the attorney by a client in that relationship or the attorney’s advice to a client, except that if the client is an insurance company, the attorney may be compelled to testify, subject to an in camera inspection by a court, about communications made by the client to the attorney or by the attorney to the client that are related to the attorney's aiding or furthering an ongoing or future commission of bad faith by the client, if the party seeking disclosure of the communications has made a prima-facie showing of bad faith, fraud, or criminal misconduct by the client.”
** Rule 26(B)(4) states that a party may discover documents and information “prepared in anticipation of litigation or for trial by or for another party or by or for that other party’s representative . . . only upon a showing of good cause therefor.”
BAD FAITH – SURETY BONDS
Eastern Steel Constructors, Inc. v. Int’l Fid. Ins. Co., 2026 Pa. LEXIS 274 (Pa., Feb. 18, 2026)
Pennsylvania Supreme Court holds that 42 Pa. Cons. Stat. § 8371 – which permits a court in an action arising under an insurance policy to impose increased interest, award punitive damages and assess attorneys’ fees if the insurer is found to have acted in “bad faith” toward the insured – does not apply to a surety bond issued by an insurance company. After noting that neither § 8371, the Pennsylvania Judicial Code nor the Pennsylvania Statutory Construction Act contained controlling definitions, it looked to Black’s Law Dictionary to determine the ordinary meaning of terms such as “insurer” (“[o]ne who underwrites insurance policies and issues them to insureds”) and “surety” (“[s]omeone who is primarily liable for paying another’s debt or performing another’s obligation”). In light of these definitions, and its observation in an earlier case that “‘suretyship is not insurance,’”* the court determined that insurance and surety bonds are distinct, in that insurance “is intended to protect the party to the contract (the insured), whereas suretyship is intended to protect others from the default of the party to the contract (the principal).” It also noted that the Pennsylvania Unfair Insurance Practices Act defines “insurance policy” to include “suretyship,”** which “implies the exclusion of the term from” § 8371. The court thus concluded that the legislature “did not intend to subject surety bonds to” § 8371.
* Foster v. Mut. Fire, 614 A.2d 1086, 1099 (Pa. 1992) (quoting Pearlman v. Reliance Ins. Co., 371 U.S. 132, 140 n.19 (1962)).
** 40 Pa. Cons. Stat. § 1171.3.
NOTICE
A.B. v. Barrow, 163 F.4th 1336 (11th Cir. 2026)
Eleventh Circuit, applying Alabama law, holds that, under a personal umbrella liability policy requiring the insured “or someone on [the insured’s] behalf” to notify the insurer of an occurrence “as soon as reasonably possible,”* the underlying claimant/judgment creditor could provide notice to the insurer, but the timeliness of the notice must be evaluated from the insured’s perspective. After reviewing dictionary definitions, it found that a reasonable person in the insured’s position could have understood “someone on [the insured’s] behalf” to permit notice by anyone acting in the interest or for the benefit of the insured. According to the court, the claimant was authorized to provide notice and did so in the insured’s interest and benefit because, by serving a subpoena on the insurer seeking copies of insurance policies issued to the insured, the claimant “was attempting to satisfy a condition precedent that would increase [the insured’s] chances of obtaining coverage.” Turning to timeliness, the court concluded that, though the policy language permitted notice from someone other than the insured, “it does not reset the notice clock for that person.” Here, there was no dispute that it was “reasonably possible” for the insured to have given notice “long before” the claimant served her subpoena on the insurer 58 months after the occurrence. Finding that the delay was unreasonable and no valid excuse for it had been offered, the court upheld the grant of summary judgment for the insurer.
On January 28, 2026, the claimant filed a petition for rehearing.
* The policy requires “‘you’ or someone on ‘your’ behalf” to (1) provide the insurer or its agent with written notice of an “occurrence” “as soon as reasonably possible”; and (2) “promptly” give the insurer all legal papers or reports relating to the “occurrence” when a claim or “suit” is filed against an “insured.”
OCCURRENCE
Granite State Ins. Co. v. Primary Arms, LLC, 161 F.4th 160 (2d Cir. 2025)
Second Circuit, applying Texas law, holds that underlying complaints alleging that the insured’s intentional marketing and sales of “ghost gun” parts to consumers led to increased gun violence and, consequently, economic damages to state and local governments did not allege an “occurrence”* necessary to give rise to a duty to defend under commercial general liability (CGL) policies. It explained that, under Texas law, an “accident” is a “fortuitous, unexpected, and unintended event” and, conversely, an act is not an “accident” when the act is intentional and “results in injuries that ordinarily follow from or could be reasonably anticipated from” the act. The court determined that the underlying complaints did not allege harm caused by an “accident,” but instead alleged that the insured had engaged in intentional conduct by marketing and selling its products to individuals who otherwise could not have bought firearms through legitimate channels. It further concluded that the alleged financial burdens on the state and local governments, rather than being “fortuitous” or “unexpected,” were the natural and expected result of the insured’s intentional acts. Finding that the factual allegations controlled, the court rejected the insured’s attempt to manufacture a duty to defend based on the conclusory references to “negligence” and negligence-based theories in the underlying complaints.
On March 6, 2026, the court denied the claimant’s petition for rehearing/hearing en banc and alternative request for certification to the Alabama Supreme Court.
* The policies require injury to be caused by an “occurrence,” which they define as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
POLLUTION EXCLUSION
Illinois Supreme Court, responding to a certified question from the Seventh Circuit, holds that a permit authorizing emissions from a policyholder’s manufacturing facility is irrelevant to assessing the application of a pollution exclusion* in a standard CGL policy. It began by considering the decisions that had prompted the certified question, including its holding in Am. States Ins. Co. v. Koloms, 687 N.E.2d 72 (Ill. 1997), that the pollution exclusion in CGL policies applies only to injury caused by “traditional environmental pollution.” Next, after reviewing the “plain” language of the pollution exclusion in question, the court concluded that the emissions at issue – discharges of ethylene oxide (EtO) into the atmosphere from a medical-equipment sterilization facility by the insured and its successor for over three decades –“fit squarely within the plain and ordinary meaning of ‘traditional environmental pollution.’” The court found it irrelevant that the facility had emitted EtO under a state permit, reasoning that the exclusion “says nothing about permitted or authorized pollution” and the permit did not change the character of the EtO emissions as pollution. According to the court, “if the EtO emissions were not pollution, there would have been no need . . . to obtain a permit . . . in the first place.”
* The exclusion bars coverage for “bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water.”
PRIMARY/EXCESS INSURANCE
N. River Ins. Co. v. James River Ins. Co., 2026 Nev. LEXIS 8 (Nev., Jan. 29, 2026)
Nevada Supreme Court, answering a certified question from the Ninth Circuit, holds that an excess insurer may pursue an equitable subrogation claim against a primary insurer that fails to settle within the primary policy’s limits when the insured, but for the excess insurer’s contribution to the settlement, would have had a claim against the primary insurer for its failure to reasonably settle. Agreeing with the reasoning of courts in “many” jurisdictions, the Nevada court reasoned that equitable subrogation allows the excess insurer to stand in the insured’s shoes and assert all claims against the primary insurer that the insured itself could have asserted, including for failure to accept a reasonable settlement offer. The court further explained that a right to equitable subrogation does not require that the subrogor suffer actual loss, but instead that the subrogor would have suffered loss had the subrogee not discharged the liability. Here, without the excess insurer’s contribution toward the settlement above the primary policy’s limit, the insured would have suffered damages. Therefore, it was irrelevant, for purposes of the equitable subrogation claim, that the underlying suit settled within the policies’ combined limits.
2025 YEAR IN REVIEW
Cases to Know
Tenth Circuit predicts the New Mexico Supreme Court would find that absolute pollution exclusions in the general liability policies at issue* would unambiguously preclude coverage for an underlying CERCLA cost recovery and contribution action involving groundwater contamination from a dry-cleaning business. According to the underlying suit, during 2+ decades of dry-cleaning operations, PCE and other hazardous substances were used and released to soil and groundwater at and to the site, which consists of a 3.5 billion gallon plume of PCE-contaminated groundwater. Finding no duty to defend or to further investigate, the Tenth Circuit rejected the determination of ambiguity by the trial court, which was based in part on adoption of what the appeals court termed “an outlier approach to interpreting absolute pollution exclusions: the Indiana approach.”** That approach, the circuit court said, is inconsistent with New Mexico authority holding it is “‘unreasonable to require [an insurer] to provide an exhaustive list of noncovered activities’ under an exclusion ‘in order for the clause to be considered unambiguous.’” The court explained (emphasis added):
The terms “pollutant” and “contaminant” are unambiguous on their face, and the terms thus unambiguously applied and precluded coverage in the CERCLA suit. The policy bars coverage for property damage by way of released contaminants, and the complaint alleges that hazardous substances contaminated groundwater. The CERCLA allegations fit nearly verbatim within the policy’s exclusion. And, as for Chisholm’s’ argument that the policy’s definition of “pollutant” does not list each of the named substances in the CERCLA complaint, regardless of what substances are alleged in the complaint, all substances released from Chisholm’s’ property contaminated groundwater and drinking water, making all substances “contaminants” and, in turn, “pollutants” under the policy.
Separately, the Tenth Circuit concluded that the “alternative liability provision” of one of the exclusions unambiguously did not apply, and thus no defense obligation existed, since there was no common law claim or request for common law damages arising from the underlying CERCLA complaint against the policyholder.***
The court denied applications by the policyholder to certify certain questions to the New Mexico Supreme Court and for rehearing and rehearing en banc.
* The two pollution exclusions at issue provide:
(1) The policy does not cover “‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants. . .[a]t or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.” The exclusion also precludes coverage for “[a]ny loss, cost or expense arising out of any. . .[r]equest, demand or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants.”
“Pollutants” is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, petroleum, petroleum products and petroleum by-products, and waste.”
(2) This “insurance does not apply to. . .‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape or emission of pollutants. . . [a]t or from any premises, site or location which is or was at any time owned or occupied by. . . any insured.” The exclusion includes an “alternative liability provision” which states that certain of its provisions “do not apply to liability for damages because of ‘property damage’ that the insured would have in the absence of such a request, demand, order or statutory or regulatory requirement, or such claim or ‘suit’ by or on behalf of a governmental authority.”
“Pollutant” is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, petroleum, petroleum products and petroleum by-products, and waste.”
** The parties advised the court that the Indiana approach would “require the policy here to specify the exact type of pollutant by name. If not exact, the parties believe that the Indiana approach would deem an exclusion ambiguous.”
*** The Tenth Circuit cited Clean Harbors Envtl. Servs., Inc. v. Boston Basement Techs., Inc., 916 N.E.2d 406 (Mass. App. Ct. 2009) which it said interpreted the alternative liability provision as creating a common law tort exception to the pollution exclusion. According to the district court, Clean Harbors appears to be the only published American decision “directly examining the scope and meaning” of this provision.
Est. of Wheeler v. Garrison Prop. & Cas. Ins. Co., 564 P.3d 611 (Alaska 2025) (Pollution Exclusion)
Alaska Supreme Court, on certified question* from the Ninth Circuit, holds that a “total” pollution exclusion** in a homeowners policy does not apply to a death claim involving carbon monoxide exposure from a residential water heater. Although it agreed that the policy’s definition of “pollutants” was broad and that carbon monoxide can reasonably be understood to be a “contaminant” and an “irritant” as ordinarily defined,*** the court concluded that the terms in the exclusion describing the method by which “pollutants” cause harm, such as “discharge” and “dispersal,” are “‘terms commonly associated with environmental law’ that suggest a narrower interpretation, excluding coverage for the kind of pollution that harms the environment” (quoting Essex Ins. Co. v. Avondale Mills, Inc., 639 So. 2d 1339, 1341-42 (Ala. 1994)). It further reasoned that, based on the policy’s exclusions for injury arising out of exposure to lead and asbestos, which it characterized as “common household ‘pollutants,’” a reasonable insured could infer that “exposure to toxic substances commonly found within the home does not fall within the pollution exclusion.” Notably, it acknowledged that some jurisdictions have interpreted the pollution exclusion in light of its supposed “drafting history,” but stated that drafting history was irrelevant to the analysis because “[m]ost reasonable people are not aware of the drafting history of clauses in insurance policies.”
* The certified question was: “Does a total pollution exclusion in a homeowners’ insurance policy exclude coverage of claims arising from carbon monoxide exposure?” The Alaska court chose to “slightly rephrase” the question as: “Does the pollution exclusion in the [at-issue] homeowners insurance policy bar coverage for injury arising out of exposure to carbon monoxide emitted by an improperly installed home appliance?”
** The policy’s pollution exclusion bars coverage for “bodily injury” and “property damage” “[a]rising out of the actual, alleged, or threatened discharge, dispersal, release, escape, seepage or migration of ‘pollutants’ however caused and whenever occurring.” “Pollutant” is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
*** The court cited dictionary definitions of “contaminant” (“a substance that contaminates”), “contaminate” (“to make impure, infected, corrupt. . .by contact” and to “pollute”), “irritant" (“something that causes irritation”) and “irritation” (“a condition of soreness or inflammation in some organ or [bodily] part”).
California appeals court holds that the presence of debris from a nearby wildfire at an insured residence, which sustained no burn damage, did not qualify as “direct physical loss to property” under a homeowners policy. The court relied primarily on case law stemming from the COVID-19 pandemic and held that the wildfire debris did not “alter the property itself in a lasting and persistent manner”; rather, the evidence indicated the debris was “easily cleaned or removed.” Citing to other California authority (emphasis added), it further rejected as irrelevant the fact that the insurer made payments to the insureds even though there was no coverage:
Because insurance companies often adjust claims for reasons entirely unrelated to their merits, [the insurance company’s] decision to pay money to the [insureds] may not be construed either as an admission of liability or as the substantive equivalent of accepting its obligations under the policy.
Requests to depublish the opinion were denied by the California Supreme Court on April 30, 2025 (2025 Cal. LEXIS 2464).
Sixth Circuit, applying Michigan law, holds that underlying claims (negligence, assault, and battery) arising out of an accidental killing during a gunfight did not allege a covered “occurrence” under the homeowner’s policy at issue even though the victim was not the intended target and the insured claimed he was acting in self-defense. The policy defines “occurrence” as “an accident” that results in “bodily injury” or “property damage” and also includes an intentional acts exclusion.* The court explained that Michigan applies a subjective standard (unless the policy provides otherwise) and defines an accident as “an undesigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected.” Unforeseen consequences of an intentional act are not accidental when “the intended act created a direct risk of harm from which the consequences should reasonably have been expected by the insured.” Here, there was no “occurrence” since harm to the victim while unintended was a foreseeable result of the insured aiming a gun and shooting at a vehicle in which she was an occupant. Even if the insured was validly acting in self-defense (and within the exception to the referenced exclusion), according to the opinion, his actions would not be accidental under available Michigan authority.**
Audio of the argument is available here.
* The exclusion precludes coverage for injury/damage that was (1) “a result of a willful and malicious act or omission of the insured;” (2) “intended by the insured;” or (3) “would have been expected by the insured based on a reasonable person standard.” It provides that parts (2) and (3) “do not apply to bodily injury or property damage resulting from the use of reasonable force to protect persons or property.”
** It cites for example to Auto Club Group Ins. Co. v. Burchell, 642 N.W.2d 406 (Mich. Ct. App. 2001) as saying “the insured’s actions were either unforeseeable accidents or intentional actions taken in self-defense; they cannot be both.” A concurring opinion asserts that other actions taken in self-defense could be found to result in a covered occurrence under this policy language.
New York appeals court issues a mixed decision on whether a suit against an insured-church and its youth group leader arising out of alleged sexual abuse was subject to New York’s timely-disclaimer requirement (N.Y. Insurance Law §3420(d)(2)) for bodily injury claims. As to the leader, the court found no duty to defend or indemnify under the liability policies issued to the church because: (1) in committing the alleged abuse, he had “departed from his duties for solely personal motives unrelated to the furtherance of [the church’s] business” and, thus, was not an “insured,” which the policies defined to include the named insured’s employees “but only for acts within the scope of their employment by” the named insured; and (2) the underlying claim did not arise out of an accident under New York law, since the alleged abuse was intended from the standpoint of the leader. Since the claims against the leader fell outside the policies’ insuring agreements, the insurer was not required to issue timely written notice of disclaimer (“as soon as is reasonably possible”) as to him under N.Y. Insurance Law §3420(d)(2).
As to the church, the court held the insurer was required to issue a timely disclaimer based on a misconduct exclusion in the policies as it was not disputed that the church was an insured and the underlying claim arose out of an accident from its standpoint. According to the court, the insurer’s initial email correspondence, sent 8 days after it had obtained the policies at issue, did not comply with the statute because it did not “apprise the claimant with a high degree of specificity of the ground or grounds on which the disclaimer is predicated.”* Although it agreed that the insurer’s subsequent email correspondence, sent 56 days after it had the policies, was sufficiently specific, the court held the disclaimer was untimely as a matter of law, even though the insurer argued the initial claim notice letter it received was “generic” and that its later email was sent 41 days after the underlying suit was filed.
* The insurer’s initial email stated that “it does not appear there was any misconduct coverage added to the policies” and that the policies “includ[ed] a specific exclusion for any misconduct or any type of allegation relating to misconduct.”
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