The Insurance and Reinsurance Report

10th Circuit “Haunts” Insurer Reversing Summary Judgment in Haunted House Suit

Western World Ins. Co. v. Markel American Ins. Co. 10th Cir. (Okla.) May 8, 2012

In what may be the most fun the Tenth Circuit has had authoring an Opinion on a coverage matter, an insurer was stripped of its victory and held responsible for its share of the defense costs of the underlying action. In a must-read Opinion fraught with puns, the Court decided that an escape clause added to a commercial liability policy by an endorsement was unclear and therefore the reasonable expectations of the insured governed.

The clause at issue stated:

This insurance shall not apply to any entity that is already an insured under any other insurance provided by any company or that would be an insured but for the exhaustion of its limits of insurance.

Under the Oklahoma doctrine of equitable contribution, where two insurers cover the same risk, the loss will be apportioned so that each insurer pays its fair share of a common obligation. The co-insurer argued that the policy’s “escape clause” allowed it to escape liability in this case. The Court found that the clause was not clear in that its broad language did not clarify what “this insurance” or “any entity” refer to.

The Court also cited to the policy provision titled “Other Insurance” finding that this provision stated that the insurance policy provides primary coverage and that if another insurance policy also provides primary coverage, the two carriers will share the cost of coverage. Reading the escape clause as the insurer urged would make the “Other Insurance” provision a dead letter.

The Court found that the provision was unclear and awarded the tie to the insured using the “reasonable expectations” test. The Court stated that “Applying the reasonable expectations doctrine to this case, we have no doubt a reasonable insured in Brewer Entertainment’s shoes would have expected coverage from Markel.” After making this statement the Court acknowledged that this action involved only two co-insurers, both sophisticated parties, but stated that Oklahoma law does not currently have an exception to the “reasonable expectations” test that would allow a different standard to be applied here.

The Court reversed the grant of summary judgment to the co-insurer finding that “there is no escape for either of them” and remanded the case to determine the share of the costs that are attributable to the co-insurer.

For a copy of the decision click here

Fallyn Reichert and Sarah Delaney

Court Denies MTD in Coverage Suit Following Chilean Tanker Spill

Momentive Spec. Chem., Inc. v. Chartis Spec. Ins. Co  (S.D. Ohio March 12, 2012)

This case arises out of an insurance coverage dispute following a methanol spill from a Chilean tanker ship in Paranagua Bay, Brazil.  The court was asked to rule on a motion to dismiss brought by defendant, Aon Risk Services Northeast, Inc. (AON).  Plaintiff, Momentive Specialty Chemicals, Inc. (Momentive), and its subsidiary Momentive Quimica de Brazil Ltda (Momentive Brazil), brought suit against AON, Chartis Specialty Insurance, Inc. (Chartis), and Willis North America, Inc. (Willis) asserting claims for negligence, breach of contract and declaratory judgment.  A third of the spilled methanol had been ordered by Momentive Brazil, and following the spill Momentive faced a variety of damages claims and regulatory action.

Prior to the accident, Momentive had entered into two insurance brokerage agreements. In May of 2000, Momentive contracted with Willis as its worldwide insurance broker for itself and its subsidiaries, including Momentive Brazil.  In August, 2004, AON was appointed as Momentive’s exclusive insurance representative, except for policies effective July 1, 2004 which had been placed by Willis.  In the fall of 2004, AON and Momentive entered into a global insurance services agreement (AON Agreement) under which certain of AON’s duties toward Momentive were reduced to writing. Pursuant to the AON Agreement, AON was charged with administering Momentive’s insurance relationships.

The AON Agreement also included a “Brokerage Services Matrix,” pursuant to which AON agreed to “assist on claim and coverage issues with existing and former insurers.”  Momentive also claims that further duties orally agreed to by AON, including the duty to communicate with all of Momentive’s relevant insurers regarding any and all events, incidents, accidents, occurrences, pollution conditions, possible claims and/or actual claims of which AON was made aware.  AON placed the 2005-2010 Chartis Pollution Policy.  There was no allegation that AON failed to inform Chartis of the methanol spill at the time the Pollution Policy application was made, nor that it informed Momentive that such information need not be disclosed.

Momentive alleged that AON representatives were notified of the spill shortly after it occurred. There was no allegation that AON told Momentive that AON would inform Chartis of the accident, nor was there an allegation that Momentive was told not to inform Chartis of the accident because there was no coverage available.  On August 10, 2005, the Brazilian environmental agency fined Momentive for environmental damage in Paranagua Bay.  The following day, Momentive Brazil notified AON of the fines. On August 12, 2005, AON’s representative allegedly incorrectly informed Momentive Brazil that there was no insurance that would cover the fines. There was no allegation that AON told Momentive anything regarding the fines that was specific to the Chartis policy.

On August 25, 2005, Momentive provided AON with information relating to the spill and asked AON to comment on any insurance coverage available. Thereafter AON was provided with information relating to other claims filed against Momentive arising out of the spill.  In September of 2009, Momentive again requested that AON opine on any coverage available to cover the fines.  Three months later, Momentive requested that AON convey notice of the claims against it to all of its relevant insurers.  It was unclear from the complaint who notified Chartis of the accident, though Momentive alleges that by at least January of 2010, Chartis was put on notice of the accident.

Breach of Contract

AON argued that Momentive’s complaint failed to properly state a claim for breach of contract because it did not identify when the agreement went into effect and the precise terms allegedly breached.  The court found that Momentive sufficiently stated a claim for breach of contract against AON in that the complaint alleged that pursuant to the agreement AON was to provide advice and guidance on insurance claims, that Momentive performed by issuing payment, that AON failed to perform by failing to notify the various insurers of the potential claims, and that Momentive sustained related damages.

Negligence

AON moved to dismiss Momentive’s negligence claim on the basis of Ohio’s economic loss doctrine.  The doctrine generally prevents tort recovery of damages for purely economic loss.  The court determined that because Momentive’s claims against AON were purely economic ones, the economic loss doctrine bared Momentive’s negligence claim against AON.  The court acknowledged that the doctrine did not bar claims for negligent misrepresentation against an insurance agent or broker.  However, the court concluded that even a very liberal reading of Momentive’s complaint could not support a finding that the complaint stated a claim for negligent misrepresentation.

 Declaratory Judgment

Momentive sought a declaration of the “existence, scope and breach of AON’s duties and obligations to [Momentive] under the AON Agreement.”  In short, Momentive sought a declaration as to the obligations required pursuant to either the contract between the parties or the alleged special relationship between them.  The court held that Momentive did not allege any immediacy nor reality that would warrant a declaratory judgment.  Thus, the court ruled that the controversy was not sufficiently active to warrant the use of the court’s declaratory judgment powers.

Motion to Sever

Finally, AON asked the court to sever the claims against it from the underlying coverage dispute claim against.  AON argued that severance would serve the convenience of the parties because the claims against AON for breach of an insurance brokerage contract are different than the claims against Chartis for insurance coverage.  AON also argued that the claims against it are contingent upon a finding that there is no coverage under the Chartis policy.  Thus, if the issue of coverage was tried first, and coverage was found to exist, then the claims against AON would be moot.  Additionally, AON argued that it would be prejudiced if it was forced to participate in the primary coverage lawsuit and bifurcation would streamline the case because litigating the claims against AON would unnecessarily complicate the issue of coverage.

The court disagreed, finding that the issue of coverage under the Chartis policy may hinge upon whether the pollution conditions were disclosed in the application for insurance.  AON was the broker who assisted Momentive in procuring the Chartis policy and presumably had a role in preparing the application for insurance.  Thus, the same witnesses would likely be called upon to testify as to AON’s actions in both the coverage case and the breach of contract case.  Therefore, in the interests of judicial economy and convenience, AON’s motion to sever was denied.

For a copy of the decision click here

Matt Cabral and Sharon Angelino

EMERGENCY REPAIRS NOT INCLUDED WITHIN LOSS OF USE DAMAGES

VICOR CORPORATION v. VIGILANT INSURANCE COMPANY (1^st Cir. (Mass.) March 16, 2012).

By a panel including retired U.S. Supreme Court Justice David Souter, the First Circuit rejected a broad application of the word “for” in the definition of damages, and concluded that emergency response costs did not constitute damages relating to “loss of use of property not physically injured.” 

The insured manufactured power converters for use in radio base stations.  Radio base stations are used to set up and operate cellular telephone towers and networks.  A manufacturer of radio base stations used the insured’s power converters in its design and manufacture.  It then sold those radio base stations to cellular providers worldwide.  The insured power converters began failing, causing severe outages in the cellular networks.  The insured was sued, among other things, for replacement of defective equipment, loss of use of the equipment, and cost to repair and restore the loss cellular service (including emergency response costs).  The trial court instructed the jury that repair costs were not covered, except for “emergency repairs” to “get the system up and running.”  The insurer and insured both appealed that holding.

The insured contended that the emergency response costs constituted “loss of use,” focusing on the word “for” in the phrase “pay damages…for…property damage caused by an occurrence.”  The insured basically sought a but-for causation between the loss and the claimed damages for coverage to apply.  The insurers’ disputed that, and argued that “loss of use” damages are subject to a temporal limitation that confines coverage to damages incurred due to the inability to use the failed equipment until it is repaired or replaced. In other words, repair costs end the loss of use, but the costs themselves are not damages. 

Recognizing the classic “loss of use” damage as a replacement automobile rented while one’s care is in the shop, the First Circuit expanded its analysis to include cases involving more similar fact patterns to the case before it:  electronic items in which a defective component or components required replacement.  Distinguishing between damages directly attributable to the loss of use and those with a more indirect connection, the court noted that loss of use damages were those accrued pending the repair of the out-of-service items, not for the repair of the items themselves. 

Remanding the matter to the trial court for clarification of the jury instructions, the First Department held that the costs of repair, even emergency repair, were not covered.  However, to the extent that “classic” loss of use damages were incurred during the repair period, those damages might be included.  The court also held the trial court should instruct the jury on the failure to mitigate.

A copy of the decision is located here 

Sarah Delaney and Patrick Omilian

Eighth Circuit Withholds Coverage in Construction Case

Secura Ins. v. Horizon Plumbing, Inc. (8^th Cir. (Mo.) Mar. 5, 2012)

The Eighth Circuit recently held that a general contractor was not entitled to insurance coverage in a case arising from its alleged breach of a construction contract. The Eighth Circuit held that damages arising from an insured’s breach of contract, including failure to correct defective work, are not accidental and, therefore, do not arise from an “occurrence.” 

MH Metropolitan LLC (“Metropolitan”) hired Weitz Company LLC (“Weitz”) as the general contractor on a project to build an apartment complex in Kansas City, Missouri. Weitz subcontracted the plumbing work to Horizon Plumbing, Inc. (“Horizon”). After a variety of problems, Weitz stopped work on the project. Metropolitan then fired Weitz, but had Horizon continue with the plumbing work. It was later discovered that Horizon failed to connect two fourth floor balcony drains and, as a result, that moisture had entered the building and caused mold growth and flooding.

Weitz sued Metropolitan for breach of contract, alleging that Metropolitan had improperly terminated it from the project and failed to pay all sums due to it. Metropolitan counterclaimed for breach of contract, alleging that Weitz failed to timely complete the project, failed to provide progress reports, failed to supervise, coordinate, and pay subcontractors timely, failed to maintain adequate accounting records, and failed to correct deficient and defective work. Both Metropolitan and Weitz sued Horizon for the allegedly defective plumbing.

Weitz tendered its defense and indemnity for the Metropolitan counterclaim to Horizon’s insurers, contending that it qualified as an additional insured under the policies. After a trial on Weitz’s and Metropolitan’s claims, the court ordered Horizon to pay Weitz $115,619.80 in attorneys fees and $12,576.30 in costs for Weitz’s defense against Metropolitan’s claims related to Horizon’s work under its subcontract with Weitz. Weitz, however, argued that Horizon’s insurers were obligated to reimburse it for the entire cost of defending against Metropolitan’s counterclaim, which Weitz claimed totaled $1.1 million.

In the ensuing declaratory judgment action, the lower court agreed with Horizon’s insurers that Weitz was not entitled to the cost of defending against Metropolitan’s counterclaim not related to Horizon’s plumbing issues. The Eighth Circuit agreed, finding that Metropolitan’s counterclaim did not allege an “occurrence” within the meaning of the policies. Rather, the Eighth Circuit noted that Weitz’s performance of the Metropolitan contract according to its terms was within its control and management and its failure to perform could not be described as an unexpected event.

For a copy of the decision, click here

Carrie Appler and Jonathan Kuller

Fourth Circuit Finds Coverage for Violation of Fair Labor Standards Act

Republic Franklin Ins. Co. v. Albemarle County School Board (4^th Cit. (Va.) Feb. 24, 2012)

The Fourth Circuit recently held that an insured’s violation of the Fair Labor Standards Act (“FLSA”) constituted a “wrongful act” within the meaning of a school board’s insurance policy, triggering the insurer’s duty to defend. Although the court found that the policy did not cover unpaid wages arising from the school board’s violations, it concluded that the school board was entitled to coverage for any liquidated damages or attorneys’ fees assessed under the statute.

In January 2010, several transportation workers employed by the Albemarle County School Board (“the Board”) in Virginia filed suit under the FLSA on behalf of themselves and other employees similarly situated for unpaid wages and overtime pay. The workers asserted that they were not paid at the premium overtime rate when they worked for more than 40 hours in a week. As a result of the Board’s FLSA violations, the workers demanded unpaid wages, overtime pay, liquidated damages as authorized by the FLSA, and attorneys’ fees.

The Board promptly tendered its defense and indemnity to Republic Franklin Insurance Company (“Republic”), which had issued a “commercial package” insurance policy to the Board. Republic agreed to defend the Board against the action, but reserved its rights to challenge coverage on two grounds, including (1) that the Board’s violations of the FLSA did not constitute a “wrongful act” within the meaning of the policy; and (2) that the complaint did not allege a “loss.” In the ensuing declaratory judgment action, the district court agreed with Republic’s coverage position, finding that the Board’s violations of the FLSA did not amount to a “wrongful act,” reasoning that “[t]o find otherwise could encourage parties to routinely circumvent the requirements of the FLSA—whether negligently, willfully, or intentionally—because they have nothing to lose.”

The Fourth Circuit reversed, thereby rejecting Republic’s argument that the Board’s FLSA violations did not constitute a “wrongful act” because it had a preexisting duty to comply with the statute. The Fourth Circuit noted that “every duty breached or violated is necessarily a preexisting duty, and it is the breach of violation of that duty which constitutes the wrongful act.” The Fourth Circuit went on to find that although the policy did not coverage unpaid wages or overtime, it did cover liquidated damages and attorneys’ fees under the FLSA because such damages were compensatory, not punitive in nature. 

 

For a copy of the decision, click here

Carrie Appler and Jeffrey Kingsley

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

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

District Court Finds that Obligation to Pay “Claim Expenses” is Inseparable from Duty to Defend

Continental Cas. Co. v. Duckson (N.D. Ill. Nov. 15, 2011)

In a matter of first impression, the district court for the Northern District of Illinois rejected an insured’s argument that his professional liability was obligated to reimburse him for “claim expenses” even though it was not obligated to defend him.

The insured, a partner at a law firm, tendered his defense and indemnity to his professional liability insurer after he was sued by the Securities and Exchange Commission (“SEC”). Specifically, the SEC complaint alleged that the insured, acting as outside counsel for an investment fund, made materially false and/or misleading statements about the fund by assisting in the preparation of two private placement memoranda, both of which were misleading. The SEC complaint sought (1) a declaratory judgment; (2) permanent injunctive relief; (3) disgorgement of ill-gotten gains plus prejudgment interest thereon; (4) civil penalties; and (5) officer-director bars.

The insurer denied coverage on the ground that the SEC complaint did not seek damages covered by the policy. The court agreed, thereby rejecting the insured’s argument that the damages sought were not restitutionary in nature because money received by the SEC as civil penalties or disgorgement of ill-gotten gains can be used to compensate victims.

The insured then argued that the insurer was obligated to reimburse him for “claim expenses” even though it was not obligated to defend him. According to the insured, the policy created three entirely independent obligations: (1) the duty to defend; (2) the duty to pay “damages”; and (3) the duty to pay “claim expenses.” The insured claimed that the duty to pay “claim expenses” did not require a showing that the SEC complaint alleged covered “damages.”

In a matter of first impression in Illinois, the court held that although the subject policy could have been drafted in a more artful fashion, it did not obligate the insurer to reimburse the insured for “claim expenses” where the underlying complaint did not allege covered “damages.” Rather, the court predicted that the Illinois Supreme Court would find that the duty to pay “claim expenses” should be interpreted consistently with the duty to defend. The court stated that it would be unreasonable to hold that the insurer had a duty to defend only when the underlying complaint sought covered damages and then require the insurer to cover the insured’s defense costs as “claim expenses.”

For a copy of the decision, click here

Carrie Appler and Michael Glascott

U.S. Supreme Court To Review Health Care Reform Law

Dept. of Health and Human Services v. Florida; NFIB v. Sebelius; and Florida v. HHS, November 14, 2011

On Monday, November 14, 2011, the U.S. Supreme Court had decided to determine the constitutionality of the sweeping health care reform law, Patient Protection and Affordable Care Act (“PPACA”), proposed by President Barack Obama.  The announcement was made via a brief order issued on Monday.

Oral arguments are likely to be scheduled for late February or March, with a ruling possibly as early as June.  The court has blocked out five and a half hours for the oral argument.

Specifically, the Supreme Court has agreed to hear issues on two questions: whether the law’s key provision is unconstitutional, and if so, whether the entire law, with its 450 sections, must be scrapped.

The largest and broadest challenge to the act came from a joint filing from 26 states, with Florida leading the charge.  It was these appeals that the Supreme Court accepted.  At issue in those cases is whether the “individual mandate” section is a proper exercise of federal authority.  The “individual mandate” requires nearly all Americans to buy health insurance by 2014 or face financial penalties.  The states argue that if this provision is unconstitutional, the entire law must be deemed unconstitutional.

Joining Florida in the challenge are Alabama, Alaska, Arizona, Colorado, Georgia, Idaho, Indiana, Iowa, Kansas, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, North Dakota, Ohio, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming.  Virginia and Oklahoma have filed separate challenges.

The states argue that individuals cannot be forced to buy insurance, something the individual may not need or want.  However, the Justice Department countered by citing 2008 figures which showed the uncompensated costs from millions of uninsured individuals who received health services was $43 billion, a cost which was then shifted to insurance companies and passed on to consumers.

So far, three federal appeals courts have found the PPACA to be constitutional, while another has said it is not, labeling it “breathtaking in its expansive scope.”

Supporters of the act claim that the law will extend insurance coverage to about 30 million Americans, and currently under some of the effective provisions, it has allowed one million more young Americans to afford health insurance, and woman to obtain mammograms and preventive services without paying anything extra out of pocket.

Opponents on the other claim that PPACA would overly burden states and small businesses, raise costs, and reduce individual choice.

One of the key players in opposing this act is the National Federation of Business.

For a copy of the announcement click here

Sarah Fang and Michael Saltzman

Antitrust Violations Do Not Amount to “Advertising Injury”

Rose Acre Farms, Inc. v. Columbia Cas. Co. (7^th Cir. (Ind.) Nov. 1, 2011)

The Seventh Circuit ruled last week that an insured was not entitled to defense or indemnity from its liability insurers in several class action lawsuits claiming that the insured conspired to fix the price of eggs.

The insured, the nation’s second largest egg producer, was charged in a number of class action suits with violations of the Sherman Act. The underlying complaints alleged that as a member of United Egg Producers, Inc. (“UEP”), the insured participated in and profited from UEP’s efforts to reduce supply and fix prices. The insured claimed that the allegations amounted to “personal and advertising injury” within the meaning of the policy.

The insurance policies defined “personal and advertising injury” as “injury…arising out of one or more of the following offenses,” including “the use of another’s advertising idea in your ‘advertisement.’”       The insured argued that it advertises its compliance with UEP guidelines on its website, where it also advertises that it sells eggs produced by not only caged chickens, but also “free-roaming” chickens. The insured’s website states that eggs produced by “free-roaming” chickens cost more than regular eggs because “free-roaming” chickens have access to fresh water, fresh air, and fresh feed, and are given space to move about and socialize with other chickens. The website also notes that eggs produced by “free-roaming” chickens must be gathered by hand, which also increases their cost. The insured argued that because its statements about the cost of eggs produced by “free-roaming” chickens could be thought to be intended to deceive consumers about the insured’s alleged price fixing, the allegations constituted a “personal and advertising injury” within the meaning of the policy.

The district court disagreed with the insured’s position and the Seventh Circuit affirmed. In so ruling, the Seventh Circuit noted that the underlying complaints did not even mention the insured’s website nor did they even pertain to the price of eggs produced by “free-roaming” chickens. Rather, the underlying complaints complained only about the insured’s conspiring to fix the price of eggs from caged chickens. The Seventh Circuit also noted that even if the underlying complaints alleged “personal and advertising injury,” coverage would be barred by the policies’ exclusions for “advertising injury” that is “caused by or at the direction of the insured with the knowledge that the act [triggering liability] would violate the rights of another” or that “aris[es] out of a criminal act committed by or at the direction of any insured.”

For a copy of the decision, click here

Carrie Appler and Colleen Murphy

Dan Gerber and Jeff Kingsley Discuss Emerging Reinsurance Trends at 2011 Monte Carlo Rendez-Vous

As attendees and presenters at the 2011 Reinsurance Rendez-Vous in Monte Carlo, the premier annual conference for the global reinsurance industry, Goldberg Segalla partners and Insurance and Reinsurance Report editors Daniel W. Gerber and Jeffrey L. Kingsley were at the forefront of discussions among key decision makers in the reinsurance community.

Visit the Goldberg Segalla website for video interviews with Dan and Jeff on emerging reinsurance trends, recorded on the scene at the Monte Carlo Rendez-Vous.

The Inside Scoop From the 2011 Inside FAC Monte Carlo Roundtable

Goldberg Segalla partners Dan Gerber and Jeff Kingsley joined top-level reinsurance industry representatives and thought leaders as participants in the Inside FAC Roundtable, held during the September 2011 Reinsurance Rendez-Vous in Monte Carlo. The discussion addressed numerous critical issues affecting reinsurers, cedants, underwriters and others today and into the future.

Visit the Goldberg Segalla website for a full transcript of the Inside FAC Roundtable discussion.

ELEVENTH CIRCUIT DECLARES REQUIREMENT THAT ALL AMERICANS PURCHASE HEALTH INSURANCE UNCONSTITUTIONAL

State of Florida, et al. v.  United States Department of Health and Human Services (11^th Cir. August 12, 2011)

In a 304-page decision, the Eleventh Circuit Court of Appeals has held that the 2010 law requiring all Americans to purchase health insurance, strongly favored by President Obama, was unconstitutional.

The plaintiffs consisted of 26 states, two private individuals and the National Federal of Independent Businesses (NFIB).  The defendants consisted of the HHS, the Departments of Labor and Treasury.  The plaintiffs challenged the constitutionality of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010), amended by Health Care and Education Reconciliation Act of 2010 (“HCERA”), Pub. L. No. 111-152, 124 Stat.1029 (2010).  The Act requires individual Americans who do not qualify for Medicaid or Medicare purchase insurance through private health insurers. The plaintiffs contended that such a mandate violated the constitutional rights of individuals.

The 11th Circuit decision, decided by a divided three person panel, held that “the individual mandate contained in the Act exceeds Congress’s enumerated commerce power”:  “What Congress cannot do under the Commerce Clause is mandate that individuals enter into contracts with private insurance companies for the purchase of an expensive product from the time they are born until the time they die.”

In a lengthy dissent, Circuit Judge Stanley Marcus argued that the majority ignored the “undeniable fact that Congress’ commerce power has grown exponentially over the past two centuries, and is now generally accepted as having afforded Congress the authority to create rules regulating large areas of our national economy.”

The Eleventh Circuit did hold portions of the law were constitutional, whereas the District Court had held that the entire law was indivisible, and therefore void in its entirety.  It upheld portions of the law requiring medical insurance to be extended to children of insureds through age 26 and the expansion of Medicaid discounts.

It is expected that the government will seek a review by the full Eleventh Circuit and potentially appeal to the United States Supreme Court.

A copy of the 304-page opinion can be accessed here.

Sarah Delaney and Mike Glascott

CLASS ACTION SUIT FILED REGARDING MEDICARE LIENS

Rebecca Meek-Horton v. Trover Solutions Inc. et al (State of New York, Supreme Court, New York County, Case No. 108804-2011)

 A lawsuit naming 50 insurers as defendants has been filed in New York Supreme Court, New York County.  The complaint relates to Medicare Advantage plans and accuses the insurers of violating a 2009 state law by imposing liens on patients who receive personal injury settlements.  The law bars insurers from pursuing liens on settlements absent statutory authorization, and questions exist regarding whether Medicare Advantage insurers are granted that statutory right. Medicare has a statutory right to impose liens, and the insurers are claiming a derivative right.  A recent trial court case held that the insurers did not have a right to subrogation.

The law, General Obligations Law Section 5-335 (McKinney’s 2011), created a conclusive presumption that personal injury settlements do not include health care costs, except where there is a statute authorizing a carrier to establish a lien.  Accordingly, health care providers cannot establish a lien on personal injury settlements because there is no statutory authorization.  It is alleged that the Medicare Advantage policies attempt to provide liens for the benefit of health care providers, in violation of the statute.    

The class representative plaintiff settled a personal injury claim, only to have an insurer impose a lien on the proceeds to recover for medical costs.  The suit seeks an injunction prohibiting such liens and restitution.  The class size is currently unknown, but could potentially include thousands of personal injury plaintiffs who settled cases since 2009. 

 A copy of the complaint can be found here

Sarah Delaney and Mike Glascott

California Appeals Court Rules Against Coverage for Proposition 65 Claims

Ulta Salon, Cosmetics & Fragrance, Inc. v. Travelers Prop. & Cas. Co. of Am.(Cal. Ct. App. July 11, 2011)

 A California appeals court recently held that an insurer was not obligated to defend or indemnify its insured against a claim that the insured violated Proposition 65, the California Safe Drinking Water and Toxic Enforcement Act of 1986. The court based its ruling on the complaint’s failure to allege “bodily injury” and rejected the notion that an insurer’s duty to defend can be triggered by allegations that the insured’s conduct could potentially lead to bodily injury.

Ulta Salon, a nail products manufacturer, was sued by Christine Deubler, “on behalf of the general public,” for civil penalties and injunctive relief for alleged violations of California’s Proposition 65. The complaint alleged that Ulta’s nail products contain DBP, a reproductive toxin. Per Proposition 65, businesses are required “to warn individuals about carcinogens and reproductive toxins to which they are exposed through consumer transactions, employment, and the environment.” The complaint alleged that Ulta knew its nail products contained DBP, that consumers are exposed to DBP through the intended and foreseeable use of the nail products, and that Ulta failed to give consumers a clear and reasonable warning regarding the reproductive toxicity caused by exposure to DBP.

Ulta tendered its defense and indemnity to Travelers, its commercial general liability carrier. Travelers denied coverage, after which Ulta filed suit seeking a declaration that Travelers was obligated to defend and indemnify it under the policy. Travelers demurred to the first complaint, contending that it had no duty to defend or indemnify because the Deubler lawsuit did not allege bodily injury or property damage and sought only civil penalties under Proposition 65. The trial court sustained Travelers’ demurrer to the first amended complaint without leave to amend. Ulta appealed.

On appeal, Ulta argued that Travelers’ duty to defend was triggered by the underlying complaint which allegedly contemplated bodily injury insofar as it repeatedly emphasized the toxic nature of products manufactured by Ulta. The court, however, disagreed. The court held that an insured may not trigger the duty to defend by speculating about extraneous facts and ways in which the claimant might amend his or her complaint at some future date. A corollary to this rule, the court noted, is that the insured may not speculate about unpled claims to manufacture coverage.

For a copy of the decision, click here

Carrie Appler and Jonathan Kuller

Allegations of Emotional Injury Require Defense Until Physical Injury Disproved, Even if No Physical Injury Alleged

Abouzaid v. Mansard Garden Associates, LLC (N.J. June 21, 2011)

Under New Jersey law, a cause of action exists for negligent infliction of emotional distress based upon witnessing injury to a family member.  Based on Portee v. Jaffe, 84 N.J. 88 (1980), it was an action for the unique emotional distress suffered by a bystanders when loved ones are killed or injured.  The elements are:  (1) death or serious injury of another caused by the defendant’s negligence; (2) a marital or intimate relationship between the plaintiff and the injured person; (3) seeing the injury or death; and (4) severe emotional distress as a result.  Bodily injury is not a requirement for a successful Portee claim.

Two mothers asserted Portee claims as a result of watching their children get caught in a fire.  The fire was caused when a contractor hired by a landlord used paint thinner on a kitchen floor.  The paint thinner was ignited by the oven’s pilot light, and sent out flash of fire, which spread quickly and engulfed three young boys.  Their mothers, who were not injured in the fired, heard the explosion and saw their sons “engulfed by a fireball.”  As a result, the mothers brought Portee claims. 

The landlord’s insurer denied defense of the Portee claims, contending that no bodily injury had been alleged and since bodily injury was not a requirement of a Portee claim, could not be assumed.  New Jersey courts had previously held that emotional injury accompanied by physical distress constituted “bodily injury” within the meaning of insurance.   Courts held that because emotional distress claims required physical injury, there was a possibility of a duty to indemnify and therefore a duty to defend existed. 

With regard to Portee claims, which do not require physical manifestation to be actionable, the New Jersey Supreme Court held that “severe” emotional distress in most cases, bear with it a physical component.  Therefore, it could be assumed that a Portee claim included bodily injury, requiring an insurer to defend until physical injury has been conclusively disproven.

For a copy of the decision click here

Sarah Delaney and Sharon Angelino

Verdict for Energy Company Against Insurer Overturned

Mid-Continent Casualty Co. v. Eland Energy Inc. (N.D. Tex. June 16, 2011)

Mid-Continent Casualty Co. issued two insurance policies to several energy companies: a primary policy with a $1 million occurrence limit and $2 million aggregate, and an umbrella policy with a $5 million aggregate.  After Hurricane Katrina, crude oil leaked from the energy companies’ storage tanks at an oil and gas facility in Louisiana.  More oil that was put in a containment boom during cleanup leaked when Hurricane Rita hit.  Following the leaks, lawsuits were filed against the companies by the owners of neighboring properties and commercial fisherman.

The insurer initially agreed to defend the companies, but as the cleanup progressed, the insurer issued them a check for $1 million and $5 million and cut off payment for litigation costs, saying the limits of the policies were exhausted by the cleanup costs.  The insurer also denied defendants’ claim for cleanup costs resulting from Hurricane Rita, contending there was no new release of crude oil.

In a subsequent declaratory judgment action, defendants claimed that their insurer improperly cut them checks for $6 million, even though the cleanup costs had only reached $5.7 million, so the insurer could invoke a contractual right to stop paying their litigation costs.  The insurer alleged, however, that it was legally obligated to pay the combined policy limits when the defendants’ full liability for the cleanup costs became clear.

In October 2009, the court ruled that the insurer did not have to indemnify defendants for a  $2 million settlement in one of the underlying cases because the insurer had the right to waive certain elements of the insurance contract.  On February 22, 2010, the court rejected the defendants arguments, and reaffirmed its decision

The court, however, had allowed a claim to proceed alleging that plaintiff harmed one of the companies by directly settling early with a third-party claimant that sustained property damage.  Plaintiff offered the claimant nearly $55,000 to settle the claims but the energy company asked plaintiff to withdraw the offer.  After the offer was withdrawn, the claimant commenced a class action against the energy company that settled for $2 million.  A jury found that plaintiff put the energy company in a worse position by offering the settlement.

The company maintained that, but for Mid-Continent’s misconduct, it would have had the opportunity to discuss the offer with the claimant, persuaded him not to join the class, not to become the class representative, and not to discuss his offer with his neighbors or other class members. The company suggested that, had it been given that opportunity, it would have been able to settle class action suit for less than $2 million. The court held that the company did not adduce any evidence, however, from which a reasonable jury could have found that, given the opportunity and the information it needed, and without any interference from Mid-Continent, the company would have been successful in its attempts to discuss the offer with claimant or to persuade the claimant not to join the class, not to become the class representative, or not to discuss his offer with others. In other words, although the company argued that it would have tried to accomplish these goals, it offered no evidence from which a reasonable jury could have found it more likely than not that it would have succeeded.  Moreover, the company’s motivation to settle the class action was not solely based on Mid-Continent’s investigation of the damage to the claimant’s property and the offer to that claimant.  One reason the company settled the class action was out of concern about jury sympathy for hurricane victims.

Accordingly, on June 16, 2011, the court overturned the jury’s verdict against Mid-Continent. 

For a copy of the decision click here

Toni Frain and Joseph Oliva

Lloyd’s Files Suit to Rescind $17 Million Michael Jackson Policy

At the time of Michael Jackson’s death on June 25, 2009 he was days away from beginning a slate of 30 concerts at the 02 Arena in London. In fact, the first show was scheduled for July 8, 2009.

AEG Live, LLC the company that contracted with Jackson to perform the show obtained a Contingency Non-Appearance and Cancellation policy from Lloyd’s providing coverage in the amount of $17,500,000. The policy listed AEG Live and the “Mark Jones Company, LLC” as insureds. It is alleged that the “Mark Jones Company, LLC” is in fact the “Michael Jackson Company, LLC.”

The policy provided coverage for losses that resulted from any of the planned concerts being “cancelled, abandoned, postponed or interrupted.” Included within the insured perils was the illness or death of Michael Jackson. After his death, AEG Live tendered to Lloyd’s seeking payment under the policy. Lloyd’s, in turn, filed the instant action.

Initially, the complaint alleges that AEG Live has failed to properly cooperate in Lloyd’s investigation of the claim. The complaint, states in part:

Underwriters' ability to thoroughly and properly investigate and evaluate the claim remains impaired because the documents and other information requested have to date not been provided by AEG or its counsel as obligated under California law

Lloyd’s is seeking, in part, to rescind the policy based upon various “misrepresentations or concealments.” In particular, Lloyd’s contends that AEG Live should have communicated Michael Jackson’s prescription drug use/drug addiction.

In addition, Lloyd’s also seeks a declaration that it is not required to indemnify AEG Live as Michael Jackson’s death was not an “Accident” as contemplated by the policy. The policy required that Lloyd’s receive a medical report and a Lloyd’s representative attend the rehearsals taking place in London, as neither occurred, Lloyd’s contends it is not required to provide coverage.

For a copy of the complaint, click here

Brian Biggie and Dan Gerber

Insurer Sues To Block Coverage For Suits Involving Stolen Body Parts

State Automobile Ins. Co. v. Garzone Funeral Home Inc. E.D. Penn., May 27, 2011

Plaintiff insurer filed suit against defendant policyholder, seeking to avoid indemnity for a host of lawsuits over the harvesting and sale of body parts from bodies at the Philadelphia funeral home.  The underlying actions by the families of the deceased allege that defendants and others conspired to sell body parts of corpses. 

Plaintiff insurer files the current suit seeking an order declaring that it does not have a duty to defend the policyholder in lawsuits brought by families of the deceased.  Plaintiff insurer also named several of the plaintiffs in the underlying actions as defendants in the insurance coverage action.

In 2009, Gerald Garzone pled guilty to 244 counts of theft of body parts, as well as criminal conspiracy and reckless endangerment, and was sentenced in to a prison term of eight to 20 years.  Garzone was insured by plaintiff insurer and plaintiff insurer argues that the language of Garzone’s policy excludes coverage for injury resulting from a criminal act by the insured.

Under the criminal indictment, prosecutors claimed that Garzone along with other funeral directors and medical workers alleged and sold body parts from corpses that were scheduled to be cremated by another company also owned by Garzone.  Spines, bones, organs and other tissues from these bodies were collected by a team of “cutters.”  These body parts – some of which had been left out unrefrigerated for days – were then sold to medical providers and researchers through a company owned by the conspirators.  

The ringleaders of the conspiracy was, Gerold Garzone, his brother,  Louis Garzone, and former dentist Michael Mastromarino.  It is believed that the body selling conspiracy collected $3.8 million from the dismemberment of 1,077 bodies in New York, New Jersey and Pennsylvania, including $1 million for 244 bodies in Philadelphia.

Mastromarino was sentenced to 18 to 54 years in prison in New York in June 2008 while Louis Garzone was sentenced to 8 to 20 years after pleading guilty in a Pennsylvania court.

In November, another insurer, who issued insurance policies to the cremation company and another Philadelphia funeral home linked to the body parts scheme, has settled over its coverage for the lawsuits but the terms of settlement were not disclosed. 

For a copy of the complaint click here

Sarah Fang and Michael Saltzman

Mining Company Settles Coverage Dispute with Several Insurers Over Cleanup Costs from Uranium Mine

Newmont USA Ltd. v. Allstate Ins. Co., et al. (U.S. District Court, E.D. WA)

Newmont USA Ltd., one of the world’s largest gold producers which also mines lead, silver and uranium, settled claims on Monday against two insurers, Allstate Insurance Company and Seaton Insurance Company.  The claims involved a coverage dispute over the cleanup of a former uranium mine in the state of Washington.  Approval of the settlement and dismissal of the action was made in separate Orders by U.S. District Court Judge Justin Quackenbush (E.D. WA), although both insurers will remain involved in the litigation as cross-claimants with other insurers under numerous policies with effective periods from 1969 through 1985.  A third insurer, Employers Insurance Company of Wassau, reached a settlement in Principal and the court approved a dismissal of pending motions as moot in light of the agreement.  The terms of the settlements were not made public. 

The dispute involved the cleanup of the Midnite Mine Superfund site, located in the Selkirk Mountains in eastern Washington.  The mine was active from 1955 to 1981.  The U.S. government sued Newmont and its subsidiary in Washington federal court in 2005 seeking damages under the Comprehensive Environmental Response, Compensation and Liability Act for pollution from the site.  A 2008 decision found that Newmont was liable for $15.8 million of the site's cleanup costs.  Newmont argued in the coverage dispute that none of the insurers had met their duty to defend them or reimburse them for defense costs over the environmental claims.  The company also said the insurers had refused to indemnify them.

For a copy of the orders click here

Bryan Richmond and Joanna Roberto

District Court Holds Pollution Exclusion Bars Coverage for Chinese Drywall Claims

Nationwide Mut. Ins. Co. v. The Overlook LL (E.D.Va., May 13, 2011)

This coverage disputed arises out of an underlying property damage claim caused by Chinese drywall. Overlook, LLC is a real estate developer that operated in Richmond, Virginia. Overlook has developed a complex known as the “Overlook Townhouse.” One of the units was purchased by Mr. Ricky Edmonds. After Overlook determined that various homes were constructed with Chinese drywall, Overlook undertook efforts to “work with” homeowners and remediate the affected homes. Overlook, however, did not repair the home owned by Mr. Edmonds as Mr. Edmonds had refused Overlook’s offer and instead simply filed suit.

Overlook sought coverage under a number of policies issued by Nationwide. The insurer agreed to provide a defense under a reservation of rights. While the respective policies presented some differences, each policy contained a pollution exclusion. Nationwide sought a declaration that it owned Overlook no defense or indemnity for claims arising out of the Edmonds action, in addition to seeking declaration that it was not required to provide coverage in connection to the Overlook property coverage claims.

With regard to the duty to defend, the court looked to the “Eight Corners” rule by which a court reviews the allegations of the complaint and the terms of the policy. In doing so, the court noted that Edmonds alleged that the drywall in his home was defective and emitted various sulfide gases and other toxic chemicals. In comparing these allegations to the language of the pollution exclusion, the court concluded, “As a result, Edmonds' allegations in his complaint regarding the movement of the sulfide gases satisfy the discharge, dispersal, seepage, migration, release or escape requirement of the Pollution Exclusion.10.”

The resulting inquiry was whether the sulfide gas constituted a “pollutant.” The court rejected the argument that the term pollutant was ambiguous, and instead held that the underlying complaint’s allegations fall squarely within the scope of the exclusion. As a result, Nationwide was not required to provide a defense to Overlook in response to the Edmonds suit.

The court did, however, deny Nationwide’s motion with respect to the duty to indemnify Overlook for losses involving other homes as there was insufficient discovery as to how the damage to the “non-Edmonds” home occurred.

For a copy of the decision, click here

Brian Biggie and Michael Glascott

Third Circuit Declares That Insurers Have Standing to Contest Mass-Tort Bankruptcy Plan

In Re: Global Industrial Technologies, Inc. (May 4, 2011, 3^rd Circuit (PA))

The United States District Court for the Third Circuit has given insurers the opportunity to contest the formation of mass-tort bankruptcy trusts, and potentially to minimize potential tort claims. Despite a strong four-judge dissent and recognizing the insurer’s financial stake in such proceedings, the Third Circuit succinctly summarized its holding:

The decision we announce is no more far-reaching that this: when a federal court gives its approval to a plan that allows a party to put its hands into other people’s pockets, the ones with the pockets are entitled to be fully hear and have their legitimate objections addressed.  In short, they at least have bankruptcy standing.

Global Industrial Technologies, Inc. and several of its subsidiaries filed for bankruptcy protection.   The bankruptcy resulted, in large part, from the number of asbestos claims made against one of the company’s subsidiaries, the totaling over 400,000 separate claims nearly $1 billion in costs.   Although not cited as a reason for the bankruptcy, one class action involving 169 silica claims existed at the time of the bankruptcy.

As part of the bankruptcy plan, an asbestos trust was established.  The plan also called for an injunction of silica-related claims, and channeling of those claims to a separate silica trust.  The trust was to be fully funded by insurance, with assignments of policies made to the silica trust.  In order to obtain approval for the plan, the debtors needed to show that the plan, including the silica trust was both necessary and fair.   In order to obtain the necessary claimant votes for the silica trust, the debtors obtained lists of silica claimants from another company’s bankruptcy.  As a result, potential claims rose from 169 to over 5,000.

The insurers objected, arguing that the silica trust was neither necessary nor appropriate.   The insurers also noted that many of the proposed silica claims were likely illegitimate, had resulted from diagnoses made by physicians previously deemed “not credible” in other silica litigation, and existed amongst claimant who had already made asbestos claims.  Thus, it appeared over 90% of the proposed silica claims were suspect.  The bankruptcy court confirmed the plan notwithstanding the objection, holding that the issue of claim legitimacy was ultimately irrelevant and that the insurers had no standing to object, particularly because the insurers would still maintain their coverage defenses.  In other words, since the insurers were only there to pay liability claims they had no interest in the formation of the trust.

The Third Circuit reversed, citing the “broad right” of participation in bankruptcy cases, and finding that the silica trust would not be “insurance neutral” because the mere promise of the trust increased claims by 27 times, creating a increase in exposure including new administrative costs and litigation costs to ferret out fraudulent claims. The Court also held that based upon the facts presented, allegations of collusion between the debtor and plaintiffs’ counsel was warranted.

For a copy of the decision click here

Sarah Delaney and Thomas Segalla

Insurers Required To Continue Coverage Of Insolvent Company In Investor Actions Alleging Negligent Misrepresentations

Philadelphia Indemnity Ins. Co. v. Allied Mortgage and Financial Corp. S.D. Florida, May 9, 2011

U.S. District Judge Adalberto Jordan refused to toss a lawsuit filed by plaintiff insurer against defendant policyholder to free insurer from providing coverage to the insolvent company in investor actions.  The underlying action involved a state claim by investors seeking damage over defendant’s mishandling of investments and loans.  Specifically, the investors alleged negligent misrepresentations. 

Plaintiff issued an insurance policy to defendant providing professional liability coverage in connection with the company’s mortgage broker and banker service from 2006 to 2010.  The policy also provided coverage for the company’s officers and directors.  The policy provides that plaintiff is responsible for any damages resulting from, or expenses incurred in defense of, any claims or legal actions brought against defendant related to its provision of mortgage broker/banker services.

The company then became insolvent and refused to honor certain promissory notes.  In 2010, defendant was sued in state court by separate groups of investors, with allegations of negligent misrepresentation, negligent operation, breach of fiduciary duty, action on promissory notes, violations of Florida’s Securities and Investor Protection Act and unjust enrichment.  Defendant then turned to plaintiff for coverage and reimbursement of defense costs related to these investment actions.  Although plaintiff provided defendant with defense in those matters, it did so under a full reservation of rights.  The plaintiff then instituted this declaratory judgment action.

The district judge rejected defendant’s contention that the current federal declaratory judgment suit should be dismissed because the underlying investor action seeking damages in state court was a parallel proceeding.  The judge found that the action is not parallel because the state court action against defendant and its officers relate to claims by investors that have lost money due to defendant’s insolvency, and the plaintiff here is not a party to those investor actions.  In addition, plaintiff in this declaratory judgment action is seeking a declaration regarding its policy obligations as to defendant and its officers and directors in the state court actions.  Therefore, the judge concluded, the two actions involve fundamentally distinct issues and different parties and the declaratory judgment action should not be dismissed. 

The judge also rejected defendant’s argument that the declaratory judgment action was premature finding that insurer’s duty to defend became ripe when the state court complaints were filed against defendant and its officers and directors.  Although the judge found the issue as to the duty to defend was ripe, he did stay the issue as to indemnification, holding that such a duty cannot be determined until the state court proceeding has concluded.

For a copy of the decision click here

Sarah Fang and Anthony Golowski

New York’s Highest Court Determines That CGL Policy Is Primary Over D & O Policy Based Upon Relevant “Other Insurance” Clauses

FIELDSTON PROPERTY OWNERS ASSOCIATION, INC. v. HERMITAGE INSURANCE COMPANY AND FEDERAL INSURANCE COMPANY

(N.Y. Ct. App. February 24, 2011)

 

 

Fieldston Property Owners Association, Inc. (“Fieldston”) was sued first in federal court and subsequently in New York state court by Chapel Farm Estates (“Chapel Farm”) based upon “false statements and fraudulent claims Fieldston allegedly made concerning Chapel Farm’s right to access Fieldston’s property during a construction project.  In the federal lawsuit, Chapel Farm asserted causes of action for injurious falsehood and interference with property rights and sought damages and injunctive relief. 

 

Fieldston was insured under a commercial general liability policy issued by Hermitage as well as a Directors and Officers Liability policy issued by Federal Insurance Company.  Hermitage agreed to defend Fieldston in the federal action under a reservation of rights and subsequently demanded that Federal participate in the defense of their common insured.  Federal refused, relying upon the “other insurance” clause in its policy which states:

 

If any Loss arising from any claim made against the Insured(s) is insured under any other valid policy(ies) prior or current, then this policy shall cover such Loss, subject to its limitations, conditions, provisions, and other terms, only to the extent that the amount of such Loss is in excess of the amount of such other insurance whether such other insurance is stated to be primary, contributory, excess, contingent or otherwise, unless such other insurance is written only as specific excess insurance over the limits provided in th[is] policy.

 

Thereafter, the federal lawsuit was dismissed and Chapel Farm, which then became known as Villanova Estates, Inc., commenced an action in New York State Supreme Court, essentially alleging the same operative facts and asserting 18 separate causes of action.  Once again, Hermitage agreed to defend under a reservation of rights, specifically advising Fieldston that only the injurious falsehood claim was potentially covered under the general liability policy.  Federal disclaimed coverage, asserting that the D & O applied on an excess basis.

 

Ultimately, Fieldston was successful in getting the injurious falsehood claim dismissed, and Heritage re-tendered to Federal, which agreed to take over the defense.

 

Two declaratory judgment actions followed, one commenced by Fieldston and one by Federal.  Summary judgment motions were filed and the decisions in both actions were appealed.  On appeal, the Appellate Division, First Department, determined that Federal should reimburse Hermitage its equitable share of defending the federal court action based upon its conclusion that with the possible exception of the injurious falsehood claim, none of the other causes of action were covered under the Hermitage policy while several of them were potentially insured under the D & O policy. 

 

Federal sought leave to appeal to the Court of Appeals.  The Appellate Division granted leave certifying the question as follows: “Was the order of this Court … properly made.”

 

The Court of Appeals answered the certified question in the negative and reversed.  Inasmuch as Hermitage’s duty to defend was triggered, its obligation continued, and extended to all claims, until such time as the injurious falsehood claim was dismissed.  Moreover, based upon the language of the relevant “other insurance” clauses, Hermitage’s policy applied on a primary basis, without contribution from Federal, notwithstanding that “Federal would appear to have an obligation to indemnify Fieldston for a greater proportion of the causes of action” if liability was found.

 

For a copy of this decision, click here 

 

Brian Biggie and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/sharon-angelino

http://www.goldbergsegalla.com/attorneys/brian-r-biggie

 

 

 

Pulsar Re Ltd Files Suit Against Lehman Brothers Holdings, Inc.

Pulsar Re Ltd v. Lehman Brothers Holding, Inc. Case No. 08-13555

Pulsar Re has filed a $450 Million suit against Lehman Brothers alleging the former investment company looted money it held for Pulsar in an effort to improve its books. The Adversary Suit filed in the U.S. Bankruptcy Court for the Southern District of New York seeks an order placing the $450 Million placed into a trust contending that the money is not part of the bankruptcy estate.

According to the complaint, Pulsar and Lehman reached an agreement whereby Lehman ceded approximately $1 Billion in reinsurance risk to Pulsar. Pulsar then pledged $450 Million to Lehman (in cash) to secure Pulsar’s reinsurance obligations. Lehman purportedly promised that the money would be held as cash and would not be converted into any other assets.

Subsequent to Lehman’s bankruptcy filings, Pulsar learned that Lehman misappropriated the money through a one-sided repurchase transaction backed by illiquid and materially overvalued assets. The suit alleges that the vast majority of the $718 Million taken out was in fact, Pulsar’s money.

For a copy of the complaint, click here

Brian Biggie and Sharon Angelino

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Workers compensation carrier obtains $1.4 million premium fraud judgment.

Liberty Mutual Insurance Co., et al. v. Viking Industrial Security, Inc., et al., Superior Court of New Jersey, Law Division:  Somerset County, Docket Nos. SOM-L-525-07; SOM-L-1223-07.

On January 20, 2011, the Superior Court of New Jersey entered a $1.4 million judgment in this case of first impression.  The judgment is based on the 35 page written opinion in which the Court applied both New Jersey’s workers compensation fraud statute and Insurance Fraud Prevention Act to an elaborate premium fraud scheme.

 The fraud scheme involved the creation and maintenance by the employer/insured of two sets of payroll records and corresponding payroll tax returns.  One set of payroll records was referred to as “small” payroll, it was small payroll only that was provided to the workers compensation premium auditors; not “large” payroll.

The insurer’s forensic analysis disclosed that the employer also “hid” significant amounts of payroll in the company’s expense accounts in its QuickBooks accounting records.  A court ordered download of the employer’s computers allowed the insurer to confirm and quantify “hidden” payroll. 

For a copy of the decision click here

Jonathan Kuller and Anthony J. Golowski II

http://www.goldbergsegalla.com/attorneys/Kuller.html

http://www.goldbergsegalla.com/attorneys/Golowski.html

 

SECOND CIRCUIT CERTIFIES QUESTION TO NEW YORK COURT OF APPEALS RE: CREATION OF COVERAGE BY ESTOPPEL BASED UPON A CERTIFICATE OF INSURANCE

10 Ellicott Court Corp. v. Mountain Valley Indemnity Corp.  (2nd Cir. December 23, 2010)

In 10 Ellicott Square Court Corp. v. Mountain Valley Indemnity Company, the Second Circuit noted the divergence between New York’s Appellate Divisions regarding whether a Certificate of Insurance can create coverage.  In the First and Second Departments, courts have held that Certificates of Insurance are insufficient standing alone to provide a basis for estoppel.  The Third and Fourth Departments have held that where a party seeking coverage reasonably relied on a Certificate of Insurance issued by an agent of the insurer, the insurer may be estopped to deny coverage. 

The circuit court certified the following question:  “In a case brought against an insurer in which a plaintiff seeks a declaration that it is covered under an insurance policy issued by an agent of the insurer that states that the policy is in force but also bears language that the certificate is not evidence of coverage, is for informational purposes only, or other similar disclaimers, estop the insurer from denying coverage under the policy.”

In the case before it, the additional insured endorsement required that a contract be executed before additional insured coverage attaches.  Although a certificate of insurance was issued prior to the loss date, the contract was not signed.  The court questioned whether the purported additional insured’s reliance on the certificate of insurance in allowing the named insured to commence work was a sufficient basis for estoppel where there was no evidence that the purported additional insured ever saw the policy, or have a relationship with the agent or insurer making reliance reasonable.  On the other hand, the court questioned whether an insurer had an obligation not to issue false or misleading certificates if it is aware that parties will rely on the certificates. 

We will follow the case and  will update if the New York Court of Appeals accepts the certification.

For a copy of the certification click here

Sarah Delaney and Michael Saltzman

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Saltzman.html

case provided courtesy of Lexis. 

United States Supreme Court Refuses to Hear Benefits Appeal

Richards v. Hewlett-Packard Corp. (U.S. Sup. Ct. December 6, 2010)

In 1991, Edward Richards filed for long-term disability benefits after being diagnosed with chronic fatigue immune dysfunction and fibromyalgia.  Mr. Richards had worked for Digital Equipment Corp., now Hewlett-Packard Co., as a software engineer since 1984.  Prudential Insurance Co. of America granted his claim and in 1992, Mr. Richards was granted Social Security disability benefits.

The company’s plan permitted Prudential Insurance to confirm Mr. Richards’ condition from time to time.  In 2001, several physicians commissioned by the insurer found that Mr. Richards should be able to perform his job duties and was well enough to work a primarily sedentary job.  As a result, the insurer canceled Mr. Richards’ benefits.  Mr. Richards exhausted his administrative remedies and filed suit against the insurer, arguing that it violated Employee Retirement Income Security Act by basing its decision largely on the evaluation of its own physicians who never examined Mr. Richards. 

The lower court granted summary judgment in favor of the insurer and Mr. Richards’ employer.  In January 2001, the United States Court of Appeals for the First Circuit affirmed.

On December 6, 2010, the United States Supreme Court refused to grant Mr. Richards’ petition for writ of certiorari.

For a copy of the decision click here

Toni Frain and Joanna Roberto

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

Federal Court Dismisses Insurer’s Suit In Chinese Drywall Suit

National Union Fire Ins. Co. v. Vicino Drywall (S.D. Florida, November 29, 2010)

On Monday, November 29, 2010, Judge Alan Gold of the U.S. District Court for the Southern District of Florida, issued an order dismissing a suit brought by an insurer that asked the court to declare the insurer has no duty to defend or indemnify defendant policyholder and two other companies in 17 lawsuits over allegedly defective Chinese drywall.

Plaintiff insurer issued three umbrella insurance policies, which provided excess coverage, to the defendants.  Although the defendants had not sought payment or reimbursement from the insurer for defense costs in the underlying claims, plaintiff insurer argues that the controversy is ripe for consideration because of the number of suits against the defendants and the substantial judgments in other drywall cases; therefore, making it very likely that the excess coverage will be triggered. 

The federal court concluded that the action did not qualify as a proper case or controversy because plaintiff insurer does not cite any case law which would authorize the court to exercise jurisdiction over the dispute based on judgments in separate actions against separate parties.  Furthermore, at this juncture, the parties' liabilities "are merely contingent and may never materialize."

For a copy of the decision click here

Sarah Fang and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Fang.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

Insurer Obligated to Cover Environmental Cleanup Costs for Contamination Caused by Predecessor of Named Insured Prior to Merger With Named Insured.

Land O’ Lakes, Inc. v. Employers Mutual Liability Ins. Co., Case No. 09-CV-0693, 2010 U.S. Dist. LEXIS 124817 (D. Minn., Nov. 24, 2010).

The U.S. District Court for the District of Minnesota recently ruled that a CGL policy issued to a named insured more than a decade before the named insured merged with another entity provided coverage for environmental cleanup costs of the non-named entity for contamination that occurred during the policy period. Travelers insured Land O’ Lakes from 1964 through 1982 under successive CGL policies. Land O’Lakes merged with Midland Cooperative in 1982. Under the terms of the merger, Land O’ Lakes became responsible for all of Midland’s liabilities. Midland had operated an oil refinery from the 1940’s to the 1970’s but sold the refinery to a third party several years prior to the merger. Midland’s operation of the refinery caused contamination that resulted in an enforcement action by the USEPA against Land O’ Lakes sometime after the merger. Land O’ Lakes sought coverage from Travelers under its multiple CGL policies.

 

It was undisputed that the cleanup costs were amounts that Land O’ Lakes was legally obligated to pay as damages for an accident or occurrence that took place during the policy period. The central question instead was whether the policies issued to Land O’ Lakes before it merged with Midland provided coverage for contamination caused by operation of the refinery even though Land O’ Lakes never owned or operated the refinery. The court focused on the named insured provisions of each of the policies. A 1964 policy identified four specific named insureds and provided no coverage. Policies issued between 1974 and 1981 identified specific named insureds and included entities acquired during the policy period and which were owned or controlled by Land O’ Lakes. These policies provided no coverage. Policies issued between 1971 and 1981 included similar language which the court could not reasonably construe as providing coverage for these liabilities. However, the court found that certain policies issued between 1965 and 1970 provided coverage because the named insured provision included entities controlled or owned by Land O’ Lakes “now and hereafter” without a time limitation on the acquisition. The court explained that Travelers knew how to write policies with a time limitation, as evidenced by the language in the 1974 to 1981 policies, but that it hadn’t done so, at its own risk. Thus, the court concluded Travelers was obligated to provide coverage under five of the policies at issue.

For a copy of the decision click here

Patrick Omilian and Tom Segalla

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Segalla.html

Berkshire Hathway Purchase Sun Life's Reinsurance Business

Wednesday, Sun Life announced that Sun Life Assurance Company of Canada is selling its life reinsurance business to Warren Buffet's Berkshire Hathaway Life Co. of Nebraska.  Sun Life's CEO is quoted in the company's press release as stating “Our reinsurance business is profitable, but it is not a growth area for Sun Life Financial and this transaction releases capital which can be put to work in other businesses.”  The transaction is expected to be completed by December 31, 2010.

 Sun Life reinsures approximately $113 billion (Canadian) in life insurance.  The purchase price has not been disclosed by the company.  The deal is subject to regulatory approval and is expected to expected to increase Sun Life’s Minimum Continuing Capital and Surplus Requirement (MCCSR) ratio, by 10 to 14 percentage points. Sun Life’s MCCSR ratio was 210% as of June 30, 2010.

 For the press release click here:  http://www.sunlife.com/Global/News+and+insights/News/News+releases/2010/Sun+Life+sells+reinsurance+business+to+Berkshire+Hathaway?vgnLocale=en_CA

Sarah Delaney

http://www.goldbergsegalla.com/attorneys/Delaney.html

SOCIAL MEDIA IN CLAIMS INVESTIGATION – THE SMELL OF “TWEET” SUCCESS

It is becoming more and more apparent that by utilizing social networking tools, claim professionals increase the chance of successful claim resolution. One must, however, understand the processes and have a strategy.  For an interesting article on the subject, click here

By Daniel W. Gerber, Richard J. Cohen, and Tamara C. Bigford

http://www.goldbergsegalla.com/attorneys/Gerber.html

http://www.goldbergsegalla.com/attorneys/Cohen.html

http://bsocialmedia.com/?p=16

 

 

 

PRIMARY INSURER REQUIRED TO RECOGNIZE PRIORITY OF COVERAGE REGARDING SUBROGATION PROCEEDS

TRAVELERS V. NATIONAL UNION (8^TH Cir. September 2, 2010)

 

The insured, KCPL, suffered a loss estimated at $452 million, a large segment of which was uninsured.  It maintained a $200 million primary policy with National Union and a $100 million excess policy with Travelers.

 

Following the loss, National Union and KCPL invited Travelers to enter into an agreement regarding subrogation.  Travelers declined, stating it did not want to send the "wrong message" that the loss would reach its excess policy limits.  National Union and KCPL agreed to split the subrogation proceed 55%-45%, with the 45% designated for KCPL representing uninsred losses.  Following the agreement, two lawsuits commenced: one for subrogation and one for insurance coverage.  The insurance coverage claim against National Union resulted in payment of the $200 million policy proceeds.

 

KCPL subrogated and settled with a number of tortfeasors for approximately $142 million.  It went to trial regardign its claims against the last tortfeasor.  Although the trial resulted in $97 million in damages awarded to KCPL, it was reduced to $190,000.  While that verdict was on appeal, Travelers and KCPL settled the coverage action for $10 million.  Subsequently, the $97 million award was reinstated.

 

Travelers then commenced this action seeking recovery of the $10 million it paid from KCPL and National Union.  The Eighth Circuit held that Travelers could not recover from KCPL because of its refusal to participate in the subrogation agreement and the designation of KCPL's losses as uninsured.  It also, however, recognized that Travelers' priority of coverage over National Union persisted, despite its failure to participate.

 

National Union's policy recognized priority of coverage and it was bound by KCPL's agreement with Travelers (i.e. the excess policy).  Therefore, National Union recognized Travelers' priority interest in subrogation proceeds and was required to repay Travelers' $10 million.

 

For a copy of the decision click here 

 

Sarah Delaney and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

UNDER NEW JERSEY LAW, A PREVAILING INSURED MAY RECOVER LEGAL FEES, EVEN WHERE THE LITIGATION TAKES PLACE OUT OF STATE

MYRON CORPORATION V. ATLANTIC MUTUAL INSURANCE CO.

(SUPPREME COURT OF NEW JERSEY, JULY 27, 2010)

 

New Jersey Rule 4:42-9(a)(6) allows fee shifting in “an action upon a liability or indemnity policy of insurance in favor of a successful claimant.”  The insured, a New Jersey company, was sued for blast faxes sent allegedly in violation of the Telephone Consumer Protection Act of 1991 and Illinois consumer protection laws.  It sought defense and indemnity from its insurer, who defended under a reservation of rights.

 

When American States Ins. Co. v. Capital Associates, 393 F.2d 939 (7^th Cir. (Ill.) 2004) was issued, the insurer disclaimed coverage and commenced a declaratory judgment action in Illinois seeking a declaration of no coverage.  The insured filed its own coverage action in New Jersey.  The insured convinced the Illinois court that New Jersey had a stronger connection to the case, and the court accordingly abstained.  By that point, the insured has spent $160,000 on the Illinois action.

 

The insured then litigated the New Jersey action to a successful conclusion.  It sought the defense costs for the Illinois action based upon the R. 4:42-9(a)(6), but the insurer refused.  The trial court agreed with the insurer, holding that because Illinois had not equivalent rule, the insured would not be entitled to fees there even if it had prevailed.

 

In reversing, the appellate division stated that the fee rule should apply because “unless the insured can recover its counsel fees for out-of-state litigation in this situation, an insurer could wear down the insured financially through forum shopping.” See Myron Corp. v. Atlantic Mutual Ins. Co., 407 N.J. Super 302 (2009). Since the Illinois litigation was a “battle[] in a war that [the insured] ultimately won,” it was part of the “entire controversy” that was favorably resolved in the insured’s favor in New Jersey.

 

New Jersey’s highest court adopted the appellate division’s decision in total. In a strong dissent, however, Justice Roberto Rivera-Soto stated that the ruling “does needless violence to the concept of comity among states,” and raised concerns that plaintiffs would flock to New Jersey to take advantage of the rule once they received successful results in other jurisdictions.  Further, the insured did not “prevail” in the Illinois action.  Myron Corp. v. Atlantic Mutual Ins. Co., 2010 N.J. LEXIS 700 (July 27, 2010).

 

For a copy of the decisions click here and here

 

Sarah Delaney and Joanna Roberto

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

Federal Appeals Court Orders A New Trial In False Claims Lawsuit

U.S. ex rel. Loughren v. Unum Group

(1^st Cir. (Mass.) July 29, 2010)

 

Patrick J. Loughran, as relator, brought a lawsuit under the qui tam provisions of the False Claims Act, alleging that Unum Group (“Unum”) had burdened the Social Security Administration (“SSA”) by knowingly causing people to file baseless applications for Social Security disability insurance.  Unum allegedly had information in its claims files that the applicants had capacity for work under the SSA, but Unum still required them to apply for Social Security benefits. 

 

Unum argued in part that its practice of requiring people to apply for benefits was no different than what the Federal Employee Retirement System and comparable state programs require before granting benefits.  The lower court prohibited Unum from offering this evidence at trial, however.

 

The United States Court of Appeals for the First Circuit ruled that the lower court abused its discretion in excluding this evidence.  The court found that such evidence could support Unum’s argument that an applicant’s statement on his application that he believes he is unable to work is not material to the SSA’s decision whether to approve or deny benefits, but it can influence the agency.  The court held that since the SSA knows that all federal employees are required to apply, and it cannot distinguish Federal Employee Retirement System applicants from other applicants, SSA must assume that any given applicant is applying only because he is required to do so, not necessarily because he has a good faith belief that he is entitled to benefits.  A jury could reasonably conclude that the SSA has no reason to believe that any applicant is implying that he may be eligible for benefits.  By excluding evidence of the SSA’s knowledge of the requirement by the Federal Employee Retirement System and comparable state programs that all claimants apply for benefits without regard to potential eligibility, the lower court prevented the jury from considering evidence “that was highly relevant to the essential element of materiality.”

 

Accordingly, the appeals court ordered a new trial so a jury could consider the improperly excluded evidence.

 

For a copy of the decision click here

 

Toni Frain and Jonathan Kuller

 

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Kuller.html

Louisiana Passes Law Prohibiting Insurance Companies from Cancelling Homeowner Policies Due to the Presence of Chinese Drywall

The Governor of Louisiana, Bobby Jindal, has signed a new law into effect that prohibits insurance companies from cancelling the policies of homeowners who have toxic Chinese drywall in their homes.  The drywall, which can corrode electrical equipment and fill homes with a rotten egg smell, is difficult and expensive to remove.  Thousands of complaints were received from homeowners across the United States who say that toxic Chinese wallboard imported between 2004 and 2007 releases sulfuric odors, causes health problems, and corrodes wiring and appliances.  Millions of sheets of the Chinese drywall were imported from China into the United States due to a domestic shortage caused by a housing boom and construction following a serious of hurricanes that struck the southeastern United States.

The new Louisiana drywall insurance law will be in effect until June 1, 2013. It prevents insurance companies from abandoning homeowners who find that they have imported Chinese drywall in their homes. However, the new law does not prevent insurance companies from raising premiums on those homeowners, only applies to residential properties, and allows companies to cancel or not renew a policy if the insurance company can find another factor besides Chinese drywall on which to base their decision.  The law only applies to homes with Chinese drywall imported before December 31, 2009. Insurance companies who defy the law could be penalized up to $15,000 per incident.

For a copy of the new law click here

Bryan Richmond and Joanna Roberto

http://www.goldbergsegalla.com/attorneys/Richmond.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

Goldberg Segalla Recognized as the 6th Most Influential Law Firm in the World of Reinsurance

Reinsurance Magazine unveiled its Hot List and named Goldberg Segalla LLP the 6th most influential law firm in the world of reinsurance.  All of us here at the Insurance and Reinsurance Report are extremely proud and honored by this designation.   

Jeff Kingsley and Dan Gerber

Insured Waives Attorney-Client Privilege By Inadvertently Disclosing Damaging Emails

Felman Prod., Inc. v. Industrual Risk Ins.

(S.D. W.Va. July 23, 2010)

 

A federal judge ruled that an insured claiming $39 million in business losses waived the attorney-client privilege protecting an enormous number of emails, including an email between the insured’s human resource manager and its attorney. In the email, the human resources manager asked the insured’s attorney whether to ask customers to backdate contracts in order to produce evidence for the purposes of its insurance claim.

 

The action centers on a business interruption claim arising from a transformer failure at the insured’s smelting plant that rendered the plant’s furnace inoperable. The insured claims $39 million in lost business, a figure that allegedly reflects the projected sale of an amount of the silicon-manganese consistent with the simultaneous operation of three furnaces.

 

In connection with the litigation, the insured produced more than one million pages of electronically stored information (ESI). In reviewing the ESI, attorneys retained by the defendant insurer, Industrial Risk Insurers, discovered the damaging email between the insured’s human resource manager and its attorney. They also discovered an additional 377 documents otherwise protected by the attorney-client privilege. The insurer immediately filed a motion to amend its answer to add counterclaims for fraud and breach of contract against the insured. Although both parties agreed that the documents were subject to the attorney-client privilege, the insurer refused to return them, arguing that the insured waived the privilege through its disclosure. The Magistrate Judge agreed.

 

The district court affirmed the Magistrate’s ruling, noting that the “ridiculously high number of irrelevant materials and the large volume of privileged communications produced demonstrate a lack of reasonableness.” The court held that the sheer volume of privileged documents that were inadvertently disclosed weighed in favor of waiver. 

 

For a copy of the case, click here

 

Carrie Appler and Michael Saltzman

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Saltzman.html

 

case provided courtesy of Lexis

Two Insurers Refuse to Defend Chinese Drywall Claims

Granite State Ins. Co. v. American Bldg. Materials  Inc.

(M.D. Fla. July 13, 2010)

 

Two insurers have filed suit against their insured, American Building Materials Inc. (“ABM”), a drywall supplier, and KB Home Inc., alleging that their policies do not cover claims arising from defective drywall installed in homes constructed by KB Home.

 

In 2009, ABM reported 35 homeowner claims to the plaintiff insurers. The claims arose from the “unusual release of sulfide gases” from ABM-supplied drywall used in the construction of homes by KB Home. ABM sought defense and indemnity against the claims for itself and KB Home. The insurers denied coverage based on the policies’ pollution exclusions. According to the insurers, “the mere presence of defective drywall is not ‘property damage’ and there is no coverage under the policies for any costs arising out of the process of repairing or replacing the drywall.” The insurers also denied coverage based on lack of an “occurrence,” damage outside the policy periods, and because no lawsuit had been filed seeking damages under the policies.

 

The U.S. Consumer Product Safety Commission reports that it has received thousands of complaints from residents who believe their health symptoms or the corrosion of certain metal components in their homes are related to drywall imported from China. Litigation involving insurance coverage for Chinese drywall claims is still in its infancy, however. Recently, a Louisiana judge held that a policy’s pollution exclusion did not bar coverage for Chinese drywall claims, while a federal court in Virginia decided in June that a policy’s pollution exclusion precluded coverage for the same type of claims.

 

For a copy of the complaint, click here

 

Carrie Appler and Dan Gerber

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Gerber.html

Additional Insured Obtains Dismissal from Coverage Action on Jurisdictional Grounds

Liberty Mutual Fire Insurance Co. v. Southeastern Mechanical Services Inc. and San Miguel Electric Cooperative Inc. (M.D. Fla. June 18, 2010)

Liberty Mutual Fire Insurance Co. ("Liberty Mutual") insured Southeastern Mechanical Services Inc. ("Southeastern"). San Miguel Electric Cooperative Inc. ("San Miguel") contracted with Southeastern to perform maintenance work in 2007 during a scheduled service outage at its facility. As part of the agreement, San Miguel required that Southeastern name it as an additional insured party on its Liberty Mutual policy. San Miguel claimed that Southeastern’s poor welding work resulted in a nine-day power outage, leading San Miguel to lose revenue from the lack of electricity generation.

Liberty Mutual sued San Miguel and Southeastern seeking a declaration of no coverage, alleging that the cost to repair the shoddy work did not constitute property damage under the policy. San Miguel moved to dismiss the complaint for lack of personal jurisdiction.

Liberty Mutual argued that the San Miguel met the long-arm statute's requirement for conducting substantial activity within Florida because the cooperative held 135 contracts with Florida companies worth about $10 million over the past five years. Liberty Mutual also argued that San Miguel fell under Florida's long-arm statute ecause of the cooperative's request to be added as an insured party under Southeastern's insurance policy.

The court rejected these arguments, noting that San Miguel's contracts were all made for purchases, not sales. Additionally, they constituted less than 3% of the company's total expenditures in any given year. Accordingly, the contracts could not satisfy the statute's "substantial and not isolated activity" requirement. The court noted that San Miguel had no insured property in Florida and that simply being a potential third-party beneficiary of an insurance policy was not enough to bring San Miguel under Florida’s long-arm statute.

The court held that asserting jurisdiction over San Miguel would violate due process, as the company had not "established minimum contacts" with the state of Florida.

For a copy of the decision click here

Toni Frain and Anthony Golowski

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Golowski.html

US Supreme Ct Revives Dismissed Lawsuit Finding Cruise Ship Should Have Known That It Would Have Been Sued

Krupski v. Costa Crociere, S.p.A.

(U.S. Supreme Court, June 7, 2010)

 

Plaintiff Krupski made a mistake in failing to name Costa Crociere, even though it was aware of its existence.  Rather,  Krupski named “Costa Cruises” a related corporate entity that had a Florida address as its listing. Both the district court and the Court of Appeals for the Eleventh Circuit dismissed the action ruling that Krupski delayed filing an amended complaint against Costa Crociere and that its identity was clearly marked on the furnished ticket which was always in Krupski’s possession.

 

The US Supreme Court reversed the lower court and found that Krupski meant to sue the company that owned the ship but mistakenly named the wrong entity.  In light of this error, the US Supreme Court stated that Costa Crociere should have known that it was not named in the lawsuit and only because of Krupski’s misunderstanding about which “Costa” entity was in charge, it would have been included in the Complaint.

 

The opinion and decision was delivered by newly appointed Justice Sotomayor.

For a copy of the decision click here

Joanna Roberto

http://www.goldbergsegalla.com/attorneys/Roberto.html

E-Discovery: Subpoenas to Facebook and MySpace for Private Messages Quashed

Crispin v. Christian Audigier, Inc.

(C.D. Cal. May 26, 2010)

 

A federal district court recently held that private messages exchanged on Facebook and MySpace cannot be subpoenaed under the 1986 Stored Communications Act. The case is Crispin v. Christian Audigier, Inc., __ F. Supp. 3d __ (C.D. Cal. May 26, 2010).

 

The plaintiff, Buckley Crispin, alleges that between November 2005 and January 2006, he granted defendant Christian Audigier and Christian Audigier, Inc. (“CAI”) an oral license to use certain of his works of art in a limited manner in connection with the manufacture of certain types of garments. The agreement purportedly required Audigier and CAI to pay a specified sum for the right to reproduce each work of art on street-wear apparel and also required that they include Crispin’s logo on each garment. Crispin alleges that Audigier and CAI have not only failed to include his logo on a substantial quantity of apparel bearing his artwork, but at times they attributed the artwork to another artist or to Audigier himself. Crispin alleges that Audigier and CAI also violated his rights by sublicensing his artwork without obtaining his consent. He asserts that the artwork has now been used on jewelry, watches, shoes, pet accessories, luggage, sunglasses, swimwear, denim, wine bottles, and a variety of other products that are purportedly outside the scope of the limited oral license.

 

Defendants served subpoenas duces tecum on three social networking websites: Facebook, Media Temple, Inc, and MySpace, Inc. The subpoenas sought Crispin’s basic subscriber information, as well as all communications between Crispin and tattoo artist Bryan Callan, and all communications that referred or related to Audigier, CAI, the Ed Hardy brand, or any of the sublicensee defendants. Audigier and CAI contend that this information is relevant in determining the nature and terms of the agreement, if any, into which Crispin and Audigier entered.

 

In a lengthy decision, U.S. District Judge Margaret Morrow reversed a ruling from a magistrate judge that found that defendants were entitled to subpoena private messages exchanged on Facebook and MySpace. The court held that private messages exchanged on Facebook and MySpace are no different than email exchanges governed by the Stored Communications Act. Because the Stored Communications Act prevents “providers” of communication services from divulging private communications, such as electronic messages, to certain entities and individuals, the court quashed the subpoenas with respect to the private messaging. With respect to the Facebook wall postings and MySpace comments, the court remanded the matter to the magistrate judge for further evidentiary development of whether certain of the sought after information was publicly available.

 

For a copy of the case, click here

 

Carrie Appler and Rick Cohen

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Cohen.html

 

case provided courtesy of Lexis 

 

Court Granted Insurer Summary Judgment On Policyholder’s Chinese Drywall Claims

Travco Ins. Co. v. Ward

(United States District Court, Eastern District of Virginia, June 3, 2010)

 

This environmental coverage dispute resulted from a property loss involving Chinese Drywall installed in policyholder’s residence. Over time, the Chinese Drywall released sulfuric gas into the residence causing damage to the interior structures of the home. Defendant filed a lawsuit against several development and supply companies, alleging that they constructed his home with "inherently defective" drywall. Thereafter, the insurer filed a declaratory judgment action seeking a declaration that, under the Policies, it has no obligation to provide coverage for the losses claimed by the policyholder. 

 

The insurer requested judgment that the Policy does not provide coverage for the cost of removing and/or replacing the Drywall in the residence; nor coverage for any damage caused by the Drywall for any damage caused by the discharge of gas from the Drywall, including but not limited to any damage to wiring and copper components of the home. 

Specifically, the insurer argued that the Policy does not provide coverage for the cost of removing the Chinese Drywall, because "the Drywall has not sustained a 'direct physical loss,' and therefore does not fall within the grant of coverage in the Policy."  The insurer further argued  that even if there had been a direct physical loss to the Drywall, the loss would be excluded from coverage under either the latent defect or faulty material exclusions,  Additionally, Plaintiff argued that any direct physical loss caused by gas and odor would be subject to the pollutant exclusion. 

 

Based on a review of applicable Virginia law, the Court held that the policyholder’s residence and its components suffered a "direct physical loss" within the meaning of the Policy.  However, the Court also concluded that four separate exclusions applied to the damage claimed. Specifically, the claimed losses were found to be excluded by the Policy's latent defect, faulty materials, corrosion, and pollutant exclusions.

 

As to the pollutant exclusion, the Court specifically rejected policyholder’s argument that Chinese Drywall is not a "contaminant" or a "pollutant."  While the Drywall itself may not be a pollutant, the gases it releases are. The Court determined that there is no dispute that the Chinese Drywall has released reduced sulfur gases into the residence and that both state and federal authorities recognize reduced sulfur gases as pollutants.  Moreover, the court noted that the broad definition of pollutants in the Policy includes "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste."  Thus, under any reasonable definition of these terms, the gases released in the home qualified as irritants and contaminants. 

 

For a copy click here

 

Paul Steck and Jeff Kingsley

 

http://www.goldbergsegalla.com/attorneys/Steck.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

 

 

Bermuda Seminar Entitled "From Claim to Conclusion: Examining Insurance/Reinsurance Coverage Issues for the 21st Century"

On May 18th, the law firm of Goldberg Segalla will present a comprehensive free seminar in Bermuda that will address cutting edge topics such as the latest developments in the recent Ponzi Scheme, understanding the importance of the recent Wasa decision along with emerging insurance issues involving genetically engineered foods, Chinese drywall, green building and the possible emergence of the New York Insurance Exchange and its implications.  CLE is available upon request at registration.

For more information regarding this FREE seminar, please contact Erin Casell at 716-566-5407 or ecasell@goldbergsegalla.com 

PATENT INFRINGEMENT CLAIMS FOUND TO CONSTITUTE “ADVERTISING INJURY”

Hyundai Motor America v. National Insurance Company of Pittsburgh (9th Cir. (Ca.) April 5, 2010)

Recently, the Ninth Circuit ruled that a patent infringement claim constituted “misappropriation of ideas,” triggering a CGL carrier’s duty to defend under the Personal and Advertising Liability Coverage.    Hyundai’s website featured a “build your own vehicle” (“BYO”) feature, which allowed users to input information regarding vehicle preferences and generated customized vehicle images and pricing. 

Orion IP, LLC had patented an “electronic system for creating customized product proposals” which asks questions of the user and based upon the user’s responses, links product pictures and text into a customized proposal.  Orion IP, LLC sued Hyundai and nineteen other car companies for patent infringement related to the BYO feature.  It alleged that Hyundai was infringing on its patents by “methods” used on its website, marketing methods, marketing systems and sales methods.   Hyundai sought a defense from its insurers pursuant to the Personal and Advertising Injury Coverage. 

The insurers denied coverage, asserting that patent infringement was not “advertising injury.”  Applying a three-part test established by the Supreme Court of California in Hameid v. National Fire Ins. of Hartford, 31 Cal.4th 16 (2003), the Ninth Circuit disagreed and found a duty to defend.   First, the court held that the BYO feature on the website was “advertising” to the public at large even though it created custom proposals.  Generally, such solicitations are not deemed “advertisements” because they are not directed to the public at large. Noting the distribution of the BYO feature to “millions” of web-browsing potential customers, the court presented an analogy:  if instead of the web, the company used a crude paper version and distributed that in the newspaper.  The court reasoned that in such a case it seemed clear that the distribution via the newspaper was advertising.   Second, the court determined that the BYO feature was a “misappropriation of advertising ideas” as defined in the policy.  The insurers argued that the actual content or form of the advertisement must infringe, not just the product being advertised. 

The court rejected that argument, noting that the “form” of the advertisement was the infringing feature.  The insurers also claimed that in order to infringe, the infringer must be a direct competitor.  The court rejected that argument based upon the plain language of the policy, which contains no such requirement Additionally, the court found a causal connection between the injury and the advertisement because it was alleged that the use of the BYO feature injured Orion.  There was a casual connection because “the advertising itself was the improper use of the patented method.”  

For a copy of the decision click here

Sarah Delaney and Richard Cohen

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Cohen.html

Case provided courtesy of Lexis

New York State Superintendent of Insurance Discusses the Possible Re-Emergence of the New York Insurance Exchange

Last week in London, James Wrynn, New York's Superintendent of Insurance, discussed the possibility of reconstituting a New York Insurance Exchange during a panel conference at the invitation of the Insurance Insider.  While recognizing the challenges to a New York Insurance Exchange, Mr. Wrynn believes that such an exchange could be a tremendous asset in providing the flexibility and technological advancements to the claims process.

A copy of the article summarizing Mr. Wynn's discussion can be found here

Sharon Angelino, Tom Segalla and Dan Gerber

http://www.goldbergsegalla.com/attorneys/Angelino.html

http://www.goldbergsegalla.com/attorneys/Segalla.html

http://www.goldbergsegalla.com/attorneys/Gerber.html

Texas Supreme Court: Indemnity Duty May Exist Even If Defense Duty Does Not

D.R. Horton-Texas, Ltd. v. Markel Int’l Ins. Co.

(Tex. Dec. 11, 2009)

 

The Texas Supreme Court recently reversed an appellate decision declaring that Markel International Insurance Company was not obligated to indemnify a putative additional insured in underlying construction litigation. The Texas Supreme Court held that Markel may have a duty to indemnify a general contractor for whom Markel’s named insured did work, even though it has no duty to defend that general contractor.

 

Owners of a newly-constructed house sued the general contractor, D.R. Horton-Texas, Ltd., for damages allegedly caused by latent defects in the house that led to mold damage. D.R. Horton tendered its defense and indemnity to Markel International, the insurer of a subcontractor who performed work on the house. Markel denied coverage on the ground that the complaint did not allege that D.R. Horton’s liability arose from the subcontractor’s work. D.R. Horton retained counsel at its own expense, settled the underlying action, and filed an action against Markel to recoup its defense and indemnity costs.

 

Markel moved for summary judgment, arguing that it had no duty to defend or indemnify D.R. Horton in the underlying litigation because the homeowners’ petition did not allege facts that triggered coverage. D.R. Horton responded by arguing that the homeowners’ pleadings should be liberally construed in favor of coverage. The court of appeals affirmed the lower court’s ruling that Markel did not owe D.R. Horton a defense or indemnity.

 

On appeal, the Texas Supreme Court ruled that D.R. Horton failed to preserve its argument that an exception to the eight-corners doctrine permits the parties to introduce extrinsic evidence relating to the duty-to-defend analysis. As a result, the court affirmed the appellate ruling that Markel was not obligated to defend D.R. Horton in the underlying litigation.

 

The Texas Supreme Court, however, reversed the appellate decision on the duty-to-indemnify issue. The court held that an insurer’s duty to indemnify is controlled by facts established in the underlying suit. Inasmuch as D.R. Horton produced evidence to support that its liability arose from the work of Markel’s insured, the court held that the appellate court erred in declaring that Markel was not obligated to indemnify D.R. Horton in the underlying action. The court further noted that even if Markel had no duty to defend D.R. Horton, it may still have a duty to indemnify it. Therefore, the case was remanded for further proceedings.

 

For a copy of the decision, click here

 

Carrie Appler and Joanna Roberto 

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

 

The case is published with consent from Karen Yotis 

Insurer Ordered to Disclose Documents in Legionnaires’ Outbreak Case

Pentair Water Treatment (OH) Co. v. Continental Ins. Co.

(S.D.N.Y. Nov. 16, 2009)

 

The District Court for the Southern District of New York ordered Continental Insurance Company to disclose various underwriting documents and produce underwriting witnesses in a dispute over insurance coverage for a cruise ship outbreak of Legionnaires’ Disease. In 1994, passengers on the cruise ship Horizon became ill after an outbreak of Legionnaire’s Disease. The outbreak was traced to the whirlpool spa on the vessel and, specifically to its filter, which had been manufactured and distributed by the plaintiff, Pentair, formerly known as Essef Corp. Many of the passengers who fell ill sued the cruise ship line, Celebrity Cruises, which, in turn, cross-claimed against Pentair. Ultimately, Pentair was found 70% liable for the outbreak. A jury awarded the plaintiffs $2.6 million in compensatory damages. They also found Pentair liable for $7 million in punitive damages. In a related action commenced by the cruise ship line for damages including lost profits, judgment was entered against Pentair for $30 million.

 

Pentair sought payment under an excess umbrella liability policy issued by Continental. Continental, however, denied coverage based on the pollution exclusion, among other grounds. Pentair sued for coverage under the policy. During discovery, Pentair requested that Continental produce documents relating to any pollution exclusion clause that Continental used during the relevant time period. Continental refused, arguing that it was only obligated to disclose documents related to the specific language used by Continental in Pentair’s policy. The court disagreed, finding that information concerning other pollution exclusions employed by Continental could well shed light on the meaning of the pollution exclusion in Pentair’s case. The court also ordered Continental to produce witnesses to testify about Continental’s underwriting practices and manuals during the period of 1993-95.

 

For a copy of the decision, click here

 

 

Carrie Appler and Joanna Roberto

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

 

 

 

NJ Court Awards Counsel Fees to Prevailing Policyholder For Out of State Declaratory Judgment Actions

Myron Corp. v. Atlantic Mutual Ins. Corp., A-5528-07T2; App. Div. (Reisner, J.A.D.) (June 5, 2009)

Plaintiff policyholder obtained a commercial policy from defendant insurer. As part of the policyholder’s business, it sent various faxes to business throughout the country which prompted lawsuits against it for violation of a federal statute against junk faxes. The policyholder requested defense and indemnification from the insurer for the out-of-state lawsuits. The insurer defended the policyholder, but commenced two  declaratory judgment actions in Illinois seeking a declaration that there was no coverage under its policy. The first Illinois cases was dismissed for lack of diversity and abstention was granted in the second on the ground that New Jersey was a forum with more substantial ties. The policyholder then commennced an action in New Jersey to determine whether or not the insurer had duty to defend and indemnify the policyholder in the out-of-state lawsuit. The New Jersey court held that the insurer had a duty to defend and indemnify the policyholder in the out-of-state litigation.

The policyholder then sought to recover counsel fees and costs in defending against insurer’s two out-of-state declaratory judgment actions under Rule 4:42-9(a)(6). The New Jersey Appellate Court held that because the policyholder prevailed on its coverage lawsuit, it was entitled to counsel fees for defending the two out-of-state declaratory judgment actions filed against it by the insurer. The right of policyholder to obtain counsel fees stems directly from the success of its coverage action in New Jersey, therefore there is no extraterritorial application of the counsel fees rule to allow recovery of counsel fees for the out-of-state actions. Further the Appellate Court held that allowing the policyholder to collect counsel fees also furthers the important purposes of the rule since unless the policyholder can recover its counsel fees for out-of-state litigation in this situation, an insurer could wear down the insured financially through forum-shopping.

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By Sarah X. Fang and Richard J. Cohen

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Emerging Issue - Developing Coverage for Americans With Disabilities Acts Claims

Last week, California's highest court held that a restaurant is liable for an unintentional ADA violation. (Click here for more information on this decision). The decision again raises the issue of insurance coverage for ADA and similar claims. For an article addressing these issues in detail, click here.

By Daniel W. Gerber and Carrie P. Appler

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http://www.goldbergsegalla.com/attorneys/Appler.html