The Insurance and Reinsurance Report

FLORIDA JURY AWARDS GLORIA ESTEFAN’S HOTEL CO. $ 6.7 MILLION FOR HURRICANE DAMAGE

Pin-Pon Corporation v. Landmark American Insurance Co. , case number 2009 0320 CA 03, consolidated with Pin-Pon Corporation v. Lexington Insurance Co., case number 31 2009 CA 01 2244, May 3, 2012 (Indian River County, FL)

Lexington Insurance Co. and Landmark American Insurance Co., were found by a Florida state jury to be liable to Gloria Estefan’s Pin-Pon Corp. in the amount of $6.7 million for failing to provide coverage for hurricane damage.

The insurers had made some payments, but the jury found that the insurers failed to provide the coverage that they owed for damage to the company’s Vero Beach hotel. Hurricane Frances hit the hotel in August 2004 and Hurricane Jeanne hit again in September 2004, causing extensive damage. The jury found that the insurer’s had failed to pay for building damages, code upgrade damages and costs while the hotel was unable to operate as repairs were being made.

Gloria Estefan’s hotel company had a primary policy with Lexington and an excess policy with Landmark at the time that the Hurricanes hit.  Both policies provided coverage for windstorm damage and business interruption coverage. The hotel company provided documentation of its losses but the insurers refused to pay the full amount. The insurers argued that the hotel company was renovating the hotel and much of the repairs and business interruption were due to the renovation and not the storm damage.

The jury found that the insurers were obligated to indemnify the hotel for the costs it incurred in having to restore the hotel before it could be renovated in the first place. Moreover, the jury found that the insurers had to indemnify the hotel for the damages it incurred in bringing the hotel up to code after the damage caused by the Hurricanes.

The hotel reopened in 2008, and the hotel company is going to seek prejudgment interest on the $6.7 million for the time between 2008 and this jury decision.

For a copy of the decision click here

Clay Waterman and Joanna Roberto

 

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Cases for Reinsurance Review - May 2012 Edition

Cases provided courtesy of LexisNexis.

Ace American v. Christiana

Arch Re v. Underwriters

McNeary v. JP Morgan

Olympus v. Aon Benfield

USFIC v. Warren

Policyholders Not Owed Defense Against Criminal Charges for Rhode Island Nightclub Fire

Derderian v. Essex Ins. Co. (R.I. Apr. 27, 2012)

The Supreme Court of Rhode Island recently held that two night club owners charged with involuntary manslaughter in connection with 100 deaths at the club were not entitled to a defense from the club’s liability insurer for the criminal proceedings against them.

In February 2003, 100 people died in a fire that occurred at the Station nightclub, which was co-owned by appellants Michael and Jeffrey Derderian. The fire engulfed the Station within a matter of minutes when polyurethane foam covering the ceiling and walls caught fire after a band performing at the nightclub ignited a pyrotechnic display. The foam that kindled the conflagration had been installed by the Derderians in June 2000, and was not flame-resistant, as required by the statute in effect at that time.

The Derderians were indicted on charges of criminal negligence as a result of the fire. They tendered their defense in the criminal proceeding to Essex Insurance Company under a general liability policy issued to the nightclub. Essex denied coverage, contending that the policy provided coverage for a “suit,” which was specifically defined as a “civil proceeding.” The Derderians argued that Rhode Island General Law §12-28-5 required Essex to provide a defense. The statute, referred to as the "Victim's Rights" statute, provides:

Upon his or her final conviction of a felony after a trial by jury, a civil judgment shall automatically be entered by the trial court against the defendant conclusively establishing his or her liability to the victim for any personal injury and/or loss of property that was sustained by the victim as a direct and proximate cause of the felonious conduct of which the defendant has been convicted. The court shall notify the victim at his or her last known address of the entry of the civil judgment in his or her favor and inform him or her that he or she must establish proof of damages in an appropriate judicial proceeding in order to recover for his or her injury or loss. This section shall not apply to crimes set forth in title 31 arising from the operation of a motor vehicle.

The Derderians contended that Essex’s defense obligation was triggered because the statute required an automatic civil judgment against them if convicted. Essex argued, in response, that the criminal proceedings were not “suits” within the meaning of the policy because they did not seek damages because of “bodily injury.” Essex also contended that, as a matter of course, general liability policies do not provide coverage for criminal proceedings, and that to interpret §12-28-5 as requiring a general liability policy to provide a defense for such matters would result in an undue windfall for insureds.

The lower court held that the criminal proceedings were not “suits” within the meaning of the policy. The Rhode Island Supreme Court affirmed, noting that the statute is merely a “procedural mechanism" that fixes civil liability, but that still requires a separate proceeding to establish damages. As a result, the court held that the statute was not meant to require an insurer to defend its insured in a criminal proceeding. As the court explained, “[u]nlike the alchemists of yore, we do not claim the ability to transmute base metal into gold; neither can we transmute a 200-count criminal indictment into a civil proceeding.”

For a copy of the decision, click here.

Jeffrey L. Kingsley and Carrie P. Appler

Mining Operator’s Lead Waste Determined To Fall Within The Policies’ Pollution Exclusion

Doe Run Resources Corp. v. Lexington Ins. Co.
(United States District Court, Eastern District of Missouri, April 23, 2012)

In this coverage dispute, the insurer moved for summary judgment asserting that the policy’s pollution exclusion precluded coverage for environmental contamination due to the release of mining wastes.  Specifically, Doe Run was involved in the mining, milling, and smelting of lead.  An underlying complaint alleged that Doe Run’s mining operations adversely impacted the environment and human health through the release of toxic contamination in to the soil, air and water from its lead and zinc mines resulting in violations of various federal laws including, RCRA, the Clean Water Act and the Clean Air Act. 

After Lexington denied coverage, Doe Run sought a declaration that its insurer was obligated to pay its defense to the underlying Nadist suit.  At issue were eight policies issued by Lexington from 1998 to 2006, each of which contained a pollution exclusion.  Lexington argued that it was entitled to summary judgment on all of Doe Run's claims because the plaintiff's allegations "fall squarely within the terms of the pollution exclusions," and even the broadest reading of the Nadist complaint permits no reasonable interpretation other than that the injuries alleged therein arose out of the discharge, dispersal, release, or escape of pollutants or contaminants, thus bringing the complaint fully within the language of both forms of the pollution exclusion contained in the Lexington policies. 

In contrast, Doe Run argued that Lexington could only deny a defense based on the pollution exclusions if it can prove that every allegation in Nadist fell within the exclusion such that under the "potential for coverage" standard, Lexington owed a defense. Doe Run asserted that the Nadist complaint included allegations concerning lead, metals, and other substances that are commercially valuable materials to Doe Run. It further contended that under Missouri law, such commercially valuable materials, unless expressly identified in the policy definition of "pollutant," are not considered "pollutants," and here the policies failed to list lead in the definition of "pollutant." Doe Run also relied on the deletion of the "lead exclusion" in its policies after 2004 arguing that application of the pollution exclusions to the claims in Nadist "would all but render coverage illusory" under the policies.

The court, in rejecting Doe Run’s arguments, held that the failure to list lead as a pollutant in the pollution exclusion did not “by itself, … automatically render the exclusion ambiguous.”  The district court also concluded that the absence of a lead-specific exclusion did not undermine the pollution exclusions or reverse their effect.   Lastly, the court noted that Lexington’s 2008 disclaimer referencing the lack of a lead exclusion did not indicate an intent to cover those claims, as the lead exclusion at issue was far broader than the pollution exclusion.    As such, the court held that Lexington met its burden establishing that the pollution exclusion, even when strictly construed against the insurer, precluded Doe Runs right to coverage under the subject policies.

For a copy of this decision, click here.

Joanna M. Roberto and Paul C. Steck 

Insurer Owes No Duty to Defend Policyholder for Emitting Greenhouse Gases

The AES Corp. v. Steadfast Insurance Company, (Record No. 100764, April 20, 2012.)

The Virginia Supreme Court reaffirmed that Steadfast Insurance Co. owed no duty to defend AES Corp. under a CGL policy against claims of intentional release of greenhouse gases. The court found that there was no occurrence because this was intentional act. The court also found that even if the acts of AES constituted negligence rather than an intentional act, it would still not be an occurrence under the policy. 

In the underlying case, Native Vill. of Kivalina v. ExxonMobil Corp., 663 F.Supp.2d 863 (N.D. Cal. 2009), The Village of Kivalina filed suit against AES and other energy companies alleging that the greenhouse gas emissions released by those companies contributed to global warming which destroyed the Village. The underlying complaint alleged that the companies intentionally released the greenhouse gasses while generating power and that they knew or should have known that the gasses would damage the Village.

AES argued the complaint alleged negligent acts because the complaint stated that AES “should have known” its emissions would cause this damage. AES argued that these acts could be construed as negligent and unintentional and therefore Steadfast should owe a duty to defend because the acts could be considered an accident or occurrence.

The court stated that allegations of negligence or non-intentional acts were not always allegations of an accident or occurrence. In the underlying case, the plaintiff alleged that AES knew that its greenhouse gas emissions would lead to the kind of damage that destroyed the Village. The court stated “Whether or not AES’s intentional act constitutes negligence, the natural or probable consequence of that intentional act is not an accident under Virginia law.”

A concurrence by Justice Mims noted that Virginia case law differs from other states in that it limits insurance coverage of negligence claims, finding that negligence and accident or occurrence are not one in the same. Mims warned that this may surprise people and paint Virginia into a corner. 

For a copy of this decision, click here.

Daniel W. Gerber and Clayton D. Waterman

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Cases for Professional Liability Monthly – April 2012 Edition

Cases provided courtesy of LexisNexis.

CLEAVER v. THE UNITED STATES OF AMERICA

DAVID H. MARION, ET AL. v. HARTFORD FIRE INSURANCE CO.

GERE v. LOUIS

HIESHETTER v. LIBERTY INS. CORP.

IN RE PHC, INC. SHAREHOLDER LITIGATION; PETER BLAKESLEE v. PHC, INC., ET AL.

JOBAR REALTY CO. INC. v. TOMBALAKIAN

MULTARI v. YALE NEW HAVEN HOSPITAL

PETERSON v. McGLADREY & PULLEN, LLP ET AL.

SEVEN BRIDGES FOUNDATION v. WILSON AGENCY, INC.

SHAW v. FREEMAN

VAZQUEZ v. CHS PROFESSIONAL PRACTICE, P.C.

TCPA Claims Uninsurable on Public Policy Grounds

Standard Mut. Ins. Co. v. Lay  (Ill. Ct. App. April 20, 2012)

In a matter of first impression, an Illinois appellate court recently held that damages assessed under the Telephone Consumer Protection Act (TCPA) are punitive in nature and, therefore, are uninsurable on public policy grounds.

A real estate agent hired a fax broadcaster to assist in his advertising effort to sell a property listing. The broadcaster represented that the fax recipients would be only entities that consented to receiving fax messages such as the one contemplated by the real estate agent. Unbeknownst to the agent, the broadcaster violated the TCPA because the fax recipients had not consented to receive faxes advertising property for sale.

One of the fax recipients, Locklear Electric, Inc. (Locklear), filed a class action lawsuit against the agent, seeking treble damages under the TCPA for the alleged sending of unsolicited faxes. The agent tendered its defense to its insurer, Standard Mutual Insurance Company. Standard assigned defense counsel to the agent, but reserved its rights to disclaim coverage on several grounds, including that the complaint did not allege “bodily injury,” “property damage,” or “advertising injury” within the meaning of the policy.

After the agent died, his wife retained new counsel and settled the class action lawsuit for $1.7 million. Under the settlement agreement, Locklear agreed not to execute on any property or assets of the agent other than his insurance policies with Standard. In the related declaratory judgment action, Standard and Locklear each moved for summary judgment. The trial court granted Standard’s motion, finding that it did not owe a duty to defend or indemnify the agent against Locklear’s TCPA claims.

On appeal, the court considered whether damages under the TCPA are punitive in nature and, therefore, uninsurable as against Illinois public policy. The court adopted Standard’s argument that because the $500 statutory rate in the TCPA for each unauthorized fax is far in excess of actual damages, it is the equivalent of punitive damages and, therefore, not covered by insurance. The court held that shifting responsibility for payment of damages beyond actual damages frustrates the TCPA’s purpose of deterring and preventing the sending of unwanted faxes.

For a copy of the decision, click here.

Thomas F. Segalla and Carrie P. Appler

Settling Insurer Not Absolved of Contribution for Defense Cost

Potomac Insurance Company of Illinois v. Pennsylvania Manufacturers’ Association Insurance Company(Superior Court of New Jersey, Appellate Division, April 13, 2012)

In a case of first impression, the Superior Court of New Jersey held that settlement with the insured of a contested coverage claim did not eliminate co-insurers rights to seek reimbursement for defense costs.  In deciding the first case on the issue, the Superior Court adopted the California rule, allowing a direct right of action between co-insurers of the same risk on the basis of equitable contribution and not dependent on the insured’s rights.

The insured built a school property, which apparently suffered significant water intrusion over the years.  When suit was finally brought, two of its insurers picked up the defense, while at least two other declined based on the business risk exclusions.  As a result, the insured brought a declaratory judgment action, via an attorney assigned by one of the insurers defending it.  At arbitration in the declaratory judgment action, the insured obtained a favorable ruling. Subsequently, the insured and disclaiming insurer settled for a lump sum. The settlement agreement went through several iterations before it was actually signed, and specifically excluded non-parties as “intended beneficiaries.”  The other insurers were specifically excluded from mention in the settlement agreement. 

After the settlement between the settling insurer and insured, one of the defending insurers commenced an action seeking defense costs.  The insured and settling insurer disagreed about the intention of the settlement agreement, and whether it was intended to be binding on the insured’s other insurers. 

The court recognized an insurer’s right of equitable contribution, separate from subrogation, and held that settlement was not a bar to the contribution claim. Although the insured could not seek more than to  be made whole, if other insurers paid to make the insured whole they could seek contribution for defense or indemnity even if the insured could not pursue such insurers.  The court also held that the insured’s release of its rights did not impact the insurer’s rights to seek contribution.  With regard to the language of the actual settlement agreement, the court found that there was no meeting of the minds regarding whether the other insurers were barred from seeking contribution based on the divergent testimony regarding the settlement agreement’s negotiation and execution. 

For a copy of this decision, click here.

Richard J. Cohen and Sarah J. Delaney

Connecticut Supreme Court Reverses Itself On Issue of Burden of Proof

Arrowood Indemnity Company v. Pendelton King Et Al. (Supreme Court of Connecticut, March 27, 2012)

The Connecticut Supreme Court has long held that in the context of late notice under an insurance policy, the burden was on the insured to prove lack of prejudice to the insurer as a result of the late notice, rather than on the insurer to prove prejudice. Aetna Cas. & Surety Co. v. Murphy, 206 Conn. 409 (1988). In an important decision issued March 27, 2012, the Connecticut Supreme Court reversed its holding in Murphy, and brought Connecticut in line with the majority of other jurisdictions that require the insurer to bear the burden of proving prejudice.

In Arrowood, the insured’s son, Pendleton King, Jr., had been driving an all-terrain vehicle while pulling a friend, Conor McEntee, who was riding on a skateboard pulled by a rope. Conor McEntee let go of the rope and subsequently fell, suffering a severe head injury that resulted in hospitalization and a temporary coma. Following the accident, the Kings and the McEntees socialized and the McEntees did not indicate that they intended to bring an action related to the accident. More than one year after the accident, however, the Kings received a letter from an attorney representing the McEntees alerting them that an action might be filed, at which time the Kings notified their insurer of the potential claim.

The Connecticut Supreme Court was asked to consider several issues of state law that had been certified to it from the Second Circuit Court of Appeals. One of the certified questions was: “Under Connecticut law, where a liability insurance policy requires an insured to give notice of a covered claim ‘as soon as practical,’ do social interactions between the insured and the claimant making not reference to an accident claim justify a delay in giving notice of a potential claim to the insurer?”

The Connecticut Supreme Court noted that the duty to give notice as “soon as practicable” requires an insured to give notice when facts develop which would suggest to a person of ordinary and reasonable prudence that liability may have been incurred, and the duty is complied with if notice is given within a reasonable time after the situation so assumes an aspect suggestive of a possible claim for damages. The court found that the Kings had an obligation to give notice following the ATV accident, because the injured child suffered a severe head injury leading to hospitalization and a temporary coma connected to Pendleton King, Jr.’s use of an ATV entrusted to him by his parents. The court found that these facts would have led a reasonable person to believe that liability may have been incurred. The court rejected the Kings’ suggestion that notice was not required because their social interactions with the McEntees led them to believe that no claim would be filed. The court noted that the notice requirement turns not on the insured’s subjective assessment of how likely a claim is to be brought, but rather on whether a reasonable person would recognize that liability may have been incurred.

The court then noted that if notice was untimely, a further determination must be made of whether the insurer was prejudiced by the late notice. The court took this opportunity to reexamine the allocation of the burden of proof on this issue, even though that question was not before the court.

The court indicated that it had previously allocated the burden to prove lack of prejudice to the insured, because it was the insured who was seeking to be excused from the consequences of a contract provision with which the insured had concededly failed to comply. In reversing that long-standing holding, the Court stated, “We now conclude that this reasoning, while legally tenable, is not as consistent with the principles we articulated previously herein as the contrary rule. As we recognized in Murphy, the task of proving a negative is an inherently difficult one, and it may be further complicated by the opposing party’s interest in concealment. Imposing this difficult task on the insured – the party least well equipped to know, let alone demonstrate, the effect of delayed disclosure on the investigatory and legal defense capabilities of the insurer – reduces the likelihood that the fact finder will possess sufficient information to determine whether prejudice has resulted from delayed disclosure. This uncertainty, which may prevent the court from meaningfully weighing the parties’ real interests, compromises the principled balance that this court intended to strike in Murphy. To better achieve that balance, we now join the overwhelming majority of our sister states in adopting a rule that facilitates informed determinations of prejudice by incentivizing insurers to bring evidence of prejudice, should it exist, to the court’s attention.” Arrowood, 304 Conn. at 202-03.

For a copy of this decision, click here.

Jeffrey L. Kingsley and Sandra Snaden Kuwaye

Federal Judge Dismisses Breach of Contract Suit Against Reinsurance Brokers

Olympus Insurance Co. v. Aon Benfield Inc. and Benfield Inc. (D. Minn. March 30, 2012)

On March 20, 2012 a federal judge in Minnesota dismissed a breach of contract action brought by Olympus Insurance Co. (“the insurer”) against its reinsurance brokers, Aon Benfield Inc. and Benfield Inc. (collectively “the reinsurance broker”), by which the insurer sought money allegedly owed to the insurer, finding that the reinsurance broker did not owe the insurer an annual fee.  The insurer alleged that it hired the reinsurance broker to obtain reinsurance policies for the insurer and that the reinsurance broker had agreed to pay the insurer an annual fee based on a percentage of the commissions that the reinsurance broker received during the contract year from the insurer’s reinsurance providers.

The insurer alleged that in early 2009, Peter Chandler, the specific reinsurance broker who handled the insurer’s reinsurance business, left the employment of the reinsurance broker and went to work for Guy Carpenter & Co. LLC.  Subsequently, the insurer appointed Guy Carpenter as its new reinsurance broker effective June 1, 2009.  The insurer argued that it was owed the annual fee that was due at the end of the 2008-2009 fiscal year.  The reinsurance broker responded that it did not owe the annual fee because the insurer terminated it as its reinsurance broker no later than March 25, 2009, and, under the forfeiture provision of the contract between the parties, no annual fee was thereafter due.  The reinsurance brokers moved to dismiss and, on March 30, 2012, U.S. District Court Judge Patrick J. Schiltz granted their motion.

The judge ruled that no annual fee was due before March 25, 2009 because the insurer ended its relationship with the reinsurance broker prior to that date.  According to the court, pursuant to the forfeiture provision, no annual fee was payable subsequent to such a decision.  Because the annual fee was not payable before the insurer’s decision to terminate the reinsurance broker, and because the annual fee was not payable after that decision, the annual fee was not payable at all, the court concluded.

The court rejected the insurer’s contention that the term “Subject Business” contained in the contract was limited to a time period beginning on June 1, 2008 and ending on May 31, 2009.  The court decided that to interpret the “Subject Business” of the contract as referring only to the placement and servicing of reinsurance contracts during the initial term was inconsistent with the unambiguous language of the contract.  According to the court, the terms “terminate” and “replace” contained in the contract include non-renewal.  Therefore, the insurer’s decision to terminate its relationship with the reinsurance broker, and to replace the reinsurance broker with Guy Carpenter, was clearly a decision by the insurer to terminate or replace the reinsurance broker as its reinsurance broker for any portion of the “Subject Business” of the contract.

Finally, the court held that the insurer, as a party to an express contract, could not recover on claims for quasi contract, unjust enrichment, and quantum meruit.  In the opinion of the court, the insurer received exactly what it bargained for in the written contract: the placement and servicing of reinsurance contracts as well as the conditional entitlement to an annual fee.  Both of these benefits were legally sufficient consideration in the eyes of the court regardless of whether the insurer subjectively believed these benefits to be adequate consideration.

For a copy of the decision click here

Matthew Cabral and Daniel Gerber

April Edition of Reinsurance Review is Now Available

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Cases for Reinsurance Review - April 2012 Edition

Cases provided courtesy of LexisNexis.

Elmore v. Nat’l Idem Co.

Syncora Guar., Inc. v. HSBC Mexico, S.A.,

Workmen’s Auto Insurance Co., v. Guy Carpenter & Co., Inc.

United States Fidelity & Guaranty Co. v. American Re-Insurance Co.

Global Resinsurance Corp. v. Equitas LTD.

Kudler v. Tuffelman

Gamma Group, Inc., v. Transatlantic Reinsurance Co.

 

 

Fifth Circuit: Contract Exclusion Does Not Apply to Copyright Infringement Claim

Looney Ricks Kiss Architects, Inc. v. State Farm Fire & Cas. Co. (5^th Cir. (La.) April 4, 2012)

The Fifth Circuit recently predicted that the Louisiana Supreme Court would apply a “but for” test when construing an insurance policy’s breach-of-contract exclusion. As a result, the court held that two insurers were obligated to defend and indemnify their mutual insured against a copyright infringement claim because the insurers failed to show that the injury would not have occurred but for the breach of contract.

Looney Ricks Kiss Architects (“LRK”), an architecture firm, filed a copyright infringement action against a former client, Steve Bryan, and his affiliate building companies (the “Bryan defendants”). The complaint alleged that LRK created a design known as the Island Park Apartments, which was constructed by the Bryan defendants. LRK and the Bryan defendants entered into a contract pursuant to which LRK retained all common law and statutory rights to the building’s architectural drawings, specifications, and technical drawings. LRK also registered the Island Park Apartments with the United States Copyright Office as an Architectural Work and Technical Drawing.

LRK sued the Bryan defendants for copyright infringement after the Bryan defendants obtained permits to construct the Cypress Lake Apartments in Louisiana, which LRK alleged infringe on its copyrighted work. The Bryan defendants’ insurers, Lafayette Insurance Company (“Lafayette”) and State Farm Fire and Casualty Company (“State Farm”) issued policies that covered copyright infringement, but excluded injury arising out of a breach of contract.

The Fifth Circuit noted that the Louisiana Supreme Court has not addressed whether a breach-of-contract exclusion precludes liability for a statutory tort that an insured has a contractual obligation not to commit. Making an Erie guess, the Fifth Circuit observed that courts in other jurisdictions have used two tests when deciding whether a breach-of-contract exclusion applies: the “but for” test and “incidental relationship” test. The Fifth Circuit concluded that the Louisiana Supreme Court would likely apply a “but for” test to a breach-of-contract exclusion, such that the exclusion would apply only where the injury would not have but for the breach of contract. Since LRK’s claim emanated from a source other than contract law, i.e., federal copyright law, the Fifth Circuit held that the breach-of-contract exclusion did not apply. Therefore, Lafayette and State Farm were obligated to defend and indemnify the Bryan defendants against LRK’s claim.

For a copy of the decision, click here

Carrie Appler and Rick Cohen

Indiana Supreme Court Rules Trichloroethylene Is Not A Pollutant, As The Policy’s Pollution Exclusion Is Ambiguous

State Automobile Mut. Ins. Co. v. Flexdar, Inc. (Supreme Court of Indiana, March 22, 2012)

This environmental coverage dispute arises from an insurer’s declaratory action contending that coverage for Trichloroethylene (TCE) contamination of soil and groundwater by policyholder Flexdar at its property was excluded pursuant to the pollution exclusion in the policy.  

The insurer denied coverage and filed the subject declaratory action.  In moving for summary judgment, Flexdar argued that language of the pollution exclusion was ambiguous under Indiana law and should be construed in its favor. The trial court agreed and entered summary judgment for Flexdar.  The Court of Appeals affirmed holding the pollution exclusion is ambiguous and therefore must be construed in favor of coverage and the Indiana business operations endorsement language did not cure the ambiguity.  The policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including some, vapor, soot, fumes, acids, alkalis, chemicals and waste.” 

In taking an extremely narrow and conservative approach on the interpretation of the provision, the Indiana Supreme Court held pursuant to its previous decision in American States Ins. Co. v. Kiger, 662 NE2d 945 (Ind. 1996) and its progeny, that the provision was ambiguous because it did not specifically identify the chemical at issue.   It further noted that “this clause cannot be read literally as it would negate virtually all coverage.”  “In other words, practically every substance could qualify as a pollutant under this definition rendering the exclusion meaningless.”  The court specifically acknowledged that with regard to interpretation of the applicability of this exclusion, “Indiana has taken a different direction” than other jurisdictions and noted the existence of two fundamental jurisdictional views in interpreting these clauses: the “literal approach” and the “situational approach.”  The literal approach applies in non-traditional settings and generally holds that the exclusion is unambiguous in all circumstances, whereas the situational approach applies in “traditional” contamination settings. 

Significantly, the court also noted that due to the conservative interpretation of this provision in Indiana, over the years the insurer has modified the provision and promulgated an Indiana business operations endorsement and an Indiana endorsement defining “pollutant” which identifies specific chemicals associated with common pollution releases, including TCE, as well as many others listed on the CERCLA Hazardous Substances Priority List.  As such, the Supreme Court noted that because this policy did not contain these revised endorsements the court did not feel compelled to modify its prior precedent.  Specifically, in holding the exclusion was ambiguous, the court noted “Indiana decisions have been consistent in recognizing the requirement that language of a pollution exclusion be explicit.”  Further, “‘[t]o unsettle the law … would show scant respect for the principle of stare decis.’”  

In a rather critical dissent, Justice Sullivan noted that this holding renders the seminal Kiger case as demanding that the pollution exclusion found in most general liability policies be ignored. The dissent further notes this decision is completely contrary to the sound rationale posited in a recent 7^th Circuit decision Scottsdale Indem. Co. v. Vill. Of Crestwood, 2012 US App. Lexis 5069 (7^th Cir. Mar. 12, 2012) published just a few days before this court’s decision which enforced a pollution exclusion essentially the same as presented in this case.  Extensive portions of Crestwood decision are quoted by the dissent “both for its clarity and applicability.”

For a copy of the decision, click here.

Paul C. Steck and Joanna M. Roberto 

Court of Appeals: New York’s Antitrust Statute does not reach London’s Reinsurance Marketplace

Global Reinsurance Corp. v. Equitas Ltd. (N.Y. March 27, 2012)

In a suit by a New York branch of a German reinsurance corporation against U.K.-based entities engaged in the business of providing retrocessionary reinsurance, asserting a claim under New York State’s antitrust statute, the Donnelly Act, the Appellate Division’s ruling in favor of the plaintiff on a CPLR 3211 motion to dismiss was reversed by the New York Court of Appeals.

The retrocessionaires, or retrocessionary reinsurers, wrote coverage for risks ceded to them by reinsurers.  The complaining German reinsurer, through its New York branch, purchased retrocessional coverage in a London marketplace and consequently sustained economic injury when retrocessional claims management services were by agreement within that London marketplace consolidated so as to eliminate competition over their delivery.  In the reinsurer’s second amended complaint, although a worldwide market was nominally alleged, there was no allegation of any anticompetitive effect attributable to the alleged conspiracy beyond the London marketplace. 

While there was no dispute as to the relevant market, the complaint failed to allege the requisite power within the relevant worldwide market on the part of the claimed conspirators.  The extraterritorial reach of the Donnelly Act did not reach a competitive restraint imposed by participants in a British marketplace that only incidentally affected commerce in the United States by the circumstance that the reinsurer’s purchasing branch happened to be situated in New York.  Accordingly, the Court of Appeal held that any injury was not redressable under the Donnelly Act.

For a copy of the decision click here 

Jeffrey Kingsley and Matthew Cabral 

NEVADA AUTHORIZES TORT CLAIMS AGAINST ERISA ENTITY

Lynam v. Health Plan of Nevada (Nev. March 21, 2012)

The plaintiff, Donald Lynam, received managed health care services from a health plan.  As part of his “managed care,” he was referred by the health plan to a medical services provider for treatment.  During the course of his treatment, allegedly through the unsafe practices of the provider, he contracted hepatitis C.  He sued the health plan asserting that the plan “knew or should have known” about the unsafe conditions and failed to have a quality assurance program as required by Nevada law. 

The health care plan asserted ERISA preemption as a defense and the trial court accepted the defense.  Noting that while ERISA is broad, the Supreme Court also noted it is not presumed to preempt a state’s police powers.  If the health plan had leased out its own providers (rather than facilitating selection of providers), the ERISA would not preempt state law.  Likewise, if it had purchased a policy from a HMO, ERISA would also not preempt the application of state law. 

Since the allegations in the complaint and moving papers did not present sufficient information to determine whether ERISA would preempt the claims, the case was remanded to the trial court to give the plaintiff the opportunity to prove Nevada law applied.

A copy of the decision can be found here

Sarah Delaney and Sharon Angelino

Supreme Court Takes Up Health Care Reform

The Supreme Court today began a record three-day session to hear oral argument on the constitutionality of President Obama's Patient Protection and Affordable Care Act. In today's 90-minute hearing, the high court considered arguments on the issue of whether it has jurisdiction in the case, or must wait until the law goes into effect and is enforced with penalties after 2014. The justices appeared to favor the view that the Anti-Injunction Act -- which bars legal action to impose prior restraint on Congress' power to tax people -- does not apply in this case. Widely seen as the main event, Tuesday's arguments will address the Act's so-called "individual mandate" provision, which requires most people to buy health insurance by 2014 or pay a tax penalty. Challengers to the provision, including 26 of the 50 states, claim that the Act violates the Constitution's commerce clause and could lead to a wide range of other requirements. The Obama administration counters that the insurance market is unique because virtually every person will need medical care and those who opt not to purchase insurance disproportionately burden the system. The justices will take up two questions on Wednesday, including whether, if the individual mandate is declared unconstitutional, it can be severed from the rest of the law.

The justices will also consider whether Congress improperly put new burdens on states when it expanded eligibility under Medicaid. A ruling is not expected until June. If the court decides that it does not have jurisdiction pursuant to the Anti-Injunction Act, any action would be set aside at least until 2015.

For copies of the respective briefs click here

Carrie Appler and Jeffrey Kingsley

Professional Liability Monthly - March Edition is Now Available

For a free copy of this month's edition of Professional Liability Month, click here.

To be added to our circulation list whereby you receive this publication for free each month via email, please contact Brian Biggie at bbiggie@goldbergsegalla.com.

Cases for Professional Liability Monthly – March 2012 Edition

Cases provided courtesy of LexisNexis.

Bryans v. Cossette

Cast Art Industries v. KPMG LLP

City of Alexandria v. Ratcliffe Constr. Co., LLC

Darby v. Caterino

DeJesus v. Mishra

Gere v. Louis

Gurvey v. Cowan, Liebowitz & Latman, P.C.

In Re Coudert Brothers LLP v. Development Specialist, Inc.

Matter of Sullivan Fin. Group, Inc. v. Wrynn

Mimms v. Pricewaterhouse Coopers, LLP

Serio v. Baystate Properties, LLC

Yemen Corp. v. 281 Broadway HoldingsRandall Co.

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

Goldberg Segalla Announces International Expansion With Opening of London Office Led by Clive O’Connell

Goldberg Segalla is pleased to announce the law firm will expand internationally with the opening of an office in London led by leading reinsurance solicitor Clive O’Connell. The office will open in April 2012 and will be located in the heart of London’s finance and insurance district at No. 1 Cornhill across from the Royal Exchange. The London expansion and addition of Clive closely follows former New York State Superintendent of Insurance James J. Wrynn joining the firm as head of its Manhattan office and regulatory compliance practice.

Clive is the former head of the Commercial Risk and Reinsurance Department at Barlow Lyde & Gilbert LLP in London. He is recognized as one of the world’s leading insurance and reinsurance legal professionals in all major international legal ranking directories, including Chambers and Partners, Legal 500, Euromoney Expert Guides, Who’s Who Legal, The International Who's Who of Insurance & Reinsurance Lawyers, and others. The Chambers and Partners directory has noted, “Clive O’Connell is deemed a formidable reinsurance lawyer by market sources.” In 2011, Legal 500 called him “one of the best reinsurance lawyers in London.”

“Adding Clive O’Connell to our Global Insurance Services team significantly enhances our Best Practices, client-driven service model,” said Daniel W. Gerber, Co-Chair of Goldberg Segalla’s Global Insurance Services Practice Group. “Our clients will greatly benefit from Clive’s talents, experience, and unparalleled understanding of the complex global insurance and reinsurance markets. We are thrilled to welcome him to a growing team.”

“I am excited to join the talented professionals at Goldberg Segalla,” Clive said. “This forward-thinking firm takes great pride not only in being a premier law firm serving international markets, but also in achieving that status through hard work and putting the needs of its clients above all else. Goldberg Segalla’s ethos is one of innovation, superior service, and collaboration amongst its lawyers and across its offices and practice groups. I look forward to contributing to the success of the firm and its international client base in the insurance and reinsurance industry.”

Clive’s experience includes representing clients in some of the world’s largest reinsurance disputes in recent years. He has acted for clients on wording both of their general programs as well as unique transactions. He has also been involved in every aspect of run-off and exit strategies for reinsurers and insurers.

Clive has acted for clients in disputes in a variety of forums including the Commercial Court and arbitration in England, the federal and state courts and arbitration in the United States, the Commercial Court and arbitration in France, as well as other jurisdictions such as Bermuda, Jamaica, Switzerland, Sweden, and Hong Kong. He is currently General Counsel of the International Insurance Society, and is a regular presenter at meetings of the International Association of Claims Professionals. Since 2005, he has been the Legal Correspondent of The Review - Worldwide Reinsurance magazine. Clive writes regularly for publications including Insurance Day, Reactions, and Global Reinsurance. He is a contributor to Reinsurance Practice and the Law and an author of a chapter on legal issues for Alternative Risk Strategies. He has served for several years on the panel deciding Reactions Magazine’s London Market Awards.

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

March Edition of Reinsurance Review is Now Available

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

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

Cases for Reinsurance Review - March 2012 Edition

Cases provided courtesy of LexisNexis.

Scandinavian v St Paul

United Heritage v. Farmers

Cole v. Jackson National Life

Isilon v. Twin City

Mississippi Windstorm Underwriting Assoc. v. Union Nat. Fire Ins. Co.

 

 

CaseWatch: Insurance March 2012 Edition Now Available!

For a free copy, please click here.

If you would like to receive future editions of CaseWatch: Insurance directly by email, please contact Sarah Delaney at sdelaney@goldbergsegalla.com.

Cases for the March 2012 Edition of CaseWatch: Insurance

Cases provided courtesy of LexisNexis.

Amica v. Fogel

Aspen Square v. Scottsdale

Bay Farms v. Great American

Cumberland County Guidance Center, et al. v. Scottsdale Insurance Co.

Dept. of Health & Human Services v. Florida; NFIB v. Sebelius; Florida v. HHS

Fenn v. Colony Insurance Co.

GC Finance, LLC v. Old Republic National Title Ins. Co.

Grissom v. Welker

Houston Cas. Co. v. St. Paul Fire & Marine Inc. Co.

Indian Harbor Ins. Co. v. Bestcomp, Inc.

International Chemical Corp. v. Nautilus Ins. Co.

Jadick v. Nationwide Prop. & Cas. Ins. Co.

Kassouf v. Blue Cross of California

KLLM Transport Services, LLC v. Marsh USA, Inc.

Mount Vernon Fire Ins. Co. v. Okmulgee Inn Venture

National Union Ins. Co. v. NGM

Norfolk & Dedham Mut. Fire Ins. Co. v. Clearly Consultants, Inc.

Northwestern National Ins. Co. v. Insco., Ltd

Otte v. Life Insurance Co. of N. Am

Raynor v. Landmark Chrysler

Siefers v. Pacificare Life Assur., Co.

SNL Financial, LC v. Philadelphia Indemnity Ins. Co.

Stangl v. Occidental Life Ins. Co. of North Carolina

State Farm Mut. Ins. Co. v. Curran

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

Yeager v. Polyurethane Foam Insulation, LLC

SOCIAL SECURITY DEPENDENT BENEFITS OFFSET PARENT’S LOST WAGES

SCHULTZ v. AVAILL, INC. LONG TERM (7^th Cir. March 2, 2012)

Proposed class-action plaintiffs sought a ruling that Social Security Benefits provided to children of disabled parents did not constitute “loss time disability payments,” subject to an offset under long-term disability insurance. 

According to the opinion, the plaintiffs argued that the dependent payments were “additional” and did not constitute replacement of income: “Essentially, they argue, the purpose of Social Security payments to a dependent child of a disabled parent is not to replace the income that the household has lost as a result of the parent’s inability to work. The purpose is instead to provide additional ‘support’ for the child.” Plaintiffs argued that because the dependent’s benefits can only be used for the support of the child, they differed from the general-use benefits which the insurers contracted to provide and did not duplicate them.  In essence, the argument was that the insurers contracted to provide broader benefits, and offsetting them by limited benefits impermissibly reduced the intended scope of coverage.

Rejecting the argument, the court held that the only possible interpretation of the statute required a finding that the dependent benefits were intended to replace the disabled parent’s loss of income due to “loss of time.”  Therefore, they were subject to offset under a policy requiring the offset of “loss time disability payments.”  It found that social security benefits for children were part of the “total package” based on the loss of time from work.

For a copy of the decision click here

Sarah Delaney and Michael Saltzman

Fourth Circuit Certifies Pollution Exclusion Ambiguity To The Virginia Supreme Court

Travco Ins. Co. v. Ward

(Fourth Circuit, March 1, 2012)

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 had no obligation to provide coverage for the losses claimed by the policyholder. 

Based on a review of applicable Virginia law, the district 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 district court specifically rejected policyholder’s argument that Chinese Drywall was not a "contaminant" or a "pollutant" and further held “under Virginia law, pollutant exclusions are not limited to ‘traditional environmental pollution.’”  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.  Thus, the gases released in the home qualified as irritants and contaminants.

On appeal to the Fourth Circuit, the policyholder asserted that the district court erred in holding that the policy exclusions barred coverage for the claimed losses.  Specifically, the policyholder contended that Travco failed to meet its burden of establishing that the exclusions applied, and argued that the language in each of the exclusions at issue is not clearly or unambiguously defined.

Specifically, as to the pollution exclusion, the policyholder alleged that the meaning of “pollutant” is ambiguous under Virginia law, and was not intended to apply to product liability claims, but was intended to limit or exclude coverage for past environmental contamination.  The policyholder further noted that the district court relied on cases involving traditional environmental pollution and that there is a split in authority as to the scope of the pollution exclusion, generally.  The policyholder further argued that the issue is controlled by Unisun Ins. Co. v. Schulwolf, 53 Va. Cir. 220 (Va. Cir. 2000) wherein the Virginia Circuit Court declined to apply a pollution exception to a lead paint case, stating that “it is reasonable to conclude that the exclusion clause applies only to claims based on environmental pollution.”

The Circuit court, in certifying these questions to the Virginia Supreme Court, noted there is no clear controlling Virginia precedent to guide its decision on this appeal and the questions presented are purely questions of state law which have not been addressed by the Virginia Supreme Court.  In addition, the Fourth Circuit acknowledged the far-reaching impact of this decision and the state’s incentive for establishing how to interpret these standard exclusions in light of the number of consumers and insurers addressing similar drywall issues.  As such, the Fourth Circuit court held that, in light of the unusual nature of the losses involved, and because the questions are sufficiently unsettled, certification is warranted on the application of these four exclusions.

For a copy of the decision click here

Paul Steck and Michael Glascott

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

N.Y. Court of Appeals: No Excess Coverage for Insured Not Acting as ERISA Fiduciary

Federal Ins. Co. v. IBM N.Y. Ct. Apps., Feb. 21, 2012

The Court of Appeals unanimously affirmed the lower court’s decision declaring that the excess insurer was not required to indemnify the insured where the alleged ERISA claims were not covered under the underlying policy. The issue was whether the allegations against the insured included a breach of fiduciary duties imposed under ERISA.

The underlying policy provides coverage only for the insured’s violations when acting in an ERISA fiduciary capacity. The excess policy was a “follow form” policy and thus Federal argued that the insured was not accused of breaching fiduciary duties under ERISA therefore there was no coverage under either policy.

The underlying allegations were that certain amendments to the benefit plans violated ERISA age discrimination provisions by reducing pension benefits up to 50% for some elderly workers. The case was later settled and after the underlying $25 million policy was exhausted, the insured sought indemnity from the excess insurer.

The New York Court of Appeals agreed with the excess insurer, finding that the allegations were comprised of actions by the insured as a settlor of the plan and not a fiduciary. Thus, there was no coverage under the underlying policy and neither Zurich nor Federal was required to indemnify the insured.

For a copy of the decision click here 

Sarah Delaney and Fallyn Reichert

Court Clarifies the Discoverability of Loss Reserves and Reinsurance Information

Isilon Systems, Inc. V. Twin City Fire Ins. Co. (W. D. Wash. February 15, 2012)

Plaintiff, Isilon Systems, Inc. (“Isilon”) brought a motion to compel arguing that Defendant, Twin City Fire Ins. Co. (“Twin City”) wrongfully withheld and redacted numerous documents based on meritless claims of privilege and attorney work product.  Isilon also alleged that Twin City’s privilege logs were inadequate, and took exception to Twin City’s position that information about loss reserves and reinsurance was not discoverable.

In response, Twin City argued that information about loss reserves is not relevant to bad faith claims because a reserve does not equate to an admission of liability or the value of a particular claim.  Furthermore, Twin City argued that reinsurance information is generally not discoverable and that the redacted portions of its Claim Summary Report were protected by attorney-client privilege and attorney work product doctrine.

The court determined that Twin City’s privilege and redaction logs did not meet the standards of Federal Rule 26(b)(5)(A)(iii).  According to the court, the logs included very brief descriptions that failed to provide any factual or legal explanation for why privilege was asserted, and were therefore insufficient to enable the opposing party, or the court, to assess the validity of the claimed privilege.

On the issue of loss reserves, the court noted that insurance reserves are generally relevant in a bad faith case against insurance companies.  Notwithstanding this precedent, Twin City argued that in a diversity case governed by the Federal Rules of Evidence, loss reserves information is not relevant because the reserves represent nothing more than an accounting decision made by persons without actual knowledge of the policies involved.

The court determined that in the present case, loss reserves decisions were in fact made by members of Twin City’s upper management with knowledge of the actual policies involved. Thus, the general rule establishing the relevancy of insurance reserves was applicable, and the court ordered Twin City to turn over all materials withheld or redacted relating to loss reserves.  The court noted, however, that while aggregate reserve information is not protected as attorney work product, individual case reserves calculated by defendant’s attorney may be.

Finally, with respect to reinsurance, the court noted that reinsurance polices themselves are discoverable under Federal Rule 26(a)(1)(D).  However, this rule does not extend to communications between the insured and the reinsurer regarding the reinsurance policies.  Thus, in the present case, the court held that while Twin City must produce all reinsurance policies themselves pursuant to Federal Rule 26(a)(1)(D), Twin City does not have to produce other reinsurance documents unless Isilon presents a basis for the relevance of such documents.

A copy of the decision can be found here

Jeffrey Kingsley and Matt Cabral

Professional Liability Monthly - February Edition is Now Available

For a free copy of this month's edition of Professional Liability Month, click here.

To be added to our circulation list whereby you receive this publication for free each month via email, please contact Brian Biggie at bbiggie@goldbergsegalla.com.

Cases for Professional Liability Monthly – February 2012 Edition

Cases provided courtesy of LexisNexis.

Willson v. Vanderlick

Corky McMillin Constr. v. US Speciality Ins. Co.

Assured Guaranty (UK) Ltd. v J. P. Morgan Investment

Darwin Select Ins. Co. v. Laminack, Pirtle & Martines

Afrim Frangu v. Eugene Axelrod et al.

Robert Grimm v. John Wayne Fox

LaBar v. McDonald

Wilcox v. Schwartz

Assouline Ritz1 LLC, et al., v. Mills & Assoc.

Farrell v. Whiteman

Charlotte Hungerford Hospital v. Kevin Creed

Sixth Circuit Vacates Class Certification for Cancer Patients Suing Life Investors Insurance Company

Gooch v. Life Investors Ins. Co. of Am. Et al., (United States Court of Appeals for the Sixth Circuit February 10, 2012)

The Sixth Circuit vacated an order of class certification for cancer patients because there was an overlap between class members of this class and a class that had settled on the same issue in another case. Despite this, the Court upheld a preliminary injunction forcing the defendant to pay for the plaintiff’s lymphoma treatment bills in full.

The plaintiff brought a claim against the defendant insurance company for wrongfully denying policyholders payment on cancer treatment claims. The plaintiff brought the case because the defendant changed its previous policy from paying the higher list price of treatments that appeared on hospital bills to paying the actual charges incurred by patients covered under its cancer policies.

The Sixth Circuit Court noted that there was an identical class action case in Arkansas that took on this same issue and settled in 2009. The Arkansas case is known as the Runyan Case. The case involved the same defendant and the same claims that covered cancer patients during the years 2004-2009. The Court found that this class action was precluded by the Runyan Case. The Court found that there was overlap between the settling plaintiffs in the Runyan case. The class members in this case attempted to represent the class members who were covered by cancer policies issued by the defendant from 2001 to present. Moreover, the current plaintiff had opted out of the Runyan Case, and that impacted his status as a class representative.

The Court did not dismiss the defendant’s appeal of the order in which the District Court denied the defendant’s motion to dissolve the preliminary injunction because it could not “review a district court order denying a request for reconsideration of a previously granted preliminary injunction.” Therefore the Court held that the preliminary injunction remained in place forcing the defendant to pay for the plaintiff’s lymphoma treatment bills in full.

The decision can be found here

Sarah Delaney and Joanna Roberto

Washington Court Rules That Diminished Value Auto Loss Covered

In a controversial decision, the Supreme Court of Washington recently determined that an automobile policy obligated an insurer to compensate an insured for the diminished value of a repaired car, post-accident. The court also approved class certification for the lawsuit against the auto insurer. The case is Moeller v. Farmers Ins. Co. of Wash., No. 84500-0, 2011 Wash. LEXIS 957 (Dec. 22, 2011).

David Moeller's 1996 Honda Civic CRX was damaged in a collision. His insurer, Farmers Insurance Co. of Washington ("Farmers"), elected to repair the car and then paid for the cost of repairs less Moeller's $500 deductible. Moeller then sued Farmers alleging breach of contract for failure to reimburse him for diminished value of the vehicle after repairs were complete. Moeller sought to certify his suit as a class action against Farmers, which was approved by the court below.

The Farmers policy covered "loss to your Insured car caused by collision," with loss defined as "direct and accidental loss of or damage to your Insured car, including its equipment." The policy also stated that the limits of liability for loss "shall not exceed ... the amount which it would cost to repair or replace damaged or stolen property with other of like kind and quality, or with new property less an adjustment for physical deterioration and/or depreciation." Finally, the policy also stipulated that "we may pay the loss in money or repair or replace damaged or stolen property."

Moeller argued that the policy was ambiguous with respect to whether diminished value was covered. Farmers argued that the policy clearly obligated it to either repair a vehicle or pay the insured money for the loss, but not both.

The court agreed with Moeller, finding that the policy language was ambiguous and, therefore, that the policy had to be interpreted strictly in favor of coverage. The court followed Georgia (State Farm v. Mabry) and West Virginia (Ellis v. King), which have addressed the issue and determined that a post-accident and post-repair diminution in value loss is covered by similar auto policy language because a reasonable insured would expect such coverage in order to be made whole after an accident. The court explained that an insurer is required not merely to restore a vehicle to usable condition but also to pay for any lost value after repairs are complete. A strong, lengthy dissent countered the majority, saying that the decision created a new contractual obligation not embodied in the Farmers policy.

The decision should have wide-ranging impact in the insurance industry due to the frequency of covered auto losses.

This article was first published on IRMI.com and is reproduced with permission. Copyright 2012, International Risk Management Institute, Inc.

Former New York State Superintendent of Insurance, James J. Wrynn, joins Goldberg Segalla LLP as Partner

Goldberg Segalla LLP is pleased to announce James J. Wrynn will join the law firm March 5. He will run the firm’s New York office and will be a senior partner in its Global Insurance Services Practice Group.

Mr. Wrynn served as the 40th and last Superintendent of Insurance in the State of New York until it merged with the New York State Department of Banking to form the new Department of Financial Services. He then served as the first Deputy Superintendent of the new department. Prior to serving as Superintendent, Mr. Wrynn served as the Executive Director of the New York State Insurance Fund, New York's Largest workers' compensation and disability benefits carrier.

In addition to overseeing the state’s supervision of all insurance companies that do business in New York, Mr. Wrynn played a key role in developing national and international regulations and policies governing the insurance industry. In 2010 he was elected Chair of the Northeast Zone of the National Association of Insurance Commissioners (NAIC), the organization of the chief insurance regulatory officials of the 50 states, the District of Columbia, and five U.S. territories. He also served as a member of the NAIC’s Executive Committee, as Vice Chair of its International Insurance Relations “G” Committee, as Co-Chair of its Credit Rating Task Force, and as Vice Chair of the task force involved in a review of international developments regarding insurance supervision, banking supervision, and international accounting standards and their potential use in United States insurance regulation as part of a critical self-examination of the United States Insurance Solvency Regulation framework known as the “Solvency Modernization Initiative.”

Mr. Wrynn also represented the United States as a member of the International Association of Insurance Supervisors (IAIS), an organization of insurance supervisory authorities from nearly 140 countries that sets international standards for insurance regulators. He participated heavily in international issues such as Solvency II (an economic risk-based solvency regulatory framework to be utilized by all European Union member states); systemic risk (and the development of a methodology for the identification of globally systemically important financial institutions and the measures to be taken once identified); the development of a common framework for the supervision of internationally active insurance groups (known as “COMFRAME”); group supervision; and numerous other issues and initiatives.

“The addition of Jim Wrynn to our team marks a significant milestone in our firm’s growth and a reinforcement of our position as a premier law firm for the global insurance and reinsurance markets,” said Richard J. Cohen, Managing Partner of Goldberg Segalla. “He knows the industry and insurance law inside and out, and he is tremendously respected in the business community. His experience will bring a unique perspective and a distinct advantage to Goldberg Segalla’s insurance and reinsurance clients across the globe. We are thrilled to have him on board.”

Mr. Wrynn said: “In my career I’ve had the opportunity to develop great relationships with a number of the partners at Goldberg Segalla, and I felt this firm would be the perfect fit for my return to private practice because of its high regard in the insurance industry and its refreshing service ethic that truly does put clients first. I’ve always admired the breadth and depth of the firm’s capabilities, as well as its bold vision to become the go-to law firm for insurers and reinsurers everywhere. I’m excited to join this talented team, and I look forward to serving the needs of our clients.”

Mr. Wrynn has more than 25 years of experience as an attorney focusing in the areas of life, accident, and health insurance; property and casualty insurance; general liability insurance; insurance coverage disputes; professional malpractice; and product liability. His extensive legal background includes counseling agents, brokers, risk-retention groups, and insurance companies in most lines of insurance and excess insurance, reinsurance, self-insurance, and captive insurance.

Mr. Wrynn began his legal career in 1982 and later was a founding partner in the law firm of MacKay Wrynn & Brady, LLP. He received his B.A. in Accounting from St. John’s University College of Business Administration and his J.D. from St. John’s University School of Law.

Insurer has a Duty to Defend Policyholder for Clean Air Act Violations

Louisiana Generating LLC et al v. Illinois Union Insurance Company, U.S. Dist. Ct. Louisiana, January 30, 2012

In this case, both parties made motions for summary judgment seeking a declaration on the insurer’s duty to defend the policyholder in the underlying suit. The suit was brought by the Federal Government against the policyholder for Clean Air Act violations. The underlying suit alleged that the policyholder, a subsidiary of NRG Energy Inc., made major modifications to a coal plant within notifying the government or obtaining the necessary permits. The federal government sought a mitigation plan and civil penalties for the harm done by the excess emissions caused by the illegal modifications to the plant.

The underlying action alleged that the major modifications to the plant resulted in increased emissions. The court first ruled that the underlying action fell under the policy’s coverage period and then ruled that the insurer had a duty to defend the policyholder as the allegations, on their face, were covered by the policy.

The insurer argued that the government allegations did not relate to covered claims as there was no property damage and no remediation demanded in the complaint. The court found that, although the insurer may ultimately prove otherwise, the air injury alleged in the action and the retrofitting sought in the action constituted remediation.

The court also found that the fines and penalties exclusion in the policy, which excluded coverage for criminal fines, did not apply because the penalties sought by the federal government were civil and not criminal penalties. The court thus found that the insurer owed a duty to defend.

The decision can be found here

Joanna Roberto and Paul Steck

Second Circuit Reverses Vacatur of Arbitration Award; Find Arbitrators Impartial

Scandinavian Reins. Co. Ltd. v. St. Paul Fire & Marine Ins. Co. (2^nd Cir. (N.Y.) Feb. 3, 2012)

The Second Circuit recently reversed a district court’s vacatur of an arbitration award, holding that there was insufficient evidence to support a finding of “evident partiality” of two of the arbitrators.

 Plaintiff Scandinavian and defendant St. Paul entered into a specialized type of reinsurance contract  known as a stop-loss retrocessional agreement. Pursuant to the agreement, St. Paul ceded to Scandinavian some of the reinsurance liabilities that St. Paul had assumed from other insurance companies. In exchange for Scandinavian’s assuming these liabilities, St. Paul became obligated to pay premiums to Scandinavian, by retaining those funds within an “experience account” from which any liabilities would first be paid out. Only if the experience account became fully depleted would Scandinavian have to pay St. Paul out of its own funds.

In January 2002, Scandinavian entered into “run off,” thereby ceasing to underwrite new business. St. Paul also entered into run-off later the same year. After St. Paul requested that Scandinavian indemnify it for much of its loss, two disputes emerged concerning the agreement’s interpretation. First, the parties disputed whether the agreement limited the volume of liability assumed by Scandinavian. Second, the parties could not agree on whether the agreement provided for a single experience account or three separate experience accounts.

Per the agreement, the parties submitted their disputes to arbitration. Each of the arbitrators made initial disclosures to the parties. The arbitral panel, consisting of two party-selected arbitrators and an umpire, concluded that the agreement was valid and should be enforced according to its terms, thereby exposing Scandinavian to an aggregate limit of approximately $290 million in liability. The panel also ruled in favor of St. Paul on the number of experience accounts.

Scandinavian filed an action to vacate the arbitration panel’s award based on two of the arbitrator’s “evident partiality.” Specifically, Scandinavian argued that the fact that two of the three arbitrators on the panel had failed to disclose their concurrent service in an arbitration involving “a common witness, similar disputed issues and contract terms, and the company that succeeded to the business of St. Paul” reflected bias by those arbitrators in St. Paul’s favor. The district court agreed and vacated the arbitration award.

The Second Circuit reversed, noting that “evident partiality” did not exist simply because two arbitrators served together in a separate arbitration. The Second Circuit also rejected Scandinavian’s argument that the Court should infer partiality by virtue of the arbitration panel ruling in St. Paul’s favor. Rather, the Court stated that “the fact that one party loses at arbitration does not, without more, tend to prove that an arbitrator’s failure to disclose some perhaps disclosable information should be interpreted as showing bias against the losing party.”

The Second Circuit's Decision can be found here

Carrie Appler and Jeffrey Kingsley

February Edition of Reinsurance Review is Now Available

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

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

Cases for Reinsurance Review - February 2012 Edition

Cases provided courtesy of LexisNexis

United States of America v. Leif D. Rozin

Alabama Municipal Insurance Corporation v. Alliant Insurance Services

Transport Insurance Company v. Tig Insurance Company

Evangelical Presbyterian Church v. American Fidelity Assurance

George Campbell Painting, v. National Union Fire Insurance Company of Pittsburgh, PA,

United States Fidelity & Guaranty Company v. American Re-Insurance Company

Reinsurers on the Hook for Settlement that Arguably Included Bad Faith Claims

United States Fidelity & Guar. Co. v. American Re-Insurance Co.
N.Y. App. Div. 1st Dep’t, Jan. 24, 2012

The case arose out of litigation concerning the underlying asbestos claims spanning several decades. The Appellate Court reviewed and affirmed the lower courts Order granting the reinsured summary judgment and denying the reinsurer’s motion for summary judgment.   The reinsurance treaty involved was an excess of loss treaty with a $100,000 retention and a maximum $4.9 million payable by the reinsurers for any one loss subject to a $3 million limit for personal injury or property damage liability. The reinsurer’s refused to pay the reinsured’s claim for several reasons including the basis that the settlement included an amount for the settlement of bad faith claims which were not covered by the treaty.

The reinsurers’ argued that the lower court erred in applying the “follow the fortunes” doctrine. After a brief statement setting forth the purpose of the doctrine, the Appellate Court affirmed its applicability finding that it precluded the court’s review of the reinsured’s allocation of the loss, including any alleged bad faith claims. The court stated that the parties involved in negotiating the settlement confirmed that the settlement amount did not include costs for bad faith. Additionally, the court stated that the issue of payment for the bad faith claims was never “actually litigated” despite statements in the bankruptcy court record that the insured had “colorable claims for bad faith” and that “some portion of the $2 billion contribution to the trust was attributable to those bad faith claims.”  

The opinion drew a one judge dissent with the view that a triable issue of fact existed with regard to whether a portion of the $987.3 million was attributable to the bad faith claims not covered under the reinsurance treaty. The dissenting opinion notes the reinsured’s reliance on Peerless Ins. v. Inland Mut. Ins. for the proposition that bad faith damages are covered under the reinsurance treaty but distinguishes the cases based on the fact that the reinsurers here did not participate or acquiesce in the reinsured’s defense of the underlying action. Regardless, the dissent cites the New York Court of Appeals case, Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd’s of London for the proposition that a follow the fortunes clause does not serve to alter the terms of the contract or create coverage where none exists. The dissent points to language in the bankruptcy court opinion that clearly suggests that the court would not have approved the bankruptcy plan if it had believed that there was no payment for bad faith claims included in the settlement.

For a copy of the decision click here

Jeffrey Kingsley and Patrick Omilian

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

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

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

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

For a copy of Countrtwide's papers click here

Sarah Delaney

 

 

 

 

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

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

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

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

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

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

For a copy of this decision click here

Sarah Delaney and Richard Cohen

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

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

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

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

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

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

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

For a copy of the decision click here

Matthew Cabral and Jeffrey Kingsley

Sixth Circuit Dismisses Agent’s Fraud Claims against Nationwide

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

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

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

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

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

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

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

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

For a copy of the decision click here

Jonathan Kuller and Anthony Golowski

Professional Liability Monthly - January Edition is Now Available

For a free copy of this month's edition of Professional Liability Monthly, click here.

To be added to our circulation list whereby you receive this publication for free each month via email, please contact Brian Biggie at bbiggie@goldbergsegalla.com.

Cases for Professional Liability Monthly – January 2012 Edition

Cases provided courtesy of LexisNexis.

John J. Rivers v. Wachovia Corp.,

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

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

Fallon v. Hahnemann Hosp

Toney v. Chester County Hospital

Jeffrey v. Methodist Hospital

Swain v. Alterman

Javaid v. Weiss

Olszewski v. Jordan,

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

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

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

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

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