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 October issue. To view, click on the appropriate title and you will be brought to the full version of the article below.
Virginia Supreme Court Holds Policy’s Period of Limitations Is Not a Statute of Limitations Subject to Tolling
The Virginia Supreme Court held that a policy’s contractual period of limitations is not a statute of limitations and is thus not subject to a statute which tolls the statute of limitations for nonsuited actions. Allstate Property v. Ploutis, No. 141536, 2015 WL 5448064 (Sept. 17, 2015).
The insured sued her property insurer for breach of contract. At the insured’s request, an order of nonsuit was entered. The insured then refiled her action over two years after the loss. The insurer filed a demurrer asserting that the insured had failed to comply with the policy’s period of limitations which required that suits on the policy be commenced within two years after inception of the loss. The trial court overruled the demurrer. It held that the period of limitations was essentially a statute of limitations and was thus subject to Virginia Code § 8.01-229(E)(3) which tolls the statute of limitations for nonsuited actions.
On appeal, the Virginia Supreme Court reversed and entered judgment for the insurer. It held that the tolling provision in Virginia Code § 8.01-229(E)(3) does not apply to a contractual period of limitations. It also noted that neither the Code nor the policy provided for such tolling, and that the parties had voluntarily entered a contract containing a two-year period of limitations. Thus, it held that a contractual period of limitations is not a statute of limitations and is thus not tolled under Virginia Code § 8.01-229(E)(3).
(return to top)
Texas Supreme Court to Determine Scope of Gandy’s “Fully Adversarial” Exception
The Texas Supreme Court recently heard argument on whether Gandy’s “fully adversarial trial” exception to the Stowers doctrine – which enables insureds to require insurers whose negligence results in a judgment above policy limits to indemnify the full amount of the judgment – applies when there could not have been a “fully adversarial trial” because the insurer wrongfully failed to defend its insured. Yorkshire Ins. Co., Ltd. v. Seger, 407 S.W.3d 435, 436 (Tex. App.—Amarillo 2013), review denied (Feb. 14, 2014), order withdrawn (Aug. 29, 2014), petition reinstated (Aug. 29, 2014), review granted (Mar. 13, 2015).
An oil field worker was killed in a rig collapse. His heirs obtained a default judgment against a party that was insolvent and dissolved at that point, but which assigned to the worker’s heirs its claim against its insurers. His heirs were awarded damages after the court found that their claims were covered and that the default judgment was the result of an adversarial trial. The Court of Appeals found that the default judgment was not the result of a truly adversarial proceeding, holding that the judgment was based on insufficient evidence of damages. The heirs appealed.
In briefing to the Texas Supreme Court, the insurers argued that the judgment was a sham and that they should not be liable for it because the judgment did not arise from a “fully adversarial trial” as required by the Texas Supreme Court in State Farm Fire and Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996). According to the insurers, “[t]his is the case Gandy sought to prevent,” and the Stowers doctrine must not apply if, in a case where no coverage exists, the parties’ lawyers agree to create a Stowers situation “by allowing a sham default judgment in an unsupportable amount for collection directly from the defendant’s insurer, rather than from the dissolved, insolvent defendant.” The decedent’s heirs rely on Evanston Ins. Co. v. Atofina Petrochemicals Inc., 256 S.W.3d 660 (Tex. 2008), which held that an insurer may not challenge a settlement’s reasonableness when it has refused defense or coverage, and contend that the insurers’ refusal to defend made a truly adversarial proceeding impossible.
(return to top)
Virginia Supreme Court Holds Judge, Not Jury, Must Make Bad Faith Determination
The Virginia Supreme Court recently held that a judge, not a jury, must determine whether an insurer acted in bad faith in denying coverage or refusing payment. Revi, LLC v. Chicago Title Insurance Company, No. 141562 (Va. Sept. 17, 2015).
The plaintiff sued its title insurer for breach of contract and bad faith after the insurer denied a claim under its policy for damages and attorney’s fees. The insurer filed a motion to have the trial judge, rather than the jury, decide the issues of bad faith and attorney’s fees. The judge allowed the jury to determine whether the insurer had engaged in bad faith and to award attorney’s fees. However, after the jury verdict finding bad faith and awarding attorney’s fees, the judge vacated the attorney’s fees award and held that Virginia law required the trial judge, not the jury, to determine whether an insurer had engaged in bad faith warranting an award of attorney’s fees.
On appeal, the Virginia Supreme Court examined the question of whether Virginia Code Section 38.2-209(A) requires that a judge determine whether an insurer acted in bad faith warranting an award of attorney’s fees. That statute provides that an, “individual insured shall be entitled to recover from the insurer costs and such reasonable attorney’s fees as the court may award.” The Supreme Court held that the term “court” used in the statute means “judge” and thus found that, “the judge, not the jury, must determine whether the insurer breached the insurance contract in bad faith before it may award attorney’s fees and costs to the insured pursuant to Code § 38.2-209(A).”
(return to top)
Arkansas Supreme Court Asked to Answer Certified Questions Regarding Coverage for Construction Defect Claims
A federal district court in Arkansas has certified two questions to the Arkansas Supreme Court addressing coverage for breach of contract in a construction defect claim. Columbia Insurance Group, et al. v. Cenark Project Management Services, Inc., et al., 2015 U.S. Dist. LEXIS 127573 (E.D. Ark. Sept. 23, 2015). The court has asked that the Supreme Court consider:
1) Whether faulty workmanship resulting in property damage to the work or work product of a third party (as opposed to the work or work product of the insured) constitutes an “occurrence”; and
(2) If such faulty workmanship constitutes an “occurrence,” and an action is brought in contract for property damage to the work or work product of a third person, does any exclusion in the policy bar coverage for this property damage?
(return to top)
Mississippi Supreme Court Holds Failure to Disclose Minor Residing in Insured’s Household When Requested Is Material Misrepresentation
The Mississippi Supreme Court upheld a trial court’s grant of summary judgment in favor of an insurer finding no coverage was owed to an insured who failed to disclose that a 15 year-old resided with the insured, rendering her motor vehicle liability policy void. Jones-Smith v. Safeway Ins. Co., 2015 WL 5157597 (Miss. Sept. 3, 2015).
The insurer sought a declaratory ruling that the insured’s policy was void after the insured’s son was involved in a motor vehicle accident. The insured’s insurance application required her to warrant that she had provided the names of all regular frequent drivers of the covered vehicles, as well as all residents of her household who were 14 years old or older. The insurer argued that the failure to disclose the 15 year-old son resulted in a lower premium and was a material misrepresentation, rendering the policy voidable. The Supreme Court found that the case was not about whether a proper exclusion existed, contrasting the case of Lyons v. Direct Gen. Ins. Co. of Miss., 138 So. 3d 887 (Miss. 2014), where an admittedly valid policy simply excluded the teen. It held the policy void because an untrue statement by either party as to a matter vital to the agreement voids the agreement even where there is no intentional fraud in the misrepresentation.
(return to top)
South Carolina Appellate Court Holds Phrase “Furnished to You” In Commercial Auto Policy Is Ambiguous
In a case of first impression in South Carolina, the South Carolina Court of Appeals recently held that the phrase “furnished to you” in a commercial auto policy is ambiguous, and in so doing found coverage for injuries sustained by an insured’s “temporary employee.” Canal Ins. Co. v. National House Movers, LLC, No. 2014-000150, 2015 WL 5438703 (S.C. Ct. App., Sept. 16, 2015).
The insured, a house mover, was sued for negligence after one of its workers was injured while moving a house. The insured tendered the lawsuit to its commercial auto carrier, which sought a declaration of no coverage. The trial court found that the insured was entitled to coverage. The insurer appealed, arguing that the claimant was an “employee” and that coverage was excluded for damages arising from bodily injuries sustained by an employee in the course of his or her employment.
The policy’s definition of “employee” specifically excluded “temporary workers.” The policy defined “temporary worker” as, “a person who is furnished to the employer to substitute for a permanent employee on leave or to meet seasonal or short-term workload conditions.” The insured argued that the claimant fell within the definition of “temporary worker” and was thus not an employee. The insurer disputed such characterization because the claimant had not been furnished by a staffing or leasing agency. The Court of Appeals analyzed whether the claimant had been “furnished to” the insured. Looking to the plain meaning of the phrase “furnished to” and to case law from other jurisdictions, it found that the term requires third-party involvement. Because the policy did not specify who the third-party must be, the court found the phrase “furnished to” to be ambiguous and resolved that ambiguity in favor or coverage, holding that claimant was a “temporary worker” and that coverage for his injuries therefore was not excluded.
(return to top)
Fifth Circuit Holds Insurer Violated Texas Prompt-Payment Statute by Failing to Accept or Reject Coverage
The U.S. Fifth Circuit Court of Appeals affirmed a judgment against an insurer after the insurer failed to accept or reject the insured’s claim within fifteen days after receiving some, but not all, of the requested information from the insured in violation of the Texas Prompt Payment of Claims statute. Weiser-Brown Operating Co. v. St. Paul Surplus Lines Ins. Co., No. 13-20442 (5th Cir. Sept. 16, 2015).
An oil and gas exploration and production company lost control of a well and incurred costs in unsuccessfully attempting to regain control. It provided notice of the claim under its control of well policy. The insurer appointed an adjuster who initially sent a request for seventeen categories of information. Within one month of the request, the insured sent some, but not all, of the requested information. After an additional request for information, also only partially fulfilled by the insured, the adjuster sent the insured an email stating that an independent expert had reached a preliminary conclusion that there was not a loss of control of the well and requested additional information. The insured provided that information, and three months later, the adjuster informed the insured that the opinion of the expert had not changed and requested a response from the insured. The insured challenged the expert’s opinion, and the insurer indicated that it would forward the insured’s response to the expert for further review and comment. Shortly thereafter, the insured filed suit.
The Texas Insurance Code requires an insurer to provide written notice of acceptance or rejection of a claim “not later than the 15th business day after the date the insurer receives all items, statements, and forms required by the insurer to secure final proof of loss.” The trial court held that because the insurer did not accept or reject the insured’s claim within fifteen days of receiving the insured’s additional information used to “confirm” the expert’s opinion that the well was never out of control, the insurer violated this provision. The insurer appealed, arguing that the insured did not provide all of the requested information, including proof of its extra expenses.
The Fifth Circuit affirmed, reasoning that by the time the lawsuit was filed, the insured had provided enough information to establish that an actual loss had occurred, when, where, and how it occurred, as well as supporting invoices, even though the insured had not provided all of the requested information. In addition, it concluded that the insurer’s expert had concluded that the loss was not covered by the policy, but that the insurer never communicated its position to the insured in a formal notice of rejection.
(return to top)
Tenth Circuit Holds Excess Insurer Has No Duty to Proactively Investigate Claims or Initiate Settlement Negotiations Under Oklahoma Law
The Tenth Circuit Court of Appeals upheld summary judgment in favor of an excess liability insurer sued by its insured for breach of contract and bad faith for not proactively investigating claims against the insured and for refusal to tender its limits in initiation of settlement negotiations, making an Erie guess that no such affirmative duties existed under Oklahoma law for the excess insurer until the primary policy was exhausted. SRM, Inc. v. Great American Ins. Co., 2015 WL 5011719 (10th Cir. Aug. 25, 2015).
The insured was sued after its truck collided with a train. Three train workers sued the insured’s primary insurer. The excess insurer received notice of the claims and monitored the case for potential exposure under its policy. The primary insurer projected exposure in excess of the primary policy limits. The insured demanded policy limits by both insurers, arguing that exposure could exceed the combined limits of insurance. The primary insurer offered its limits, but the excess insurer declined, advising that additional discovery was required and that the case would likely settle in mediation. The excess insurer’s counsel estimated the damages to exceed combined policy limits, but believed a jury verdict would be less. The case eventually settled for an amount greater than combined limits.
The insured then sued its excess insurer for the excess it paid in settlement, alleging that the excess insurer’s failure to tender policy limits caused a delay in negotiations and the plaintiffs were willing to settle for policy limits earlier in litigation. The district court found that an excess insurer’s contractual duties to an insured are not triggered until the primary insurer’s policy limits have been exhausted, noting that the policy provided that unless primary insurance limits were exhausted or the insured faced a claim not covered by a primary insurer’s policy, the excess insurer would not be obligated to assume charge of investigation, settlement or defense of any claim or suit against the insured. Summary judgment in the insurer’s favor was granted.
The Tenth Circuit affirmed, ruling that no duty by an excess insurer exists to investigate, initiate settlement negotiations, or proactively tender policy limits in the face of unambiguous policy language and absent a settlement demand from plaintiffs or proposed settlement agreement from a primary insurer.
(return to top)
Fifth Circuit Declines to Acknowledge “Sophisticated Insured” Exception to Contra Proferentem Doctrine Under Texas Law
The U.S. Fifth Circuit Court of Appeals recently upheld a district court’s decision to decline to apply a “sophisticated insured” exception to the doctrine of contra proferentem under Texas law. Certain Underwriters at Lloyds London v. Perraud, 2015 WL 4747318 (5th Cir. Aug. 12, 2015).
Two employees sought reimbursement for attorney’s fees and costs under their employer’s directors’ and officers’ liability policy after a successful defense of federal criminal charges. The insurers refused to pay and filed a declaratory judgment on the basis of a policy exclusion. The district court found the exclusion ambiguous and interpreted it in favor of coverage pursuant to the doctrine of contra proferentem. The district court then declined to apply a sophisticated-insured exception to that doctrine on the basis that, even if Texas were to recognize the exception, the insurers had presented no evidence that the company had negotiated or drafted the exclusion. The insurers appealed.
The Fifth Circuit limited its analysis to narrow and middle-ground versions of the “sophisticated insured” exception and found that the evidence was insufficient to create a genuine dispute of material fact under the middle-ground approach. The Fifth Circuit reasoned that absent any information on the content of negotiations, how the contracts were prepared or other indicators of relative bargaining power, the insurers did not present evidence that the insured employer influenced the terms of the exclusion.
(return to top)
Fifth Circuit Holds No Coverage For Suit Under False Claim Act
The U.S. Fifth Circuit Court of Appeals has affirmed a district court’s grant of summary judgment in favor of a general maritime liability insurer and an excess insurer that no coverage existed for False Claim Act (FCA), common law fraud, unjust enrichment, and negligent misrepresentation claims against the insured. XL Spec. Ins. Co. v. Bollinger Shipyards, Inc., 800 F.3d 178 (5th Cir. 2015).
The insured won a contract to upgrade eight U. S. Coast Guard vessels. The vessels failed, and the U. S. sued the insured, alleging causes of action under the FCA, common law fraud, negligent misrepresentation, and unjust enrichment. The insured sought coverage from its general maritime liability insurer, and in the ensuring litigation the district court granted summary judgment for the insurer, holding that the policy did not cover the claims in the lawsuit and thus did not impose a duty to defend. The court concluded that all claims in the underlying complaint fit into either an exclusion related to the failure of the insured’s products to meet any predetermined level of fitness or one related to liability “arising out of or incidental to any alleged violation(s) of any federal or state law regulating, controlling, and governing antitrust or the prohibition of monopolies, activities in restraint of trade, unfair methods of competition or deceptive acts and practices in trade and commerce…” and liability “arising out of or contributed to by… dishonesty or infidelity.” The insured appealed, and the insurer cross-appealed.
The Fifth Circuit agreed with the district court that exclusions excluded coverage for all claims.
(return to top)
Eleventh Circuit Affirms Dismissal of Breach of Contract Action Based on Alleged Activities Failing to Constitute Lending Services
The U.S. Eleventh Circuit Court of Appeals held that allegations of an insured bank’s involvement in a scheme to provide money transfers on behalf of an insolvent entity do not constitute “lending services” as defined by a professional liability policy. Greater Community Bancshares, Inc. v. Federal Ins. Co., 2015 WL 4897467 (11th Cir. Aug. 18, 2015).
A bankruptcy trustee for an insolvent payroll company initiated an adversary bankruptcy proceeding against the insured, a bank, for its alleged involvement in an allegedly fraudulent scheme to hide the payroll company’s insolvency by advancing funds needed to complete requested transfers and defraud the insolvent entity’s creditors. The bank sought coverage from its professional liability insurer. The policy provided coverage for any claim by a customer for wrongful acts while performing “lending services,” defined as “any act performed by an insured for a lending customer in the course of extending or refusing to extend credit or granting or refusing to grant a loan.” The insurer denied coverage and refused to defend on the ground that neither the underlying plaintiff nor the payroll company were the insured’s customers and that the allegations did not involve lending services as defined by the policy. The insured sued the insurer for breach of contract. The court granted the insurer’s motion to dismiss because the underlying complaint did not allege “lending services” as defined by the subject policy. The insured appealed.
The Eleventh Circuit affirmed, finding that the underlying complaint did not refer to the kind of activities that constitute “lending services” as defined by the policy. The Eleventh Circuit noted that the underlying complaint did not include the terms “loan” or “extension of credit.” The Eleventh Circuit further noted that allegations involving a “debt” owed to the insured were more akin to a form of overdraft protection and not a bank loan or extension of credit as those terms are conventionally understood.
(return to top)
Eleventh Circuit Holds Employment Practices Liability Insurance Policy Does Not Cover Claims Made by Insured’s Alleged Employer
The U.S. Eleventh Circuit Court of Appeals held that an employment practices liability policy does not provide coverage for claims made against the insured by an entity alleging it is the insured’s employer. Carolina Cas. Ins. Co. v. Red Coats Inc., 2015 WL 4880523 (11th Cir. Aug. 17, 2015).
The underlying plaintiff, a medical facility, sued the insured, a security company, for negligence and vicarious liability after one of the insured’s security guards stole computers with sensitive information from the facility. The facility alleged that it employed the insured at the time of the incident. The insured sought coverage from its employment practices liability insurer. The insurer sought a judicial declaration that it had no duty to defend or indemnify because the underlying claim did not arise from an employment relationship. A federal court in Florida granted summary judgment in favor of the insurer, finding that the underlying claims did not trigger coverage under the subject policy because an employment relationship did not exist between the insured and the underlying plaintiff. The insured appealed.
The Eleventh Circuit, applying Florida law, affirmed the district court’s entry of summary judgment in favor of the insurer. It held that the policy was designed to apply to disputes between the insured and its own employees – not disputes between an insured and its employer. Therefore, the Eleventh Circuit concluded that an employment relationship did not exist between the insured and the underlying plaintiff and that the underlying claim did not trigger coverage under the policy.
(return to top)
Federal Court in Georgia Holds Conversion Not An Occurrence Under Commercial General Liability Policy
A federal court in Georgia held that a conversion – whether intentional or negligent – does not constitute an “accident” under a CGL policy, and thus is not an “occurrence.” Spivey v. Am. Cas. Co. of Reading, Pa., 2015 WL 5157755 (S.D. Ga. Sept. 1, 2015).
The underlying plaintiffs, former contractors, sued the insured, the present contractor, for conversion of traffic control equipment that they had left at a project site. The insured sought coverage from its liability insurer, which denied coverage and refused to provide a defense. The underlying plaintiffs obtained a consent judgment against, and assignment of rights from, the insured. In their capacity as assignees, the underlying plaintiffs then sued the liability insurer, alleging bad faith denial of coverage and breach of a statutory duty to indemnify a claim. The underlying plaintiffs argued that the insurer wrongfully refused to cover the potentially covered negligent conversion claim against its insured and that negligent conversion would be an “occurrence.” The insurer moved to dismiss on the theory that the event for which the underlying plaintiffs sought coverage – conversion – does not constitute an “occurrence.”
The policy provided that the insurer would pay for covered property damage caused by an “occurrence,” which the policy defines, in pertinent part, as an “accident.” The district court granted the insurer’s motion to dismiss, finding that conversion – whether intentional or negligent – does not constitute an “accident” and is therefore not an “occurrence” under the policy. The district court found that the underlying complaint alleged a “willful and malicious” conversion and did not seek a remedy for the unintentional consequences of an intentional act so as to qualify as an “accident.” The district court also noted that even if the alleged conversion were based in negligence, negligent conversion is still not an “accident” under Georgia law.
(return to top)
Florida Appellate Court Finds Coverage for Noxious Fumes from Chinese Drywall Excluded Under Efficient Proximate Cause Doctrine
A Florida appellate court recently held that coverage for a loss caused by Chinese drywall was barred by pollution and latent defect exclusions, despite covering ensuing losses, because the insureds failed to prove that a covered peril was the efficient proximate cause of the loss. Peek v. Am. Integrity Ins. Co. of Fla., 2015 WL 5616294 (Fla. 2d DCA September 25, 2015).
The insureds made a claim under their all-risk homeowners’ policy for damage to their home caused by Chinese drywall used in its construction. The insurer denied coverage for the loss based on the policy’s exclusions for latent defects, corrosion, pollutants, and faulty, inadequate, or defective construction materials. The insureds sued the insurer for breach of contract, alleging that humidity was a concurrent cause contributing to the loss triggering coverage under the policy. At trial, the insureds established that they suffered a loss to their property within the policy period, but failed to present evidence regarding the cause of loss or any rebuttal evidence to prove any exceptions to the exclusions raised by the insurer. After the charge conference to finalize jury instructions based upon the concurrent cause doctrine, the insurer filed a renewed motion for directed verdict based upon the efficient proximate cause doctrine, which provides that, the finder of fact, usually the jury, determines which peril was the most substantial or responsible factor in the loss and if that peril is covered, then coverage is provided for the loss. The trial court granted the insurer’s motion for directed verdict and entered final judgment in favor of the insurer. The insureds appealed.
On appeal, the insureds argued that the evidence established 1) that their loss was caused by both the Chinese drywall and humidity, 2) that humidity is covered under the policy as a “weather event” and 3) that the question of whether the Chinese drywall or humidity was the efficient proximate cause of the loss was a jury question. The appellate court disagreed, noting that the uncontroverted evidence demonstrated that humidity was not a peril that caused the insureds loss, let alone that it was the efficient proximate cause of their loss. It determined that there was no question for the jury to resolve and that the trial court did not err in entering a directed verdict for the insurer. In the alternative, the insureds argued that, even if the excluded peril of Chinese drywall was the efficient proximate cause of their loss, the insurer is still required to cover the ensuing loss to the property. The appellate court disagreed, holding that an excluded cause of loss – defective Chinese drywall – led directly to another set of exclusions – pollution and corrosion. The appellate court affirmed.
(return to top)