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Insurance Law Report: August 2018

August 16, 2018

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


Alabama Supreme Court Rules Two-Year Statute Of Limitations For Claims Against Agents Ran From Date Insured Had Notice Of Coverage Shortfall

The Alabama Supreme Court ruled that Alabama’s two-year statute of limitations for claims against agents and brokers for failing to procure insurance ran from the date that the insured should have been alerted to a coverage shortfall. Beddingfield v. Mullins Ins. Co., 2018 WL 2997849 (Ala. Jun. 15, 2018).

The insureds purchased three separate homeowners’ liability policies from two different insurers. Subsequently, one policy was cancelled by the insureds who believed it to be duplicate, and a second policy was cancelled by the insureds’ agent based on the agent’s mistaken belief the insureds failed to pay the premium. After the cancellation of these two policies, a guest of the insureds’ was injured while at the sole remaining insured property and filed suit. The insurer which issued the only remaining policy defended, but a verdict exceeding policy limits was entered against the insureds. The insureds sued the agent alleging multiple counts of negligence and wantonness with relation to the agent’s handling of the various policies. The agent moved for summary judgment arguing, in part, that the insureds’ claim accrued three years before the institution of the suit when the insureds’ defense was accepted by only one insurer under one policy limit and, therefore, the claim was barred by Alabama’s two-year limitations period for claims against agents. The trial court granted the motion for summary judgment and the insureds appealed.

The Alabama Supreme Court affirmed that the claim accrued at the time the insureds were notified that their defense was provided by only one insurer and was subject to only one, lower limit of liability. The Court noted that although the insureds’ coverage was never denied, the shortfall in coverage should have alerted them to the alleged negligence of the agent, and rejected the insureds’ argument that the limitations period did not begin to run until later when the judgment exceeding the amount of available coverage was entered against them.


Eleventh Circuit Holds Slogan Is Not Trademark And Enforces Intellectual Property Exclusion

The U.S. Eleventh Circuit Court of Appeals distinguishes a slogan from a trademark and holds that an exception for infringement of slogan in an intellectual property exclusion does not apply to a claim for trademark infringement. Land’s End at Sunset Beach Community Ass’n, Inc. v. Aspen Specialty Insurance Co., 2018 WL 3795312 (11th Cir. Aug. 9, 2018).

A community association sued a company that shared the phrase “Land’s End” in its name, and the defendant counterclaimed for infringement, unfair competition and false designation of origin and alleged that the association’s advertisement created a likelihood of confusion with the company’s trademark “Land’s End.” The association’s insurer disclaimed coverage, and the association sued, arguing that the personal and advertising injury offenses of “use of another’s advertising idea in your advertisement” and “infringing on another’s slogan in your advertisement” encompass the claim against it. The court held an intellectual property exclusion precluded coverage, and the association appealed.

The Eleventh Circuit affirmed, holding that all claims arose out of alleged trademark infringement, and that the exception in the intellectual property exclusion for infringement of slogan does not apply because the “Land’s End” mark is not a slogan. It noted that the trademark was only a “product or source identifier” and not an “attention-getting catch phrase” that courts associate with a slogan.


Fifth Circuit Holds Insured’s Failure To Allocate Payments Between Covered And Uncovered Damages Negates Coverage

The U.S. Fifth Circuit Court of Appeals held that a contractor’s unilateral decision to allocate payments from subcontractors to uncovered parts of a claim does not permit the contractor to access its excess insurance. Satterfield and Pontikes Construction, Inc. v. U.S. Fire Insurance Co., 2018 WL 3671370 (5th Cir. Aug. 2, 2018).

A contractor was found liable in an arbitration proceeding for the cost of repairs to a building to correct construction deficiencies. It satisfied the award with its own funds, its primary insurers’ contributions and proceeds of settlements with subcontractors. The contractor’s excess insurer did not participate, taking the position that less than half the award was covered damages and that none of the subcontractor settlements were allocated to specific damage, except for those caused by the waterproofing contractor that fairly could be allocated to mold damage, coverage for which the excess policy excluded.

The contractor argued that the subcontractor payments were for uncovered damages. The trial court denied relief, and the contractor appealed. The Fifth Circuit affirmed, holding that the contractor failed to satisfy its burden of allocating the subcontractor settlement funds between covered and uncovered damages and thus could recover nothing from its excess insurer.


Tennessee Appellate Court Finds Insurer’s Rescission Of Renewal Policy Based On Misrepresentation In Original Application Valid

A Tennessee appellate court reversed a trial court order denying an insurer’s motion for summary judgment seeking rescission of a renewal policy based on misrepresentations in the original application. Dutton v. Tennessee Farmers Mut. Ins. Co., 2018 WL 3116555 (Tenn. Ct. App. June 25, 2018).

An application for an insurance policy stated that any misrepresentation would void the policy. The named insureds, a husband and wife, answered “no” to questions about whether they had ever been charged with, convicted of, or pled guilty to a felony, despite the fact the wife had a criminal record and various felony convictions. A policy was issued, and was renewed multiple times reflecting various changes, including the removal of the wife as an insured following a later conviction and incarceration and the transfer of interest in the property to another party who was substituted as an insured under the policy. The insured property was then destroyed by fire and a claim was made. The insurer denied coverage and a lawsuit ensued. The insurer filed a motion for summary judgment alleging that material misrepresentations regarding earlier convictions by the wife on the initial application voided the original and all renewal policies, despite the later amendments to the policy and deletion of the wife as an insured. The trial court denied the motion, but granted an interlocutory appeal.

On appeal, the appellate court reversed, finding that the misrepresentations on the application were material and increased the risk of loss, and held that the original policy was void. It further noted jurisprudence that renewals are presumptively an extension of an original policy, and concluded that the renewals at issue did not contradict this presumption. The court concluded that the renewals were intended to extend or continue the terms of the original policy and not to form a new contract. It thus held that because the policy was void from inception, the renewals were also void.


North Carolina Court Of Appeals Finds Continuous Act Of Withholding Evidence Not A Single Wrongful Act

The North Carolina Court of Appeals recently found that two wrongful acts committed sixteen years apart by the same municipal police department were not sufficiently related to be deemed a single wrongful act. City of Hickory v. Grimes, 2018 WL 2642125 (N.C. Ct. App. June 5, 2018).

A man was convicted of rape and sentenced to life in prison. However, the police department that investigated the rape withheld exculpatory forensic and testimonial evidence. Years later, the convicted man contacted an actual innocence project, which over several years attempted to obtain evidence related to the alleged rape committed by the convicted man. The police department ultimately acknowledged it had a fingerprint card containing fingerprints lifted from the original crime scene that demonstrated that some individual other than the convicted man committed the rape. Based upon this evidence, the convicted man was exonerated and released from prison. The convicted man then sued the police department, and the police department sought coverage from its various insurers.

An insurer which insured the police department for a period of years after the conviction declined coverage on the basis that the repeated failure to turn over the exculpatory evidence, while a wrongful act under the policy, was merely a continuation of the wrongful conduct that first occurred years earlier when exculpatory evidence was withheld during trial, and which did not occur during its policies. In ensuing coverage litigation, the North Carolina Court of Appeals held that, due to the varying nature of the wrongs and the time had elapsed, the two acts were not substantially similar, logically related, causally related, or temporally related. Accordingly, it found the insurer was obligated to defend.


Florida Appellate Court Holds Policy Benefits May Be Assigned More Than Once

A Florida appellate court recently held that the assignment of benefits under an insurance policy to a mitigation contractor can be valid even when the insured had already assigned policy benefits to a different mitigation contractor. Nicon Constr., Inc. v. Homeowners Choice Prop. & Cas. Ins. Co., 2018 WL 2169853 (Fla. 2d DCA May 11, 2018).

The insured homeowner sustained a loss when a pipe in his home burst. The insured assigned benefits under his insurance policy to two different mitigation contractors—one which performed water and debris removal and then another for asbestos remediation. Both later sued the homeowner’s insurer, alleging that the insurer had failed to pay all benefits due under the policy. The insurer moved for summary judgment against the asbestos remediation contractor, arguing that the benefits assigned to the asbestos remediation contractor were invalid because all benefits under the policy had previously been assigned to the water and debris removal contractor. The court, agreeing that the insured had no further rights under the policy left to assign to the asbestos remediation provider, granted summary judgment in favor of the insurer. The asbestos remediation contractor appealed.

The appellate court reversed and remanded, holding that the assignment of “any and all insurance rights, benefits, and causes of action under my property insurance policy” in the contract with the water and debris removal contractor, when viewed in light of the entire assignment and the purpose for which it was entered, meant that the insured was assigning all rights under the policy to payment for the water and debris removal services, and not all of his rights to payment for the entire claim. Thus, the appellate court found that the assignment of benefits to the asbestos remediation contractor was valid and that it was error for the trial court to have entered summary judgment in favor of the insurer.


Louisiana Appellate Court Finds Insurer Cannot Deny Coverage For Lack Of Insured’s Cooperation

A Louisiana appellate court reversed a trial court’s grant of summary judgment in an insurer’s favor based on the insureds’ alleged breach of the policy’s cooperation condition where the insured refused to submit to an examination under oath. McCartney v. Shelter Mut. Ins. Co., 2018 WL 3372622 (La. App. July 10, 2018).

After their home was destroyed by a fire, the insureds made a claim under their homeowners’ policy. The policy required the insureds to cooperate with the insurer in any matter relating to a claim, including submitting to an examination under oath by the insurer. Payment under the policy was contingent upon receipt by the insurer of the proof of loss and the insureds’ compliance with policy conditions. The insurer denied coverage based on the insureds’ alleged violation of the cooperation clause by failing to submit to an examination under oath. The insureds filed suit arguing they did not refuse to submit to an examination, but merely postponed it. The trial court granted the insurer’s motion for summary judgment, finding that the insureds breached the cooperation clause, and the insureds appealed.

On appeal, the court of appeal reversed, holding that an insurer must show a diligent effort to obtain the requested information, and, further, that the insureds’ breach must be both material and prejudicial. The court held that the facts did not support a dismissal of the action based on the alleged violation, where the insureds did not refuse to an examination but merely postponed following the institution of the lawsuit.


Federal Court In Kentucky Finds Policy’s Contractual Limitation Period Consistent With Public Policy But Unenforceable Where Insured Lacked “Reasonable Time To Sue”

A federal court in Kentucky denied an insurer’s motion for judgment on pleadings seeking dismissal of an insured’s lawsuit for breach of contract and bad faith as untimely based on a two-year contractual limitation in the policy, finding that although the provision did not contravene Kentucky public policy, it was nonetheless unenforceable because it did not allow the insured a “reasonable time to sue.” Willowbrook Investments, LLC v. Maryland Cas. Co., 2018 WL 3186982 (W.D. Ky. June 28, 2018).

An apartment owner’s policy included a two-year time limitation for bringing a legal action against the insurer. During the policy period, nine apartments in the insured building were destroyed by fire and a claim was made. The insurer made a partial payment for the depreciated cost of the damage to the building, but withheld additional payments until repairs were completed. However, the insured was unable to rebuild the damaged units until four years after the date of loss due to unforeseeable permitting delays caused by governmental agencies. After the rebuild was complete, the insured requested payment for additional costs it incurred rebuilding the apartments. The insurer denied the request, and the insured filed suit for breach of contract and for bad-faith refusal to pay. The insurer filed a motion for judgment on the pleadings, arguing the insured’s breach of contract claim was untimely based on the policy’s limitation period because the loss occurred over two years prior to the date of filing. The insured argued the two-year limitation was unenforceable because it contravened Kentucky public policy and because it was impossible under the circumstances to file suit within two years of the loss.

The district court denied the insurer’s motion finding that although the two-year limitation in the policy did not violate Kentucky public policy, the provision was unenforceable because the additional payments under the policy were not warranted until the property was actually repaired, and repairs were delayed until after the two-year limitation period due to delays by governmental agencies over which the insured had no control. The court distinguished earlier Kentucky cases enforcing similar time limitations, stating that the insureds in those cases had at least some time in which to file under their respective policies. The court, however, granted the insurer’s motion as to the bad-faith claim which was dismissed where the court found the two-year limitation provision presented a debatable issue of law upon which the denial was based.


Federal Court In Florida Finds Exception To Pollution Exclusion Inapplicable

A federal court in Florida found inferences made from allegations did not trigger an exception to a pollution exclusion as the underlying complaint did not allege sufficient facts to allow the court to conclude that the exception applied. Colony Insurance Co., et al. v. The Courtyards at Hollywood Station Homeowners Ass’n, Inc., et al., 2018 WL 3453975 (S.D. Fla. July 17, 2018).

The insured operated an apartment complex in which two people died while sleeping. It was determined that the deaths were caused by carbon monoxide poisoning, and the mother of one of the decedents sued the insured, alleging that the carbon monoxide “is believed to have come from a motor vehicle” in the garage and that the carbon monoxide “seeped into the A/C ducts or vents” and made its way to the bedroom where it was inhaled by the victims. The apartment operator’s insurer sought a declaration that it had no duty to defend based on the pollution exclusion in the policy and moved for summary judgment. The apartment operator and the decedents’ representatives argued that since the source of the carbon monoxide was unknown (the allegation was only that it was “believed” to be a motor vehicle), the exception to the pollution exclusion for injury within a building caused by smoke, fumes, vapor or soot “produced by or originating from” heating or cooling equipment could apply. The court held such an inference to be impermissible. The court also held that the carbon monoxide had not originated from the A/C ducts or vents within the meaning of the phrase “produced by or originating from.” The court granted summary judgment.


Federal Court In Texas Holds Pollution Exclusion Bars Coverage For Claim Over Crushed Rock That Clogged A Stream

An insurer with an umbrella policy covering a rock quarry operation brought an action for declaratory judgment that it would not have a duty to defend or indemnify its insured for claims against it for unintentionally pumping fine chips of rock into a tributary and reservoir based on an absolute pollution exclusion. Great American Ins. Co. v. Ace American Ins. Co., et al., Civil Action No. 18-114 (N.D. Tex. July 10, 2018).

The insured and its parent company ran numerous rock quarry operations. As part of its operations, the insured breaks up rock into fine chips which it then sells for use as fill material. The insured keeps the chips in retention ponds. The insured was anticipating a heavy rainfall at one of its New Jersey facilities and turned on pumps to lower the water level in a retention pond and pump it into a nearby stream; however, the manager failed to turn off the pumps before leaving for the day, and a substantial amount of rock chip was pumped into the stream altering the course of the waterway and causing damage. The State of New Jersey and governmental agencies cited violations of numerous statutes and required remediation.

Without the insured fully briefing a choice of law analysis, the court found that Texas law should apply because the policy was negotiated, brokered and issued in Texas among other factors. The court noted that the pollution exclusion is clear and unambiguous and that the rock chips were “pollutants” because they were a “waste” material from crushing the rock despite their usefulness in other applications as fill material. The court found that coverage was excluded.


Federal Court In Oklahoma Holds No Coverage For Claim By Artist For Destruction Of Artwork

A federal court in Oklahoma has held that destruction of artwork does not constitute an accident even though there was no intent or expectation to injure the artist. United Specialty Insurance Co. v. Homeco LLC, 2018 WL 3423858 (W.D. Okla. July 12, 2018).

An artist painted a mural on the side of a commercial building. Years later, the building owner leased the building to an advertising company. Under the lease, the owner agreed to paint over the mural. The artist sued the owner under the Visual Artists Rights Act of 1990. The owner’s insurer denied coverage and sought a declaratory judgment, moving for summary judgment.

The court concluded that there was no “accident,” which the court defined as “an unusual and unexpected result” following the performance of a routine act or an “unknown or unexpected cause” of injury. The building owner argued that it had not intended or expected to injure the artist. The court rejected the argument because the policy merely required that an “accident” take place and was silent on whether an insured must expect or intend an injury.


Federal Court In Alabama Holds Estoppel Defense Must Be Established To Preclude Insurer Summary Judgment

A federal court in Alabama has held that the failure to establish evidence of a failure to comply with a statutory requirement that an insurer mail or deliver a policy to the purchaser and named insured within a reasonable time after issuance precludes an estoppel defense to insurer’s summary judgment motion that no coverage exists. Catlin Specialty Insurance Co. v. Joseph J. Johnson, et al., No. 5:17-cv-01432 (N.D. Ala. Aug. 3, 2018).

Alabama Code §27-14-19 requires an insurer to mail or deliver a policy to the purchaser and named insured within a reasonable time after issuance, and the Alabama Supreme Court has held that failure to do so may estop an insurer from asserting conditions of, or exclusions from, coverage if the purchaser or insured is prejudiced by such failure. Brown Machine Works & Supply Co. v. Ins. Co. of N. Am., 659 So.2d 51 (Ala. 1995). An insurer filed a declaratory judgment action and moved for summary judgment relying on an exclusion, and the response raised the defense of estoppel based on Brown and argued that there was an issue of fact as to compliance with the code requirement. However, the response offered no evidence of failure of mailing or delivery.

The court found that the exclusion applied, and held that, as estoppel is an affirmative defense for which the defendant has the burden of proof, the failure to have established evidence to support the defense did not raise an issue of fact and did not shift the burden to the insurer to refute the defense. The court found it was therefore appropriate to grant summary judgment, and it did.

Phelps Dunbar attorneys represented the insurer. For questions please contact William Shreve in Phelps’ Mobile office.


Insurer Not Required To Defend Or Indemnify In Hit-And-Run Suit Causally Related To An Assault And Battery

A federal court in South Carolina recently held that an insurer did not have a duty to defend or indemnify in a suit alleging that insured bars negligently overserved alcohol to a woman who drove her car over a man in one of the bar’s parking lots as he lay unconscious after having tried to break up a fight. Scottsdale Ins. Co. v. GS Thadius LLC d/b/a The Bar, et al., 2018 WL 3222889 (D. S.C. July 2, 2018); appeal filed (4th Cir. July 18, 2018).

The decedent’s estate claimed that the bars are liable because they overserved the driver the night she ran over the decedent. Each of the bars had a CGL policy with the same insurer. After the underlying suit was filed, the insurer filed a declaratory judgment action seeking a declaration that it neither had a duty to defend nor to indemnify the bars pursuant to an Assault and/or Battery Exclusion in the policies. The estate argued that the exclusion was inapplicable because the hit-and-run event was a separate and independent event from the brawl.

The court held that “[the driver’s] alleged conduct is neither isolated nor independent from the Decedent being knocked unconscious,…. [i]nstead, the relationship between the assault and battery and the ultimate injury,… was immediate and direct. It, therefore, arose from the assault and battery as contemplated under the policy exclusion.” As a result, the court held that the insurer neither had a duty to defend nor indemnify the bars.

Phelps Dunbar attorneys represented the insurer. For questions contacts Robert M. Kennedy, Jr. of Phelps' Raleigh office.


Developers And General Contractors Have Standing To Assert A Counterclaim Regarding Subcontractor’s Insurer’s Coverage Obligations

A South Carolina federal court recently held that developers and general contractors had standing to assert counterclaims in a declaratory judgment action in which an insurer sought a declaration as to its coverage obligations to a subcontractor in an underlying suit. Am. S. Ins. Co. v. Affordable Home Improvements, 2018 WL 2087229 (D. S.C. May 4, 2018).

An underlying lawsuit arising from construction defects was filed against the construction project’s developers, general contractor and subcontractor (the insured). The developers and general contractor brought cross-claims against the subcontractor. The subcontractor’s insurer filed a declaratory judgment action seeking a declaration that it had no coverage obligation with respect to the underlying suit, leading the developers and general contractor to file a counterclaim asserting that the insurer had coverage obligations with respect to the insured subcontractor.

The court held that the developers and general contractor had standing to assert a counterclaim against the insurer because “their recovery in the Underlying Lawsuit may be implicated by a decision in this Court as to coverage issues involving [the subcontractor].” Notwithstanding the court’s holding, the court also held that the insurer did not have any coverage obligations because: (1) the policy at issue was not in force at the time of the incident; and (2) even if the policy was in effect at the time of the incident (which it was not), the subcontractor was not insured under the policy.


Federal Court In Virginia Finds Auto Exclusion Excludes Coverage For Negligent Engineering Of A Road

A federal court in Virginia recently held that an exclusion excluding coverage for “any claim which arises from, or is related to, any collision or accident involving an automobile….” excluded coverage for injuries suffered in an automobile accident caused by a civil engineering firm’s negligent construction of a road. Admiral Ins. Co. v. W.W. Assocs., Inc., 2018 WL 3097335 (W.D. Va. June 21, 2018).

One individual was killed and two individuals were seriously injured when they were struck by an automobile while walking in a crosswalk. The injured individuals and representatives of the decedent sued the engineering firm for negligent engineering of the road and prevailed. The engineering firm sought indemnity from its professional liability insurer. In a subsequent insurance coverage action, the court found that the auto exclusion unambiguously excluded coverage for injuries arising out of automobile accidents under the plain language of the exclusion, even though the engineering firm itself was not operating the automobile. Accordingly, the court found that the professional liability insurer had no obligation to indemnify the engineering firm.

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