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 March issue. To view, click on the appropriate title and you will be brought to the full version of the article below.
GEORGIA SUPREME COURT GRANTS NEW TRIAL FOR DEFENDANT’S FAILURE TO DISCLOSE INFORMATION ABOUT ITS LIABILITY INSURERS IN DISCOVERY
The Georgia Supreme Court held that plaintiffs in a product liability suit were due a new trial because the defendant failed to disclose information about its excess liability insurers during discovery as required by Georgia law. Ford Motor Co. v. Conley, 2014 WL 695224 (Ga. Feb. 24, 2014).
The plaintiffs brought a product liability suit against an automaker after a single-vehicle rollover accident. During discovery, the plaintiffs asked the automaker whether or not it carried casualty or liability insurance to insure against the incident. The automaker objected and replied merely stating that it had sufficient resources to cover any reasonable judgment. The automaker prevailed at trial. Almost two years later at an unrelated trial for a similar incident, the automaker disclosed its excess liability insurers. The plaintiffs learned of the disclosure and filed a motion for new trial, arguing that the automaker’s failure to disclose its excess insurance liability carriers before their trial prevented the plaintiffs from having a fair and impartial jury hear the case. The trial court granted the motion. On appeal, the Georgia appellate court divided evenly on the appeal, and the case was transferred to the Georgia Supreme Court for decision.
The Georgia Supreme Court affirmed. The automaker argued that the plaintiffs were not materially harmed by its answers and that it properly objected to questions about possible liability insurers because the automaker, in fact, had sufficient resources to cover any reasonable judgment. The Supreme Court rejected this argument because, under Georgia law, a party to a civil case is entitled to have a jury qualified by the trial court considering whether any jurors are shareholders, officers, directors or employees of any insurance carrier with a financial interest in the case, and the automaker’s responses deprived the plaintiffs of this opportunity at the original trial.
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SOUTH CAROLINA SUPREME COURT UPHOLDS DEFAULT JUDGMENT BASED ON MAIL SERVICE NOTWITHSTANDING STATUTE REQUIRING SERVICE THROUGH DEPARTMENT OF INSURANCE
The Supreme Court of South Carolina recently held that a prescribed alternative means of service from service through the South Carolina Department of Insurance can support a default judgment. White Oak Manor, Inc. v. Lexington Ins. Co., 753 S.E.2d 537 (2014).
A nursing home resident sued the nursing home after sustaining injuries. The insured settled the lawsuit without the involvement of its insurer, but subsequently filed a declaratory judgment action for a declaration of coverage for the claim. The insured served its insurer by mailing the summons to the address listed in the service of suit clause in the policy, where the summons was accepted by an unknown individual. The insurer thereafter evidently misplaced the summons and failed to respond to the complaint. Default judgment was entered against the insurer, and the insurer moved to set aside entry of default, alleging insufficient service of process. The insurer argued that service on an insurer could be effected only by service on the South Carolina Department of Insurance as required by South Carolina Code § 15-9-270. The trial court denied the motion to set aside because it found that the parties had contractually agreed to another means of service and that the insurer had substantially complied with it. The court of appeals reversed, holding that the only permissible way to serve an insurance company is by serving the South Carolina Department of Insurance, and the insured appealed.
Reversing, the South Carolina Supreme Court held that parties are free to agree to alternative methods of service and that the insurer was bound by its own policy’s terms. The Supreme Court concluded that service of process is intended to provide notice and obtain personal jurisdiction, and that an insurer can designate in its policy a method for an insured to accomplish these goals, which it found was done.
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FLORIDA SUPREME COURT HOLDS INSURED COULD APPLY AMOUNTS RECEIVED IN INDEMNITY FROM A THIRD PARTY TOWARD SELF-INSURED RETENTION
The Florida Supreme Court recently held that an insured may apply indemnity payments received from a third-party toward the satisfaction of a policy’s self-insured retention. Intervest Constr. of Jax, Inc. v. Gen. Fid. Ins. Co., 2014 WL 463309 (Fla. Feb. 6, 2014).
A general contractor was sued by a third party for injuries arising out of faulty construction of the third party’s home. It sought indemnification from its subcontractor under the terms of their subcontract. The general contractor, subcontractor and their insurers settled the third party’s claim, with the subcontractor paying the general contractor, which would be used to pay part of the settlement. The subcontractor then filed suit against the general contractor’s insurer, claiming that the payment to the general contractor satisfied the self-insured retention under the policy and that the insurer should then pay the balanced owed to the third party. The insurer argued that the payment to settle the indemnification claim did not reduce the self-insured retention because the payment originated from the subcontractor, not the general contractor. The trial court granted the insurer’s motion for summary judgment, holding that the general contractor could not use the payment to satisfy the self-insured retention under the policy. On appeal, the U.S. Eleventh Circuit Court of Appeals certified the issue to the Florida Supreme Court.
The Florida Supreme Court answered the certified question in the affirmative by finding that the policy allowed the general contractor to apply indemnification payments received from a third party toward satisfaction of its self-insured retention.
The Florida Supreme Court found that the general contractor had paid for the right to indemnification from its subcontractor by way of the subcontract, and thus, hedged its retained risk. The Supreme Court concluded that there was no policy provision that would contradict its holding.
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TEXAS SUPREME COURT HOLDS CONTRACTOR’S AGREEMENT TO COMPLETE WORK IN A “GOOD AND WORKMANLIKE MANNER” NOT AN AGREEMENT TO ASSUME LIABILITY FOR ITS DEFECTIVE WORK
On certified questions from the U.S. Fifth Circuit Court of Appeals, the Texas Supreme Court held that a contractor’s agreement to complete its work in a “good and workmanlike manner” does not enlarge its duty to exercise ordinary care in fulfilling its contract, and thus does not assume liability for damages arising out of its defective work that would otherwise trigger a contractual liability exclusion. Ewing Construction Co., Inc. v. Amerisure Ins. Co., No. 2014 WL 185035 (Tex. Jan. 17, 2014).
A contractor constructed tennis courts for an independent school district. The school district complained that the courts began cracking and flaking, making them unusable for their intended use, and filed suit against the contractor. The contractor’s contract with the school district included an agreement to complete its work in a “good and workmanlike manner.” The contractor’s CGL policy included an exclusion for contractual liability “assumed in a contract.” In the litigation that ensued, the insurer took the position that the failure to complete the work in a “good and workmanlike manner” triggered the exclusion. This position was based, in part, on the Texas Supreme Court’s earlier dicta in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s, London, 327 S.W.3d 118 (Tex 2010). The Texas Supreme Court held that a contractor’s promise to complete its work in a “good and workmanlike manner” was not an agreement to assume liability, and that the contractual liability exclusion would not apply. This decision effectively overrules the Texas Supreme Court’s prior suggestion in Gilbert that breach of contract could trigger a contractual liability exclusion.
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GEORGIA SUPREME COURT HOLDS PHRASE “HELD LEGALLY LIABLE TO PAY” REQUIRES ACTUAL HOLDING OF LIABILITY IN ORDER TO TRIGGER COVERAGE
The Georgia Supreme Court held that an insurer had no obligation to indemnify an insured that had not been cast in judgment when the policy required that the insured be “held legally liable to pay,” distinguishing that phrase from the phrase “legally liable to pay.” Lloyd’s Syndicate 5820 v. Agco Corp., 2014 WL 998700 (Ga. Mar. 17, 2014).
An insured had an extended protection plan to cover its customers for defective products. Underwriters had paid a number of claims on a defective wheel motor after the insured declared there to have been an epidemic failure, but at some point refused to pay more. The insured sued, and the trial court and appellate courts held coverage was owed. Underwriters appealed.
On appeal to the Georgia Supreme Court, the insured argued that Underwriters’ duty to indemnify is triggered if the insured’s liability would be recognized if it were sued. The Georgia Supreme Court disagreed, holding based on the policy wording that Underwriters were required to pay only when there is an actual holding of legal liability by a court.
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ARKANSAS SUPREME COURT HOLDS RESCISSION OF POLICY BASED ON INSURED’S FRAUDULENT MISREPRESENTATION COULD NOT VOID INSURER’S OBLIGATION TO NAMED MORTGAGEE
The Arkansas Supreme Court held that a property insurer must honor policy obligations to a mortgagee notwithstanding its right to rescind the policy coverage due to the insured’s fraud in obtaining the policy. Nationwide Mut. Fire. Ins. Co. v. Citizens Bank & Trust Co., 2014 WL 272685 (Ark. Jan. 23, 2014).
An insurer issued a property policy for a dwelling, identifying the mortgagee and containing a standard mortgage clause that entitled the mortgagee to make a claim under the policy. After the insured property was destroyed by fire, the insurer learned that the insured’s application failed to disclose two prior fire losses. The insurer voided the policy ab initio and refunded the insured’s premium. The mortgagee presented a claim for the fire loss with respect to its mortgage interest, which the insurer denied on the basis of the rescission. Suit was filed and the parties filed cross-motions for summary judgment. The trial court ruled in favor of the mortgagee and the insurer appealed.
The Arkansas Supreme Court affirmed, holding that the “standard mortgage clause” (left unquoted by the opinion) constituted a separate contract between the mortgagee and the insurer and therefore the rescission of the policy based on the acts of the insured did not affect the “independent contract.”
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KENTUCKY COURT OF APPEALS FINDS FAILURE TO ISSUE TIMELY RESERVATION OF RIGHTS WAIVES COVERAGE POSITION
The Court of Appeals of Kentucky has held that an insurer’s failure to reserve rights for over two years waived all coverage defenses and enlarged the scope of coverage under the policy. Ohio Cas. Ins. Co. v. Wellington Place Council of Co-Owners Homeowners Ass’n, Inc., 2014 WL 97395 (Ky. App. Jan. 10, 2014).
The insured contractor and its CGL insurer were sued by a condominium association for alleged construction defects. The insured settled its claims with the association and entered into a stipulated judgment. The association and the insurer then filed cross-motions for summary judgment on coverage issues. The trial court held that the insurer waived its position of no coverage by failing to reserve rights for over two years after it received notice of the claim. The trial court held that a subsequent decision of the Kentucky Supreme Court that faulty workmanship is not an “occurrence” did not absolve the insurer of its failure to issue a timely reservation of rights. The insurer appealed.
The appellate court affirmed, holding that a failure to reserve rights can broaden the scope of coverage under a CGL policy. It rejected the insurer’s argument that it could not have anticipated the intervening decision of the Kentucky Supreme Court construing the meaning of the term “occurrence” with respect to faulty workmanship claims. It also held that the condominium association, as a judgment creditor of the insured, had standing to rely on the waiver and estoppel arguments.
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FOURTH CIRCUIT HOLDS EQUITABLE ESTOPPEL CANNOT EXTEND COVERAGE TO PARTY NOT OTHERWISE INSURED
The U.S. Fourth Circuit Court of Appeals recently held that the principle of equitable estoppel cannot extend coverage to a third party not otherwise insured under South Carolina law. First Financial Ins. Company v. Brumbaugh, 2014 WL 57558 (4th Cir. Jan. 8, 2014).
The insurer issued a policy to a sole proprietor operating a business. Midway through the policy’s term, the insured stopped operating the business. However, a former co-worker opened a new business, operating in the same location under the same name. After receiving the final bill for the premium of the original policy at the business address, the former co-worker paid the last installment without attempting to cancel the policy or transfer coverage to his own name. After the original policy’s expiration, the insurer issued a new policy to the former co-worker in his own name. The insurer, however, did not attempt to rescind the prior policy or to return the last premium installment.
Just prior to the expiration of the original policy, but after the former co-worker assumed the business operation, an employee was involved in a vehicle collision that resulted in a third party’s death which led to a wrongful death lawsuit against the co-worker. The insurer sought a declaration that the original policy did not cover the underlying lawsuit. The district court held that the insurer was equitably estopped from denying coverage because it had induced the former co-worker into believing that the original insured’s rights had been transferred to him by failing to return the premium after learning that that insured had ceased operating the business. The insurer appealed.
Reversing, the Fourth Circuit noted that under South Carolina law estoppel cannot extend coverage or create primary liability coverage, and found that the former co-worker was not an insured under the original policy, and estoppel could not be used to create coverage as to his liability. The court stated that equitable estoppel could only be used to create coverage when an insurer misleads its insured, not a stranger to the policy, to believe that the risk in question is covered.
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ELEVENTH CIRCUIT AFFIRMS DISMISSAL OF CLASS ACTION COMPLAINT FOR LACK OF PRIVATE RIGHT OF ENFORCEMENT
The U.S. Eleventh Circuit Court of Appeals recently held that a class of Florida insureds could not assert a claim against a group of local and foreign insurers for selling allegedly worthless surplus line policies because the Florida Insurance Code provisions relied on by the insureds do not permit a private right of action against insurers. Lemy v. Direct Gen. Fin. Co., 2014 WL 903371 (11th Cir. Mar. 10, 2014).
Class representatives filed suit against a group of local and foreign insurers alleging that the insurers acted in concert to sell the insureds worthless surplus line policies and that the policies are the result of a scheme to avoid and violate Florida insurance laws and regulations. The insurers removed the action under the Class Action Fairness Act (“CAFA”), and the insureds moved to remand the case under CAFA’s local controversy exception to federal jurisdiction, which withdraws federal jurisdiction where the class seeks “significant relief” from a local defendant. The district court held that the insureds failed to establish the applicability of the local controversy exception and denied the motion. The district court also dismissed the complaint in its entirety, holding that the Florida Insurance Code provisions do not provide for private enforcement and that, even if they did, the insurers’ conduct did not materially violate those provisions. The insureds appealed.
The Eleventh Circuit affirmed, finding that only one of the insurance code provisions cited by the insureds provided a private right of action. The Eleventh Circuit considered the sole code provision cited by the insureds that did allow for a private right of enforcement and stated that the district court correctly determined that there was no merit to the insureds’ claim that the insurers violated this code provision. The Eleventh Circuit agreed with the district court’s finding that the text and structure of the code provisions signal a deliberate intention by the Florida legislature not to create a private cause of action and do not render the policies void.
Phelps Dunbar attorneys represented certain defendants. For more information about this ruling, please contact Patti McLean in our Tampa office at email@example.com.
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FOURTH CIRCUIT REVERSES LOWER COURT’S SET-ASIDE OF PUNITIVE DAMAGES VERDICT AGAINST INSURER OVER BAD FAITH SETTLEMENTS
The U.S. Fourth Circuit Court of Appeals recently reversed a district court’s set-aside of a jury verdict that an insurer acted in bad faith when settling underlying lawsuits against its insured, finding that the insurer did not need to have caused actual damages to be liable for punitive damages under South Carolina law. Liberty Mutual Fire Ins. Co. v. JT Walker Industries, Inc., 2014 WL 504086 (4th Cir. Feb. 10, 2014).
The insured window manufacturer was sued in five lawsuits alleging defective manufacturing and installation of windows and doors that led to progressive water damage in condominium developments. The insured tendered the lawsuits to its insurer, which eventually settled each of the suits for less than the policy’s deductible. After the insured refused to pay the costs of the settlements out of its deductible on the basis that it did not desire the settlements, the insurer brought suit for breach of contract. The insured counterclaimed, alleging breach of contract and breach of implied covenant of good faith and fair dealing. A jury found both parties liable for contractual damages, and found the insurer liable for actual and punitive damages on the bad faith claim, finding that the insured failed to prove actual damages and, as a result, was not entitled to punitive damages. Both parties appealed.
After affirming the district court’s ruling that the insured failed to prove actual damages on its bad faith claim, the Fourth Circuit reversed the lower court’s decision setting aside the punitive damages verdict, finding that the absence of ascertainable damages does not necessarily preclude punitive damages under South Carolina law where the jury finds a party liable for punitive damages. Remanding the case to the district court, the Fourth Circuit ordered the judge to consider whether the evidence supported the jury’s finding that the insurer engaged in willful, wanton or reckless conduct.
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ELEVENTH CIRCUIT APPLIES EXCEPTION TO FLORIDA “FOUR CORNERS” RULE ON DUTY TO DEFEND
The U.S. Eleventh Circuit Court of Appeals held that an insurer was entitled to consider the date a claim was tendered to it in declining to defend based on a buy-back provision in an exclusion that was limited, in part, to claims reported to the insurer within 30 days after becoming known to the insured. Composite Structures, Inc. dba Marlow Marine Sales v. The Continental Insurance Company, No. 12-15866 (11th Cir. Mar. 20, 2014).
Seamen alleged injury from exposure to excessive amounts of carbon monoxide while working aboard a vessel that a shipyard built. Suit was filed almost three years after their time on the vessel. The shipyard’s broker gave notice to the shipyard’s insurer, which denied coverage under CGL policies based on the insured’s failure to meet a condition in a buy-back clause for a pollution exclusion requiring an “occurrence” to be known to the insured within 72 hours of its commencement. The insured settled with the seamen and sued the insurer. Cross-motions for summary judgment were filed, and the district court granted the insurer’s motion. The insured appealed.
The Eleventh Circuit affirmed, concluding that the circumstances fell within exceptions to the “four corners” rule recognized by the Florida Supreme Court and that the insurer was permitted to consider the uncontroverted date of notice as it would not be a fact normally included in a complaint and that when so considering that date and other conditions to the buy-back, it was not possible for the claim to fall within coverage.
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FIFTH CIRCUIT REVERSES AND REMANDS ON PROFESSIONAL LIABILITY EXCLUSION ISSUE
In a case involving competing declaratory actions by two insurers, the majority of a panel of judges of the US. Fifth Circuit Court of Appeals held that the facts supported a finding that the occurrence was “use of an auto” covered by an auto policy and reversed summary judgment from below on that basis. Nat’l Cas. Co. v. Western World Ins. Co., 2014 WL 128610 (5th Cir. Jan. 15, 2014) (per curiam).
EMTs were in the process of placing a patient in the load position on a gurney outside of the ambulance with one door open. While an EMT had one hand on the gurney and the other on the ambulance door, and while the gurney was still outside the ambulance with its wheels on the ground, the wheels apparently caught on something causing the gurney to tip over, dropping the patient to the ground causing injury. The majority found this to constitute “use” of the auto making it covered by the auto policy. The dissent pointed out that under Texas law, the vehicle must cause the injury and do something more than merely provide the location of injury in order to constitute “use” of the auto. However, the majority held that there were insufficient facts to determine if the “professional liability” exclusion on the auto policy would preclude coverage and remanded on that basis.
Phelps Dunbar, LLP represented the auto insurer. For more information on this decision, please contact Peri Alkas at firstname.lastname@example.org.
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ELEVENTH CIRCUIT HOLDS NON-OWNING INSURED’S INSURABLE INTEREST IN PROPERTY LIMITED UNDER FLORIDA LAW TO ACTUAL FINANCIAL INTEREST
The U.S. Eleventh Circuit Court of Appeals held that Florida law limits an insured’s recovery under a commercial property policy to its actual insurable interest and not the full amount of property damage when the insured does not own the property. Banta Properties, Inc. v. Arch Specialty Ins. Co., 2014 WL 274478 (11th Cir. Jan. 24, 2014).
The insured purchased commercial property insurance for three apartment complexes it managed in exchange for a percentage of the gross income. The complexes were damaged and suffered lost rents. After settling its property damage claims with the primary insurer for the policy limit, the insured filed a property damage claim with the excess insurer. The parties were unable to resolve the claim, and the insured sued the excess insurer. After trial, the jury found that the insured had a $5 million insurable interest in the property and had suffered $4 million in damage to that interest. The excess insurer moved for judgment as a matter of law, but the district court denied the motion. The excess insurer appealed.
On appeal, the Eleventh Circuit reversed and held that Florida’s insurable interest statute precludes an insured’s recovery beyond the revenue stream it derives from managing the properties. The court found that, under Florida law, a non-owner’s insurable interest in property is limited to the actual value of the potential loss one might suffer from damage to the property. The only right the insured had in the insured property at the time of the loss was the contractual right to receive a percentage of gross income in exchange for its services as property manager. Thus, the court concluded that the sole injury the insured suffered to its insurable interest was its share of the percentage of lost rent.
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FEDERAL COURT IN MISSISSIPPI HOLDS ATTORNEY RETAINED BY HIS BROTHER AS PART OF SCHEME TO DEFRAUD BANKS WAS NOT AN “EMPLOYEE” UNDER BANK’S SECURITY BOND
A federal court in Mississippi granted summary judgment in favor of an insurer in a suit against a security bond by a bank which was defrauded by a scheme of two brothers involving false certificates of title used to indicate the bank was a priority holder of property offered as collateral for loans. Copiah Bank, N.A. v. Fed. Ins. Co., Inc., 2014 WL 172122 (S.D. Miss. Jan. 15, 2014).
Two brothers engaged in a scheme by which one would arrange financing with multiple banks, using the same piece of property as collateral, and the other, an attorney, would provide certificates of title to the lending institutions which failed to indicate other encumbrances. Thus, each bank believed it was receiving a priority security interest in property when it was not. One such defrauded bank was insured under a security bond, and the bank sought recovery of the loss it suffered through the scheme. It claimed under three theories: (1) that the coverage for dishonesty of an employee encompassed the acts of the attorney brother in the scheme; (2) that the On Premises clause providing coverage for loss of property resulting directly from false pretenses, or common law or statutory larceny, committed by a person while on the premises encompassed the actions of the brothers and (3) that the Extended Forgery clause providing coverage for “loss resulting directly from the ASSURED having, in good faith, for its own account or the account of others … extended credit … in reliance on [a ‘(3) Certificate of Origin or Title’] which is a Counterfeit Original,” encompassed the actions.
The court held that no evidence was presented which would support a finding that the attorney brother was the bank's employee. The attorney brother was “retained” by his brother, who purported to be offering the property in question as collateral, and not by the bank. The attorney brother never received a pay check from the bank and no retainer agreement existed, nor was any retainer ever paid. The attorney had not served as trustee of the bank’s deed of trust, did not receive or disburse the loan proceeds, and did not process any of the loan closing. As to the second theory, the court held that an exclusion for “loss resulting from the complete or partial non-payment of or default on any Loan whether such Loan was procured in good faith or through trick, artifice, fraud or false pretenses” precluded coverage. The third theory was also held insufficient based on the definitions within the clause that made it clear that the term “Certificate of Origin or Title” as used in the bond, refers to personal property rather than real property.
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FLORIDA COURT HOLDS TWO DOG BITES DURING ONE ATTACK ARE SEPARATE OCCURRENCES
A Florida court of appeals recently held that two dog bites sustained by two different victims during a single attack constituted two separate occurrences under the insured’s homeowner’s policy. Maddox v. Fla. Farm Bureau Gen., 129 So.3d 1179 (Fla. 5th DCA 2014).
While living with her boyfriend and his two dogs, a woman and her son sustained dog bites from a dog owned by her boyfriend. The dog first attacked the son, and after the woman was able to release the dog’s grip on her son, the dog bit the woman. The woman sued her boyfriend seeking damages for the injuries she sustained. His insurer exhausted its limits by payment of the son’s claim and filed a declaratory judgment action seeking a declaration that it was not liable for the injuries sustained by the woman since her injuries were subject to the same occurrence limit applicable to the son’s injuries. The insurer moved for summary judgment, which the trial court granted, finding that the two dog bite injuries were subject to a single per occurrence limit.
The appellate court reversed, finding that the two injuries were separate occurrences under the policy. The court applied the cause theory, which considers the cause of a party’s injuries for determining the number of occurrences under the policy. Because the court found that it was reasonable to construe the cause of the injuries as either the entire attack or as each separate bite, the court concluded that the policy wording regarding an occurrence was ambiguous and must be construed against the insurer.
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FIFTH CIRCUIT ENFORCES PROTECTIVE SAFEGUARD ENDORSEMENT
The U.S. Fifth Circuit Court of Appeals affirmed a grant of motion for summary judgment based on a Protective Safeguards Endorsement. Scottsdale Ins. Co. v. Logansport Gaming, L.L.C., 2014 WL 687963 (5th Cir. Feb. 24, 2014).
The insured property included a restaurant. A fire began in the kitchen of the restaurant, and a fire extinguishing system did not activate. The insurer sought a judicial declaration of no coverage based on the insured’s failure to comply with the Protective Safeguards Endorsement, in which the policy required protective safeguards to be “maintained … in complete working order.” The insured counterclaimed seeking a declaration of coverage and statutory penalties for bad faith claims handling. The district court granted summary judgment declaring that the policy’s Protective Safeguard Endorsement precluded coverage for the fire damage.
On appeal, the insured made three arguments:
(i) the phrase “maintain … in complete working order”—as used in the Protective Safeguards Endorsement—is ambiguous;
(ii) an application of the district court’s interpretation of the Protective Safeguards Endorsement would lead to absurd results; and
(iii) “due diligence” is the proper standard for determining whether there was compliance with the policy wording.
The Fifth Circuit found that the insured had failed to raise the ambiguity and absurdity arguments at the district court level and, therefore, waived those arguments on appeal. Thus, the sole issue considered on appeal was whether “due diligence” is the proper standard for determining compliance with the Protective Safeguards Endorsement. The Fifth Circuit answered this question in the negative. The Fifth Circuit found that the phrase “in complete working order” is crucial because it modifies the word “maintain,” thereby eliminating any arguable lower standard of “due diligence” for the policyholder to merely maintain a protective safeguard, e.g., by maintaining a service contract. The Fifth Circuit found that, under this policy wording, the protective safeguard must be maintained such that it works at the time of loss, and affirmed the summary judgment.
Phelps Dunbar attorneys represented the insurer. For more information regarding the opinion, please contact Jay Sever at email@example.com or Pablo Gonzalez in our New Orleans office at firstname.lastname@example.org.
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FIFTH CIRCUIT HOLDS INSURER HAS NO DUTY TO DEFEND OR INDEMNIFY GENERAL CONTRACTOR AS ADDITIONAL INSURED UNDER SUBCONTRACTOR’S CGL FOR LIABILITY ARISING FROM COMPLETED OPERATIONS
The U.S. Fifth Circuit Court of Appeals held that there is no duty to defend an additional insured after it completed work where the additional insured endorsement in a CGL policy limits coverage to liability arising out of “ongoing operations.” Carl E. Woodward, L.L.C. v. Acceptance Indem. Ins. Co., 743 F.3d 91 (5th Cir. 2014)
An insurer issued a CGL policy to a concrete subcontractor, who worked on a condominium project. The project was subsequently completed and sold. The purchaser sued the seller and general contractor for rescission, breach of contract and gross negligence, alleging faulty construction and damage from the construction. The claims were arbitrated, and it was established that part of the alleged defects and damage were due to the work of the concrete subcontractor. The general contractor then made a claim as an additional insured under the subcontractor’s CGL policy for the arbitration costs and award. The insurer refused to defend based on an endorsement which limited insureds to “include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of ongoing operations performed for that insured.” Litigation ensued.
The Fifth Circuit held (following Mississippi precedent) that the phrase “ongoing operations” refers to actions “actually in process.” The Fifth Circuit found that if coverage were allowed under the endorsement based on an allegation of failure to follow plans and specifications, the policy would be effectively converted into a performance bond. As there were no allegations in the cross-claim that non-conforming concrete work caused damage during the insured subcontractor’s ongoing operations, there could be no coverage.
The Fifth Circuit further rejected the general contractor’s assertion that a causal link between the subcontractor’s operations and the damage sued for was sufficient, finding that such a conclusion would allow a project owner to assert a breach of contract claim against a contractor for any claim made during the course of construction, regardless of whether the contractor might remedy the problem before completing the project. The Fifth Circuit held no coverage existed under the CGL policy since the cross-claim allegations against the general contractor did not arise out of the ongoing operations of the subcontractor.
Phelps Dunbar attorneys represented the insurer. For more information regarding this opinion, please contact Jim Wyly in our Gulfport, Mississippi office at email@example.com.
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FEDERAL COURT IN SOUTH CAROLINA HOLDS ACTION SEEKING ATTORNEYS’ FEES TRIGGERS DUTY TO DEFEND
A federal court in South Carolina recently held that a lawsuit seeking attorneys’ fees triggered an insurer’s duty to defend pursuant to policy wording providing coverage for claims seeking coverage for “compensation in the form of money for a person who claims to have suffered an injury.” Episcopal Church in South Carolina v. Church Insurance Company of Vermont, 2014 WL 37225 (D. S.C. Jan. 6, 2014).
Several break-away Episcopal churches sought a declaratory judgment against the insured Episcopal Church in South Carolina that the break-away churches’ existence and continued use of disputed property were proper. After the Episcopal Church’s insurer denied the insured’s tender of the defense of this lawsuit, the Episcopal Church sued alleging breach of contract and bad faith and seeking a declaration that the insurer had a duty to defend and indemnify the insured. The insurer filed a motion to dismiss, arguing that the underlying lawsuit did not seek “damages” as the term was defined by the policy.
Denying the insurer’s motion to dismiss, the court noted that the insurer’s duty to defend was triggered where an underlying action sought “damages” which may be covered, with the term “damages” defined as “compensation in the form of money for a person who claims to have suffered an injury.” Amongst their various causes of action, the break-away churches sought temporary and permanent injunctions against the insured, including “reasonable attorney’s fees” related to alleged trademark infringement. Because break-away churches were seeking monetary compensation for alleged “advertising injury,” i.e., trademark infringement (which typically is not “advertising injury”), the court concluded that the insurer’s defense obligation was triggered. The court also granted the insured’s motion for summary judgment on the breach of contract and declaratory judgment claims. As to the insured’s bad faith claim, the court found that there was a question as to the reasonableness of the insurer’s refusal to defend, and thus denied the insured’s motion for summary judgment with respect to that claim.
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NORTH CAROLINA APPELLATE COURT HOLDS UNDER OKLAHOMA LAW EMPLOYER LIABILITY EXCLUSION APPLIED TO INJURIES CAUSED BY SUBCONTRACTOR’S EMPLOYEE
The North Carolina Court of Appeals recently held (applying Oklahoma law) that a policy’s employer’s liability exclusion, which provided that no coverage would be afforded for bodily injury claims arising out of employment by “any” insured, applied to injuries of an additional insured’s employee. Naylor Concrete Construction Co., Inc. v. Mid-Continent Casualty Co., 754 S.E.2d 259 (N.C. App. 2014).
After an employee of a general contractor was struck by a backhoe operated by one of the insured subcontractor’s employees, the general contractor’s employee sued the subcontractor to recover for her injuries. The insurer refused to defend the subcontractor, and, following a bench trial, the employee was awarded damages. The subcontractor thereafter filed suit against its insurer, alleging breach of contract, unfair and deceptive trade practices and bad faith refusal to provide coverage and a defense. The insurer moved for summary judgment, arguing that the policy’s employer’s liability exclusion applied and that there was no coverage for the employee’s claims. The trial court granted the insurer’s motion for summary judgment, and the subcontractor appealed.
Affirming, the court of appeals held that under Oklahoma law (which applied because the policy was issued in Oklahoma), the employer liability exclusion, which excluded coverage for “bodily injury” to an “employee” of “any” insured, was clear and unambiguous, and applied to the general contractor's employee’s claim against the subcontractor.
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FIFTH CIRCUIT HOLDS TEXAS’ ANTI-TECHNICALITY STATUTE APPLIES TO FIRST-PARTY LOSS AND AFFIRMS COVERAGE DESPITE POLICY BREACH
The U.S. Fifth Circuit Court of Appeals applied the Texas Anti-Technicality Statute to hold that an insurer owed payment for loss to an insured despite a breach of a condition of the policy. W.W. Rowland Trucking Co., Inc. v. Max America Ins. Co., No. 2014 WL 685217 (5th Cir. Feb. 24, 2014)(per curiam).
The insured trucking company claimed a loss for the theft of its truck from its distribution center. At the time of the theft, the truck contained goods for a third party. The insurer agreed that theft was a covered loss under a portion of its policy entitled “Legal Liability Coverage.” However, the policy required that the terminal be “100% fenced, gated, locked and lighted 24 hours per day, 7 days per week,” or coverage would be “null and void.” The insurer determined that there were gaps in the perimeter fence along the southern and western borders in violation of the policy’s requirement and denied coverage even though it also determined that thieves had cut a hole in the eastern perimeter fence to gain access to the truck.
The insurer argued that the Anti-Technicality Statute did not apply because it does not apply to liability insurance, only to property insurance. The Fifth Circuit held that the statute applied because as a bailee of the truck’s cargo, the trucking company had an insured interest in it, and the portion of the insured’s policy covering the stolen cargo arose from its property insurance. The Fifth Circuit affirmed the district court’s findings that the loss was covered because the breach of the policy’s fencing provision did not cause the theft loss.
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