The Insurance and Reinsurance Report

COUNTRYWIDE FINANCIAL CORP. APPEALS RULING THAT MORTGAGE INSURERS DO NOT NEED TO ESTABLISH DAMAGES TO RECOVER

In the fall out of the sub-prime mortgage meltdown, numerous mortgage insurers have sued lenders claiming that they were induced to underwrite mortgage risks based on inaccurate, misleading and fraudulent information. In other words, the mortgage insurers are claiming that the mortgages did not meet the underwriting criteria for insurance, but that the mortgage lenders provided incorrect information which caused the policies to be written. In two actions, Syncora Guarantee, Inc. v. Countrywide Home Loans, and MBIA Insurance Corporation v. Countrywide Home Loans, the insurers are seeking to recover for amounts paid out on policies that were underwritten based on misrepresentations, as well as force Countrywide to repurchase the risk for the allegedly defective mortgage loans.

The insurers sought a declaration that they were entitled to recover: (1) for damages on a fraudulent inducement claim upon proof that there was a fraudulent inducement, without regard to whether the inducement caused damages; (2) for damages on a breach of contract claim, upon proof that demonstrates material misrepresentation, not that damages resulted from the misrepresentation; and (3) on its claim to have Countrywide repurchase defective mortgage loans, upon proof that the loach breached a representation or warranty in a way that increased the risk profile of the insurance, without demonstrating the increased risk lend to a loss. Countrywide argued that the insurers must demonstrate losses caused by the alleged breaches to recover.

In a January 3, 2012 decision, Hon. Eileen Bransten, Supreme Court, New York County granted the insurers’ motion in part, seemingly lowering the bar to establish recovery for fraudulent inducement by eliminating a requirement establishing damages from the breach. It held that the insurers could recover “rescissory damages” upon proof of material representation (without regard to causation), but denied other relief. Both parties have now appealed, with Countrywide contesting the insurer’s ability to recover damages without showing causation. In the Pre-Argument Statements filed by Countrywide on January 27, 2012, which can be found here, Countrywide argues that damages cannot be awarded without causation and that the judge’s decision should be reversed in its entirety on that basis alone.

For a copy of Countrtwide's papers click here

Sarah Delaney

 

 

 

 

Ninth Circuit Weighs in on Excess Insurer's Duty to Defend

National Union Fire Insurance Company of Pittsburgh, PA v. Seagate Technology, Inc.,  (9^th Cir., January 20, 2012, No. 10-17194)

 In today’s insurance litigation environment, United States Courts of Appeals are rarely required to weigh in on such fundamental insurance coverage issues as the duty to defend.  In a rare exception, the Ninth Circuit clarified an excess insurer’s obligations in that regard.

In the underlying case, the insured was sued in connection with its “silent” hard drive.  The complaint alleged misappropriation of trade secrets and patent infringement.  The underlying complaint alleged that the insured “falsely claims that its technology is equivalent to [plaintiff’s] technology.”  Initially, the insured’s primary carriers refused to defend, asserting the complaint did not allege a covered cause of action.  The district court called the case “close” regarding whether the primary insurers had a duty to defend.  At first, it held the insurers did not have a duty to defend, but later reversed that holding based upon the possible disparagement claim.  It then terminated the duty to defend based upon “facts alleged to have happened after the complaint was filed.”  

The insured claimed that because the primary insurer’s duty to defend was terminated, its excess carrier’s duty was triggered.  The district court accepted that argument, but the Ninth Circuit reversed.  Since the primary insurer’s policies were not exhausted, even though the claim exceeded the underlying policy limits and the primary carrier refused to defend, the excess carrier’s defense obligation is not triggered. 

Further, the court held that while the underlying plaintiff’s statements prevented the primary insurers from intervening in the underlying action and defending, the complaint still potentially contained a disparagement claim that had not been resolved.  Thus, the primary insurers had a duty to defend. 

For a copy of this decision click here

Sarah Delaney and Richard Cohen

New York's First Department Rejects Well-Established Precedent on Coverage Notices

George Campbell Painting v. National Union Fire Ins. Co. of Pittsburgh, PA  (N.Y. App. Div. January 17, 2012)

Following settlement of a personal injury lawsuit brought by a subcontractor’s employee against the general contractor and owner, Plaintiffs, the general contractor and owner, sued the subcontractor’s excess insurer (“Insurer”), seeking a declaration that Insurer’s disclaimer of coverage was untimely under former Insurance Law § 3420(d) (current version at § 3420(d)(2)), and seeking recovery, as additional insureds, of Insurer’s alleged pro rata share of the employee’s personal injury settlement. On appeal, the First Department determined that Plaintiffs did not provide Insurer with notice of the employee’s personal injury suit against them until two years after it was filed and over a year after they learned that the employee’s claim, if successful, would far exceed the subcontractor’s primary insurance.

According to the court, pursuant to § 3420(d) of the Insurance Law, once Insurer had all the information it needed to determine that Plaintiffs had failed to give it timely notice of the claim as required by the policy, it had no right to delay disclaiming on the ground of late notice while it continued to investigate whether Plaintiffs were in fact additional insureds. In coming to its decision, the court overruled the case of DiGuglielmo v. Travelers Prop. Cas., which had held that under § 3420(d), an insurer was not required to disclaim on timeliness grounds before conducting a prompt, reasonable investigation into other possible grounds for disclaimer.

The court reasoned that the DiGuglielmo rule was inconsistent with the text of § 3420(d), which requires that a disclaimer be issued “as soon as is reasonably possible.”  To follow the DiGuglielmo rule would permit an insurer to delay deciding whether to disclaim on grounds known to it while pursuing an investigation of other potential grounds for disclaiming liability or denying coverage. The court noted that the Court of Appeals specifically rejected an insurer’s argument that § 3420(d) should be read to require speed in giving notice once the decision to disclaim has been made, but to permit delay in making the decision. According to the Court of Appeals, the literal language of the statutory provision requires prompt notice of disclaimer after decision to do so, and obligates the insurer to reach the decision to disclaim liability or deny coverage within a reasonable time.

Furthermore, the Court of Appeals has also made it clear that the determination of whether the disclaimer was issued as soon as was reasonably possible is made with reference to the time when the insurer first acquired knowledge of the ground upon which it disclaimed. The timeliness of an insurer’s disclaimer is measured from the point in time when the insurer first learns of the grounds for disclaimer of liability or denial of coverage. When the basis for denying coverage was or should have been readily apparent before the onset of the delay of disclaimer, the insurer has no excuse for its delay.

In the opinion of the court, adhering to the DiGuglielmo rule would be tantamount to deliberately setting aside the rule promulgated by the Court of Appeals and flowing naturally from the language of the statute.  Additionally, the court concluded that the policy behind § 3420(d) is best served by applying the rule articulated by the Court of Appeals rather than the DiGuglielmo rule.  Delay on the part of the insurer to disclaim may detrimentally delay the policyholder’s own search for alternative coverage.  Thus, the court held that § 3420(d) precludes an insurer from delaying issuance of a disclaimer on a ground that the insurer knows to be valid while investigating other possible grounds for disclaiming.

For a copy of the decision click here

Matthew Cabral and Jeffrey Kingsley

Sixth Circuit Dismisses Agent’s Fraud Claims against Nationwide

Nemier v. Nationwide Mutual Insurance Company (United States Court of Appeals for the Sixth Circuit, January 13, 2012)

The plaintiff, an agent of defendant Nationwide, brought an action against Nationwide for fraud and breach of contract based on Nationwide’s issuance of a loan to the plaintiff to open an office under a new initiative which Nationwide allegedly promised would be successful. The District court granted summary judgment in favor of Nationwide because Nationwide did not intend to break promises or deceive the plaintiff. The Sixth Circuit upheld the ruling.

The plaintiff was a long time owner of a Nationwide insurance agency in Michigan when Nationwide started a new national initiative to be more competitive which encouraged agents to open satellite offices. The plaintiff expressed interest in opening a satellite office and a Nationwide business consultant prepared a business plan in a new area for her. The consultant  predicted that the office would have positive cash flow, while another Nationwide employee warned the plaintiff that there had been problems rolling out the new initiative.

The plaintiff took out a loan from Nationwide to open the new office, allegedly relying on the consultant’s studies and her past success. The loan would not have to be repaid if the plaintiff met certain sales targets. The plaintiff opened the new office and later learned that Nationwide was selling insurance directly to residents in the area where the plaintiff opened the office and that a Nationwide subsidiary was selling similar insurance at a lower price. Moreover, the new Nationwide initiative was unsuccessful and made its rates less competitive than before. The plaintiff closed her satellite office and missed her sales targets, and later resigned from Nationwide.

The plaintiff alleged three theories of fraud, all of which the court denied. First she claimed Nationwide fraudulently induced her to borrow money by promising more competitive rates in the area. The court found that the statements made by Nationwide were not promises and were not intended to be broken by Nationwide at the outset.

The plaintiff also claimed that Nationwide’s projections for the plan in the area were dishonest. The court found that this was not fraudulent because Nationwide did not know that the projections would be wrong.

Last she alleged that Nationwide acted fraudulently because it did not tell her that Nationwide was going to sell insurance directly or that other agents were unable to meet loan-waiver targets. The court also found this argument unconvincing as Nationwide had no obligation to share such information because this does not constitute knowledge that the plaintiff would naturally rely upon and because both parties were sophisticated business people. Moreover, the court noted that the plaintiff knew that Nationwide could make business decisions adverse to her interests.

The court denied the plaintiff’s breach of contract claim because it should have been aimed at a Nationwide subsidiary and not Nationwide itself.  

For a copy of the decision click here

Jonathan Kuller and Anthony Golowski

Professional Liability Monthly - January Edition is Now Available

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Cases for Professional Liability Monthly – January 2012 Edition

Cases provided courtesy of LexisNexis.

John J. Rivers v. Wachovia Corp.,

Upper Deck Co. v. Endurance American Specialty Ins. Co.,

Don Katz v. China Century Dragon Media, Inc.,

Fallon v. Hahnemann Hosp

Toney v. Chester County Hospital

Jeffrey v. Methodist Hospital

Swain v. Alterman

Javaid v. Weiss

Olszewski v. Jordan,

Jackson v. Truly Green Landscape and Maintenance, Inc.,

Barrick v. Holy Spirit Hosp. of the Sisters of Christian Charity

Bancroft Life & Cas. ICC, Ltd. v. Intercontinental Management Ltd.,

BancInsure, Inc. v. U.K. Bancorporation Inc.United Kentucky

Download Fireman v. Travelers Cas. & Sur. Co. of America

Pollution Exclusion Does Not Bar Carbon Monoxide Claim

Scottsdale Ins. Co. v. Pursley (11^th Cir. (Ga.) Jan. 10, 2012)

The Eleventh Circuit recently held that the pollution exclusion in a CGL policy did not bar coverage for a wrongful death claim arising from carbon monoxide poisoning.

The decedent retained the insured to make repairs on his boat. When making the repairs, the insured neglected to cover the exhausts for the starboard engine. While the repairs were ongoing, the decedent stayed overnight on the boat and used a generator to power the air conditioner. The next morning, the decedent was found dead next to his bed. It was later found that uncovered exhaust vents emitted carbon monoxide into the cabin via the air conditioner.

The decedent’s widow and his estate sued the insured for wrongful death and property damage. The insured’s CGL carrier denied coverage on the ground that the policy’s pollution exclusion applied. The district court agreed and found that the pollution exclusion precluded coverage.

On appeal, the Eleventh Circuit noted that the carrier’s reliance on the Georgia Supreme Court’s holding in Reed v. Auto-Owners Ins. Co., 677 S.E. 2d 90 (Ga. 2008) was misplaced. In Reed, the Georgia Supreme Court found that a pollution exclusion in a landlord’s insurance policy precluded coverage for a claim arising from carbon monoxide poisoning. The Eleventh Circuit noted that in Reed, the insured owned the premises, whereas in the case before it, the insured did not. The distinction was an important one insofar as the exclusion at hand barred coverage only if a pollutant leaks “at or from any premises, site or location which is or was at anytime owned or occupied by or rented or loaned to any insured.” The Eleventh Circuit held that the pollution exclusion did not apply because the insured did not own the boat where the decedent died.

For a copy of the decision, click here

Carrie Appler and Jeffrey Kingsley

 

Insurer RICO Class Action Suit Filed against Walgreen, Par for Overcharging on Generics

United Food & Comm. Workers Unions v. Walgreen Co. U.S. Dist. Ct., N.D. Ill, Filed Jan. 11, 2012

Insurance companies, self-insured employers, and union health and welfare plans filed the class action in Illinois Federal Court alleging several RICO violations against Walgreen Co. and Par Pharmaceutical Co. for engaging in a scheme to overcharge for generic versions of Zantac and Prozac.

Walgreen and Par entered into a “health resource partnership” under which Par manufactured and marketed generic versions of the drugs Zantac and Prozac in dosage forms that were not currently subject to strict reimbursement limitations. The scheme boosted Walgreen’s profits by allegedly systematically and unlawfully filling customer’s prescriptions with the more expensive Par products instead of the inexpensive dosages that had been prescribed. Under the alleged scheme, Walgreen could bring in $80 million per year instead of the $5 million that the originally prescribed tablets would have netted it costing the third-party payers two to four times more.

The complaint alleges that “even though a pharmacy cannot legally change a prescription without a physician’s express authorization, Walgreens filled prescriptions written for low-priced 150-mg ranitidine tablets with much more expensive 150-mg ranitidine capsules manufactured by Par.” Further, Walgreens allegedly made the Par capsules the only form of generics readily available to its retail customers, despite the fact that it was dispensing a drug that was not legally substitutable for tablets. “Walgreens did not have a system to obtain physician or patient authorization for the drug switching, or even a system to notify the physician or patient that a different drug had been dispensed.”

This class action comes months after a similar whistleblower suit was unsealed in July 2011, thereby publicly revealing the details of the alleged schemes. Plaintiff insurers have reproduced documents from that suit in support of its complaint. Back in June 2008, Walgreen settled RICO allegations with the federal government, 42 states and Puerto Rico, by paying $35 million regarding allegations it had overcharged state Medicaid programs by filling prescriptions with the more expensive dosage forms.

The four count complaint seeks to represent thousands of third-party payers who paid for prescriptions from 2001 to 2006. The plaintiff’s seek compensatory damages, treble damages, prejudgment interest and attorney’s fees.

For a copy of the decision click here

Tom Segalla

Federal Court Refuses to Dismiss Bad Faith Claims Against Insurer for Failure to Indemnify Pipeline Manufacturer

Gulf Prod. Co. v. Hoover Oilfield Supply, Inc. (U.S. Dist. E.D.LA, January 11, 2012)

A Louisiana federal court denied an insurer’s motion to dismiss bad faith claims brought in an insurance coverage dispute involving the manufacturer of a pipeline.  The manufacturer itself is no longer a party to the action, having settled with the underlying gas company plaintiffs.  The plaintiffs are seeking compensation from the insurer for bad faith due to the insurer’s alleged arbitrary and capricious decision not to offer a settlement and a dispute over attorneys’ fees sought by the manufacturer.

The gas companies had sued the pipeline manufacturer for $2 million for allegedly misrepresenting the quality of its pipe.  The companies were involved in a 2008 gas extraction project in Louisiana, which they alleged was significantly hampered by the manufacturer’s allegedly shoddy pipelines.  According to the suit, the pipes allegedly failed at much lower pressures than the pipes were supposed to withstand.  The gas company plaintiffs claimed that the pipeline manufacturer made false representations when selling the pipes and said the ThermoFlex pipe could withstand pressures of up to 1,200 psi, but actually failed at levels well below that threshold.  Indeed, the plaintiffs assert that the pipeline failed during a hydrostatic test at 756 psi, rupturing in several places and causing the pipeline to twist and coil over the marsh, damaging wetlands and bottom water.

In its motion for summary judgment, the insurer argued that it had provided an adequate defense to the manufacturer and the dispute was limited to the fees paid to the manufacturer’s attorneys.  It argued that it is not possible for the insurance company to be in bad faith when it is providing a defense to its insured and the failure to pay sums demanded by the manufacturer for attorneys’ fees does not warrant bad faith penalties unless arbitrary, capricious or without probable cause.  The plaintiffs contended in opposition to the motion that the bad faith claims are over more than attorneys’ fees and now include the refusal to offer a settlement, which the plaintiffs say was arbitrary and capricious.

The federal court held in its order that the insurer’s motion failed to overcome substantial issues of fact concerning the extent of insurance coverage and what providing coverage requires the insurer to do.  The court held that this is ultimately a factual determination that must be submitted to the trial court.  Trial is scheduled to begin later this month.

For a copy of the decision click here

Joanna Roberto and Bryan Richmond

January Edition of Reinsurance Review is Now Available

For a free copy of this month's edition click here.

To receive this publication for free each month, please contact Jeff Kingsley at jkingsley@goldbergsegalla.com.

Cases for Reinsurance Review - January 2012 Edition

Cases provided courtesy of LexisNexis

Security Life Ins. Co. of America v. Southwest Reinsure, Inc.

Northwestern National Insurance Co. v. INSCO, Ltd.

Munich Reinsurance America, Inc. v. Tower Ins. Co. of New York

Miller v. Hartford Life Ins. Co.

American Home Assurance Company v. Everest Reinsurance Company

United States Department of Justice Files First Brief in Health Care Reform Battle

Department of Health and Human Services v. State of Florida (U.S. Supreme Court, No. 11-398)

On January 6, 2012, the U.S.D.O.J. filed its first brief in the matter of Department of Health and Human Services v. State of Florida, et al. In that matter, a number of states are seeking a declaration from the United States Supreme Court that Congress overstepped its constitutional powers by enacting the Health Care Reform bill, which requires that private individuals purchase health coverage or pay a penalty.  In the 130 page brief, the DOJ asserts that Congress’ power under the commerce clause allows it to pass the individual mandate because it constitutes a regulation of interstate commerce and also constitutes a constitutional tax.

The DOJ claims that interstate commerce is impacted by health insurance because health insurance is a major part of the U.S. economy, and the uninsured participate in health care by getting health care without insurance.  The costs for health care get passed on to the American people (through interstate commerce) for people who are uninsured and do not pay for their treatment.

“Congress has a wide latitude when deciding how best to achieve its constitutional objectives,” and requiring minimum coverage is “eminently reasonable.”

The Sixth Circuit upheld the mandate’s constitutionality in June, while the Eleventh Circuit struck it down.  The Fourth Circuit declined to rule on the issue, finding the plaintiffs did not have standing to sue.  The high court granted three petitions for certiorari on cases regarding the law, one filed by the U.S. Department of Justice, a second filed by 26 states challenging the law, and a third filed by small business trade group the National Federation of Independent Business.

Two amicus brief were also filed:  one on behalf of 100 economists arguing the individual mandate is not severable from the rest of the law (as the Eleventh Circuit found), and another by the American Center for Law, which was joined by 117 members of Congress, also contesting severability.

A copy of the brief can be found here

Sarah Delaney and Tom Segalla

Second Circuit Dismisses Proposed Class Coverage Action against Allstate

Woodhams v. Allstate Fire & Cas. Co, (United States Court of Appeals For the Second Circuit, January 3, 2012)

Plaintiffs commenced a putative class-action suit against defendants, Allstate Fire and Casualty, Insurance, Indemnity and Property and Casualty Insurance Companies (Allstate), because Allstate denied plaintiffs reimbursement for repairs from fire damage that were not completed within 180 days of Allstate’s initial payment to the plaintiffs for the actual cash value of their damaged property. The Second Circuit Court upheld the District Court’s decision to dismiss the case.

The plaintiffs alleged that Allstate’s policy was inconsistent with New York law because it required repairs to be completed within 180 days. Plaintiffs claimed that this did not allow a reasonable time for repair after such loss. New York only requires an insurer to pay the lesser amount of the actual cash value of the property, the cost of repair or replacement, or an otherwise fixed limitation-on-liability amount. Because Allstate already paid the actual cash value at the time of the loss, Allstate satisfied its obligations under New York law. Therefore the Court found that the plaintiffs failed to state a claim in this regard.

The plaintiffs also alleged that Allstate’s denial of payments for repairs in excess of the damaged property’s actual cash value that were not completed within 180 days was inconsistent with the terms of the insurance policy. The policy stated that Allstate will “reimburse an insured repair costs, provided that the insured repairs, rebuilds or replaces damages, destroyed or stolen covered property within 180 days of the actual cash value payment.” The plaintiffs argued that since the word complete was missing from the policy, the policy was ambiguous as to whether their repairs should be paid for if the repairs were started but not completed within the 180 days. The court noted that the plaintiffs did not even start repairs within 180 days and therefore the absence of the word “complete” merited no discussion. The court found the rest of the language of the policy unambiguous and that the plaintiffs failed to state a claim because Allstate did not breach its policy.

For a copy of the decision click here

Tom Segalla and Jeffrey Kingsley

Fourth Circuit Finds Professional Liability Insurer has Duty to Defend Accounting Firm in Pension Plan Action

Trice, Geary & Myers, LLC v. Camico Mut. Ins. Co. (U.S. Ct. Apps., Fourth Circuit, Dec. 22, 2011)

The Fourth Circuit ruled that a professional liability insurer had a duty to defend its insured against negligence suits arising from advice the accounting firm gave relating to defined pension plans which were entirely funded by life insurance policies. The underlying actions accused the insured of negligence for recommending the plans which led to audits by the IRS citing numerous defects with the plans. The insurer argued that the policy excluded coverage for claims “in connection with or arising out of any act, error or omission by any Insured in his/her capacity as an [insurance] agent or broker.” The Court found that the underlying allegations of substandard tax and accounting advice raised a potentiality for coverage triggering the duty to defend.

The district court granted summary judgment in favor of the insurer finding that all of the claims asserted were in connection with or arising out of the accounting firm’s acts, errors, or omissions regarding the sale of life insurance and annuity products. The Fourth Circuit applied Maryland law to the case and analyzed the issue under a two-prong inquiry focusing on the language and requirements of the policy and the allegations of the suit. Under the first part of the inquiry the Court held that the language of the endorsement applies only to claims asserting insurance agent or broker professional liability and therefore did not preclude coverage for the insured. The Court found that the gravamen of the underlying actions was that the insured rendered substandard accounting and tax advice.

Under the second part of the inquiry, the court focused on the issue of the capacity in which the insured acted when he provided advice to the plaintiffs in the underlying actions. Finding that the underlying claims alleged actions relating to the insured’s role as accounting and tax advisors and not as insurance agents or brokers, the Court held that the insured had a duty to defend. The Court stated that although one of the underlying actions contained a “fleeting” allegation relating to the insured’s status as an insurance agent, this sole allegation did not put all of the actions within the Exclusion. Additionally, the Court stated that while the district court had noted that the insureds received a commission on the insurance sales, that fact alone is not enough to show a principal-agent relationship or employment as a broker.

For a copy of the decision click here

Joseph Oliva and Sharon Angelino