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Insurance Law Report: April 2019

April 29, 2019

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


Georgia Supreme Court Holds Insurer Did Not Act Unreasonably In Failing To Accept Offer Before It Was Withdrawn When It Contained No Deadline To Accept

The Georgia Supreme Court recently held that, although injured parties presented an insurer a valid offer to settle within the insured’s policy limits, because that offer did not include a deadline for accepting the offer, the insurer did not act unreasonably in failing to accept the offer before it was withdrawn. First Acceptance Ins. Co. of Ga. v. Hughes, 2019 Ga. LEXIS 161 (Ga. Mar. 11, 2019).

The insured caused a multi-vehicle collision. His auto insurer was advised that five other people had been injured as a result of the collision and retained counsel to help resolve the five known injury claims. The insurer’s counsel sent a letter to the attorneys for the claimants to inform them of the insurer’s interest in arranging a joint settlement conference/mediation in an effort to resolve the claims. Counsel for two of the claimants sent letters to the insurer’s counsel stating his clients’ interest in attending a settlement conference, and, in the alternative, offered to settle for the available policy limits. The claimants’ counsel later filed a complaint against the administrator of the insured’s estate seeking damages arising out of the collision and, shortly thereafter, revoked the offer. The jury returned a verdict against the administrator, which sued the insurer alleging negligence and bad faith in the insurer’s failure to settle within policy limits. The appellate court reversed the trial court’s grant of summary judgment to the insurer on the administrator’s failure-to-settle claim. The Georgia Supreme Court granted certiorari.

The Georgia Supreme Court reversed, finding that the offer did not include a deadline for acceptance and the insurer was not put on notice that its failure to accept the offer within any specific period would constitute a refusal of the offer, nor could it have reasonably known that it needed to respond promptly or risk that its insured would be subject to a judgment in excess of policy limits. The Supreme Court found that the insurer’s failure to promptly accept the offer was reasonable, as an ordinarily prudent insurer could not be expected to anticipate that the claimants would abruptly withdraw their offer.


Supreme Court Of South Carolina Holds Insurer Can Bring Direct Claim For Legal Malpractice Against Retained Attorney

In another instance of what appears to be the beginning of a trend, the Supreme Court of South Carolina recently held that an insurer may bring a malpractice action against counsel it hired to defend its insured. Sentry Select Ins. Co. v. Maybank, 2019 S.C. LEXIS 18 (S.C. Mar. 11, 2019).

An insured was sued, and its insurer retained counsel to defend. Counsel failed to timely respond to requests for admission. Anticipating that the court would deem the requests for admission admitted due to the lack of timely response, the insurer settled the claim for ten times the valuation the insurer had on the case prior to counsel’s failure to respond to the requests for admission. The insurer then sued counsel for malpractice, and the court certified to the Supreme Court of South Carolina the question whether an insurer may maintain a direct malpractice action against counsel it hired to represent its insured.

The Supreme Court held that it could but noted that the insurer may recover only for the attorney’s breach of his duty to his client, the insured, when the insurer proves the breach is the proximate cause of damages to the insurer. The Court emphasized that the retained attorney owes no separate duty to the insurer.


Mississippi Supreme Court Finds No Estoppel Or Waiver

The Mississippi Supreme Court rejected a claim of estoppel and waiver after an insurer hired a lawyer to defend its insured and then denied coverage after investigation and withdrew from the insured’s defense 47 days prior to entry of a default judgment against the insured. Hinton v. Pekin Insurance Co., 2019 Miss. LEXIS 79 (Miss. Feb. 21, 2019).

Plaintiffs’ son was killed in a fall from a hunting tree stand sold by the insured. The insurer hired an attorney to defend the insured, but after investigating the claim, denied coverage on the basis of a tree stand exclusion and notified the insured that the insurer would pay for the hired attorney only for a month longer to allow the insured to hire an attorney of its choice to defend the suit. The insured was cast in default judgment 47 days later as it failed to respond to the lawsuit. The plaintiffs then sought recovery against the insurer because it failed to defend, did not file a declaratory judgment action and allowed a default judgment to be entered. The court granted summary judgment for the insurer, and denied the plaintiffs’ motion for partial summary judgment. The plaintiffs appealed.

The Supreme Court found that because the insurer promptly investigated and denied coverage, and because the insured was given time to hire an attorney to continue its defense once coverage was denied and did nothing, the insurer was not estopped from denying coverage. The plaintiffs also asserted that the insurer waived its coverage position based on Illinois law when it failed to defend the suit under a reservation of rights or to seek a declaratory judgment that it owed no duty to defend the manufacturer. The Court found this argument without merit because the policy included a tree stand exclusion and the insurer denied coverage.


Texas Supreme Court Holds Subrogation Waiver Prevents Insurer From Recovery

The Texas Supreme Court’s interpretation of an endorsement waiving subrogation rights precluded an insurer’s reimbursement of payments to injured workers even though reference to extrinsic evidence might have suggested a contrary result. Exxon Mobil Corp. v. Ins. Co. of the State of Pennsylvania, 568 S.W.3d 650 (Tex. 2019).

A refinery hired a contractor to perform services at its plant. Two workers employed by the contractor were injured from a release of hot water and received workers compensation’ benefits. One worker then sued the refinery for damages, and the workers’ compensation carrier sought to recoup its payments first as allowed under Texas workers’ compensation law. The refinery contended that contractor had waived subrogation before the date of the injury, and therefore, the carrier was not entitled to first dollars. The carrier countered that the waiver of subrogation endorsement in its policy provided that the contractor waived subrogation only to the extent of liabilities it assumed and the contractor never contractually assumed the tort liability of the refinery. Therefore, it argued, the waiver of subrogation did not apply as to the refinery operator.

The Supreme Court disagreed, holding that while the Texas standard subrogation waiver form requires one to look at past the policy and to the service agreement to determine if there was a waiver, the policy does not necessarily incorporate the terms of that contract. The Court distinguished prior Supreme Court opinions in In re Deepwater Horizon and Ken Petroleum Corp. v. Questor Drilling Corporation because in those cases the policies had different wording even if the contractual provisions were very similar. The Court explained that if the policy directs the court elsewhere to determine coverage, then the court will refer to the unincorporated document but only to the extent required by the policy. Here, the Court had to look to the contract to determine whether the contractor was required to provide the waiver to the refinery, but held that “[i]t does not necessarily follow, however, that circumstances limiting the waiver may also be considered.”


Texas Supreme Court Holds Insurer Does Not Waive Attorney-Client Privilege By Designating Its Claims Adjuster As An Expert Witness

The Texas Supreme Court held that the attorney-client communication privilege is not waived when the client or the client’s employee is designated as a testifying expert. In re City of Dickinson, 568 S.W.3d 642 (Tex. 2019).

The insurer designated its senior claims examiner as an expert witness in a coverage dispute with a municipality. The city sought to compel discovery of all of his communications with the insurer’s counsel, arguing that the attorney-client communications about the client’s expert testimony were discoverable because the municipality was entitled to discovery of documents related to a testifying expert’s testimony. The insurer contended that its counsel’s e-mails with the claims adjuster were protected by the attorney-client communication privilege. The trial court ordered production, but the appellate court vacated that order holding that the e-mails were protected by the attorney-client communication privilege.

The Texas Supreme Court held that Texas’ expert discovery rules are subject to the attorney-client privilege, and that the privilege is not waived by a client or the client’s employee offering expert testimony in its own case.


Fifth Circuit Finds Subrogation Claim Barred By Waiver Of Subrogation Clause

The U.S. Fifth Circuit Court of Appeals, applying Louisiana law, affirmed a Texas federal court’s summary judgment in favor of an engineering firm precluding recovery by subrogated insurers of losses from the failure of an offshore oil rig. Lloyd’s Syndicate 457, et al. v. FloaTEC LLC, et al., 2019 U.S. LEXIS 11256 (5th Cir. Tex., Apr. 17, 2019).

After paying substantial losses due to failed tendons on an offshore oil rig, insurers brought an action in subrogation against the engineering firm that designed the tendons. The engineering firm contended that the insurers were precluded from doing so because the insured’s contract with the firm contained a waiver of subrogation clause against any “other assured” under the policy. The term “other assured” was defined to include companies with whom the insured had entered into a written contract for work on the project and that the engineering firm had done so. The insurers argued that the “other assured” status occurred only if the insured had been contractually obligated also to provide insurance for that contracting company, which the insured was not obligated to do for the engineering firm. The Fifth Circuit disagreed, noting that the policy’s definition of “other assured” did not require that the insured also be obligated to provide coverage, and the court would not insert that requirement into the contract.


Eleventh Circuit Holds Fax Blasts Do Not Constitute An “Accident” Under Georgia Law

The U.S. Eleventh Circuit Court of Appeals, applying Georgia law, recently held that fax blasts do not constitute an “accident.” G.M. Sign, Inc. v. St. Paul Fire & Marine Ins. Co., 2019 U.S. App. LEXIS 10868 (11th Cir. Apr. 12, 2019).

The insured began a fax advertising program by purchasing lists of people who the insured mistakenly believed had consented to receive marketing materials by fax. A class action lawsuit was brought against the insured for, among other things, violations of the Telephone Consumer Protection Act and for sending the fax advertisements without the recipients’ permission. The insured demanded defense and indemnity from its CGL insurer which denied coverage. The insured eventually settled the class action, and the class brought a declaratory judgment action seeking a judgment that the policies issued to the insured covered the claims. The court granted summary judgment in favor of the insurer, finding that the policies did not cover. The class appealed.

The Eleventh Circuit affirmed, finding that the insured’s alleged intentional transmission of scores of fax advertisements did not constitute an “accident” under Georgia law, even if the insured believed it had consent to send the fax advertisements. Relying on the court's opinion in Mindis Metals, Inc. v. Transportation Insurance Co., the Eleventh Circuit rejected the plaintiffs’ argument that the insurer was required to indemnify it because the term “accident” under Georgia law covers injuries resulting from negligence. The Eleventh Circuit noted that the insured intended to send the faxes and thus intended to cause the resulting property damage, i.e., the use of the fax machines and the depletion of the machines’ ink and paper. The Eleventh Circuit held that the fact that the insured mistakenly thought the recipients had consented to receive the faxes was insufficient under Georgia law to render the damage as resulting from an “accident.”


Louisiana Court Holds Insured’s Substitution Of Primary “Underlying Policy” Did Not Breach Obligation To Maintain Underlying Policy In Excess Policy

A Louisiana court of appeal reversed a trial court’s dismissal of claims against an excess carrier, holding that coverage under the excess policy was available even though the insured unilaterally cancelled and substituted the “underlying policy” listed in the excess policy’s declarations with a different policy. Ellis v. McDonald, 2019 La. App. LEXIS 187 (La. App. 5 Cir. Feb. 6, 2019).

The insured’s primary policy was designated as an “underlying policy” in its excess policy. Two weeks into the policy period, the insured retroactively cancelled the underlying policy and substituted it with another policy issued by another insurer, but with the same limits and for the same policy period. The excess policy contained the following condition:

It is a condition precedent to coverage under this Policy that the Insured maintain the underlying policies in full effect during this policy period.... Failure of the Insured to maintain the underlying policies shall not invalidate this Policy, provided, however, in the event of such failure, the Insurer shall only be liable to the same extent as it would have been had the Insured maintained such underlying policies.

The excess insurer argued on motion to dismiss that the insured did not “maintain” the original underlying policy because, as it had been retroactively cancelled, it had never been implemented and thus could not be characterized as having been “maintained.” The trial court dismissed the claim. The court of appeal reversed, finding that the original underlying policy had been implemented because it was in effect for two weeks before it was retroactively cancelled and thus was “maintained.”


Florida Appellate Court Holds Sixty-Day Cure Period Begins To Run When Civil Remedy Notice Is Electronically Filed With The Department Of Financial Services

A Florida appellate court recently held that the sixty-day cure period for bad faith under section 624.155, Florida Statutes, begins to run when the insured electronically files a Civil Remedy Notice with the Department of Financial Services. Harper v. GEICO Gen. Ins. Co., 2019 Fla. App. LEXIS 3211 (Fla. 2d DCA Mar. 1, 2019).

An insurer refused to pay underinsured motorist benefits, and the insured electronically filed a Civil Remedy Notice with the Department of Financial Services. She mailed a copy to the insurer on the same date, which the insurer claimed it received almost two weeks later. Thereafter, the insurer agreed to pay benefits and indicated that it would send payment and a release under separate cover. The check and release were mailed to the insured’s counsel sixty-five days after the Civil Remedy Notice had been electronically filed. The insured filed suit, taking the position that payment was untimely under section 624.155(3)(d), which requires that payment be made within sixty days of the date when the Civil Remedy Notice is filed with the Department. The insurer moved to dismiss, arguing that payment was timely because it was made within sixty days of the date of its receipt of the notice. The trial court entered judgment in favor of the insurer. The insured appealed.

The appellate court reversed, rejecting the insurer’s argument that the sixty-day cure period begins when an insurer actually receives the Civil Remedy Notice, finding that nothing in section 624.155 requires the insurer to receive the Civil Remedy Notice before the sixty-day cure prior begins. Further, the appellate court stated that starting the sixty-day cure period only upon an insurer’s actual receipt of the Civil Remedy Notice would lead to conflicts with the application of section 624.155(3)(f), which tolls the statute of limitations for a bad-faith action for a period of sixty-five days from the date the Civil Remedy Notice is mailed to the insurer. Thus, it held that because the insurer did not pay the claim within sixty days of the date the Civil Remedy Notice was electronically filed, the insurer did not pay the claim within the sixty-day cure period, and the insured was entitled to pursue her action for the insurer’s alleged bad faith.


Florida Appellate Court Holds Insurers Must Provide Insureds Notice Of Statutory Right To Mediation Before Demanding Appraisal

A Florida appellate court held that once a first-party property dispute arises, an insurer must provide an insured with notice of the right to mediate before it can demand appraisal. Kennedy v. First Protective Ins. Co., 2019 Fla. App. LEXIS 3443 (Fla. 3d DCA Mar. 6, 2019).

The insureds made a claim with their insurer for replacement of windows damaged in a storm. The insurer suggested that the windows only needed to be repaired, not replaced, but the insureds advised that the window model was no longer produced, and thus needed replacing. This disagreement continued for months, after which the insurer demanded appraisal. The insurer then provided the insureds with notice of their right to mediate. Subsequently, the insureds filed a breach of contract lawsuit, and the insurers moved to compel appraisal. The trial court granted the insurer’s motion, and the insureds appealed.

The appellate court reversed. It focused on the intent of the statutory mediation requirement, which is to provide an informal and non-litigious forum to resolve claims before being forced to participate in expensive and adversarial processes, such as appraisal or litigation. The appellate court opined that the statute places the burden on an insurer to provide notice to insureds of their right to mediate claims before taking part in appraisal, and without this notice, an insured cannot be forced to participate in appraisal. The appellate court also found that the insurer was anticipating litigation months before the insureds filed suit and was therefore aware that a dispute existed at that time. Thus, the appellate court found that the insurer was acting in opposition of the statutory intent by failing to first work with the insureds toward resolution in a non-adversarial forum.


Arkansas Appellate Court Reverses Summary Judgment For Insurer Finding Term Grain Policy May Be Property Policy Subject To State’s Statutory Notice Requirements

A state appellate court in Arkansas reversed summary judgment in an insurer’s favor finding that a term grain policy may be deemed a property policy subject to state statutory notice requirements, as opposed to a casualty policy typically exempted from such requirements. McClendon v. Farm Bureau Mut. Ins. Co., 2019 Ark. App. 216 (Apr. 10, 2019).

The insured, a farmer and grain bin owner, was issued a ninety-day term grain policy to cover wheat harvested from his farm stored on the property ahead of sale. Eighty days after the expiration of the policy, the storage bins suffered damage, and the crop stored in the bins was also damaged. The insured tendered his claim to his insurer, which denied coverage because the policy expired prior to the loss. The insured filed suit asserting claims for breach of contract and negligence based on the insurer’s failure to provide notice of the expiration of the policy. On motion for summary judgment, the insurer argued that it was under no duty to notify the insured of the policy’s expiration because it was a casualty policy not subject to Arkansas statutory requirements obligating insurers to provide notice of expiration for certain policies, including those for property. The trial court granted the motion, and the insured appealed. The appellate court reversed, finding that the two kinds of policies are not necessarily mutually exclusive under the statute and that disputed issues of fact prevented summary judgment.


Federal Court In South Carolina Holds Insurer That Declines Defense Cannot Be Liable For Excess Judgment

A federal district court in South Carolina recently held that an insurer must concede coverage and assume the defense of its insured before it can be held liable under the Tyger River doctrine, under which an insured can be entitled to recover excess judgment beyond the policy limits from its insurer if the excess judgment was caused by the insurer’s bad-faith refusal to settle or defend a case. Church Creek Constr., LLC v. Mt. Hawley Ins. Co., 2019 U.S. Dist. LEXIS 25711 (D. S.C. Feb. 19, 2019).

After judgment was entered against an insured, the judgment creditor sued the insured and its insurers to determine responsibility for payment of the judgment and, as to the insurers, for negligent failure to settle the claim. The insurers moved to dismiss, arguing that because they never agreed to defend, they could not be held liable for the excess judgment beyond the policy limits pursuant to the Tyger River doctrine. It provides that an insurer may be liable to both the insured and the claimant when an insured suffers a loss because the insurer took control and management of negotiations for settlement of a claim and negligently and in bad faith, with a view to its own interests alone, neglected and refused to settle the claim.

The court acknowledged that South Carolina courts have not considered whether the Tyger River doctrine applies in circumstances where an insurer never assumed the defense of the insured. However, the court also recognized that the South Carolina Supreme Court’s discussion of the Tyger River doctrine assumes that the insurer accepted the defense of the insured. The court also cited a prior ruling in which the court distinguished a claim for refusing to defend an insured and a Tyger River claim by explaining that in the first claim, the insurer had denied coverage, while in the other, the insurer conceded coverage. The court held that an insurance company must concede coverage and assume the defense of its insured before it can be liable under the Tyger River doctrine, and granted the insurers’ motion.


Federal Court In North Carolina Holds Insurer That Fails To Defend Its Insured Cannot Complain That Defense Costs Are Unreasonable

A federal court in North Carolina held that a primary insurer that wrongfully fails to defend its insured cannot complain of the reasonableness of defense costs incurred when that insurer is forced to participate in the insured’s defense. Westfield Ins. Co. v. Weaver Cooke Constr., LLC, 2019 U.S. Dist. LEXIS 62208 (E.D. N.C. Apr. 11, 2019).

Two insurers who issued policies to subcontractors refused to defend a general contractor that qualified as an additional insured. The general contractor’s excess insurers then sued the subcontractors’ insurers for reimbursement of the excess insurers’ portion of incurred defense costs. The subcontractors’ insurers argued that they should not be liable for any portion of incurred defense costs because the general contractor’s selected attorney charged a higher rate than the subcontractors’ insurers wanted to pay. The court rejected this argument, noting that if an insurer that refuses to defend an insured could avoid reimbursement of incurred defense costs by disagreeing with the rate of the selected counsel, an insurer would be encouraged to ignore its duty to defend. The court held that an insurer cannot complain of the amount of defense costs when that insurer fails to defend its insured.


Federal Court In Georgia Holds Total Pollution Exclusion Did Not Bar Claims Arising Out Of Claimant’s Exposure to Vaporized Liquid Nitrogen

A federal court in Georgia recently held that a pollution exclusion did not unambiguously exclude coverage for claim arising out of exposure to vaporized liquid nitrogen. Evanston Ins. Co. v. Xytex Tissue Servs., LLC, 2019 U.S. Dist. LEXIS 51668 (S.D. Ga. Mar. 27, 2019).

The insured stored biological material in cryogenic storage freezers in its warehouse, utilizing an on-site liquid nitrogen delivery system to keep the material cold. On the date of the loss, the system released liquid nitrogen to lower the pressure in the system. The liquid nitrogen then vaporized, which caused oxygen levels in the warehouse to drop which, in turn, caused a dense fog that set off the warehouse’s motion detectors and burglar alarms. A responding police officer passed away due to exposure to the conditions in the warehouse. The officer’s family filed a wrongful death lawsuit against the insured, which the insurer defended under a reservation of rights. The insurer then filed a declaratory judgment action and moved for summary judgment.

The court found that the pollution exclusion did not unambiguously exclude coverage so as to preclude a duty to defend. The court analyzed whether nitrogen was a “pollutant” as defined by the policy, i.e., an “irritant” or “contaminant.” The court rejected the insurer’s argument that the nitrogen was an “irritant” or “contaminant,” finding that, under the circumstances, there were multiple plausible interpretations of whether “irritant” and “contaminant” encompassed vaporized liquid nitrogen and differentiated vaporized liquid nitrogen from other substances such as lead and carbon monoxide. Thus, the court held that the application of the exclusion was a fact issue to be determined by a jury. The court determined the exclusion to be ambiguous, and held that the allegations of the underlying complaint failed to unambiguously exclude coverage and that the insurer was obligated to defend.


Federal Court In Louisiana Holds Coverage For Oilfield Damage Excluded Under Pollution Exclusion And Damage To Property Exclusions

A federal court in Louisiana granted an insurer’s motion for summary judgment holding the insurer had no duty to indemnify or defend against a “legacy” oilfield claim because the policy’s pollution exclusion and various exclusions for damage to property precluded coverage. Evanston Ins. Co. v. Riceland Petroleum Co., 2019 U.S. Dist. LEXIS 53830 (W.D. La. Mar. 28, 2019).

Landowners sued the insured for damage caused by the insured’s oil and gas operations which allegedly polluted the plaintiffs’ property. The insured sought coverage under its primary and excess policies, and the insurer filed a complaint for declaratory relief and moved for summary judgment. The insurer argued that coverage was not triggered and that any coverage, if afforded, was excluded by the pollution exclusion and various exclusions for damage to property.

The court granted the insurer’s summary judgment motion. The court held that the pollution exclusion applied after finding all three factors of the Doerr test articulated by the Louisiana Supreme Court had been satisfied: (1) the insured was a “polluter” based on the nature of and risk posed by its business; (2) the injury-causing substances allegedly released by the insured were “pollutants”; and (3) the insured released these “pollutants.” The court also held that coverage was barred pursuant to exclusions for damage to property the insured owns, rents or occupies; property loaned to the insured; and real property on which the insured is performing operations because the insured damaged the plaintiffs’ property while conducting oil and gas operations pursuant to mineral leases on the property.


Federal Court In Louisiana Suggests That A Court Applying Louisiana Law May Consider Policy Language Deleted By Endorsement When Determining Parties’ Intent

A federal court in Louisiana held that coverage was afforded under successive claims-made-and-reported polices even though the claim was made during one policy period and reported during the next because of the deletion of certain wording by endorsement in the second policy. Boyce v. CUSA, LLC, 2019 U.S. Dist. LEXIS 33349, at *2 (W.D. La. Mar. 1, 2019).

A plaintiff sustained injuries during the pendency of the first policy on the insured’s property and the insured gave its insurer notice of its claim. The insurer contends the claim was not reported until after the second policy incepted. The plaintiff sued the insured and the insurer. The insurer moved for summary judgment arguing that coverage was not afforded under either claims-made-and-reported policy because the claim was made during the first policy period and reported during the second. The plaintiff argued that the insurer’s deletion of policy wording by endorsement amended the insuring agreement by allowing coverage for prior wrongful acts even those known and reported to the insurer. The insurer countered that deleted language cannot be relied upon when interpreting an insurance contract and, thus, had no effect on the requirement that the claim both be made and reported during the policy period.

The court found the insurer’s failure to offer an explanation for the deletion of the wording to be relevant, and further found that the non-Louisiana cases cited by the insurer in support of its contention that deleted wording may not be considered and were not to be taken into account. Although the court deemed the policy language to be ambiguous without regard to the deleted wording, its reasoning suggests that policy wording deleted by endorsement may be considered by a Louisiana court when construing a policy.

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