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Insurance Law Report: May 2014

May 30, 2014

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 May issue. To view, click on the appropriate title and you will be brought to the full version of the article below.

ALABAMA SUPREME COURT WITHDRAWS PRIOR OPINION INVOLVING COVERAGE FOR FAULTY WORK 
The Alabama Supreme Court withdrew a September 2013 opinion addressing coverage for faulty work in a construction defect case and reversed its earlier decision on the meaning of “occurrence” in that context. Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 WL 1270629 (Mar. 28, 2014).

A homebuilder was sued after a home that it constructed began to experience water leaks. Its CGL insurer defended under a reservation of rights and filed a separate action for declaratory judgment against both the insured and the homeowners. The homeowners were awarded damages against the builder in arbitration. Following the arbitration, the homeowners and the builder moved for summary judgment in the declaratory judgment action. The insurer opposed and filed a cross-motion for summary judgment. The trial court held that the damages were covered. The insurer appealed.

In a September 2013 opinion, the Alabama Supreme Court concluded that all of the damages claimed and awarded were within the scope of the builder’s own work and therefore outside the definition of “occurrence.” That opinion was withdrawn. The Supreme Court has now concluded that “faulty workmanship” itself is not property damage caused by or arising out of an occurrence. Though it did not fully elaborate on the question, the end result appears that the cost to repair or replace an insured’s own faulty work does not constitute “property damage,” whereas the cost to repair damage caused by the insured’s own faulty work does.

In its latest opinion, the Supreme Court did not offer any discussion of what damages could be covered as “property damage” caused by an occurrence. Instead, it reinstated the trial court’s ruling that the insurer was obligated to cover the arbitrator’s award in full. A partial dissent noted that the arbitrator’s award included damages for repairing the insured’s own faulty work and faulted the majority for arriving at the “seemingly inconceivable conclusion” that the damages awarded did not encompass cost to replace the insured’s own faulty work.
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TEXAS SUPREME COURT REJECTS EQUITABLE REIMBURSEMENT CLAIM AGAINST INSURED
The Texas Supreme Court rejected an insurer’s equitable claim to recover overpayments because the policy contained contractual remedies that addressed the insured’s conduct. Gotham Insurance Co. v. Warren E & P, Inc., 2014 WL 1190049 (Tex. Mar. 21, 2014), petition for rehearing filed (Apr. 7, 2014).

The insured represented that it owned a 100% interest in a well that blew out, and the insurer paid claims accordingly. However, the insurer later learned that the insured had only a partial interest in the well and that others shared in the loss. The insurer sued the insured seeking reimbursement under both breach of contract and equity theories. Reemphasizing its holding in Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex. 2007), the Texas Supreme Court noted that "an insurer is limited to contractual claims when the policy addresses the matter at issue. Here, the policy contains several clauses addressing misrepresentations, reporting, salvage and recoveries, subrogation and due diligence." Accordingly, because the insurer had a contractual remedy to recover the overpayments, it could not rely on equitable claims. The Supreme Court also held that the insurer could not pursue equitable claims against the third parties who benefited from the overpayments.
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ARKANSAS SUPREME COURT FINDS NO COVERAGE FOR SEXUAL ABUSE CLAIMS
The Arkansas Supreme Court has held that CGL insurers had no duty to defend or indemnity an insured apartment complex for claims arising out of the alleged sexual abuse of residents. Kolbek v. Truck Ins. Exchange, 2014 Ark. 108, 2014 WL 1096168 (Mar. 13, 2014).

An apartment complex was sued by residents who allegedly sustained abuse. The residents were part of a communal religious group led by an officer of the insured. The insured and the officer sought a defense from the insured’s insurers, which denied coverage and commenced a declaratory judgment action. The trial court concluded that the policies did not provide coverage on multiple grounds and granted summary judgment to the insurers. The insured and the underlying plaintiffs appealed.

The Arkansas Supreme Court affirmed. It held that the allegations against the insured pre-dated coverage and therefore were not covered. The Supreme Court concluded that the officer was not an insured because, thought he was an officer, he was not acting as an officer when he allegedly harmed the residents. The Supreme Court also concluded that coverage for the alleged harm was excluded as expected or intended bodily injury. It finally held coverage was not available because there was no allegation or evidence that the alleged bodily injury arose out of the ownership, maintenance or use of a scheduled premises.
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LOUISIANA APPELLATE COURT HOLDS CONTRACTOR’S DUTY TO DEFEND ADDITIONAL INSURED ENDS WHEN NAMED INSURED IS DISMISSED
A Louisiana Court of Appeal held that a contractor’s insurer’s defense obligation does not extend to defending a general contractor as an additional insured after a judgment dismissing its insured from the litigation. Maldanado v. Kiewit Louisiana Co., 2014 WL 1202744 (La. App. 1 Cir. Mar. 24, 2014). See also, Maldonado v. Kiewit Louisiana Co., 2014 WL 1203180 (La. App. 1 Cir. Mar. 24, 2014).

An insured was sued by the survivors of former employees who were killed while working on a bridge construction project. The insured was dismissed, with prejudice, and the insurer discontinued defending the general contractor as an additional insured The trial court held that the contractor’s insurer continued to have a duty to defend the general contractor.  The Court of Appeal held that the policy’s additional insured endorsement provided that the policy “applies when liability is sought to be imposed upon the additional insured … because of something the named insured … is alleged to have done or failed to do” and that once the named insured, the subcontractor could no longer be held liable, the general contractor could no longer be held liable for fault of the subcontractor.
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FLORIDA APPELLATE COURT HOLDS CAUSATION NOT APPROPRIATE FOR APPRAISAL WHERE INSURER DENIES COVERAGE, CREATING SPLIT IN THE CIRCUITS
A Florida appellate court held that causation is a coverage question for the court’s consideration and not an appraisal panel’s consideration where the insurer denies coverage. Citizens Prop. Ins. Corp. v. Demetrescu, 2014 WL 1225124 (Fla. 4th DCA Mar. 26, 2014).

The insurer issued a homeowner’s policy to the insured, who reported a claim for damage to its home and some of its contents as a result of a roof leak. The insurer denied coverage and refused the insured’s demand for appraisal, citing multiple policy exclusions, including wear and tear, neglect, pre-existing damage and for noncompliance with post-loss conditions. The insured filed suit against the insurer for breach of contract and later filed a motion to compel appraisal. The trial court granted the motion and directed the parties to proceed to appraisal, stating that, because the coverage issues dealt with causation of damages, they were appropriate questions for the appraisal panel. The insurer appealed.

The appellate court reversed and held that the trial court erred in submitting the case to appraisal without first resolving the underlying coverage disputes. The appellate court determined that, as the insurer had wholly denied that there was a covered loss, all coverage issues, including causation, must be judicially determined by the trial court and that appraisal could not be used as a vehicle to make causation determinations. The opinion acknowledges that there is a circuit split on this issue, with another appellate court circuit in Florida allowing appraisal to go forward while preserving the insurer’s right to contest coverage.
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ELEVENTH CIRCUIT AFFIRMS INSURER HAS NO DUTY TO DEFEND OR INDEMNIFY FOR CLAIMS OF NEGLIGENCE CONNECTED TO ASSAULT AND BATTERY EXCLUSION
The U.S. Eleventh Circuit Court of Appeals recently held that an insurer did not have a duty to defend or indemnify its insured for negligence claims brought against the insured, all of which ultimately arose out of an assault and battery when the policy included an assault, battery, or other physical altercation exclusion. Burlington Ins. Co., Inc. v. Normandy Gen. Partners, 2014 WL 1045737 (11th Cir. Mar. 19, 2014).

The insured was sued by two people who were stabbed by a security guard employed by the insured. The claimants alleged various claims of negligence against the insured, including negligent training, negligent supervision, and respondeat superior. The insured sought defense and indemnity. The insurer initially defended under a reservation of rights and filed a declaratory judgment action to establish that it did not have a duty to defend or indemnify on the grounds that coverage was barred by an assault, battery or other physical altercation exclusion. The district court granted the insurer’s motion for summary judgment on the duty to defend issue, finding that the exclusion applied despite the fact that some of the claimants’ allegations were based on negligence because all of the claims ultimately arose out of the assault and battery committed by the security guard. The insured appealed.

The Eleventh Circuit affirmed, finding that all of the claims against the insured arose out of the assault and battery committed by the security guard. The Eleventh Circuit determined that Florida courts have construed the phrase “arising out of” to mean originating from, incident to, or having a connection with. Because all of the negligence claims against the insured were connected to the underlying assault and battery by the security guard, the Eleventh Circuit concluded that those claims arose out of the assault and battery incident.
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ELEVENTH CIRCUIT HOLDS UNDER FLORIDA LAW EMPLOYER LIABILITY EXCLUSION BARS COVERAGE FOR DEATH OF STATUTORY EMPLOYEE
The U.S. Eleventh Circuit Court of Appeals recently held that an employer liability exclusion in a contractor’s liability policy excludes coverage for the death of an employee of a subcontractor working for the contractor on the basis that the subcontractor’s employee was a statutory employee of the contractor. Stephens v. Mid-Continent Cas. Co., 2014 WL 1623737 (11th Cir. Apr. 24, 2014).

An employee of a subcontractor fell while working on a construction project and ultimately died from his injuries. The employee’s estate sued his employer and the contractor overseeing the construction project. The contractor sought defense and indemnity from its CGL insurer. The insurer denied coverage on the basis of the policy’s employer liability exclusion because the decedent was employed by a subcontractor who had been employed by the contractor and who was thus a statutory employee of the contractor. The contractor then entered into a consent agreement with the decedent’s estate, stipulating to a judgment in favor of the estate and assigning the contractor’s rights against its insurer to the estate. The estate sued the insurer to collect the judgment, and the district court granted the insurer’s motion for summary judgment, finding that the employer liability exclusion barred coverage. The estate appealed.

On appeal, the Eleventh Circuit affirmed the district court’s ruling, finding that under Florida law, a contractor who subcontracts part of its work to a subcontractor develops a statutory employment relationship with the employees of that subcontractor. As a result, the Eleventh Circuit held that statutory employees are to be treated identically to actual employees in respect of employer liability exclusions. It found there was enough evidence to show that the contractor had subcontracted work to the decedent’s company, and therefore, the claim fell within the exclusion.
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FEDERAL COURT IN GEORGIA HOLDS FAILURE TO ACQUIRE INSURER’S CONSENT TO SETTLEMENT BARS COVERAGE
A federal court in Georgia held that an insured’s unilateral agreement with a claimant to settle a liability claim without its insurer’s consent precludes coverage. Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., 2014 WL 1292667 (N.D. Ga. Mar. 28, 2014).

The insured had a primary policy and an excess liability policy. In litigation against the insured, the parties agreed to mediate the claim. The primary policy’s limits were exhausted. The excess insurer agreed to contribute less than policy limits toward a settlement against a demand far in excess of policy limits. Without seeking the excess insurer’s consent, the insured agreed to settle for the amount remaining under the excess policy’s limits, and sought the settlement funds from the excess insurer. The excess insurer asserted that it was not obligated to cover the settlement because it did not consent to the settlement. The insured sued the excess insurer for breach of contract, and the excess insurer moved to dismiss the complaint.

The district court dismissed the insured’s lawsuit, holding that the insured’s unilateral agreement to, and voluntary payment of, the settlement precluded coverage because Georgia law unequivocally states that a voluntary agreement to settle a dispute without an insurer’s consent does not constitute a legal obligation to pay and the policy provided coverage only for claims which the insured had a legal obligation to pay. The insured argued that the consent requirement should be waived because the excess insurer unreasonably withheld consent to settle the claim. The court was not persuaded because the insured knew that the excess insurer did not consent when it entered into the settlement and the insured’s argument ignored binding Georgia law.
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FEDERAL COURT IN GEORGIA DEFERS TO ARBITRATORS ON SUBSTANTIVE REINSURANCE CONTRACT ISSUES
A federal court in Georgia held that arbitration proceedings regarding a reinsurance contract could not be consolidated under the Federal Arbitration Act without an express contractual grant and that a dispute over contractual prerequisites to arbitration were for the arbitrators and not the court to decide. Ga. Cas. & Sur. Co. v. Excalibur Reinsurance Corp., 2014 WL 996388 (N.D. Ga. Mar. 13, 2014).

A party was found liable in a tort claim, but the judgment against it was reversed on appeal. The defendant’s liability insurer filed a claim with its reinsurer for defense expenses in the action against its insured. The reinsurer denied the claim, arguing that the insurer’s proper avenue for recovery of the expenses should be a malpractice suit against the insured’s defense counsel for failing to move for summary judgment. The two reinsurance contracts at issue contained arbitration provisions, and separate arbitration proceedings were initiated. The ceding insurer sued its reinsurer for breach of contract and moved for an order to consolidate the arbitration proceedings and order arbitration. The reinsurer argued that the arbitration proceedings should be stayed pending resolution of the insurer’s potential malpractice claim against the insured’s defense counsel, and moved to dismiss the ceding insurer’s suit.

The district court dismissed the ceding insurer’s lawsuit and held that separate arbitration proceedings for each reinsurance contract are the appropriate avenues to resolve the dispute, but that the decision to stay the arbitration proceedings is a decision for the arbitrators. The district court found that it was not appropriate to consolidate the arbitrations because at least one of the reinsurance contracts was governed by the Federal Arbitration Act, which does not permit consolidation of arbitration where the contracts do not contain an express contractual provision allowing for it, and neither did. The district court also concluded that the arbitrators, and not the court, must determine whether resolution of the potential malpractice claim was required before arbitration because the question goes to the merits of the dispute between the parties, which must be decided through arbitration.
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FEDERAL COURT IN VIRGINIA HOLDS INSURER HAS DUTY TO DEFEND AGAINST ALLEGATIONS OF KIDNAPPING, RACKETEERING AND CONSPIRACY
A federal court in Virginia recently held that an insurer had a duty to defend against claims that the insured conspired to kidnap a seven-year-old child. Liberty University, Inc. v. Citizens Ins. Co. of America, 2014 WL 1496674 (W.D. Va. Apr. 16, 2014)

The insured, a private university, was sued for kidnapping, racketeering and conspiracy related to the alleged kidnapping of a child. The underlying lawsuit alleged that the insured assisted one of the child’s parents in fleeing overseas with the child to escape a custody battle. Its insurer refused to defend the insured, and the insured filed suit to obtain reimbursement of the costs of the defense. On the parties’ cross-motions for summary judgment, the court granted the insured’s motion and held that the insurer had a duty to defend. The court found coverage because the underlying lawsuit included allegations of “property damage,” i.e., the child could no longer use personal items left in the United States since her kidnapping, and that there was an “occurrence” because the underlying lawsuit did not allege sufficient facts to make the child’s abduction “reasonably anticipated” from the viewpoint of the insured. The court held that there was also coverage under Coverage B in that the underlying lawsuit alleged that the injury arose out of “false arrest, detention, or imprisonment,” which was allegedly “promoted, encouraged, and ratified” by the insured.
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FEDERAL COURT IN VIRGINIA HOLDS INSURER MAY SEEK RECOUPMENT OF DEFENSE COSTS
A federal court in Virginia recently held that an insurer had no duty to defend its insured after the insured’s employees entered guilty pleas related to fraud committed by the company, and that the insurer could recoup defense costs previously incurred in defending the insured. Protection Strategies, Inc. v. Star Indemnity & Liability Co., 2014 WL 1655370 (E.D. Va. Apr. 23, 2014)

After the U.S. Attorney’s office began investigating the insured for allegations of fraud in connection with the insured’s participation in the Small Business Administration Section 8(a) program, the insurer began defending the insureds and its employees. The insured filed a declaratory judgment action to determine when the “claim” with regard to the investigation had first been made. Four of the employees later entered guilty pleas, and the insurer immediately amended its answer and asserted a counterclaim for declaratory relief, seeking a declaration it had no duty to defend the insured or its employees based on multiple policy exclusions related to the employee’s guilty pleas.

Granting the insurer’s motion for summary judgment, the court held that, in light of the employees’ guilty pleas, the entire investigation fell within the policy’s exclusion for “improper or illegal remuneration” and “any deliberate or fraudulent act” and that the insurer was entitled to recoupment of defense costs already incurred. The court found that the claims were also precluded by the policy’s prior knowledge exclusion, and a separate warranty letter from the insured attesting that neither the insured nor its employees had any knowledge of any potential claim. The court further found that the insured was entitled to recoupment of past defense costs because the policy expressly so provided.
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FEDERAL COURT IN LOUISIANA HOLDS INSURER ENTITLED TO SEEK REIMBURSEMENT FOR NON-COVERED CLAIM
A federal court in Louisiana has held that an insurer that had advanced money to an insured before it decided whether a claim was not covered is entitled to be reimbursed on an unjust enrichment theory. Bridge Lake, LLC v. Seneca Insurance Co., 2014 WL 849893 (W.D. La. Mar. 4, 2014).

The insured owned property on which an oil pipeline ruptured. Its insurer advanced funds for cleanup, but advised the insured that it did not concede coverage. The insurer later concluded that coverage was not owed due to a pollution exclusion in the policy and so advised the insured. The insured sued the insurer, which suit the court dismissed based on a finding of no coverage. In ruling on the insurer’s counterclaim for reimbursement of funds advanced, the court awarded summary judgment in the insurer’s favor, holding that it had a right to reimbursement of advanced funds if no coverage existed.
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FEDERAL COURT IN TENNESSEE HOLDS LIMITATION OF ACTION PERIOD COMMENCES WITH INSURED’S DENIAL
A federal court in Tennessee held that the one-year limitation of action period in a policy commences upon denial by the insurer. Murphy v. Allstate Indemnity Co., 2014 WL 1024165 (E.D. Tenn. Mar. 17, 2014).

Insureds made a claim under their homeowners’ policy and argued that the home could not be repaired within policy limits. Their insurer disagreed and stated it would pay no more than its estimate. Suit was later filed, but it was almost a year after a one-year limitations period in the policy had run. The insurer moved to dismiss, and the court held that the limitations began to run when the insurer denied coverage for additional funds. The court rejected the insureds’ argument that they were never advised of the limitations period and that they were given an extension of the 60-day proof of loss period which (they argued) extended the limitations period. The court also held that the insureds’ claims under the Tennessee Consumer Protection Act fail because the Act no longer applies to insurance claims (as of April 29, 2011), and that the fact that the damage occurred prior to the date is irrelevant because the cause of action did not occur until the insurer denied coverage – after April 29, 2011.
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FEDERAL COURT IN VIRGINIA HOLDS PHRASE “WHOSE BUSINESS IS PUBLISHING” MAY NOT APPLY TO BLOGGER
A federal court in Virginia recently held that an insurer had a duty to defend its insured against allegations of defamation, finding that an exclusion for “personal and advertising injury” committed by an insured “whose business is … publishing” is ambiguous. State Farm Fire and Cas. Co. v. Franklin Center for Government and Public Integrity, 2014 WL 1365758 (E.D. Va. Apr. 4, 2014).

The insured was sued for defamation after posting critical articles on its website. Its insurer sought a declaration that it had no duty to defend based on, inter alia, an exclusion which precluded coverage for personal and advertising injury committed by an insured “whose business is … publishing.” On the parties’ cross-motions for summary judgment, the court held that the insurer had a duty to defend the insured. It rejected the insurer’s argument that the exclusion for “personal and advertising injury” committed by an insured “whose business is … publishing” applied, even though the insured conceded that its activities included “publishing” news articles on its website. The court found that the term “publishing” could have more than one reasonable meaning, ranging from a traditional enterprise engaged in the production and sale of hard copy informational texts to a group (like the insured) who only post information content on a website to promote organizational purposes. The court found that the exclusion did not unambiguously apply to the claims asserted against the insured.
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FEDERAL COURT IN TEXAS DISMISSES EXTRA-CONTRACTUAL CLAIMS IN BREACH OF DUTY TO DEFEND CASE
A federal district court in Texas dismissed on summary judgment an insured’s claims under Chapter 541 of the Texas Insurance Code (Unfair Claims Practices Act), finding that there was no injury independent of the denial of policy benefits to support an extra-contractual claim. Admiral Ins. Co. v. Petron Energy, Inc., 2014 WL 798374 (N.D. Tex. Feb. 28, 2014).

The insured’s Chapter 541 claims for attorneys’ fees were based solely on the insurer’s breach of its duty to defend. The court rejected the insured’s argument that the attorneys’ fees it incurred constituted an independent injury. Otherwise, it concluded, every coverage dispute would automatically become a Chapter 541 case.
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FEDERAL COURT IN MISSISSIPPI FINDS NO DUTY TO DEFEND, REJECTING “EXTRINSIC FACTS” EXCEPTION
A federal court in Mississippi held that a suit alleging tortious interference with business relations falls outside coverage on the face of the complaint and that the “extrinsic facts” exception to the “four corners” rule (which would have allowed for consideration of facts outside the allegations of the complaint in consideration of the duty to defend) did not apply. Nationwide Ins. Co. v. Lexington Relocation Services, LLC, 2014 WL 1213805 (N.D. Miss. Mar. 24, 2014).

Several insureds who were sued sought coverage and defense from their insurer. The suit alleged that the insureds had hired a former employee of the underlying plaintiff in violation of her non-compete agreement and gained trade secrets and other knowledge used to then obtain part of their client base. The insurer filed a declaratory judgment action, alleging that no duty to defend existed because the complaint’s allegations of tortious interference with contractual relations and prospective business advantages are not covered under the policy or are otherwise subject to policy exclusions. The insureds argued that the court should consider extrinsic evidence. The court first determined that the insureds did not allege “true facts,” or facts which are indicated in the record or through investigation which support coverage, in order to meet the “extrinsic facts” exception. The court found that the insured offered only general assertions and legal positions and not “competent summary judgment evidence.”

The court then found no coverage under the policy terms. It found no “occurrence” as defined took place because no accident or continued exposure was alleged. It found also no “personal injury” as defined took place because there was no allegation of disparagement and there was no “advertising injury,” concluding that Mississippi law requires a causal connection between the advertising and the alleged “advertising injury” offense such that coverage would be expected and finding that no such connection existed. The court granted the insurer’s summary judgment in the declaratory judgment action.
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FEDERAL COURT IN OKLAHOMA HOLDS INSURER NOT IN BAD FAITH IN RELYING ON EXCLUSION LATER FOUND TO BE AGAINST PUBLIC POLICY
A federal court in Oklahoma granted summary judgment in favor of an insurer on its insured’s bad faith claim, holding that the denial of coverage on the basis of a policy exclusion was not in bad faith because Oklahoma law finding such exclusions against public policy and invalid was not handed down until after the insurer’s determination. Bryant v. Sagamore Ins. Co., 2014 WL 1600359 (E.D. Okla. Apr. 21, 2014).

An individual specifically excluded from the insured’s auto policy was involved in an automobile accident in the insured’s vehicle. The insured contacted his insurance agent and the other driver involved in the accident made a claim against the policy. After the insured failed to appear at an examination under oath following repeated attempts by the insurer to contact the insured, the insurer denied coverage on the bases that the driver was an excluded driver on the policy and the insured’s failure to cooperate. Litigation ensued, and the court determined that denial of coverage for lack of cooperation was sufficient, and further held that the plaintiff’s reliance on an Oklahoma Supreme Court case published after the insurer’s denial (finding named driver exclusions unenforceable as against public policy) was improper because the coverage determination based on that exclusion was made beforehand.
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FEDERAL COURT IN SOUTH CAROLINA UPHOLDS JOINT OBLIGATIONS PROVISION AND HOLDS COVERAGE FOR CRIMINAL ACTS BY INSUREDS’ CHILD EXCLUDED AS TO PARENTS
A federal court in South Carolina recently held a criminal acts exclusion in a homeowners’ policy precludes coverage for a lawsuit against the named insureds arising out of alleged sexual abuse committed by the insureds’ son based on the policy’s joint obligations provision. Allstate Indemnity Co v. Tilmon, 2014 WL 1154666 (D. S.C. Mar. 21, 2014).

The named insureds and their son were sued for injuries arising out of alleged sexual abuse of a minor committed by the son, and the insurer sought declaratory relief that the homeowners’ policy issued to the named insureds precluded coverage for all claims asserted due to the policy’s criminal acts exclusion. The policy also included a joint obligations provision, providing that the acts and failures of one insured would be binding on all other insureds. Granting the insurer’s motion for summary judgment, the court held that the policy’s joint obligation provision meant that the sexual battery abuse by the son was attributable to the named insureds, his parents, and that all claims asserted in the underlying lawsuit were excluded by the policy’s criminal acts exclusion.
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FEDERAL COURT IN KENTUCKY FINDS CGL INSURER OBLIGATED TO DEFEND DRUG DISTRIBUTOR AGAINST “PILL MILL” SUIT
A federal district court in Kentucky has held that a pharmaceutical drug distributor’s CGL insurer must defend it in a suit by a state attorney general alleging damages due to widespread prescription drug addiction. Cincinnati Insurance Co. v. Richie Enterprises, LLC, 2014 WL 838768 (W.D. Ky. Mar. 4, 2014)

An insured drug distributor was sued by the State of West Virginia for its part in an alleged “pill mill” scheme to supply pharmacies and prescribing doctors with far greater quantities of prescription medicine than that needed for medical purposes. The suit alleged that this conduct violated various state laws and sought damages for, among other costs, medical monitoring. The insured tendered its defense to its CGL insurer, which denied coverage and filed a declaratory judgment action. The parties filed-cross motions for summary judgment.

The insurer argued that there was no “occurrence” because the insured was alleged to have participated in a prescription drug fraud. Addressing the duty to defend only, the court rejected this argument because the complaint also contained allegations that the insured “should have known” that the prescriptions were fraudulent or invalid and because the insured failed to diligently respond to “suspicious orders.” The court also held that the suit alleged bodily injury because the “action is based on the alleged prescription drug abuse epidemic and the bodily injury of West Virginia citizens.” Finally, the court rejected the insurer’s argument that the claims were excluded as intentional or criminal actions because the complaint did not foreclose the possibility of liability predication on unintentional, non-criminal actions. 
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