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Insurance Law Report: July 2019

July 11, 2019

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


Texas Supreme Court Holds Timely Payment Of Appraisal Award Does Not Necessarily Eliminate Insurer Extra-Contractual Exposure

Two decisions from the Texas Supreme Court addressed what effect an insurer’s timely payment of an appraisal award has on an insured’s claims for breach of contract, bad faith insurance practices, and violations of the Texas Prompt Payment of Claims Act. Prior to these decisions, Texas state and federal courts had all but universally held that an insurer’s timely payment of an appraisal award estops not only an insured from pursuing a claim for breach of contract but also effectively precludes extra-contractual exposure. These new opinions make clear that an insurer’s extra-contractual exposure is not necessarily eliminated by the timely payment of an appraisal award.

The first decision, Barbara Technologies Corporation v. State Farm Lloyds, No. 17-0640 (Tex. Jun. 23, 2019), concerned a claim where the insurer inspected the property and denied coverage on the basis that the covered damage observed did not exceed the policy deductible. The insured sued the insurer, which subsequently invoked appraisal. Approximately seven months after the appraisal invocation, the appraisers agreed to an award for replacement cost value. The insurer promptly (the next day) paid the award, less deductible and depreciation. The insured then moved for summary judgment on the ground that the insurer failed to pay its claim within the 60-day deadline provided in the Prompt Payment of Claims Act. The insurer filed a cross-motion for summary judgment, citing Texas precedent that timely payment of an award precludes recovery under the Act. That motion was granted, and the insured appealed. The appellate court affirmed.

The insurer’s position was that its invocation of appraisal served as a request for additional information from the insured needed to secure final proof of loss, which statutorily extends prompt payment deadlines under the Act until such information is provided by the insured. The Supreme Court rejected this argument, and pointed out that the appraisal invocation was not a part of the claim investigation and was not invoked until well after the claim determination was made. It held that the “use of the appraisal process to resolve a dispute has no bearing on any deadlines or enforcing any missed deadlines” under the Act. The Court then noted, however, that an insurer’s payment of an appraisal award is not sufficient to establish liability for failure to timely pay the claim under the Act. The Court made clear that because appraisal only sets the amount of loss, and does not answer any questions of liability, payment of an appraisal award is neither an acknowledgement nor a determination of liability under the Act. The question of whether an insurer is liable for the claim still remains, and must be proven or admitted, before recovery under the Act can be pursued by an insured.

The second decision, Oscar Ortiz v. State Farm Lloyds, No. 17-1048 (Tex. Jun. 28, 2019) also concerned a claim where the insurer inspected the property and determined that the observed covered damage did not exceed the policy deductible. The insured submitted a public adjuster’s estimate in excess of the deductible, and the insurer performed a second inspection and determined again that covered damage did not exceed the deductible. The insured sued, asserting claims for breach of contract, for statutory and common law bad faith insurance practices, and for violations of the Prompt Payment of Claims Act. The insurer answered and, two months later, invoked appraisal. An appraisal award for actual cash value was made, which the insurer paid and then moved for dismissal of all claims, which motion was granted. The insured appealed, challenging whether payment of the award precluded claims for breach of contract, bad faith, and violations of the Prompt Payment of Claims Act.

The Supreme Court affirmed dismissal of the breach of contract claim and also the claims of violations of the duty of good faith and fair dealing and violations of Chapter 541 of the Texas Insurance Code, i.e., “bad faith.” However, the Court affirmed dismissal of the bad-faith claims because the insured failed to establish injury “independent from the loss of [policy] benefits.” The insured had attempted to establish independent injury by claiming he was damaged by having to incur fees and expenses related to the pursuit of policy benefits. The Court rejected this argument, noting that attorney’s fees and costs of litigation are separate from “damages” both under Chapter 541 of the Texas Insurance Code and under the common law; thus, these amounts could not be used to establish “independent injury.” With respect to claims under the Prompt Payment Act, the Court echoed its holding in Barbara Technologies that the payment of an appraisal award does not resolve such claims and that the issue of liability remains.

These decisions will make appraisal a less appealing option for insurers in resolving claims. Appraisal awards in Texas typically trend toward a split of the parties’ respective damage estimates and are often higher than the value assessed by insurer. The trade-off for insurers is the assurance that extra-contractual exposure is, in effect, eliminated. Under these cases, an insurer no longer has that assurance. The bigger question perhaps is how insured’s counsel will use these opinions in handling claims.


Florida Supreme Court Will Review Whether Insurer Can Sue Defense Counsel For Malpractice

The Florida Supreme Court will address whether an insurer may sue defense counsel it appointed to defend its insured. Arch Insurance Co. v. Kubicki Draper LLP, Case No. SC19-673 (Fla. Jun. 7, 2019).

An insurer sued defense counsel it appointed to defend its insured for failing to timely assert a statute of limitations defense. The trial court granted summary judgment based on a lack of privity between counsel and the insurer and that the insurer failed to establish that it was an intended third-party beneficiary. The appellate court affirmed, noting only two exceptions to the rule that only those who have privity with counsel may sue for malpractice, i.e., the drafting of wills and the drafting of private placement memoranda regarding securities.


South Carolina Supreme Court Sets Test For Waiver Of Attorney-Client Privilege

South Carolina Supreme Court recently held that insurance companies facing bad-faith actions do not automatically waive attorney-client privilege for documents sought in such suits by denying liability. In re Mt. Hawley Ins. Co., 2019 S.C. LEXIS 53 (S.C. Jun. 12, 2019).

After an insurer denied coverage for a construction defect suit, the insured brought a bad-faith tort action against the insurer. During discovery, the insured sought documents addressing why the insurer denied coverage, but the insurer argued that some of the information requested was protected by the attorney-client privilege. The court ultimately ordered that the documents in question be submitted to the court for an in camera inspection. The insurer sought a writ of mandamus from the U.S. Fourth Circuit Court of Appeals to vacate the district court’s order, leading the Fourth Circuit to certify the following question to the South Carolina Supreme Court: “Does South Carolina law support application of the ‘at issue’ exception to attorney-client privilege such that a party may waive the privilege by denying liability of its insurer?”

Noting that it was considering the question in the narrow context of a bad-faith action against an insured, the South Carolina Supreme Court answered that denying liability and/or asserting good faith in an answer does not, standing alone, place privileged communications at issue. The South Carolina court adopted an approach enunciated in an Arizona case, which took a middle-ground approach in determining whether an insurer waives attorney-client privilege in a bad-faith action. The South Carolina Supreme Court held that a client does not waive the privilege simply by defending a lawsuit, and thus in a tort action against an insurer for bad-faith refusal to provide coverage the party seeking waiver of the attorney-client privilege must make a prima facie showing of bad faith.


Supreme Court Of Oklahoma Holds Damages Cap Statute Unconstitutional

The Oklahoma Supreme Court ruled a statutory damages cap for pain and suffering is a “special law” forbidden by Article 5, Section 46 of the Oklahoma Constitution that the Legislature shall not pass “special laws” where part of an entire class of similarly affected persons is segregated and targeted for different treatment. Beason v. I.E. Miller Servs., 2019 Okla. LEXIS 28 (Okla. Apr. 23, 2019).

Plaintiffs brought a personal-injury action which went to trial, and a jury awarded compensatory damages to the injured plaintiff and his wife. The jurors then signed a “supplemental verdict form” allocating a portion of the verdict as actual non-economic damages. The judge reduced the amount of the actual non-economic damages awarded by the jury to comply with the $350,000 per person statutory cap on damages contained in 23 O.S. 2011 §61.2(B)-(F) for plaintiffs who survive their injury-causing event. The verdict from non-economic damages was therefore reduced to $700,000.

The Supreme Court ruled that since the statute limits recovery for pain and suffering in cases where the plaintiff survives the injury-causing event, while persons who die from their injury-causing event face no such limitation, it violates the constitutional prohibition of “special laws.”


Fifth Circuit Affirms Holding That Law Enforcement Policies Are Triggered When Injury Occurs During Policy Period Even If Wrongful Acts Causing The Injury Occurred Before The Policy Period

The U.S. Fifth Circuit Court of Appeals affirmed a federal court in Mississippi ruling that insurer’s defense obligation was triggered because their policies provided coverage for bodily injuries that occur during their respective coverage periods, regardless of when the acts that caused the injuries took place. Travelers Indemnity Co., et al. v. Forrest County, et al., Case No. 17-60291 (5th Cir. May 29, 2019).

In 1980 three men were sentenced to prison for the rape and murder of a woman based upon coerced confessions obtained through death threats and violence. While incarcerated, all three men were victims of numerous assaults by other prisoners resulting in physical injuries and contraction of various diseases. In 2010, the men were exonerated by DNA evidence which had been tested by the Innocence Project. The estates of the three men sued the county and city whose police arrested and prosecuted the prisoners and several individual officers for civil rights violations. The underlying civil rights suit was settled and this appeal arose out of a preservation of rights to appeal the issue of the insurers’ duty to defend.

For the years 2005 through 2011, the County had purchased law enforcement liability policies from two insurers. Both insurers argued that they were not obligated to fund the defense because the officers’ alleged wrongful acts against the three wrongfully convicted men occurred before the policies took effect. One policy stated that there was coverage for certain emotional and physical injuries that happen “while the policy is in effect,” without specifying if the actual wrongful act must occur in the same time period. The other policy was not quite as clear, but the Fifth Circuit concluded that it could be read to provide the same scope of coverage as the other policy. As a result, the Fifth Circuit affirmed the judgment that because injuries to the plaintiffs occurred during the policy periods the policies provided coverage and owed a duty to defend.


Louisiana Court Confirms Denial of Coverage Does Not Necessarily Result in Waiver Of The Right to Invoke a “Consent-to-Settle” Condition As a Defense

A Louisiana Court of Appeal affirmed summary judgment in favor of insurers concluding that the insurers had not waived their right to invoke the policies’ notice and “consent-to-settle” conditions when they denied coverage because the party seeking coverage settled the underlying claims without the insurers’ consent before giving notice. Ortiz v. MeadWestvaco Corp., 2019 La. App. LEXIS 1045 (La.App. 3 Cir. 06/05/19).

The insured contracted with the defendant to perform welding work at the defendant’s refinery, and the insured’s employees sued the defendant for personal injuries arising out of the performance of this work. The defendant settled the suits and then filed third-party demands against the insured and its insurers seeking indemnity and coverage. The insurers moved for summary judgment arguing, among other things, that even if the defendant were an insured, its failure to comply with the policies’ notice and “consent-to-settle” conditions precluded coverage. The court rendered judgment in the insurers' favor, finding that the defendant did not give notice to the insurers until it filed its third-party demand against them years after the underlying occurrence and after the defendant had settled the underlying suits. The defendant appealed on the basis that the insurers waived their right to invoke the notice and “consent-to-settle” conditions as defenses when they denied coverage and because neither insurer provided evidence of prejudice.

The court of appeal affirmed. It rejected the argument that an insurer’s denial of coverage necessarily waives its right to rely on an insured’s non-compliance with the “consent-to-settle” condition as a defense. The court found mistaken the reliance on caselaw where the insurer waived its “consent-to-settle” defense by denying coverage before the insured settled without the insurer’s consent. Unlike the settlements in the caselaw relied upon by the defendant, the settlement preceded the insurers’ coverage denial; therefore, the court held that the defendant could not argue that it was forced to settle without the insurers’ consent to minimize its losses and that enforcement of the “no-action” provision would be inequitable.


Florida Appellate Court Holds Rental Vehicle Does Not Qualify As a “Covered Auto”

A Florida appellate court recently held that a rental car passenger injured in an accident could not recover compensation for her injuries under the rental car driver’s uninsured motorist coverage because the rental car was not a “covered auto.” Progressive Am. Ins. Co. v. Pawelczyk, 2019 Fla. App. LEXIS 7373 (Fla. 2d DCA May 15, 2019).

A passenger, while in her sister’s rental car, was injured in an automobile accident. The other vehicle in the accident was an uninsured motor vehicle. The rental car passenger sought to recover compensation for her injuries under her sister’s automobile policy. The UM portion of the policy covered any person occupying a “covered auto,” which the policy defined as (a) any auto or trailer shown on the declarations page of the policy, (b) any additional auto, (c) any replacement auto, or (d) any trailer owned by the named insured. The passenger argued that the policy covered the rental car as the rental car was an “additional auto” defined under the policy as an automobile for which the policyholder is the beneficial owner during a period that does not permanently replace an automobile listed on the declarations page. The trial court granted summary judgment in favor of the passenger by finding that the rental car was a “covered auto.” The insurer appealed.

The appellate court reversed and remanded. The passenger’s primary argument on appeal was that, because her sister had dominion and control over the vehicle, her sister became the beneficial owner of the rental car and the car became an “additional auto” under the policy. The court rejected this argument, concluding that the argument’s application would be too broad because it would extend to any passenger in any vehicle driven by someone with insurance. Additionally, the court noted that this interpretation conflated a temporary possessory interest in the rental vehicle with vehicle ownership. Instead, the court reasoned that beneficial ownership, even if it does not require full fee ownership, requires more than just a mere right of possession. The court concluded that the passenger’s sister was not the beneficial owner of the rental car and that the rental car was thus not a “covered auto.”


Appellate Court in Texas Effectively Finds that Stowers Claim Can Exist in the Absence of an Excess Judgment

A Texas Court of Appeals implicitly countenanced the viability of a Stowers claim in the absence of an excess judgment by failing to grant mandamus and reverse the denial of an insurer’s motion to dismiss an insured’s claim as a matter of law. In re Farmers Tex. County Mut. Ins. Co., 2019 WL 2605630 (Tex.App.—San Antonio, June 26, 2019).

The insured was involved in an auto accident and was sued. The underlying claimant made a settlement demand for less than policy limits. The insurer was not willing to pay the amount demanded, and the insured paid the balance to conclude the settlement. The insured then sought reimbursement from her insurer on a common law claim for failure to make a reasonable settlement under the Stowers doctrine even though there had not been an excess judgment. The trial court denied the insured’s motion to dismiss. The insurer sought mandamus. The appellate court held that this was a case of first impression and that the insured’s exposure to an excess judgment was not a clear and established element of a Stowers claim. Therefore, it held that the insured could continue to pursue her claim against the insurer for failure to negotiate a reasonable settlement and that mandamus would not issue. A dissenting judge argued that an excess judgment is implicitly a necessary element of a Stowers claim as there cannot be a cause of action for negligent failure to settle a liability claim unless there is also a judgment against the insured in excess of policy limits because an insured has no legal obligation to pay anything absent a judgment.


Florida Appellate Court Holds Reliance On Extrinsic Evidence That Is Not Unconverted Or Manifestly Obvious Is Improper In Determination of Duty To Defend

A Florida appellate court held that an insurer’s reliance upon extrinsic evidence to support the application of a pollution exclusion in declining to defend was error because the denial was not based on uncontroverted facts raised in pleadings or objective facts manifestly obvious to all parties involved. Advanced Systems, Inc. v Gotham Ins. Co., 44 Fla. L. Weekly D 996, 2019 Fla. App. LEXIS 5933 (Fla. 3d DCA Apr. 7, 2019).

A foam fire suppressant system in an airplane hangar failed, resulting in damage to several airplanes. The hangar owner sued the general contractor that constructed the aircraft hangar, and the general contractor brought a third-party complaint against the insured, the subcontractor that installed the hangar’s fire suppression system. Its insurer did not respond to the insured’s tender of defense, so the insured filed a complaint for declaratory judgment. The insurer moved for partial summary judgment, arguing that it did not have a duty to defend or indemnify because coverage was barred by a pollution exclusion in the policy. The insurer submitted as evidence the declaration of a claims specialist, who attached a copy of the Material Safety Data Sheet (MSDS) for Chemguard C2. The insured claimed that Chemguard C2 was the name of the foam fire suppressant released into the aircraft hangar, and that due to Chemguard C2’s chemical composition as detailed in the MSDS, the foam was a “pollutant,” triggering the pollution exclusion. At the summary judgment motion hearing, the court asked counsel for the insurer about the source of the MSDS, to which counsel responded that the MSDS is publicly available, and “the product that was used was Chemguard, we Googled it.” The trial court granted the motion, specifically relying on the MSDS to support the conclusion that the foam was a “pollutant” within the meaning of the exclusion, and that the insurer had no duty to defend or indemnify. The insured appealed.

The appellate court reversed. It concluded that the insured consistently contested the nature and composition of the fire suppression foam that was released in the hangar, and repeatedly objected to the use of the MSDS as unauthenticated evidence not in the record and beyond the scope of determining whether a duty to defend existed. The appellate court noted that the general rule in Florida is that an insurer’s duty to defend is determined from allegations in the complaint, and that only in exceptionally rare cases is a trial court permitted to consider extrinsic evidence. The appellate court held that this was not one of those exceptional cases since the evidence relied upon in the motion for summary judgment was not comprised of objective facts manifestly obvious to all involved and did not contain uncontroverted facts not pled in the underlying action or third-party complaint filed by the general contractor.


Florida Appellate Court Holds Insured Can Recover Damages For Lost Rent Even When The Policy Does Not Provide Lost Rent Coverage

A Florida appellate court held that an insured might recover lost rent damages as consequential damages even when the policy does not provide coverage for loss of rent damage. Manor House, LLC v. Citizens Prop. Ins. Corp., 44 Fla. L. Weekly D 1403, 2019 Fla. App. LEXIS 8460 (Fla. 5th DCA May 31, 2019).

An insured owned apartment buildings that were damaged. Undisputed payment was made to the insured, but the insured later requested a considerably larger amount. When the insurer did not make further payments, the insured demanded appraisal and then filed suit. The appraisal panel awarded the insured replacement cost value, which the insurers paid. The insured then filed a breach of contract lawsuit, in which the insured sought to recover extra-contractual damages for lost rent that it lost as a result of the delay in adjusting and paying the insured’s claim. The insurers filed a motion for summary judgment based on the fact that the policy provided for only property damage, not lost rent. The trial court granted the motion.

The appellate court reversed and remanded the question of lost rent as consequential damages. The appellate court focused on, not what the policy said, but the more general proposition that a party in a breach-of-contract suit is entitled to damages that would put it in the same position it would have been if the breach had not occurred. The appellate court opined that an insured should have the opportunity to prove consequential damages in the form of lost rent due to an insurer’s delay in adjustment. Accordingly, the appellate court held that the insured be allowed the opportunity to prove all consequential damages of the breach-of-contract dispute, including lost rent, even though the policy does not explicitly provide loss of rent coverage.


Federal Court In Louisiana Finds “Tangible” Property Means “Corporeal” Property Which Does Not Include Injury To Reputation

A federal court in Louisiana granted an insurer’s motion for summary judgment that coverage was not afforded under a homeowner’s policy for a defamation claim against its insured because the alleged defamation did not constitute an “occurrence,” and that even if it did, the plaintiff did not allege physical damage to his body or property. Loston v. St. Mary Par. Sheriff’s Office, 2019 U.S. Dist. LEXIS 59445 (W.D. La. Apr. 5, 2019).

The plaintiff was arrested for the theft of the insured’s off-road vehicle. The charges against plaintiff were later dropped, but not before the insured posted a photograph of the plaintiff on Facebook stating that plaintiff was the “thug” who stole her son’s vehicle. The plaintiff sued the insured for defamation, who tendered the claim to her homeowner’s insurer. In the ensuing coverage litigation, the insurer moved for summary judgment that coverage was not afforded under the policy because, among other things, the alleged defamation was not an “accident” and, thus, was not an “occurrence.”

The court granted the motion finding that the alleged defamation was not an “occurrence.” The court added that even if the alleged defamation were an “occurrence,” the plaintiff did not allege physical injury to the body or tangible property. The court acknowledged that the Louisiana Fourth Circuit Court of Appeal in Williamson v. Historic Hurstville Association, 556 So.2d 103 (La. App. 4 Cir. 1990), had found that harm to a person’s reputation could constitute physical damage to tangible property based on the dictionary definition of “tangible,” but found Williamson unpersuasive, and instead, opted to follow U.S. Fifth Circuit Court of Appeals precedent that lost profits are not “tangible” property.


Federal Court In Georgia Holds Firearms Exclusion Not Ambiguous

On reconsideration of an insurer’s motion for judgment on the pleadings, a federal court in Georgia recently held that a firearms exclusion is not ambiguous and applied to exclude coverage. Hudson Specialty Ins. Co. v. Snappy Slappy LLC, 2019 U.S. Dist. LEXIS 73706 (M.D. Ga. May 1, 2019).

A fatal shooting occurred at a bar owned by the insured. The mother of the deceased filed a wrongful death action against the insured, who gave notice to its insurer. The insurer responded that the firearms exclusion in the policy barred coverage. The insured disputed the insurer’s position, so the insurer sought a declaratory judgment that it had no duty to defend or indemnify, and the insurer filed a motion for judgment on the pleadings. Finding ambiguity in the language of the exclusion, the court denied the insurer’s motion. The court faulted the policy for not specifying whether the phrase “use of firearms” in the exclusion was limited to persons directly involved with the insured or whether the phrase applied to any person who sustained bodily injury. The insured moved for reconsideration.

On reconsideration, the court found that the absence of language limiting the broad application of the firearms exclusion to a specific actor is not sufficient to render the exclusion ambiguous because “breadth does not equate to ambiguity.” Absent any limitation of the preceding language of the exclusion barring coverage for bodily injury arising from the manufacture, importation, sales, distribution, gunsmithing, ownership, or maintenance of firearms, the court found that the “use of firearms” was intentionally broad. The court agreed that it was the insurer’s intention that the exclusion apply to anyone’s use of a firearm, not just those directly involved with the insured. Finding no ambiguity in the exclusion, the court held that by not limiting or modifying the phrase “use of firearms” in the exclusion, the plain language barred coverage for bodily injury arising out of the use of firearms in general. The court granted the insurer’s motion for reconsideration and vacated its order denying the insurer’s motion for judgment on the pleadings.


Federal Court In Alabama Finds U.K. Arbitration Clause In Disability Insurance Policy Enforceable

A federal district court in Alabama granted an insurer’s motion to compel arbitration based on a policy provision requiring arbitration in the United Kingdom that the court found not to be unfair because the plaintiff could participate by telephone. Laura A. Thompson v. Generali Worldwide Insurance Company, Ltd., Case No. 3:18-cv-1126 (N.D. Ala. Jun. 10, 2019).

An employee of a company insured under a long-term disability policy sued her employer’s insurer for wrongfully denying her claim for long-term disability benefits. The insurer filed a motion to compel arbitration based on the policy’s broad arbitration provision which required any claims arising out of the policy to be arbitrated in the U.K. The employee argued that the arbitration provision was unenforceable because it grossly favored the insurer, and because she had no meaningful choice of whether to accept or reject the terms of the provision given the expenses associated with participating.

The court disagreed, finding the arbitration provision to be enforceable as written under Alabama law. The court ruled that under Alabama law, a plaintiff must be party to the contract of insurance to establish that there was a lack of meaningful choice regarding an arbitration provision, that the provision was unreasonably unfavorable to an insured, or that there as unequal bargaining power between the insured and the insurer. The court found that the plaintiff could not meet this burden as an employee of the insured company and thus a third-party beneficiary to the policy. The court ruled that the costs were not excessive where the provision allowed for the plaintiff to participate telephonically and did not require that she hire counsel in the U.K.

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