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Insurance Law Report: January 2015

January 28, 2015

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.


Florida Supreme Court Holds Estate Has Standing To Sue For Breach Of Contract Under Employer Liability Policy

The Florida Supreme Court recently answered a certified question and held that an estate has standing to sue under an employer liability policy for breach of contract. Morales v. Zenith Ins. Co., 2014 WL 6836320 (Fla. Dec. 4, 2014).

An employee was killed while working for his employer. The employee’s estate brought a wrongful death lawsuit against the decedent’s employer, alleging that the employer’s negligence caused the decedent’s death. The estate obtained a default judgment against the employer. After the employer’s liability insurer refused to pay the judgment, the estate sued the insurer, alleging that the insurer breached the policy. The trial court entered summary judgment in the insurer’s favor, finding that the policy’s workers’ compensation exclusion barred the estate’s suit. The estate appealed to the U.S. Eleventh Circuit Court of Appeals, which concluded that it was unclear under Florida law whether the estate had standing to sue the employer’s insurer and certified the question to the Florida Supreme Court.

The Florida Supreme Court answered the certified question in the affirmative, finding that the estate did have standing to sue for breach of contract under the employer’s liability policy. It found that under Florida law, a judgment creditor has standing to bring suit against a liability insurer that may have coverage for the judgment. Because the estate had obtained a judgment against the decedent’s employer, it had standing to bring a direct action against the employer’s insurer to recover that judgment.
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Oklahoma Supreme Court Holds Independent Adjuster Hired By Insurer Owes No Duty Of Care To Insured

The Oklahoma Supreme Court held that an independent adjuster hired by an insurer does not owe a duty of care to an insured. Trinity Baptist Church v. Brotherhood Mut. Ins. Services, LLC, 2014 WL 6908858 (Okla. Dec. 9, 2014).

The insured made a claim for damage to its building. The insurer retained an independent adjuster under a limited assignment that provided the adjuster was: “(1) not to make coverage commitments to the insured; (2) not to send written correspondence to the insured except as necessary to confirm appointments, collect necessary documentation, or provide a complete estimate; (3) to personally inspect the losses; and (4) [to] provide a descriptive report [ ] if a loss was possibly not covered so that a[n insurer] adjuster could make a coverage determination.” After lengthy investigation, the insured sued the insurer and adjuster. It alleged that (1) the adjuster assigned an individual that was inadequately skilled for adjusting the claim; (2) the adjuster was allowed to drag out the claim for over a year; (3) the adjuster was allowed to “low-ball” the insured on several occasions only to have the loss covered increased after the insured hired third-parties; and (4) the adjuster engaged in inadequate and incomplete adjustment to the insured’s detriment. The adjuster moved for summary judgment, arguing that it owed no duty to the insured which would subject it to liability for bad faith or negligent adjustment claims. The trial court found that no duty existed, and the insured appealed.

The Oklahoma Supreme Court held that Oklahoma law does not support liability by a party which is “a stranger to the [insurance] contract” with the only limited exception being where a party “acts sufficiently like an insurer so that a special relationship can be said to exist between the third-party and the insured.” The Supreme Court held that the independent adjuster had not acted in a manner creating a special relationship with the insured as it had not “had primary control over benefit determinations;…received a percentage of the premiums paid for participant coverage, which increased as losses decreased;…[or] assumed much of the risk for its determinations.” Without a special relationship, the Supreme Court held that an independent adjuster owes no duty to an insured as creating a separate duty from the adjuster to the insured would create an irreconcilable conflict with the adjuster’s contractual duty to its client, the insurer.
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Alabama Supreme Court Rules UM Insurer Not Bound By Entry Of Default Judgment Against Uninsured Motorist

The Supreme Court of Alabama has overturned a lower court’s ruling that an injured motorist’s UM insurer was liable for damages awarded in a default judgment entered against the uninsured motorist. Travelers Home and Marine Ins. Co. v. Gray, 2014 WL 7234897 (Ala. Dec. 19, 2014).

An injured motorist sued an uninsured motorist and her UM insurer. The uninsured motorist failed to answer the complaint and a default judgment for damages was entered. After the entry of the default judgment, the plaintiff moved for summary judgment against the UM insurer (which had answered the complaint and was participating in the suit), asserting that the insurer was bound by the default judgment against the uninsured motorist. The trial court granted summary judgment, finding that the UM insurer failed to contest the default judgment or the damages sought by the plaintiff, and was thus bound by the default judgment. The insurer appealed.

The Alabama Supreme Court held that the trial court erred in granting summary judgment against the insurer based solely on the default judgment taken against its insured. It held that a UM insurer actively defending a lawsuit against it is not bound by a default judgment taken against the uninsured motorist alone. It noted that the UM insurer has no relationship with the uninsured motorist and has no ability to contest a default judgment taken when the uninsured motorist does not answer the complaint. The judgment was reversed and the case remanded.
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Texas Supreme Court Affirms “No Direct Action” Rule

The Texas Supreme Court recently had occasion to enforce the “no direct action” rule precluding a claimant from suing directly a defendant’s liability insurer, and it did. In Re Essex Insurance Co., ____ S.W.3d ____, 2014 WL 6612590 (Tex. Nov. 21, 2014).

A plaintiff sued for injury and then sued the defendant’s CGL insurer (which had contested coverage) for declaratory relief seeking a declaration that the insurer must indemnify the defendant for the defendant’s liability. The insurer moved to dismiss, and the trial court denied the motion. The Court of Appeals denied the insurer’s petition for mandamus. The Texas Supreme court granted mandamus and ordered the trial court to vacate its denial of the motion to dismiss.
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Alabama Supreme Court Rejects Class Action Against Insurers Due To Failure To Exhaust Administrative Remedies

The Alabama Supreme Court has held that a class action alleging that an insurer provided illusory coverage to municipalities must be dismissed due to the class’s failure to exhaust administrative remedies through the Alabama Department of Insurance. Alabama Mut. Ins. Corp. v. City of Fairfield, 2014 WL 7234894 (Ala. Dec. 19, 2014).

A municipality commenced a class action against a UM insurer under the theory that the coverage was illusory because it excluded claims of those covered by workers’ compensation insurance, which, according to the city, were the only individuals with a realistic likelihood of seeking UM coverage. The trial court certified the class, and the insurer appealed.

The Alabama Supreme Court held that the court lacked subject matter jurisdiction because the claims asserted were subject to the exclusive jurisdiction of the Alabama Department of Insurance. It ruled that the filed-rate doctrine precluded review because the insurers’ rates, if approved by the state insurance commissioner, could not be contested in court. The Supreme Court also held that the Alabama Insurance Code required the class to first raise any dispute through administrative procedures established by the Insurance Department. The class had not availed itself of any administrative remedy prior to commencing litigation. The order certifying the class action was vacated and the suit was dismissed.
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Oklahoma Supreme Court Holds Unconstitutional “No Pay, No Play” Law Precluding Uninsured Motorists From Recovering Certain Non-Economic Damages

The Oklahoma Supreme Court found a “No Pay, No Play” law in violation of the Oklahoma Constitution, which prohibits special laws which alter jurisdiction, the rules of evidence or inquiry before the courts. Montgomery v. Potter, 2014 WL 7150021 (Okla. Dec. 6, 2014).

An uninsured motorist sued another driver for injuries and damages, which included pain and suffering. The defendant asserted that Oklahoma statute 47 O.S. 2011 section 7-116 precludes the plaintiff from pursuing pain and suffering damages, as well as certain other non-economic damages, because the plaintiff was uninsured in violation of Oklahoma’s Compulsory Insurance Law. The plaintiff moved for declaratory relief declaring the statute unconstitutional, arguing the statute was an impermissible special law that carved out a class of accident victims who are uninsured from the general class of all auto accident victims.

The Oklahoma Supreme Court held the statute unconstitutional because it is a special law which “regulat[es] the practice or jurisdiction of, or chang[es] the rules of evidence in judicial proceedings or inquiry before the courts.” The Supreme Court further held that the statute targeted from the general class of plaintiffs with bodily injuries who had the ability to recover for pain and suffering those specific individuals not in compliance with Oklahoma’s Compulsory Insurance Law. Additionally, the Supreme Court found the statute unconstitutional as it requires special treatment of the uninsured plaintiffs without consideration as to whether the plaintiffs were at fault in causing the accident or not, because it holds uninsured drivers to different and much stricter standards than other plaintiffs in automobile negligence cases by creating an impermissible special class and restricting damages in civil negligence actions.
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Eleventh Circuit Holds Term “Similar” Ambiguous In CGL Policy Condition, Requiring Coverage

The U.S. Eleventh Circuit Court of Appeals recently held that a CGL policy condition granting coverage only when an insured did not have the “same or similar” coverage elsewhere is ambiguous where both the insured and CGL insurer provided reasonable interpretations of the meaning of the term “similar.” Southern-Owners Ins. Co. v. Wall 2 Walls Const., LLC, 2014 WL 5861602 (11th Cir. Nov. 13, 2014).

A CGL policy issued to a construction company included coverage for “hired auto and non-owned auto liability” so long as the insured did not have the “same or similar” coverage under a different policy. The insured also had an auto liability policy covering three business vehicles. These vehicles were not owned by the insured, but by the insured’s principal agent. The insured’s employee injured the claimant in an auto collision while driving one of these vehicles. The auto insurer tendered its policy limits to the claimant. The CGL insurer denied the claim, citing the “hired auto and non-owned auto liability” condition, because the insured did not own the vehicles and had the “same or similar” coverage under its auto liability policy. The claimant sued the insured for her damages, and the CGL insurer filed a declaratory judgment action seeking a declaration that the policy did not cover and that the CGL insurer had no duty to defend. The district court ruled on summary judgment motion that the “hired auto and non-owned auto liability” condition is ambiguous. The CGL insurer appealed.

The Eleventh Circuit affirmed and found that the “hired auto” condition to be ambiguous with respect to the meaning of the term “similar” in the condition’s bar on coverage where the insured had “similar” coverage elsewhere. The Eleventh Circuit defined the term “similar” as: “like the same.” The CGL insurer argued that the two coverages were “similar” because they both pertained to auto liability coverage. The insured argued that the two coverages were not “similar” because the CGL coverage was much broader, as the auto liability coverage provided coverage for only three vehicles, whereas the CGL coverage potentially applied to all non-owned vehicles. The Eleventh Circuit found both interpretations to be reasonable and interpreted the condition in favor of coverage for the insured.
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Federal District Court In Oklahoma Finds Insurers Not Liable To Insureds Under Oklahoma Consumer Protection Act

A federal district court in Oklahoma held that insurance policies are not subject to claims under the Oklahoma Consumer Protection Act (“OCPA”), and that insureds’ claims for breach of fiduciary duty were subject to dismissal as Oklahoma law does not recognize the existence of such duty between an insured and insurer. Western Medical Park Owners v. U.S. Liability Ins. Group, 2014 WL 6674305 (W.D. Okla. Nov. 24, 2014); Rivera v. Hartford Ins. Co. of the Midwest, 2014 WL 7335320 (W.D. Okla. Dec. 19, 2014).

In cases involving identical issues, the same district court dismissed all of insureds’ claims except breach of contract because Oklahoma only recognizes fiduciary duty of insurer to insured in limited circumstances evincing a “special relationship,” and held the OCPA does not apply to insurer’s conduct and that an insurer has no duty to advise an insured with respect to their insurance needs.

Oklahoma Statute section 754(2) provides in part, “[n]othing in this act shall apply to: …Actions or transactions regulated under laws administered by the Corporation Commission or any other regulatory body or officer acting under statutory authority of this state or the United States….” In both cases, the district court found that under the OCPA, accepting premiums, refusing to pay benefits, offering a product that provides illusory coverage, and other actions related to adjustment of a claim were in fact regulated by the Oklahoma Department of Insurance and subject to the exception under the OCPA that applies to: (1) misrepresentation of policy terms; (2) failure to disclose policy information; and (3) accepting insurance premiums but refusing without reasonable basis to pay benefits due and owing. The court found the crux of the insureds’ allegations to involve investigation practices or the sale of property insurance and adjustment activities, which fall within the regulatory authority of the Insurance Commission which enforces provisions prohibiting insurers from (1) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue; (2) failing to adopt and implement reasonable standards for prompt investigation of claims arising under its insurance policies or insurance contracts; and (3) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear.

The court further held that Oklahoma law does not recognize the existence of a fiduciary duty between an insured and an insurer and found that the insureds failed to cite authority recognizing a fiduciary duty by an insurer and failed to plead facts showing a “special relationship,” rather than an arms’ length relationship, between an insurer and insured. It held that broad allegations regarding unequal bargaining power, unscrupulous exploitation and the existence of a fiduciary relationship are inadequate to support a breach of fiduciary duty claim.
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Texas Court Of Appeals Holds Assignment Of Claims Does Not Make Assignee Successor For Insured Vs. Insured Exclusion In E & O Policy

A Texas Court of Appeals in a split decision reversed summary judgment for an insurer regarding the defense of a director accused of misappropriation of funds and remanded the case for further proceedings. Primo v. Great American Insurance Company, No. 14-13-00492-CV, 2014 WL 7237330, (Tex.App.—Hous. [14th Dist.] Dec. 18, 2014).

A former treasurer of a condominium association wrote checks to himself on the association’s account. The association had an E&O policy and a surety bond. The surety indemnified the missing money and took an assignment, and then sued the officer for fraud, breach of fiduciary duty and other claims. The officer tendered the suit to the E & O insurer contending that he was covered under the policy as a former director and officer, but coverage was denied. The officer sued the insurer directly for breach of contract and extra-contractual claims. The policy expressly excluded “any Claim made against any Insured … by, or for the benefit of, or at the behest of the Organization or a Subsidiary … or any person or entity which succeeds to the interest of the Organization or Subsidiary,” commonly referred to as the “Insured vs. Insured” exclusion. The insurer moved for summary judgment on several grounds, including the “Insured vs. Insured” exclusion, which the trial court granted.

The appellate court found that the allegation that the surety had an “assignment” and “stepped into the shoes of [the association]” was insufficient to show that it was a “successor-in-interest” of the insured for the exclusion to apply. It concluded that a “successor” has all of the rights and obligations of its predecessor but here, the assignment appeared to be of only a right and no obligation. The court added that the insurer could have used more “typical” exclusionary language which simply states that the insurer is not liable for claims made against an officer, director, or other insured by or on behalf of another insured or the company. A dissent concluded that the first part of the exclusion should apply even if the “successor-in-interest” part did not, but the majority would not consider this, citing that the insurer did not raise this at the trial court level and thus waived it on appeal.
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Federal Court In South Carolina Holds Reasonable Expectations Doctrine Does Not Apply When Interpreting Unambiguous Policy Language

A federal court in South Carolina recently held that the “reasonable expectations” doctrine recently applied by the South Carolina Supreme Court in the context of ambiguous or conflicting policy language does not apply when interpreting unambiguous policy language. Evanston Ins. Co. v. R & L Development Corp., LLC, 2014 WL 7148715 (D.S.C. Dec. 15, 2014).

A South Carolina federal court found an endorsement excluding coverage for all property damage caused by water precluded coverage for damages caused by the insured during renovations. The insured filed a motion to alter or amend the judgment, arguing that there had been an intervening change in the controlling law in the South Carolina Supreme Court’s decision in Bell v. Progressive Direct Ins. Co., 407 S.C. 565, 757 S.E.2d 399 (2014), in which it found that the “reasonable expectation” doctrine can be used to interpret coverage under certain circumstances. The insured argued that Bell required the court to apply the doctrine of reasonable expectations to avoid an outcome it deemed to be unreasonable. The court disagreed, holding that the “reasonable expectations” doctrine applies only when policy language is unclear and unambiguous. The court noted that the relevant exclusion unambiguously excluded from coverage the property damage at issue and was not susceptible to more than one interpretation.
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Texas Court Of Appeals Holds No “Occurrence” For Conversion Where Conduct Was Intentional But The Result Was Unexpected

A Texas Court of Appeals held that intentional acts were not “occurrences” even though the result or injury may have been unintended, freeing an insurer from defending its insured against a suit for conversion. Drew v. Texas Farm Bureau Mutual Insurance Company, 2014 WL 7476481 (Tex. App.-Dallas Dec. 31, 2014).

The insureds purchased a home in foreclosure. The home was occupied at the time of the purchase, and it was alleged that the insureds changed the locks on the home while the occupants were temporarily out of the house. The insureds subsequently removed the occupants’ personal property from the home and sold or disposed of it at a garage sale. The occupants sued the insured for damages related to the sale of their property, and the insureds tendered the defense of the suit to their insurer. The insurer denied coverage for lack of an “occurrence.” The insureds argued that although their act of selling the property was deliberate, it should be considered accidental because it was done without knowledge of the pertinent fact that the property had not been abandoned. The court of appeals analyzed two Texas Supreme Court cases discussing the definition of “accidental” and “occurrence”: Argonaut Sw. Ins. Co. v. Maupin, 500 S.W.2d 633 (Tex. 1973) and Massachusetts Bonding & Ins. Co. v. Orkin, 416 S.W.2d 396 (Tex. 1967). Argonaut holds that intentional torts are not accidents, and thus are not occurrences regardless of whether the effect was unintended. Orkin stands for the proposition that deliberate acts, performed negligently, are accidents if the effect is not the intended or expected result. In analogizing the case to Maupin, the appellate court determined that the sale of the occupants’ possessions was intentional and deliberate, even if the insureds had no intent to injure the occupants.
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Texas Appellate Court Invalidates Temporary Injunction Against Re-Appraisal Of Property Damage

A Texas Court of Appeals held that a policyholder cannot dismiss a lawsuit with an unfavorable appraisal ruling, then file an ancillary suit in another court to enjoin an appraisal from happening in a first-filed lawsuit. Safeco Lloyds Insurance Company v. Barrentine, No. 05-13-01011-cv, 2014 WL 7399307, (Tex. App.-Dallas Dec. 17, 2014).

The insured's residence was damaged. The insurer invoked appraisal, and a court appointed an umpire. The umpire made an award, but purportedly did not consider the estimate or opinions of the insurer's appraiser. Accordingly, the insurer raised the issue with the court, which appointed a new umpire and ordered re-appraisal. The insured, however, dismissed the lawsuit and refiled in another county, obtaining a temporary injunction against the re-appraisal. The insurer appealed the court's temporary injunction order.

The Court of Appeals found the second court’s temporary injunction to be in error, concluding that the purpose of a temporary injunction is to preserve the status quo of the subject matter of a pending suit, and that the trial court in the later filed suit "usurped the role" of the trial court in the first filed suit.
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Federal Court In Alabama Finds Insurer Has No Duty To Defend Of Indemnify Insured Against Default Judgment

A federal court in Alabama has held that an insurer has no duty to defend or indemnify an insured contractor who failed to cooperate in the defense of litigation against it, resulting in an award of sanctions and default judgment. Auto-Owners Ins. Co. v. Premiere Restoration & Remodeling, Inc., 2014 WL 7369391 (N.D. Ala. Dec. 29, 2014).

A contractor was sued for faulty work and failing to complete a construction project. The contractor sought coverage from its general liability insurer which provided a defense under a reservation of rights. The contractor then failed to respond to repeated requests by the insurer to respond to discovery and to participate in the litigation. The plaintiffs moved for sanctions as result of the contractor’s failure to answer discovery and the court granted the motion, entered a default judgment against the contractor and awarded damages.

The insurer filed a declaratory judgment action asserting that the contractor’s failure to cooperate in the defense breached its duties under the policy and relieved the insurer of its obligation to defend and indemnify the contractor. The court ruled that the absence of participation deprived the insurer of an opportunity to defend and granted summary judgment in favor of the insurer, finding that the contractor’s failure to respond to the repeated requests for cooperation was a material and substantial breach that prejudiced the insurer.
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A Federal Court In Virginia Holds Insured Collaterally Estopped From Disputing Breach Of Fraud Provision Based On Criminal Conviction For Submitting Fraudulent Insurance Claim

A federal court in Virginia recently held an insured collaterally estopped from disputing that he breached a fraud provision of a policy where he was convicted for insurance fraud with regard to the same conduct. Miller v. Great Amer. Ins. Co., 2014 WL 5877609 (E.D. Va. Nov. 12, 2014).

Following a fire at his business, the insured submitted a claim for damages to the building structure and for damages to business personal property. After two examinations under oath, the insurer denied the claim, based on (among other things) false testimony provided during the examinations under oath. The insured sued the insurer, alleging breach of contract and bad faith. At the same time he filed suit, however, the insured was indicted for insurance fraud after the Department of Insurance found some of the claimed items of business personal property in his home. The plaintiff was eventually found guilty of the felony of attempting to obtain money by false pretense based on this fraudulent insurance claim. The insurer thereafter moved for summary judgment in the civil action based on the insured’s breach of the policy’s fraud provision.

Granting the insurer’s motion, the court held that the insured was collaterally estopped from disputing that he breached the fraud provision of the insurance policy based on his criminal conviction arising out of the same insurance claim. The court found that the conviction necessarily proved that he breached the fraud provision of the policy, rendering the policy void and barring plaintiff from recovering.
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North Carolina Court Of Appeals Holds Insured’s Son Not A “Volunteer Worker”

The North Carolina Court of Appeals recently held that the insured’s eleven-year-old son was not a “volunteer worker” as defined by policy. North Carolina Farm Bureau Mut. Ins. Co. v. Burns, 2014 WL 7125117 (N.C. App. Dec. 16, 2014).

The insured’s twenty-year-old son and eleven-year-old son were cleaning out a grain bin when the eleven-year-old’s foot became caught in auger, resulting in injury. The insurer sought a declaration of no coverage for the injuries pursuant to a provision that excluded coverage for bodily injury sustained by “volunteer workers.” After the trial court granted the eleven-year-old’s motion for summary judgment (holding that he was not a “volunteer worker”), the insurer appealed.

Affirming, the North Carolina Court of Appeals noted that the policy defined a “volunteer worker” as someone who (inter alia) “is not paid a fee, salary or other compensation” and “donates his or her work.” The court concluded that in order to give every word of the policy meaning, the word “donate” must encompass more than working without receiving payment, and found that the word “donate” must mean that one works of his own choice and free will. The court found that an eleven-year-old child acted not of his own free will, but rather in response to parental instruction and that he was not “donating” his work and was not a “volunteer worker.”
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