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Insurance Law Report: August 2015

August 11, 2015

Insurance Law Report focuses on developments in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.

Below are the articles for the August issue. To view, click on the appropriate title and you will be brought to the full version of the article below.


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Fifth Circuit Holds Texas Insurance Code Penalty For Failure To Investigate Applies From Date of Notice

The U.S. Fifth Circuit Court of Appeals would not disturb a judgment awarding an 18% interest penalty under the Texas Insurance Code accruing from the date of notice over the handling of a claim for coverage when a jury found that no investigation was timely commenced. Cox Operating, LLC v. St. Paul Surplus Lines Insurance Co., No. 13-20529 (5th Cir. July 30, 2015).

An oilfield operator sustained extensive damage to its wells and incurred costs cleaning up pollution and debris as a result. The insured provided notice of the claim under its liability policies (which provided coverage for pollution cleanup costs). According to the district court, neither the insurer nor its independent adjuster requested invoices substantiating the claim until nine months later. Then, after paying some funds, the insurer sought a declaration that the remainder of the operator's costs were not covered. The operator counterclaimed for breach of contract, and after a jury trial, the court entered judgment for damages due to breach of contract and penalty interest for failure to respond promptly to the claim in not commencing an investigation the 30 days required by the Texas Insurance Code. The district court concluded that the insurer's failure to investigate timely "signaled" to the operator that the insurer had all the information it required and that payment should have been made within 60 days pursuant to the Texas Insurance Code. Thus, according to the district court, the penalty for the failure to pay started accruing 60 days after notice was given.
 

The insurer appealed, arguing that the penalty should accrue only 60 days after the insurer receives "all items, statements, and forms required by the insurer to secure final proof of loss." The Fifth Circuit affirmed, finding that the Texas Insurance Code clearly states that the penalty provision applies if an insurer is liable for a claim "not in compliance with this subchapter." Thus, according to the Fifth Circuit, the penalty could accrue beginning 60 days after notice of a loss.
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Alabama Supreme Court Holds Insurer Entitled To Rescind Based On Misrepresentations In Application

The Alabama Supreme Court has held that an insurer is entitled to rescind a life insurance policy due to false statements in the application notwithstanding the beneficiary’s argument that true information regarding the applicant’s health was provided to the agent. Alfa Life Ins. Corp. v. Reese, 2015 WL 3964215 (Ala. June 30, 2015).

A diabetic applied for a life insurance policy. Verbally answering questions asked by the agent, the applicant stated that he suffered from diabetes and other related conditions. The agent allegedly told the applicant not to place that information in the application. It was undisputed that the application contained false information regarding the applicant’s medical condition. When he died a short time later, the insurer denied the claim, citing specific language in the application advising that agents had no authority to modify coverage and that misrepresentations would void coverage.

The beneficiary filed suit for breach of contract, bad faith and fraud. The insurer counter-sued for rescission due to misrepresentations in the application, without which the policy would never have been issued. The trial court denied the insurer’s motion for summary judgment, except as to the bad faith claim. A subsequent “renewed” motion for summary judgment was also denied, and the insurer appealed.

The Alabama Supreme Court reversed. It first held that the agent’s false statement did not absolve the beneficiary of her duty to read the application before signing it. It rejected the argument that the beneficiary was not given a full opportunity to read the application because it was prepared on a computer. The Supreme Court also rejected the argument that information provided to the agent verbally could be imputed to the insurer. On that point, the Supreme Court relied on wording in the application advising the applicant that “[n]o information or knowledge obtained by any agent … in connection with this Application shall be construed as having been made known to or binding upon the Company.”
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Texas Supreme Court Holds EPA Potentially Responsible Party Letter Is A “Suit”

In a 5-4 decision, the Texas Supreme Court ruled that a U.S. Environmental Protection Agency (EPA) administrative action to force cleanup under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) is a “suit” requiring insurers to defend. McGinnes Industrial Maintenance Corp. v. Phoenix Ins. Co., 2015 WL 4080146 (Tex. June 26, 2015).

Two insurers had issued policies in the 1960s which did not have pollution exclusions and, in responding to a letter from the EPA to their insured requiring remediation of pollution, contended that the letter was not a “suit” requiring action by them. In answering a certified question from the U.S. Fifth Circuit Court of Appeals, the Texas Supreme Court held that an EPA notice letter is a “suit.” It recognized that prior to the enactment of CERCLA, the EPA had to bring a lawsuit to enforce an action for cleanup and that CERCLA allows the EPA to pursue such remedy extrajudicially. The Supreme Court stated that such a remedy is no mere demand, but one that commands compliance.

The insurers argued that the letter from the EPA is a claim, not a suit, and that a holding that it is a suit would extend their duty to defend to every demand letter. The insurers further argued that if a suit includes CERCLA enforcement proceedings, then it must include any administrative proceedings. The Supreme Court disagreed, stating that EPA proceedings were unusual. It seemed heavily persuaded that a majority of jurisdictions – thirteen out of sixteen state supreme courts – to have considered this issue had sided with the insured on this definition of the term “suit.”

The dissent chided the majority for rewriting the terms of the policy which the Texas Supreme Court has repeatedly said in prior opinions that it would not do.
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Alabama Supreme Court Holds Arbitration Provision Is Enforceable

The Alabama Supreme Court has held that an arbitration provision in homeowners’ policies is valid and enforceable. American Bankers Ins. Co. of Florida v. Tellis, 2015 WL 3935260 (Ala. June 26, 2015).

Multiple homeowners sued the same insurer, alleging that their premiums far exceed the value of the coverage because, even if the insured property was a total loss, they could not receive the full value of their policies. The insurer moved to compel arbitration under the Federal Arbitration Act and the policies’ mandatory arbitration provisions. The policyholders opposed, arguing that they never consented to the provision and that it was unconscionable. The trial court denied the motion to compel arbitration in each of the cases. The insurer appealed, and the appeals were consolidated.

The Alabama Supreme Court reversed, holding that the provisions were enforceable. It rejected the policyholders’ argument that they did not agree to the provision, holding that each manifested assent to the policies, including the arbitration provision, by accepting and acting upon the policies when they renewed coverage and paid premiums. Rejecting the argument that the insureds never received the proper forms containing the provision, the Supreme Court held that they had a duty to read the policy, including the declarations page which indicated that the arbitration provision was contained in the policy. It also held that the Federal Arbitration Act compelled arbitration because the policies – issued to Alabama residents by a Florida insurer – affected interstate commerce. Finally, it rejected the claim of unconscionability, holding that arbitration would not be more costly to the policyholders because, according to the provision’s terms, the costs would be paid by the insurer and the arbitration proceedings would be conducted in the county where each policyholder resided.
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Kentucky Supreme Court Holds Sole Practitioner Is Not Covered Under Workers’ Compensation Policy

The Kentucky Supreme Court has held that a sole practitioner with no employees was not covered by his workers’ compensation policy for his injury. Kentucky Employers’ Mut. Ins. v. Ellington, 2015 WL 2340284 (Ky. May 14, 2015).

The insured operated a business as a sole practitioner and employed temporary full- or part-time workers as needed. He purchased a workers’ compensation policy which excluded him by name. He sustained an injury on a job site and made a claim, which the insurer denied based on the exclusion. The insured filed suit.

The workers’ compensation judge agreed that the owner was not covered under the policy. Responding to the argument that the policy covered no one if the exclusion was enforced, the court noted that it was sensible for the owner to maintain the policy in case he hired a new employee or bid on a job that required subcontractors to carry workers’ compensation insurance. The owner appealed. The appellate court held that the policy was ambiguous because it identified the owner as a “named insured” but also purported to exclude the owner. The court resolved this ambiguity in favor of the owner, holding that his injuries were covered. The insurer appealed.

The Kentucky Supreme Court reversed, holding that there was no ambiguity because, though his injury was excluded, the owner was still an “insured” protected from putative employees’ claims under the policy. Citing Kentucky statutory law, the Supreme Court noted that business owners are required affirmatively to elect coverage for themselves, and to pay additional premium, if they wished for their injuries to be covered under the policy. Here, the owner did not elect such coverage. It also noted that the owner repeatedly executed and received policy forms acknowledging that he was not covered and he knew that premiums varied according to the number of employees working for him during any given policy year. Accordingly, the Supreme Court concluded that he could not have reasonably expected that he would be covered for injuries he sustained on the job.
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Hurricane Katrina Whistleblower Action Prevails On Appeal, Reversed To Permit Discovery On Possible Additional False Claims In Wind vs. Flood Insurance Adjusting

The U.S. Fifth Circuit Court of Appeals upheld a jury verdict that an insurer submitted a false record to the U.S. government in violation of the False Claims Act (FCA) by excluding engineer reports and presuming flood damage in administering a claim after Hurricane Katrina. The qui tam lawsuit, brought by two former insurance adjusters, was tried on a single claim, and, after upholding the jury’s verdict that the homeowners’ damage was not compensable flood damage, the Fifth Circuit reversed the trial court’s denial of the plaintiffs’ request for further discovery on other allegedly false claims. U.S. ex rel. Rigsby v. State Farm Fire & Cas. Co., Cause No. 2015 WL 4231645 (5th Cir. July 13, 2015).

The two plaintiff adjusters acted as independent insurance adjusters and claimed that the insurer sought to shift its responsibility to pay wind damage claims to the government through the National Flood Insurance Program by classifying damage as caused by flood instead of by wind. The trial court denied the plaintiffs’ request for discovery as to other allegedly fraudulent claims handling by the insurer on the basis that it would be costly and far ranging. The trial court did state that it would consider the propriety of additional discovery should the plaintiffs prevail on the merits. The jury rendered a verdict that the insureds suffered no compensable flood damage and that the insurer had submitted a false record. The trial court denied insurer motions for new trial and judgment notwithstanding the verdict. Both parties appealed.

The Fifth Circuit held that the insurer’s motions were properly dismissed as the plaintiffs adequately pled claims of fraud in bringing their lawsuit and possessed personal knowledge so that they were a proper “original source” under the FCA, vesting the district court with subject matter jurisdiction. It also held that the jury could reasonably find on the evidence in the record that the insurer knowingly submitted a false record in violation of the FCA. It further held that the plaintiffs were entitled to additional discovery because their allegations and trial evidence extended far beyond the realm of a single claim, including meetings with supervisors at which adjusters were instructed generally to push the flood coverage and to relax rules and requirements for adjusting flood claims.
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Fifth Circuit Finds “Insured Contract” Provision Incorporates Master Services Agreement

The Fifth Circuit U.S. Court of Appeals applying Texas law recently ruled that an “Insured Contract” provision, standing alone, is sufficient to incorporate a master services agreement’s (MSA) limitation on coverage. Ironshore Specialty Ins Co. v. Aspen Underwriting, 788 F.3d 456 (5th Cir. 2015).

An oil well operator contracted with a service provider. The MSA contained an indemnity provision in which each party agreed to cover liability resulting from claims brought by their own employees even if the other party was at fault. The agreement required each company to hold $1 million in general liability insurance and $4 million in excess insurance. The operator’s policies limited coverage to the contractor to $5 million, but the contractor’s policies, providing coverage of $51 million, had no such limitation with respect to additional insureds and the operator was named an additional insured.

A fire at a well killed two of the contractor’s employees. With the total liability for the fatalities likely exceeding $5 million, the operator’s excess insurer sued the contractor’s excess insurers for a declaratory judgment, contending those insurers were obligated to provide coverage up to the full limits of their policies because the policies did not expressly limit the coverage available to an additional insured. In light of the Supreme Court's decision in In re Deepwater Horizon, 2015 WL 674744 (Tex. Feb. 13, 2015), the Fifth Circuit affirmed the district court’s grant of summary judgment in favor of the contractor’s insurers because the contractor was "obliged" to procure only $5 million in insurance. In reaching its decision, the Fifth Circuit concluded that Deepwater Horizon required it to hold that the "Insured Contract" provision, standing alone, was sufficient to incorporate a separate contract’s limitation on coverage.
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Tenth Circuit Holds Unauthorized Fax Transmission Not Covered

The Tenth Circuit U.S. Court of Appeals upheld a district court’s summary judgment in favor of an insurer that no coverage existed for “junk fax” advertisements by its insured. Emcasco Ins. Co. v. CE Design, Ltd., 784 F.3d 1371 (10th Cir. 2015).

The insured was subject to a class action suit by businesses who had received unauthorized faxes. After its insurer declined to defend, the insured settled with the plaintiffs in exchange for an agreement that the judgment against the insured would not be enforced against it, and that the plaintiffs would proceed against the insurer. Both the insurer and the plaintiffs filed declaratory judgment actions. The plaintiffs alleged that the insured faxed unsolicited advertisements which 1) caused damages by costing time, paper and ink toner; 2) constituted conversions; and 3) violated the Telephone Consumer Protection Act (TCPA) and Illinois statutes. Coverage was subject to two exclusions: (1) an “expected or intended injury” exclusion; and (2) a “statutory violation” exclusion, which listed violations of the TCPA, the CAN-SPAM Act of 2003 and “any statute, ordinance or regulation, other than TCPA or CAN-SPAM Act of 2003, that prohibits or limits the sending, transmitting, communicating, or distribution of material or information.”

The policy insured against “personal and advertising injury,” which included “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy.” There were exclusions for a “knowing violation” and a “statutory violation.” The Tenth Circuit held that the policy provisions were unambiguous and that the claims for violation of the TCPA as pled were subject to the “statutory violation” exclusion. It further found that the TCPA required a showing that the violator intended to rely on deception, such that the “expected or intended injury,” “knowing-violation,” and “statutory-violation” exclusions applied. The suit also alleged common law conversion, and the Tenth Circuit held that one element of intentional conversion under Oklahoma law is that a defendant intentionally divert property for his own use, triggering the “expected or intended injury” exclusion. It deemed the plaintiffs’ claim to be for traditional conversion committed under a mistaken factual or legal belief of a right to appropriate property, and held that any bare claim of a mistake would not trigger coverage as an accident. The plaintiffs argued that there was a claim for negligent conversion, but the Tenth Circuit held that no such action was recognized under the law of either Oklahoma or Illinois.
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Fourth Circuit Holds Insured’s Call To Previous Insurer Does Not Qualify As Previously-Reported Medical Incident

The U.S. Fourth Circuit Court of Appeals recently held that an insured’s telephone notification of a previous insurer that she had received a letter requesting medical records related to a patient did not trigger her current professional liability policy exclusion for damages arising out of a medical incident reported to another insurer prior to the policy inception date. First Professionals Ins. Co. v. Sutton, 2015 WL 3541370 (4th Cir. June 8, 2015).

In 2008, the insured, a physician, received notice from her employing hospital that it had received a request for medical records pertaining to the underlying claimant’s minor son’s injuries. The physician promptly notified by telephone her then professional liability insurer. In 2011, she received a notice of intent to sue from the claimant’s counsel and she referred the notice to her then insurer. The insurer sought a declaratory judgment that there was no duty to defend or indemnify because the incident in question had been reported to a prior insurer and as a result coverage was excluded. The insured counterclaimed seeking coverage.

The insurer argued that it had no duty to defend or indemnify because of an exclusion for injury or damages “arising out of a medical incident” which was previously “reported to an insurer.” The district court agreed, holding that the call to the prior insurer reporting the records request constituted a prior report of a medical incident and held that coverage was excluded. The Fourth Circuit disagreed and remanded. It held that the telephone call did not constitute a report of a medical incident because it failed to report specific “acts, errors, or omissions” and instead merely reported that the claimant’s son was a patient and had received services from the physician.
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Arbitration Agreement Between Insured And Insurer Requires Direct Action Plaintiffs To Arbitrate Claims Against Insurer

A Louisiana Court of Appeal has upheld efforts by a risk retention group to compel arbitration of a direct action plaintiff’s claims holding that the Liability Risk Retention Act of 1986 (LRRA) preempts Louisiana’s Direct Action Statute. Ronald Courville v. Allied Professional Insurance Co., 2015 WL 3536119 (La. App. 1 Cir. June 5, 2015).

A doctor sued for medical malpractice was insured by a risk retention group, which was sued by the doctor’s patient under Louisiana’s Direct Action Statute. It moved to compel arbitration arguing that the LRRA preempts the Direct Action Statute and that the arbitration provision in the policy required arbitration of the patient’s claim. The district court stayed the case and ordered arbitration. The patient appealed.

The Court of Appeal held that direct action claims against risk retention groups are not permitted by virtue of the LRRA as it is exempt from state law and that neither Louisiana’s Anti-Arbitration Statute (La. R.S. §22:868) nor the Direct Action Statute (La. R.S. §22:1269) permit direct action claims against it. The court did lift the stay as to the patient’s claim against the doctor only finding that although the arbitration agreement was enforceable as to the insurer, it could not be imposed on the patient’s claims against the doctor as the patient was not a party to the agreement.
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Federal Judge Applies Texas Law To Maritime Policy Despite New York Choice Of Law Provision

A federal bankruptcy judge found that Texas law should apply to a maritime insurance contract instead of New York law as provided in the policy. In re ATP Oil & Gas Corporation, 531 B.R. 694 (Bank. S.D. Tex., June 5, 2015).

The United States sued a rig owner for discharging pollution from an offshore platform in the Gulf of Mexico. The insured’s pollution liability policy required it to give prompt notice of a claim, which it did not. Whether the insurer must show prejudice from late notice depended on whether Texas or New York law applied. The policy provided that the law of the state of New York applied. The insured was based in Texas. The Texas Insurance Code provides that a policy of insurance issued to a citizen of Texas is a contract made and entered into in Texas and that Texas law should apply.

The court determined that maritime law, not bankruptcy law, controlled the choice of law question because bankruptcy law would not be determinative. Next, the judge analyzed the Restatement of Laws, Conflict of Laws to find that the factors weighed most heavily in favor of Texas law being applied instead of New York. The court reasoned that while New York normally required a finding of prejudice – but made a distinction for the field of maritime insurance such as this – that distinction was heavily outweighed by Texas’ regulatory needs. It was held that where a state has enacted laws to protect its citizenry as beneficiaries of insurance policies, those laws create a compelling interest in favor of the state’s regulatory scheme. The court concluded it was mandated to apply Texas law.
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Fourth Circuit Holds That A Virginia Hunt Club’s CGL Policy Did Not Cover Club Members For Personal Recreational Activities

The Fourth Circuit Court of Appeals recently held that a CGL policy did not cover a club member’s liability for unintentionally shooting another member while hunting at the insured club. Marks v. Scottsdale Ins. Co., 2015 WL 3940854, at *1 (4th Cir. June 29, 2015).

After being unintentionally shot by another member while hunting on land leased to a hunt club, the underlying claimant sued both the shooter and the club. The club’s CGL insurer denied coverage because its policy did not cover members for their personal recreational activities. In ensuing litigation, the district court entered summary judgment in the insurer’s favor.

The Fourth Circuit affirmed, holding that the policy’s endorsement covering members “with respect to [member] liability for [the Club’s] activities” unambiguously restricted coverage to situations involving a member’s vicarious liability for the activities of the club as an entity. It further held that to qualify for coverage, a member’s activity must have been performed for the club, and rejected the argument that the shooting should be covered merely because it occurred during a club activity.
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Federal Court In Arkansas Holds Untimely Notice Bars Coverage

A federal court in Arkansas has held that coverage was precluded due to a three-year delay in providing notice of suit, despite the insureds’ erroneous belief that their liability policy lapsed. Columbia Insurance Group, Inc. v. Park Plus Management Co., 2015 WL 2341273 (W.D. Ark. May 14, 2015).

The owners of a housing complex were sued by residents for various claims arising out of a rise in crime in the neighborhood. The insureds believed that their liability policy had lapsed and did not provide notice of the suit for over three years. When the insurer received notice of the claim, it defended under a reservation of rights and instituted a separate declaratory judgment action against the insureds. The insurer moved for summary judgment on its late notice defense.

The court granted the motion. It held that satisfaction of the notice provision was a condition precedent to the insured’s recovery under the policy. The court found that no reasonable juror could find that a three-year-delay satisfied the insureds’ obligation to provide notice “as soon as practicable,” and concluded that the mistake by the insureds as to the policy’s existence was irrelevant.
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North Carolina Appellate Court Holds Insured’s Adult Daughter Living In Separate Household Qualifies As An “Insured”

The Court of Appeals of North Carolina recently held that an insured’s adult daughter not living with the insured was entitled to coverage under the insured’s auto liability policy. Integon Nat. Ins. Co. v. Mooring, 2015 WL 2062042 (N.C. Ct. App. May 5, 2015)

The insured’s nineteen-year-old daughter was involved in an auto accident. The insured’s automobile liability insurer sought a declaration that the insured’s daughter was not an insured under the policy because she was not a resident of the insured’s household at the time of the accident. Cross-motions for summary judgment were filed, and judgment was rendered in favor of the insured and his daughter. The insurer appealed.

The policy definition of the term “Insured” included family members of the named Insured, and the policy defined the term “family member” as “a person related to [the policyholder] . . . who is a resident of [the policyholder’s] household.” The Court of Appeals noted that the policy did not define the terms “resident” or “household” and it therefore construed the terms broadly and in favor of coverage. The court further noted that, the insured’s daughter was wholly dependent on the insured in that he owned the residence where she lived and paid her living expenses. Accordingly, the court found that the daughter was a resident of the insured’s household at the time of the accident and affirmed the trial court’s grant of summary judgment in favor of the insured and his daughter.
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Fifth Circuit Holds Homeowners Have Duty To Determine Whether Property On Federal Land Could Be Insured By Federal Flood Insurance

According to the U.S. Fifth Circuit Court of Appeals, homeowners’ state law claims against a flood insurer for acts or omissions in the procurement of a flood policy that was void from inception are not pre-empted by federal law, but state law claims concerning claims handling on the flood policy are. Robert Spong, et al. v. Fidelity Nat’l Prop. & Cas. Ins. Co., 787 F.3d 296 (5th Cir. 2015).

Homeowners’ property was originally thought not to be within a designated Coastal Barrier Resources System (CBRS), but was later determined to be. A federal flood insurance policy with the National Flood Insurance Program (NFIP) covered the property. Under federal law, however, if a property is located in a CBRS, the NFIP is prohibited from issuing flood insurance. The insurer denied a claim for damage to the property citing that the policy was void from inception. The homeowners then sued the insurer for selling the policy and for its claims handling resulting in the denial.

The insurer moved for summary judgment that all claims are pre-empted by federal law. The trial court denied the motion, but allowed an interlocutory appeal. The Fifth Circuit agreed that while the federal government extensively regulates the administration of these policies, it has no significant interest in their procurement. Thus, it held that while federal law would pre-empt the causes of action over claims handling, it would not for causes of action regarding the issuance of the policy. Further, the Fifth Circuit held that it was incumbent upon the homeowners to ensure that the property could be covered by NFIP and, therefore, could not rely on the issuance of a policy as a misrepresentation that the property was insurable.
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Florida Appellate Court Holds That Post-Loss Property Insurance Claims Are Freely Assignable To Third Parties

A Florida appellate court recently held that an insured may assign a post-loss property claim to a third party even when the policy contains an “anti-assignment” provision. One Call Prop. Servs. Inc. v. Security First Ins. Co., 165 So.3d 749 (Fla. 4th DCA 2015).

The insurer provided homeowners’ insurance to the insured. The insured had a water loss and called a water mitigation company to remove the water. The insured assigned his rights to any insurance proceeds for the water loss to the water mitigation company as payment for its services. The insurer refused to acknowledge the assignment and did not pay the water mitigation company for its services. The water mitigation company sued the insurer as the assignee of the insured alleging breach of contract. The insurer moved to dismiss the lawsuit with prejudice on the basis that the policy’s “anti-assignment” provision prevented the post-loss assignment. The trial court agreed and dismissed the complaint with prejudice. The water mitigation company appealed.

The appellate court reversed and remanded. The appellate court held that even when an insurance policy contains a provision barring assignment, an insured may assign a post-loss property insurance claim. Additionally, the appellate court noted that the court is not in a position to evaluate the public policy arguments regarding whether post-loss assignments of property insurance claims should be valid in Florida and called for the legislature to investigate and undertake comprehensive reform regarding this topic.
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Federal Court In Mississippi Holds Default Judgment Against Insured In Declaratory Judgment Action Does Not Absolve Duties To Third Party Injured By Insured

A federal court in Mississippi denied an insurer’s summary judgment motion based on a default judgment against its insured that it likewise terminated duties to a third party injured by the insured. Progressive Gulf Ins. Co. v. Reed, 2015 WL 3504827 (S.D. Miss. June 3, 2015).

A default judgment in a declaratory judgment action by an insurer expressly stated that the insurer had no obligation to indemnify and defend the insured and that it was not obligated to perform under the insurance contract. However, the court held that, under Mississippi law, the default judgment resulting from the insured’s failure to answer the insurer’s complaint does not relieve the insurer of its duties toward third parties for several reasons. In Mississippi, a motor vehicle liability policy may not be cancelled or annulled as to third-party liability by any agreement between the insurance company and the insured after the occurrence of the injury or damage; no statement by the insured or violation of the policy shall defeat or void the policy. Also, it is no longer Mississippi law that a benefit to third parties contemplated by policies is contingent upon a judgment being awarded for which an insurer may be liable. Finally, an insurer may be named as a party to an action for the purpose of seeking declaratory judgment on the question of coverage.
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Insured May Not Maintain Bad Faith Action Against Insurer Prior To Determination By Administrative Agency

The Mississippi Court of Appeals upheld a trial court’s dismissal of an insured’s bad faith claim against her employer but reversed dismissal of her bad faith claim, finding that the conduct of the insurer prior to the insured’s exhaustion of administrative remedies could give rise to a bad faith claim. Walls v. Franklin Corp., 2015 WL 2024653 (Miss. App. May 5, 2015).

The insured sought reimbursement for costs associated with doctor-prescribed shoes and a whirlpool bath and brought a bad faith claim against her employer and insurer regarding whether the costs were reasonable and necessary prior to a determination by the Workers’ Compensation Commission. The Supreme Court found the bad faith suit premature because the insured could not maintain a bad faith action for refusal to pay disputed medical services and supplies absent the Commission’s prior determination. After the Commission’s determination that the services and supplies were reasonable and necessary, the insured again sued. The Court of Appeals, in reversing the trial court’s dismissal, held that the inability of an insured to maintain a bad faith action was separate and distinct from the actions of the insurer before the Commission’s determination, which can give rise to a bad faith claim. It held that it was error for the trial court to find that the insurer could not have acted in bad faith at any time before the insured exhausted her administrative remedies.
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Federal Court In North Carolina Rejects Construction Of Pollution Exclusion As Limited To “Traditional Environmental” Claims

A federal court in North Carolina held that a pollution exclusion excludes coverage for property damage and bodily injury resulting from defective drywall. New NGC, Inc. v. Ace American Ins. Co., 2015 WL 2259172 (W.D. N.C. May 13, 2015).

A manufacturer of drywall was sued in several lawsuits alleging that its drywall was defective and the defects resulted in bodily injury and property damage as it emits high levels of sulfur into the air inside homes which (1) harms the structure of the homes and personal property and (2) causes health problems. The manufacturer tendered the lawsuits to its insurers, one of which declined to defend asserting that the injuries fell within the policy’s pollution exclusion. The manufacturer sought declaratory judgment and breach of contract damages, and the parties filed cross-motions for partial summary judgment.

The policy’s pollution exclusion excludes from coverage injury or damage arising out of pollution, defined to include the presence in or introduction into the environment of any substance alleged to have the effect of making the environment impure, harmful, or dangerous. The insurer argued that the release of sulfur qualifies as “pollution” because sulfur is a substance that makes the environment of the homes impure, harmful, or dangerous. The manufacturer countered that the exclusion’s definition of “pollution” is more narrow than that and excludes coverage of only “traditional environmental” claims. The court held that construing the exclusion in the narrow manner asserted would effectively rewrite the contract and would expand the scope of risk undertaken. The court granted in part the insurer’s motion to dismiss and denied the insured’s motion for partial summary judgment.
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