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Insurance Law Report: January 2013

January 23, 2013

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

1.  South Carolina Supreme Court Upholds Statute Requiring Builders' General Liability Policies To Cover Faulty Workmanship

2.  Alabama Supreme Court Holds EPA Investigation Constitutes "Suit" Triggering Duty To Defend

3.  Oklahoma Supreme Court Reinstates Jury Verdict And Finding That Misrepresentation Was Not Intentional

4.  Eleventh Circuit Holds Under Florida And Massachusetts Law That Pollution Exclusion In CGL Policies Excludes Coverage For Defective Chinese Drywall

5.  Fifth Circuit Finds That Deficiencies In Insurer’s Reservation Of Rights And Delay In Asserting Coverage Position Did Not Waive Coverage Position Under Louisiana Law

6.  Eighth Circuit Affirms Ruling Allowing Stacking Of Liability And UIM Limits Under Arkansas Law

7.  Sixth Circuit Holds Insured Has No Obligation Under Tennessee Law To Continue Coverage Negotiations With Insurer After Denial Of Coverage

8.  Fourth Circuit Holds Under Virginia Law That Insurer Has Duty To Defend Alleged Negligent Handling Of Funds Claim Despite Handling Of Funds Exclusion

9.  Fourth Circuit Holds Developer Entitled To Additional Insured Coverage For “Your Work” Pursuant To Construction Agreement

10. Three Federal Courts Reach Different Results On Abstention Doctrine In Declaratory Judgment Actions

11.  Federal Court In North Carolina Dismisses Claims For Bad Faith And Unfair And Deceptive Trade Practices For Claims Arising Outside Of North Carolina

12. South Carolina Court Of Appeals Holds Coverage For Claim For Erroneous Provision Of Materials To Zoning Board Excluded By Faulty Workmanship Exclusion

13. Federal Court In Alabama Rejects Architect’s Additional Insured Claim Under Contractor’s CGL Policy

14. Federal Court In Texas Finds No Duty To Defend Suit For Negligent Handling Of Medical Records

15. Federal Court In Kentucky Finds Policy Void Due To Misrepresentation Regardless Of Policyholder Intent

16. Federal Court In Oklahoma Finds "Substantially Certain To Injure" Claim Falls Within "Intentional Act" Exclusion

17. Federal Court In Texas Finds Insurer Does Not Owe Duty To Defend Or Indemnify Party Alleged To Be Liable Under Theories Of Alter Ego, Joint Venture And Joint Enterprise



The South Carolina Supreme Court recently upheld a state law requiring builders’ general liability policies to cover damages from faulty workmanship, but ruled that the statute cannot be applied retroactively to policies executed before the law’s May 17, 2011 effective date. Harleysville Mut. Ins. Co. v. State, 2012 WL 5870799 (S.C. Nov. 21, 2012).

Following an earlier South Carolina Supreme Court decision that a standard CGL policy does not cover property damage resulting from faulty workmanship, the South Carolina General Assembly passed Act No. 26, which expanded the definition of the term “occurrence” to include property damage or bodily injury resulting from faulty workmanship. The insurer benefiting from the favorable Supreme Court ruling challenged the new law on grounds that (1) the legislature did not have authority to pass a law overturning the Court’s ruling due to the separation of powers doctrine, (2) the law unfairly targeted the insurance industry in violation of the equal protection clause of the state and federal constitution and (3) violated its rights under the contract clauses of both the state and federal constitution.

The South Carolina Supreme Court noted that because it had reversed itself on the issue in a subsequent decision, the legislature had not retroactively overruled the Court’s interpretation of a statute, and therefore held there was no violation of the separation of powers doctrine. The Supreme Court held that the legislature had a “rational basis” for enacting the legislation, noting that the insurance industry was already highly regulated, but that insurance coverage for construction liability itself lacked “clarity” and was the subject of “significant litigation, particularly with respect to whether construction defects constitute ‘occurrence.’” Accordingly, it found no equal protection violation. Finally, while noting that it was generally within the legislature’s power to define the term “occurrence,” the Supreme Court held it would violate the contract clauses of both the federal and state constitutions to apply this definition retroactively as it would substantially impair pre‑existing contracts by materially changing their terms.  It thus held that the legislation applied only prospectively to contracts executed on or after the act’s effective date of May 17, 2011.

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Responding to a certified question from a federal district court in Alabama, the Alabama Supreme Court held that a U.S. Environmental Protection Agency (“USEPA”) investigation of a “potentially responsible party” (“PRP”) constitutes a “suit” under general liability insurance policies. Travelers Casualty and Surety Co. v. Alabama Gas Corp., 2012 WL 6720790 (Ala. Dec. 28, 2012).

The insured and its predecessors‑in‑interest operated a manufactured gas plant for decades which allegedly caused environmental contamination. The USEPA investigated the site and notified the insured that it had been identified as a PRP that may be liable for remediation of the contamination. The insured tendered the claim to several insurers, demanding that they defend it. The insurers advised that they would investigate the claim, but that the USEPA investigation did not constitute a “suit” under their policies and, therefore, they had no obligation to defend. The insured commenced a declaratory judgment action in federal court against one of the insurers for breach of contract. The parties filed cross‑motions for summary judgment on the question of the insurer’s defense obligation, and the court certified that question to the Alabama Supreme Court.
The Alabama Supreme Court affirmatively answered the certified question, relying heavily on decisions from other states on the issue, and held that a “PRP letter” (or letter notifying a party that it is a PRP) commences an adversarial process that is the “functional equivalent of a suit brought in a court of law.” It rejected the argument that “suit” required formal court proceedings.

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A jury found a life insurer obligated to pay benefits to an insured’s beneficiary even though the jury was presented with evidence that the insured made misrepresentations and omissions in his insurance application. The lower appellate court reversed the trial court’s verdict. On writ of certiorari to the Oklahoma Supreme Court, the Supreme Court reinstated the jury verdict. Benson v. Leaders Life Ins. Co., 2012 WL 6585123 (Okla. Dec. 18, 2012).

Following the death of an insured in an auto accident, a life insurance beneficiary made a claim under the decedent’s life insurance policy. The claim was denied on the basis the decedent misrepresented answers to questions regarding liver disease and alcohol use. Hospital records indicate that at the time of his death, the decedent’s blood alcohol percent was .24. Under Oklahoma law, in order to deny life insurance coverage, the insured’s misrepresentation must be intentional and made with an intent to deceive. The insurer had presented evidence to the jury that the decedent misled it, and the beneficiary presented evidence that any misrepresentation or omission was not made with intent to deceive. The Oklahoma Supreme Court held the resolution of this conflict was the jury’s task, and since competent evidence was presented at trial, the jury verdict must be reinstated.

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The U.S. Eleventh Circuit Court of Appeals recently held under either Florida or Massachusetts law that coverage for damages caused by defective Chinese drywall is excluded under CGL policies’ pollution exclusions. Granite State Ins. Co. v. American Building Materials, Inc., 2013 WL 28430 (11th Cir. Jan. 3. 2013).

The insured was sued by a homebuilder for damages arising from defective gypsum drywall manufactured in China installed in homes, and the insured sought defense and indemnity from its CGL insurers. The insurers sought and obtained a declaratory judgment that they did not have a duty to defend or indemnify based on pollution exclusions in their policies. The insured appealed.
The Eleventh Circuit affirmed the district court’s ruling that pollution exclusions preclude coverage for damage caused by Chinese drywall under either Florida or Massachusetts law. The Eleventh Circuit, relying on Florida and Massachusetts precedent, reasoned that the sulfide gas released by the Chinese drywall falls within the policies’ definition of “pollutant” because it is a “gaseous . . . irritant or contaminant,” and the alleged damage would not have occurred “but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape” of that pollutant.

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The U.S. Fifth Circuit Court of Appeals has held that neither a less than perfect reservation of rights nor a delayed assertion of an affirmative defense based on an exclusion waived an insurer’s reliance on the exclusion under Louisiana law. Sosebee v. Steadfast Insurance Company, 701 F.3d 1012 (5th Cir. 2012).

A passenger on a charter fishing boat was injured when the fishing boat collided with a utility boat. The insurer of the fishing boat initiated a declaratory judgment action against the injured passenger and the owner of the fishing boat, and the passenger filed a third‑party complaint against the owner of the utility boat and its liability insurer. The insurer advised the utility boat owner, among other things, that the watercraft exclusion “might apply” and that the insurer would proceed with an investigation subject to a full reservation of rights. Though the reservation of rights letter identified the correct insurer, policy number and term, and recited verbatim the watercraft exclusion, the letter was on the letterhead of a claims company and it mistakenly referenced multiple times an affiliated insurer that provided commercial auto insurance. Soon thereafter, the utility boat owner filed for bankruptcy and the declaratory judgment action was stayed, but its insurer had in the interim undertaken its defense.
The passenger then filed a direct action against the utility boat owner’s insurer, and the insurer answered without reference to the watercraft exclusion. Almost two years later, the insurer asserted the watercraft exclusion in its answer to an amended complaint. The parties filed cross‑motions for summary judgment on the watercraft exclusion, with the passenger arguing that the insurer waived reliance on it. The court determined that the insurer had waived its position that the exclusion applied because its conduct was so inconsistent with its assertion of the position as to induce a reasonable belief that it relinquished its right to assert the exclusion and because the insurer’s conduct prejudiced its insured. The insurer appealed.
The Fifth Circuit found the reservation of rights sufficient, pointing out that the letter unambiguously referred to the correct policy and period and recited verbatim the watercraft exclusion. The Fifth Circuit also held that the fact that the letter did not explicitly state that the insurer was reserving rights with respect to the defense of the insured did not render the reservation of rights void once the insurer subsequently undertook its insured’s defense.
The Fifth Circuit next considered whether the insurer waived its position of non‑coverage by delaying its assertion of the exclusion in the passenger’s direct action suit. It noted that Louisiana law allows a direct action plaintiff to raise waiver even when the insured is a non‑party, and held, as a matter of first impression, that a plaintiff maintains such standing even when the insured is in bankruptcy. However, the Fifth Circuit found that the insurer did not have an actual intention to relinquish the right, but merely delayed asserting the right by mistake. Further, it held that the insurer’s conduct was not inconsistent with the intent to enforce the exclusion because the insurer had previously reserved rights. The Fifth Circuit noted that even if the passenger had successfully proven misleading conduct, the non‑party insured was not prejudiced by the delay in asserting the defense as the declaratory judgment action was stayed and the insured was represented. The Fifth Circuit rendered summary judgment in the insurer’s favor on the issue of coverage.

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The U.S. Eighth Circuit Court of Appeals has upheld a district court’s ruling under Arkansas law allowing stacking of liability and UIM limits in a single commercial auto policy. Argonaut Great Cent. Ins. Co. v. Casey, 701 F.3d 829 (8th Cir. 2012).

A church insured under commercial auto and umbrella policies faced numerous lawsuits following a single‑vehicle accident as a result of its bus driver’s negligence. Its insurer commenced an interpleader action to deposit its policy limits into the registry of the court. There was no dispute that the insurer owed umbrella policy limits. The parties disputed, however, whether both the underlying liability and UIM coverages applied. The insurer contended that only the liability coverage applied, relying on a provision stating that where two or more coverages applied, the insurer’s liability would be limited to the highest applicable limit of any one coverage. The district court rejected this argument and ruled that the liability and UIM coverage limits could be aggregated. The insurer appealed.
The Eighth Circuit affirmed, concluding that both the liability and UIM coverage limits applied. It noted that the UIM endorsement indicated that UIM coverage was additional or sequential to the liability coverage, stating that the UIM coverage would be paid once the applicable liability policies have been exhausted. The Eighth Circuit held that the provision on which the insurer relied was inapplicable under Arkansas precedent because the UIM endorsement was a modification of a coverage grant, not a separate coverage grant. It also held the policy provisions that preclude coverage of “duplicate payments for the same elements of ‘loss’” did not apply because none of the claimants sought double recoveries.

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The U.S. Sixth Circuit Court of Appeals has held that an insured does not have an obligation under Tennessee law to continue coverage negotiations with its insurer once an insurer denies coverage. Forrest Construction, Inc. v. The Cincinnati Insurance Company, 2013 WL 135372 (6th Cir. Jan. 11, 2013).

A contractor sued its customers for nonpayment and was counter‑sued for alleged defects in workmanship. The contractor tendered the counterclaim to its general liability insurer for defense and indemnity. The insurer denied coverage based on a “your work” exclusion. The denial letter advised the contractor that it could contact the insurer if it disagreed with the denial. The contractor subsequently defended itself against the counterclaim and was found liable for damages due to faulty construction. The contractor sued its insurer for breach of contract and bad faith denial of coverage contending that the “your work” exclusion did not apply to damages attributable to subcontractors’ faulty work. The parties cross‑moved for summary judgment, and the court found that the insurer had breached its duty to defend.
The insurer appealed arguing, in part, that the contractor should have advised it that subcontractors were involved and requested reconsideration of the denial. The Sixth Circuit held that an insurer severs an insured’s responsibilities and obligations under the policy once it unequivocally denies coverage, and that inviting the insured to contact the insurer with additional information if it disagreed with the denial does not change the fact that the letter was unequivocal in its position.

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The U.S. Court of Appeals for the Fourth Circuit has held that an insurer has a duty to defend a lawsuit arising out of the alleged negligent handling of funds, notwithstanding an exclusion for “Handling of Funds.” First Tennessee Bank Nat’l Ass’n v. St. Paul Fire and Marine Ins. Co., 2012 WL 6634911 (4th Cir. Dec. 21, 2012).

After the closing of three scheduled loans fell through, the insured, a closing agent, returned the unused funds to the company from which the loans originated and not to the bank that funded the loans. The president of the company from which the loans originated absconded with the funds, and the bank sued the insured for its alleged negligent mishandling of the funds. The insured’s insurer denied coverage under its liability policy, and the insured sued the insurer for breach of contract. The insurer obtained summary judgment based on the policy’s “Handling of Funds” exclusion. The insured appealed.
The “Handling of Funds” exclusion excluded coverage for “[a]ny unauthorized act committed by any protected person that deprives an owner of the use of its funds.” The district court had held that because the bank had not authorized the insured to return the funds to the company from whom the loans originated, the insured’s action was “unauthorized.” The Fourth Circuit disagreed, explaining that under Virginia law an act that an agent is authorized to perform does not become unauthorized simply because the agent performed the act negligently. Accordingly, the Fourth Circuit held because negligent acts are not necessarily unauthorized acts, the exclusion did not foreclose the possibility of coverage, and the insurer had a duty to defend.

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The U.S. Court of Appeals for the Fourth Circuit reversed a lower court and held that a developer was entitled to additional insured status for work performed by a contractor pursuant to the construction agreement between the developer and its general contractor. Standard Pacific of the Carolinas, LLC v. Amerisure Ins. Co., 2012 WL 6604614 (4th Cir. Dec. 19, 2012).

An individual injured on a planned community’s deteriorated walking path sued the community’s developer, general contractor and several others. The developer in turn sued the general contractor’s insurer seeking a declaration of the parties’ rights under the general contractor’s CGL policy. The contractor’s policy contained a contractor’s blanket additional insured endorsement, which extended coverage for “your work” to the extent a written contract or agreement required such coverage or “wording to that same effect.” The developer moved for partial summary judgment, arguing that the agreement with the contractor entitled it to additional insured status for the contractor’s work. The court denied the motion and sua sponte granted summary judgment to the insurer, holding that the agreement did not extend additional insured status to the developer for the contractor’s work. The developer appealed.
Reversing, the Fourth Circuit found that while the agreement between the developer and the contractor did not explicitly refer to “your work” coverage, it did include “wording to that same effect.” The Fourth Circuit pointed to provisions in the agreement that mandated minimum of amounts of “products/completed operations” coverage and obligated the contractor to indemnify the developer from and against all claims “arising out of or in connection with the performance of the Work.” Accordingly, the Fourth Circuit found that the agreement included sufficient language to extend additional insured status to the developer for the contractor’s work, and remanded the case for summary judgment to be entered in favor of the developer.

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A federal court in the Southern District of Texas recently held that the Brillhart abstention doctrine, rather than the Colorado River abstention doctrine, applies to actions brought for declaration of coverage under the federal Declaratory Judgment Act, 28 U.S.C. §2201(a). A federal court in the Northern District of Texas the next day declined to abate an insurer’s suit in federal court brought under the Declaratory Judgment Act after applying the same analysis.
In Beaufort Dedicated No. 5, Ltd. v. USA Daily Express, Inc. d/b/a Vintage Lounge, et al., 2012 WL 6608869 (S.D. Tex. Dec. 18, 2012), an insurer filed a complaint in federal court for breach of contract and declaratory judgment against its insured. Subsequently, the insured filed a petition against its insurer and the insurer’s adjuster in state court, alleging breach of contract, breach of the common law duty of good faith and fair dealing, and violations of the Texas Insurance Code. The insurer removed the state court action based on diversity jurisdiction, arguing that the non‑diverse adjuster was improperly joined. The insured filed a motion to dismiss the insurer’s first‑filed federal complaint contending that the court should apply the standard set forth in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 62 S.Ct. 1173 (1942), rehearing denied, 317 U.S. 704, 63 S.Ct. 23, 87 L.Ed. 562 (1942) and St. Paul Ins. Co. v. Trejo, 39 F.3d 585 (5th Cir. 1994) and exercise its discretion to decline jurisdiction because the state court action was the more appropriate forum to resolve the dispute and, alternatively to remand. The insurer argued that the “exceptional circumstances” standard in Colorado River Conservation System v. United States, 424 U.S. 800,96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), rehearing denied, 426 U.S. 912, 96 S.Ct. 2239, 48 L.Ed.2d 839 (1976) should apply, and since the case did not involve “exceptional circumstances,” the court should retain jurisdiction. The Southern District granted the motion to dismiss, holding that the discretionary Brillhart standard as expressed in Trejo applied because the case involved an action brought under the Declaratory Judgment Act and the corresponding coercive claim for relief, i.e., the insurer’s breach of contract claim against its insured, was frivolous.
In Admiral Ins. Co. v. Abraham Armani, M.D., et al., No. 12‑CV‑105N (N.D. Tex. Dec. 19, 2012), a patient filed a petition against a doctor and medical groups in state court alleging a breach of the duty of care and negligence. While the state court action was pending, the defendants’ insurer filed a complaint for declaratory judgment in federal court, seeking a declaration concerning its duties and obligations under the policy. The insureds filed a motion to abate the federal court action until the resolution of the state court action. The Northern District denied the motion to dismiss, finding that the same Trejo factors considered by the Southern District in Beaufort weighed heavily in favor of allowing the insurer to proceed on its complaint for declaratory judgment.
A federal court in Mississippi, applying the Colorado River factors, refused to abstain in a declaratory judgment action despite ongoing litigation in Louisiana state court. Progressive Gulf Ins. Co. v. Farve, 2012 WL 5414219 (S.D. Miss. Nov. 6, 2012). Following a fatal truck accident, the decedent’s heirs filed a wrongful death action in Louisiana state court against the other driver, his employer and their insurer. The insurer then sought declaratory relief in federal court in Mississippi, naming all parties in the Louisiana action. The heirs moved the federal court to abstain or stay the Mississippi declaratory relief action on the basis the Louisiana action would adjudicate many of the claims for relief sought in the insurer’s Mississippi action. The court denied the heirs’ motion and refused to stay the proceedings, allowing the declaratory judgment action to continue. The court weighed the Colorado River factors, finding that each was either supportive of exercising federal jurisdiction or were irrelevant, and thus supporting jurisdiction.
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A federal court in North Carolina recently dismissed claims against an insurer for bad faith, unfair and deceptive trade practices and punitive damages arising out of a dispute over the insurer’s obligation to defend and indemnify the insured against a series of international employment disputes. Martinez v. Nat’l Union Fire Ins. Co., 2012 WL 5993754 (E.D. N.C. Nov. 30, 2012).

After the insured’s Brazilian operations ceased, multiple employees sued in Brazilian courts, eventually obtaining judgments against the insured. The insured submitted a claim to her insurer under a policy providing coverage for employment practices liability applying to claims made “anywhere in the world.” The insurer denied coverage based on its interpretation of Brazilian law, leading the insured to file suit for declaratory judgment in North Carolina, seeking recovery for breach of contract, bad faith and unfair and deceptive trade practices. The insurer moved to dismiss the latter two claims.
The bad faith and unfair and deceptive trade practices claims were brought under North Carolina law. The court held that the insured could maintain such claims under North Carolina law only if she actually suffered injury in North Carolina. The court held that because the insured alleged that the insurer’s claim decision was made in New York, that she received correspondence regarding the decision in New York and that her financial injury was suffered in Brazil, she failed sufficiently to allege that North Carolina was where she actually suffered harm. Moreover, the court found that the honest dispute between the parties with regard to interpretation of Brazilian law could not plausibly constitute bad faith or an unfair and deceptive trade practice, but rather was (at most) a claim for breach of contract. The court dismissed the bad faith and deceptive trade practices claims.

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The South Carolina Court of Appeals recently held that an insurer had no duty to defend or indemnify a homeowner’s claim against a contractor who provided erroneous information to a local zoning board, resulting in the homeowner having to tear down part of a barn that the contractor built. Walde v. Ass’n Ins. Co., 2012 WL 6177947 (S.C. App. Dec. 12, 2012).

After a homeowner obtained a zoning variance and a contractor built a barn and paddock on his property, it was discovered that the structure did not comply with the variance and the barn’s top‑floor apartment had to be removed. The owner filed an arbitration demand against the contractor for breach of contract and negligent misrepresentation, and the contractor’s insurer denied coverage for the claim. The owner and the contractor settled their dispute, and the owner sued the insurer under an assignment from the insured for breach of the duty to defend and indemnify. The trial court granted summary judgment in favor of the owner, and the insurer appealed.
The South Carolina Court of Appeals rejected the insurer’s argument that the owner had not sufficiently alleged “property damage” caused by an “occurrence.” Although the court recognized that the tearing down of the barn’s second story was not “physical injury to tangible property” within the policy’s definition of “property damage” (as the repair or replacement of an insured’s defective work does not constitute “physical injury” under South Carolina law), the court held that loss of use of the barn could constitute “property damage” defined to include “loss of use of tangible property that is not physically injured.” The court was further satisfied that the owner had alleged an “occurrence” as the insured’s provision of erroneous information was unintentional and therefore could be an accident within the meaning of the policy. However, the court held that coverage for the claim was excluded under an exclusion barring coverage for “‘property damage’ to … that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

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A federal court in Alabama held that a contractor was entitled to coverage for damage arising out of construction defects notwithstanding late notice, but rejected an architect’s claim for coverage as an additional insured under the same policy. Penn. National Mut. Cas. Ins. Co. v. Cochrane Roofing & Metal Co., Inc., 2012 WL 6043078 (N.D. Ala. Dec. 3, 2012).

A property owner hired an architect to determine the cause of roof leaks in the owner’s building. The architect recommended that the roof be replaced, and a contractor was hired to install a new roof. Two years after installation, the owner began to experience new leaks. For the next several years, the contractor periodically attempted repairs under the warranty. When these attempts proved unsuccessful, the owner sued the architect and the contractor for the defective roof and water damage to personal property inside the structure. The contractor never reported the ongoing leaks to the insurer, but tendered the suit five days after it was filed. Both the contractor and the architect sought coverage under the policy. The insured agreed to defend the insured under a reservation of rights, but denied the architect’s claim.  The insurer filed a declaratory judgment action against the contractor and architect seeking a ruling that it had no obligation to defend either and moved for summary judgment.
The court held that the insurer was obligated to defend the contractor despite the failure to have given notice prior to the suit. The court held that the question of whether the notice was unreasonable was a question of fact to be decided at trial, and remanded the contractor’s claim for trial on the late notice defense. The court held that the architect was not entitled to additional insured status for three reasons. First, the automatic additional insured endorsement in the contractor’s policy extended coverage to the architect only for the acts of the contractor and the architect had been sued for its own negligence. Second, the court noted that the architect would not be entitled to completed operations coverage in any event because there was no coverage for damage following the completion of the insured’s work. Third, a “professional liability” exclusion would bar coverage to the architect because any potential liability would arise out of its failure to render architectural services.

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A federal court granted judgment on the pleadings for an insurer finding no duty to defend under a CGL policy for negligent handling of records. Armstrong Moving & Storage, Inc. v. Am. Cas. Co. of Reading, Pennsylvania, Civil Action No. A‑12‑CA‑609‑SS (W.D. Tex. Dec. 18, 2012).

The insured, a contractor hired to move medical records, apparently simply disposed of them by placing them in a trash container, sought a declaration that it was owed a defense from its CGL insurer for claims against it by a health care provider which had entrusted it with the files. The health care provider sought reimbursement of funds and attorneys’ fees expended in a suit against it by the Texas Attorney General for violations of the Texas Identity Theft Enforcement and Protection Act due to negligent handling and disposal of medical records. The court found that the claim against the health care provider was not a property damage claim, but rather one for a civil penalty for violating the law. The court also found that the loss was not an “advertising injury,” as the disposal of files in a public trash receptacle was not the oral or written publication that violated any person’s right to privacy. The court in dicta suggested that a private cause of action by a patient for loss of his or her medical records, or invasion of privacy, would trigger a duty to defend.

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A federal court in Kentucky has held that an insurer properly rescinded coverage due to a misrepresentation regarding the policyholder’s criminal history regardless of evidence that the misrepresentation was accidental. Nationwide Mut. Fire Ins. Co. v. Nelson, 2012 WL 6562029 (E.D. Ky. Dec. 14, 2012).

A homeowner completed an application which falsely stated that he had not been convicted of a felony in the last ten years. When the home was damaged in a fire years later, the insurer denied coverage and commenced a declaratory judgment action, seeking to have the policy declared void ab initio pursuant to a Kentucky statute which provides that a misrepresentation in a policy application may void coverage if the insurer would not have issued the policy if the true facts had been known. Ky. Rev. Stat. § 304.14‑110.
The insurer moved for summary judgment, supported by sworn testimony that the policy would not have been issued if the application had been truthful. The homeowner opposed, arguing that the misrepresentation was accidental, not a purposeful attempt to deceive. The court rejected the homeowner’s argument, concluding that the undisputed evidence proved that the application was false and that the insurer would not have issued the policy if the true facts had been known. It concluded that the homeowner’s intent was irrelevant under the statute and granted the motion for summary judgment.

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A federal district court in Oklahoma found claims based on alleged actions which were substantially certain to injure could not be an “accident” under employers’ liability insurance. Pennsylvania Mfrs. Ass’n Ins. Co. v. Lechner, 2012 WL 5830547 (N.D. Okla. Nov. 16, 2012).

An employee was injured at work when a car tire he was inflating exploded. The employee alleged his supervisor ordered him to inflate the tire to a “dangerous and hazardous level,” causing it to explode. The employee filed for and received workers’ compensation benefits, then brought a civil suit on the basis the actions of the supervisor were intentional and substantially certain to harm him. The employer’s insurer filed a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify and moved for summary judgment, arguing that the incident was not an “accident” under the policy.
The policy provided employers’ liability insurance for injuries by “accident” or disease that “arise out of and in the course of the injured employee’s employment….” The term “accident” was not defined. At the time of the accident, Oklahoma law defined the term “intentional” in the context of avoiding the workers’ compensation exclusive remedy defense to include acts done with the knowledge that injury was “substantially certain,” rather than plainly intentional. Thus, concluded the court, the allegations of “substantial certainty” of injury were to be construed as allegations supportive of an intentional tort claim. The court also noted that under Oklahoma law, the term “accident,” even if undefined, is not ambiguous, and held that an intentional tort claim under the “substantially certain to injure” standard does not constitute an “accident.”

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A federal court in Texas recently determined an insurer did not have a duty to defend or indemnify a party alleged to be liable under theories of alter ego, joint venture and joint enterprise because of, inter alia, a contractual liability exclusion. See, Gemini Ins. Co. v. Austin Diversified Products, Inc., Case No. 03:09‑cv‑02131 (N.D. Tex. Dec. 14, 2012).

After the death of a tree‑trimming employee, a general contractor sought defense and indemnification from the employee’s employer. When its insurer denied coverage, the general contractor sought defense and indemnity from an entity related to the deceased’s former employee under theories of alter ego, joint venture and joint enterprise, claiming that the employer was undercapitalized. That party’s insurer brought a declaratory judgment action seeking a determination that coverage did not exist.
The court accepted the pleaded facts as true and substituted the related party as the alter ego of the decedent’s employer. The court then determined that the insured’s business was solely a cleaning products producer and distributor, and that the policy contained a contractual liability exclusion that limited coverage only to contracts arising from that business. Since the underlying accident related to tree‑trimming, the court found the exclusion applied and that there was no duty to defend. The court also concluded that the insurer did not have a duty to indemnify because (1) the policy contained an exclusion for liability premised on joint enterprise and (2) Texas law would not force an insurer to cover entities of which it had no knowledge, whether or not related to a named insured.

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