Coverage Pointers - Volume IV, No. 1
07/11/02: PEOPLE v. ELRAC
New York State Supreme Court (Trial Court)
Self-Insured Car Rental Company’s Duty to Defend Extends Through Conclusion of Litigation
The Attorney General commenced this action against ELRAC (ELRAC, Inc., Snorac, Inc. and Enterprise Rent-A-Car Company), a self-insured rental company, to define the scope and extent of its duty to defend permissive users of leased vehicles when a motor vehicle accident claim is made. The issue arises in the wake of ELRAC, Inc. v. Ward, 96 NY2d 58 (2001), wherein the Court of Appeals held that a self-insured car rental company must provide the statutory minimum liability coverage required under Vehicle and Traffic Law §370 to “’inure to the benefit’ of any permissive user of the vehicle”, which, in a footnote to the decision, the Court of Appeals stated “of course, includes a duty to defend”. This court held that the self-insured car rental company’s duty to defend the action extends through the conclusion of the litigation, and cannot be terminated upon payment of a settlement or damages prior to the complete resolution of the claim. The court observed that the availability of a defense through the conclusion of all litigation is part of New York’s automobile insurance obligation, which the court concluded was supported by the Court of Appeal's observation that the self-insurance program “is in no way intended to decrease the insurance protection” otherwise available to drivers of rented automobiles (citing Allstate Insurance Co. v. Shaw, 52 N.Y.2d 818 (1980)). Thus, self-insurers must assign attorneys to provide a defense to users of its vehicles. The court held, however, that a car rental company’s duty to defend could not be determined globally, as the duty is not inescapable or unalterable. Rather, termination or modification of the duty must be determined on a case-by-case basis.
Second Circuit (applying New York law)
Are the Winds Blowing East? Federal Appeals Court, Following New York Law, Reinstates Bad Faith Verdict Against Carrier for Failure to Settle
In “excess” v. “primary” case, Second Circuit adopts New York Pattern Jury Instruction on “bad faith” in “refusal to settle” case and reinstates a jury verdict, finding that refusal to settle a medical malpractice action against plaintiff's and defendants’ insured constituted “bad faith”. Comprehensive discussion of New York law. Not necessary for jury to find “clear liability” before bad faith verdict can be sustained.
New York Court of Appeals
New York High Court Refines Quality of Proof Necessary to Establish “Serious Injury” Under No Fault Law
In trilogy of cases, New York high court refines and amplifies definition of “serious injury” under No Fault law. Diagnosis of injuries, including herniated disks, which are confirmed by objective tests such as MRI together with doctor’s findings of permanent loss of range of motion are sufficient to establish a “permanent consequential limitation” serious injury. However, chiropractor’s report of “spasm” is insufficient “objective medical evidence” to justify finding of 90/180 day disability. Although medical testimony concerning observations of a spasm can constitute objective evidence in support of a serious injury, the spasm must be objectively ascertained. This requirement was not satisfied by the testimony of plaintiff's expert that he detected a spasm, where he did not, for example, indicate what test, if any, he performed to induce the spasm. Furthermore, the chiropractor testified on cross- examination that the tests he administered to reach his conclusion regarding plaintiff's limitation of motion were subjective in nature as they relied on plaintiff's complaints of pain. Nor did the MRI report he mentioned constitute objective proof. In two of the cases here, the Court recognized that an expert’s conclusion based on a review of MRI films and reports can provide objective evidence of a serious injury. In this case, however, the witness merely mentioned an MRI report without testifying as to the findings in the report. Moreover, the MRI report was not introduced into evidence, thus foreclosing cross-examination, nor did the chiropractor testify that the underlying MRI film supported his diagnosis of an “L4-5 intervertebral disk disorder.” Given the inadequacy of the objective medical proof supporting the opinion of plaintiff's expert, defendants’ motion to set aside the verdict should have been granted.
New York State Supreme Court, Appellate Division, First Department
Absolute Pollution Exclusion Bars Claims Arising From Discharge of Mining Waste
Court held that absolute pollution exclusion barred claims arising from the discharge of mining waste. While the waste could be used as a commercial product, court held that exclusion applied because the hazardous substances were released into the open environment making it a case “where the damages alleged are truly environmental in nature, [and] where the underlying complaint alleges damages resulting from what can accurately be described as the pollution of the environment”. Court concluded “hazardous substances are not rendered non-polluting by the fact that they are naturally occurring since, in this case, the hazardous material ‘is not found in its unaltered form because mining, an unnatural process, has altered its location’”.
Visit the HOT CASES section of the Federation of Defense and Corporate Counsel website for cases covering a broad range of legal issues from other jurisdictions: www.thefederation.org.
07/09/02: HALL v. ACADIA INS. COMPANY
Maine Supreme Judicial Court
Auto Property Insurer Not Liable for Diminution in Value of Vehicle Involved in Accident, Only Amount to Repair
The issue presented in this case is one of first impression in Maine: whether an automobile insurance policy provision limiting the insurer’s liability to the amount necessary to “repair” the vehicle includes liability to pay for the diminution in the value of the vehicle resulting from the fact that it has been involved in an accident in addition to the cost of physically repairing the vehicle. Court concludes that the insurer is not liable for the diminution in the value of the vehicle and, finding no error, affirms the judgment.
07/05/02: LEO HAUS, INC. v. SELECTIVE INSURANCE
New Jersey Court of Appeals
Pollution Exclusion Applicable to Personal Injury Claims
Pollution exclusion provision in a homebuilder’s commercial liability insurance policy applies to personal injuries suffered by the homeowners when the home’s heating units discharged carbon monoxide over a one-year period. Coverage was excluded for “injury” “to persons” which “arises out of the ‘pollution hazard,’” which “means an actual exposure . . . to the . . . toxic or other harmful properties of any ‘pollutants’ arising out of the discharge, dispersal, seepage, migration, release or escape of such ‘pollutants.’” “Pollutants” were defined to include any “gaseous . . . contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Here, carbon monoxide, a gaseous contaminant, was discharged, dispersed, released or escaped into the living areas of the home, causing injury.
Prepared by Daniel Mawhinney of Thompson & Bowie, LLP in Portland, Maine.
07/05/02: BURCHETT v. KANSAS MUTUAL INS. CO.
Kansas Supreme Court
Property Policy Means what it Says -- If Insured Doesn’t Rebuild, ACV Recoverable, Not Replacement Cost
Where the unambiguous terms of an insurance contract require the insured to actually repair or replace damaged property as a precondition to collecting the full replacement cost of the damaged property and where the Kansas Valued Policy Law, K.S.A. 40-905, is inapplicable, the insured is entitled to receive only the actual cash value of a totally destroyed structure that is not rebuilt, even if the policy limits exceed the structure’s actual cash value.
07/02/02: BALTIMORE v. UTICA MUTUAL
Maryland Court of Appeals
Maryland Tackles Asbestos Coverage
This case involves a garnishment in Maryland seeking to access insurance coverage to pay a consent judgment the City of Baltimore obtained against Croker (an installer of asbestos products) for damages caused to a number of City buildings. Among other things (relating to appellate jurisdiction and garnishment in Maryland), the decision reached the following conclusions on coverage issues: (1) the product hazard exclusion applies to claims for negligent failure to warn of an inherently dangerous product such as asbestos; (2) “injury-in-fact” is an appropriate trigger of coverage rule for asbestos-in-building property damage claims; it rejects coverage theories that are based exclusively on exposure to harm or manifestation of injury; holds that the City is entitled to present evidence that the presence of asbestos resulted in property damage that continued beyond the date the asbestos was discovered and, thus, potentially show that there was an occurrence in subsequent policies but, the trial court on remand must also consider the “known loss” defense the insurers raised; (3) adopted a pro rata/time on the risk allocation formula [not the Owens-Illinois formulation; rejected an “all sums” approach; the insured will be liable for a pro rata share for uninsured periods; and horizontal exhaustion will apply.
Prepared by Louis G. Corsi of Landman Corsi Ballaine & Ford PC in New York.
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New York Law Journal July 11, 2002
SUPREME COURT, Ia Part 8, Justice Lebedeff
This proceeding was brought by the Attorney General, in the name of the People of the State of New York, pursuant to Executive Law §63 (12) and Article 22-B of the General Business Law ("GBL"), against respondents ELRAC, Inc., Snorac, Inc. and Enterprise Rent-A-Car Company, all doing business as Enterprise-Rent-A-Car ("ELRAC").
The parties ask the court to define the scope and extent of the duty to provide a legal defense for permitted users vehicles leased from ELRAC when a claim is made regarding a motor vehicle accident. ELRAC is a self-insurer and this issue arises as self-insured rental car companies and regulatory agencies implement the April 3, 2001, decision of the Court of Appeals in ELRAC, Inc. v. Ward, 96 N.Y.2d 58 (2001), which held that a self-insured rental company must provide the statutory minimum liability coverage to "'inure to the benefit' of any permissive user of the vehicle" (96 N.Y.2d at 73), and a rental car company cannot seek indemnification from its lessee "where the damage falls below the minimum insurance that the rental company is required to provide" by VTL §370 (1) (96 N.Y.2d at 69). As relevant to this decision, the Court of Appeals further noted that VTL §370 coverage, "of course, includes a duty to defend" (96 N.Y.2d at 75, n. 4 [citations omitted]).
All New York vehicles are subject to automobile liability
coverage requirements which ELRAC satisfies, not by the purchase of insurance,
but by being approved by the Commissioner of Motor Vehicles as a self-insurer
under VTL §370 (3). Self-insurance, in general, is simply an assurance that the
self-insurer has the financial means to pay any judgments against it (see,
Guercio v. Hertz Corp., 40 N.Y.2d 680 ), for a self-insurer is not an
"'insurer' of anything other than [its] own ability to pay for damages for which
[it] is legally responsible" (40 N.Y.2d at 684). While this arrangement is
sometimes confusingly called a "'policy' of self-insurance" (40 N.Y.2d at 485),
there is no actual insurance policy.
The self-insurance coverage amount is the legal minimum statutorily required personal injury liability coverage amount, including uninsured motorist coverage (Allstate Insurance Co. v. Shaw, 52 N.Y.2d 818, 820 ). For a typical car with a seating capacity of seven or fewer passengers, such required coverage for personal injury is a minimum of $25,000 and a maximum of $50,000 and, for death, a minimum of $50,000 and a maximum of $100,000 (VTL §370 [a]). Until recently, property damage coverage was not viewed as required and self-insured rental car companies could disclaim all liability for property damage (ELRAC, Inc. v. Masara, 96 N.Y.2d 847 ); such self-insured companies now must provide property damage liability coverage up to $10,000 (L. 2002, ch. 20, eff. March 26, 2002, amending VTL §370 [b]). If a renter wishes coverage above the statutory limits, a renter may pay an optional daily charge and receive "supplemental liability protection," often referred to as "SLP." The impact of SLP or other insurance upon the obligation to provide a defense is not at issue here (see, as to such issues, generally, William T. Barker, Combining Insurance and Self Insurance: Issues for Handling Claims, 61 Def. Couns. J. 352 ).
The typical "duty to defend" was crisply defined in Frontier Insulation Contractors, Inc. v. Merchants Mut. Ins. Co., 91 N.Y.2d 169, 175 (1997), as follows: "If any of the claims against the insured arguably arise from covered events, the insurer is required to defend the entire action [citation omitted]." No reason is advanced here justifying a departure from this rule, under which it is expected that there is a duty to assign an attorney to defend the driver or permitted user, which attorney shall continue to defend the action through its conclusion.
This "duty to defend" cannot be terminated upon payment of a settlement or damages prior to the complete resolution of any litigation or claim, as ELRAC urges.† Indeed, it is the general New York rule that automobile insurers must pay all defense costs until a case ends (11 NYCRR 60.1 [b]) and that automobile insurers cannot be excused from providing a full defense by tendering the policy amount (Exchange Mutual Ins. Co. v. Geiser, 130 Misc.2d 959 [Sup. Ct. Albany Co. 1986, Hughes, J.], and Delaney v. Paratransit, Inc., 132 Misc.2d 937 [Sup. Ct. Schenectady Co. 1986, Kahn, J.]; see, collecting cases from various jurisdictions, J. Kraut, Annotation, Liability Insurer's Duty to Defend Action Against an Insured after Insurer's Full Performance of its Payment Obligations under Policy, 27 A.L.R.3d 1057). Simply put, satisfaction by an insurer or self-insurer of the "duty to pay" is utterly separate from the satisfaction of the "duty to defend" (see, addressing separate nature of these duties, New York City Housing Authority v. Commercial Union Ins. Co., 289 A.D.2d 311, 313 [2d Dept. 2001], "While the duty to defend is based on the allegations in the complaint, the duty to indemnify is based on whether the loss is covered by the policy"; Servidone Constr. Corp. v. Security Ins. Co., 64 N.Y.2d 419, 424 , "the duty to pay is determined by the actual basis for the insured's liability to a third person").
Finally, given that the availability of a defense through the conclusion of all litigation is seen as a part of the New York automobile insurance obligation, the obligation to continue to provide a defense is supported by the Court of Appeal's observation that the self-insurance program "is in no way intended to decrease the insurance protection" otherwise available to drivers of rented automobiles (Allstate Insurance Co. v. Shaw, supra, 52 N.Y.2d at 820). This court concludes to permit a self-insurer to abandon the defense of its insured prior to completion of the litigation would violate New York's "well-established proscription against permitting an insurer to place its own financial interests above those of its insured" (Ansonia Associates Ltd. Partnership v. Public Service Mut. Ins. Co., 257 A.D.2d 84, 86 [1st Dept. 1999]). The determination that there is no special and separate rule for self-insurers regarding the scope of the defense obligation is consistent with the American "majority view ... that self insurers are under the same duty to defend their 'insureds' and to contribute to defense costs ... as exist for an insurance company" (1 Couch on Insurance 3d §10:7 ). For these reasons, the court concludes that the defense obligation of a New York self-insured car rental company extends through the conclusion of the case and cannot be eliminated by tendering to a claimant the part or all of the amount of available coverage.
Nonetheless, this court cannot go so far as to rule that ELRAC has an inescapable or unalterable duty to defend. The issue of termination or modification of a defense obligation by an insurer must be raised on a case-by-case basis in the forum before which the case or claim is pending and cannot be decided here on a global basis. There are two courses of action available. The best recognized is an affirmative declaratory judgment action in which a self-insurer advances the position that there is no duty to defend in a particular instance (see, for example, AIU Insurance Co. v. ELRAC, Inc., 287 A.D.2d 668, 669 [2d Dept. 2001], self-insurer not required to defend or indemnify when unauthorized driver operating rented vehicle).
Alternatively, a particular counsel may seek to be relieved from the obligation to represent a client by a motion made under CPLR 321 (b), which governs the withdrawal of an attorney from a matter.† As explained in the Practice Commentaries of Vincent C. Alexander:
"[A]n attorney may have good and sufficient reasons to seek withdrawal from representing the client. When a change of attorneys occurs during the course of an action, however, the judicial system's interest in procedural regularity and fairness to other parties requires certainty as to the point in time at which a party's change of counsel should be deemed effective. CPLR 321 (b) provides such certainty.
"When the change of counsel can be effected by agreement, the party and the outgoing attorney can simply file a jointly signed consent (with an acknowledgment by the client) with the clerk and serve notice of the change of attorney on the other parties. CPLR 321 (b)(1). If consent is lacking, judicial intervention is required for substitution of counsel. A motion must be made upon such notice as the court may direct, i.e., by order to show cause. The notice of motion must be given to the client of the outgoing attorney, the other parties and any other appropriate person as the court may direct." (Vincent C. Alexander, Practice Commentaries, McKinney's Consol. Laws of N.Y., Book 7B, CPLR C321:2 .)
While it is abundantly clear that a motion to withdraw as counsel is an inappropriate means to test an insurer's obligation to defend (Laura Accessories, Inc. v. A.P.A. Warehouses, Inc., 140 A.D.2d 182 [1st Dept. 1988], counsel, assigned by insurer to represent insured, must file declaratory action to secure a finding of no coverage; Rusolo v. Skate Odyssey, 109 A.D.2d 875 [2d Dept. 1985], disclaimer based on insured's alleged lack of cooperation not proper basis for a motion to withdraw), two types of exceptions to this general rule have been recognized.
One exception exists if a court finds a conflict of interest between the insured and the insurer exists which forms a sound basis for a motion to withdraw (see, Torres v. Bratcher, 35 A.D.2d 922 [1st Dept. 1970], attorney for insurance company permitted to withdraw where policy cancelled for nonpayment of premiums, resulting in conflict of interest between obligation of attorneys to insurer and to individual defendant). It is difficult to envision such a conflict arising between a rental car company self-insurer and a permitted user of a leased vehicle. The essential nature of the relationship for the specific type of self-insurance involved here, which covers the car rental company as owner and all permitted users, is captured by the utilized label of "omnibus" coverage (1 Couch on Insurance, supra, at §10:5). Both the car rental company and the permitted user stand on common ground, for there is no deductible nor policy exclusion which might pit their interests against each other and both desire to resolve litigation within the statutory coverage limits (compare, Pavia v. State Farm Ins. Co., 82 N.Y.2d 445, 452 , recognizing the more typical tension between a normal "insurer's interest in minimizing its payments" and an "insured's interest in avoiding liability beyond the policy limits"). In the common situation of the car rental company's liability being only derivative, the self-insurer gains nothing by an argument emphasizing the driver's liability; the self-insuring car rental company has no "incentive to direct the defense in a manner designed to do anything other than minimize liability" (William T. Barker, Combining Insurance and Self Insurance: Issues for Handling Claims, supra, 61 Def. Couns. J. at 355).
The second recognized ground for a motion to withdraw might arise when, in addition to the self-insurance, the lessee or driver has other insurance or indemnification arrangements (id.; see also, Jane Massey Draper, Annotation, Performance by One Insurer of Its Duty to Defendant as Excusing Failure of Other Insurers Equally Obligated To Defend, 90 A.L.R.3d 1199). In such an instance, if ELRAC were to tender the full amount which could be claimed under the available self-insurance coverage, the ELRAC assigned counsel might have grounds to move to be substituted by counsel assigned by another insurer or indemnitor (see, for example, Duffy v. County of Chautauqua, 247 A.D.2d 854 [4th Dept. 1998], where commercial liability policy limits exhausted and another insurer had undertaken defense, attorneys could withdraw). As a practical matter, it seems unlikely that this situation will arise with any frequency. Documentation shows that the average claims made and/or paid by ELRAC rarely reach elevated levels. Taking the statistics ELRAC reported to the Department of Motor Vehicles in recent self-insurance program applications, for the approximately 17,000 ELRAC rental vehicles in New York, for 2000, ELRAC paid an average of $5,039.42 on 359 pure personal injury claims, paid on average of $3,266.29 on 2,401 combined personal injury and property damage claims, and set aside reserves averaging $5,855.99 for each of the 743 pending pure personal injury claims; similarly, for 1999, ELRAC paid an average of $5,423.20 on 311 pure personal injury claims, paid an average of $3,876.62 on 1,142 combined personal injury and property damage claims, and set aside reserves averaging $7,121.66 for each of the 852 pending pure personal injury claims.
Because of these two exceptions, this court cannot rule that counsel assigned by ELRAC should be barred from moving for permission to withdraw. The proper course is to leave treatment of a motion to withdraw to the sound discretion of the forum in which each litigation or dispute is pending. Each individual presiding judge, or perhaps arbitrator, must balance the interests involved.
To draw to a close on the duty to defend, this court determines that ELRAC, as a self-insurer, must assign an attorney to provide a defense for users of its vehicles. The defense obligation may be terminated if either (1) a declaratory judgment determines there is no duty to defend, or (2) an order of an appropriate tribunal relieves the attorney assigned the litigation of the duty to represent such client.
As to the form in which this determination is to be embodied, both parties request a declaration sustaining their respective positions. The petition provides a basis for substantively similar injunctive relief because it is undisputed that, prior to the issuance of the decision in ELRAC, Inc. v. Ward, supra, ELRAC regularly advised its renters and permitted users that it would not provide a legal defense if an accident ensued, which is now established to be improper advice as a matter of law. An injunction may issue pursuant to Executive Law §63 (12), because even the voluntary cessation of unlawful activity does not obviate the need for, or the propriety of, an injunction (People v. General Elec. Co., Index No. 400927 [Sup. Ct., N.Y. Co. 2001]; State of New York v. Midland Equities of NY, Inc., 117 Misc.2d 203 [Sup. Ct., N.Y. Co. 1982]; Matter of State of New York v. Hotel Waldorf-Astoria Corp., 67 Misc.2d 90 [Sup. Ct. N.Y. Co. 1971]). Similarly, under General Business Law §349 (b), an injunction may be granted where a commercial misrepresentation clearly is made out by the papers before the court (People v. Appel, 258 A.D.2d at 957 [4th Dept. 1999], and Matter of the State of New York v. Stein, 72 A.D.2d 872 [3rd Dept. 1979]), even on proof which does "not reach the level of common-law fraud" (Stutman v. Chemical Bank, 95 N.Y.2d 24, 29 ). All other requests for relief in relation to the duty to provide a defense -- including claims for restitution to consumers, penalties, and possible retroactive application of this ruling -- are severed and deferred without a determination of liability at this time (see, similar severance, People v. Alamo Rent A Car, Misc.2d 501 [Sup. Ct. N.Y. Co. 1997, Crane, J.], following prior decision 162 Misc.2d 636 [Sup. Ct. N.Y. Co. 1994], affd 226 A.D.2d 294 [1st Dept. 1996], affd 89 N.Y.2d 560 ).
 ††† Under ELRAC's scenario, if ELRAC tendered its maximum dollar coverage but the plaintiff or claimant demanded a still higher amount, ELRAC's duty to defend would be satisfied and the driver or permitted user would thereafter be compelled choose whether to proceed pro se, to secure and pay for substitute counsel to appear through the conclusion of the matter, or to cease participation and be held in default.
 ††† CPLR 321 (b) provides as follows:
"(b) Change or withdrawal of attorney.
"1. Unless the party is a person specified in section 1201 [j e., an infant, incompetent person or conservatee], an attorney of record may be changed by filing with the clerk a consent to the change signed by the retiring attorney and signed and acknowledged by the party. Notice of such change of attorney shall be given to the attorneys for all parties in the action or, if a party appears without an attorney, to the party.
"2. An attorney of record may withdraw or be changed by order of the court in which the action is pending, upon motion on such notice to the client of the withdrawing attorney, to the attorneys of all other parties in the action or, if a party appears without an attorney, to the party, and to any other person, as the court may direct."
Order and judgment (one paper), Supreme Court, New York County (Walter Schackman, J.), entered July 23, 1996, which, inter alia, granted a motion by defendants Federal Insurance Company, et al., for summary judgment based on the absolute pollution exclusion in the subject policies, dismissed plaintiffs' complaint as against those insurers, and adjudged and declared that those insurers have no duty to defend, reimburse or indemnify plaintiffs under the subject policies, unanimously affirmed, with costs. Appeal from order and judgment (one paper), same court and Justice, entered July 23, 1996, which, inter alia, granted certain other insurers summary judgment based on pollution exclusion clauses in their subject policies despite a "sudden and accidental" exception to the relied upon exclusion, with related relief, unanimously dismissed, as moot, without costs. Order, same court and Justice, entered September 4, 1996, which, to the extent appealed from as limited by the brief and to the extent not moot, denied plaintiffs' motion for reconsideration of the earlier orders, unanimously affirmed, without costs.
The motion court correctly found that the absolute pollution clause relied upon by defendant insurers cannot be reasonably and fairly interpreted except to exclude the underlying claims arising from the discharge of mining waste from coverage (see, Vigilant Ins. Co. v V.I. Techs., 253 AD2d 401, 402, lv dismissed 93 NY2d 999). Even if mining waste can be used as a commercial [*2]product, it is nonetheless covered by the absolute pollution exclusion, since indisputably hazardous substances were released into the open environment (cf., Roofers' Joint Training, Apprentice & Educ. Comm. v Gen. Acc. Ins. Co. of Am., 275 AD2d 90), making this a case "where the damages alleged are truly environmental in nature, [and] where the underlying complaint alleges damages resulting from what can accurately be described as the pollution of the environment" (see, Belt Painting Corp. v TIG Ins. Co., __ AD2d __, 2002 NY App Div LEXIS 5146). The hazardous substances are not rendered non-polluting by the fact that they are naturally occurring (see, Space v Farm Family Mut. Ins. Co., 235 AD2d 797, 798), since, in this case, the hazardous material "is not found in its unaltered form because mining, an unnatural process, has altered its location" (see, Monarch Greenback v Monticello Ins. Co., 118 F Supp 2d 1068, 1080).
All of plaintiffs' remaining arguments have been rendered moot by their settlement with all defendants except Federal Insurance Company.