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 March issue. To view, click on the appropriate title and you will be brought to the full version of the article below.
1. Florida Supreme Court Holds "Economic Loss" Rule Applies Only To Product Liability Cases
2. Mississippi Supreme Court Holds Insured's Failure To Read Policy Does Not Excuse Insured From Clearly Stated Deductible
3. Arkansas Supreme Court Holds Insurer Entitled To Pursue Subrogation Action To Recover No-Fault Payments Made To Insured
4. Oklahoma Supreme Court Affirms Validity Of Properly Issued Reservation Of Rights Letters And Refuses To Require Insurer To Indemnify Insured For Uncovered Claims
5. Alabama Supreme Court Affirms Assault And Battery Exclusion Does Not Apply To Claim For Failure To Implement Risk Management Program
6. Texas Supreme Court Considers Certified Questions Concerning Coverage For Construction Defects
7. Fifth Circuit Upholds Policy’s Claims-Reporting Requirement Against Direct Action Plaintiff Under Louisiana Law
8. Fifth Circuit Holds Under Texas Law That Scope Of Coverage For Additional Insured Is Determined Solely By Terms Of Policy, Not By Contract Creating Additional Insured Status
9. Florida Appellate Court Holds Insurer Owes Separate Defense Counsel To Insured And Additional Insured
10. Under Kentucky Law, Policy Excluding Coverage For Damages Covered By Other Insurance Is Primary To Policy With "Excess" Other Insurance Clause
11. Federal Court In Kentucky Concludes That Defense Costs Incurred By Insurers With Consecutive Years Of Coverage Should Be Allocated Based On "Time On The Risk," Not "Equal Shares"
12. Fourth Circuit Holds Improper Storage Of Elevator Fluid, Leading To Multiple Surgical Mishaps, Constituted Single Occurrence
13. Fifth Circuit Affirms Subrogation Verdict For Insurer Holding Replacement Value Is Appropriate Measure Of Determining Fair Market Value Under Texas Law
14. Federal Court In Georgia Finds Lessor’s Liability Policy Does Not Cover Lessees As "Real Estate Managers"
15. Federal Court In South Carolina Finds No Professional Liability Coverage For Claims Arising Out Of Unsolicited Facsimile Advertisements
16. Federal Court In Oklahoma Reads Gynecology As Separate From Obstetrics, Rejecting Coverage Under Professional Liability Policy For Liability Arising Out Of Delivery Of Baby
17. Federal Court In Virginia Holds Insurer Has No Duty To Defend Or Indemnify Due To Late Notice As A Matter Of Law
18. Federal Court In North Carolina Holds Supplemental Extended Reporting Period Runs From Conclusion Of Basic Extended Reporting Period And Not Expiration Of Policy
19. Federal Court In South Carolina Holds No Coverage For Diminution In Value And Loss Of Use Arising Out Of Defective Septic System
20. Federal Court In Arkansas Finds Insurer Entitled To Reformation
21. Federal Court In Alabama Finds No Duty To Defend In Motion For Default Judgment Against Insured
22. Texas Appellate Court Threatens Mandamus If Trial Court Does Not Vacate Denial Of Insurer’s Motion To Compel Appraisal
FLORIDA SUPREME COURT HOLDS "ECONOMIC LOSS" RULE APPLIES ONLY TO PRODUCT LIABILITY CASES
The Florida Supreme Court has held that the application of the “economic loss” rule is limited to products liability cases. Tiara Condo. Assoc., Inc. v. Marsh & McLennan Companies, Inc., 2013 WL 828003 (Fla. Mar. 7, 2013).
The insured’s insurance broker secured windstorm coverage for the insured. During the policy period, the insured sustained significant damage and began remediation after being assured by its broker that the policy limit was a per occurrence limit. However, after it completed expensive remediation, the insured learned that the policy limit was in the aggregate, the balance of which was less than the remediation costs. Ultimately, the insured and insurer settled for an amount greater than the aggregate limit, but less than what was spent in remediation. The insured then sued its broker alleging breach of contract, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, negligence and breach of fiduciary duty. The district court granted summary judgment in favor of the broker, and the Eleventh Circuit affirmed the district court’s decision with the exception of the negligence and breach of fiduciary duty claims. As to those claims, the Eleventh Circuit certified to the Florida Supreme Court the question whether the “economic loss” rule prohibits recovery, or whether a broker falls within the professional services exception that would permit the insured to proceed with those claims.
The Florida Supreme Court, receding from prior case law and going beyond the certified question, held that the “economic loss” rule is limited to products liability cases. The Supreme Court reasoned that the rule had been expanded over time, which led to the creation of the exceptions to the rule that ultimately made it unwise and unworkable in practice. Thus, the Florida Supreme Court explicitly stated that its intent was to return the “economic loss” rule to its origin in products liability.
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MISSISSIPPI SUPREME COURT HOLDS INSURED'S FAILURE TO READ POLICY DOES NOT EXCUSE INSURED FROM CLEARLY STATED DEDUCTIBLE
The Mississippi Supreme Court affirmed summary judgment that an insured is bound by the stated policy deductible, despite the insured’s claim that it was unaware of the policy deductible. Southern Healthcare Services, Inc., et al. v. Lloyd's of London, et al., 2013 WL 628661 (Miss. Feb. 21, 2013).
The insured maintained insurance for its management of nursing homes. The insured’s original policy contained a $25,000 per claim deductible. The following year, although the insured alleged to have requested similar coverage from its broker, the insurer issued a policy containing a $250,000 per claim deductible. After a series of lawsuits against the insureds, the insurer gave notice that the insurer would defend and indemnify the insured only after the $250,000 deductibles were paid in full. Litigation ensued, and the trial court granted summary judgment to the insurer. The insured appealed.
The Mississippi Supreme Court affirmed. It found that the policy clearly and unambiguously identified the increased deductible. There was evidence the insureds received a copy of the policy prior to renewal and, based on numerous references to the deductible throughout the policy, along with several pages referencing the deductible actually signed by the insureds, the insureds could not argue that they were unaware of the deductible when it was renewed. Under Mississippi law, failure to read a policy is not a valid reason for not knowing its contents; a contracting party is under a legal obligation to read a contract before signing it and is charged with knowing the contents of any document that it executes.
ARKANSAS SUPREME COURT HOLDS INSURER ENTITLED TO PURSUE SUBROGATION ACTION TO RECOVER NO-FAULT PAYMENTS MADE TO INSURED
The Arkansas Supreme Court, reversing a lower court, has held that an auto insurer is entitled to pursue subrogation claims against a tortfeasor for no-fault medical benefits paid to its insured. Progressive Halcyon Ins. v. Saldivar, 2013 WL 655234 (Ark. Feb. 21, 2013).
A motorcycle rider was injured when he struck another vehicle that had failed to yield. He received no-fault medical payments from his insurer and did not file suit against the tortfeasor. The insurer filed a subrogation action against the tortfeasor to recover the payments made to the insured. The tortfeasor moved for summary judgment, arguing that the insurer’s right to subrogation did not arise under Arkansas Code Ann. §23-89-207 unless the insured had recovered in tort for injury, either by settlement or judgment. The trial court granted the motion, and the insurer appealed.
On appeal, the insurer argued that Arkansas Code Ann. §23-89-207 is a reimbursement statute that is inapplicable and that it is entitled to subrogation under a broader statute, Arkansas Code Ann. §23-79-146. The Arkansas Supreme Court agreed, finding that the reimbursement statute applies only if the insured receives no-fault medical benefits and recovered in tort for the injury. Because the insured did not recover in tort for his injury, the insurer is entitled to subrogation under the broader statute. The decision was reversed and the case was remanded for further proceedings.
OKLAHOMA SUPREME COURT AFFIRMS VALIDITY OF PROPERLY ISSUED RESERVATION OF RIGHTS LETTERS AND REFUSES TO REQUIRE INSURER TO INDEMNIFY INSURED FOR UNCOVERED CLAIMS
The Oklahoma Supreme Court found an insurer has no obligation to indemnify for damages arising out of a condemnation claim despite providing a defense because the insurer properly reserved its rights to deny coverage for the excluded claims. City of Choctaw v. Oklahoma Municipal Assur. Group, 2013 WL 223055 (Okla. Jan. 22, 2013).
An insured municipality was sued for inverse condemnation along with separate claims arising under Oklahoma’s Governmental Tort Claims Act (GTCA). The municipality’s liability policy covered the claims and the municipality’s insurer defended. The complaint was amended to allege additional causes of action, including inverse condemnation. The insurer advised the insured that the policy excluded coverage for liability “arising out of […] inverse condemnation, by whatever name called.” The letter also gave notice to the city of the option to retain separate counsel for its defense of the condemnation claims. Following a jury trial, the court awarded damages arising out of the condemnation claim. The insurer then filed a declaratory judgment action seeking a declaration that it had no duty to indemnify the municipality for the condemnation damages. Both parties moved for summary judgment. The trial court denied the insurer’s motion for summary judgment and granted summary judgment in favor of the municipality because of estoppel. The insurer appealed.
The Oklahoma Supreme Court found that the insurer had properly limited its defense of the plaintiff’s suit to claims that implicated the city’s liability under the GTCA, had notified the city of this fact and did not mislead the city concerning the scope of the insurer’s coverage or defense. The Supreme Court further held that the summary judgment granted in the lower court was improper and that estoppel was not appropriate, and remanded the case with directions to enter summary judgment in favor of the insurer.
ALABAMA SUPREME COURT AFFIRMS ASSAULT AND BATTERY EXCLUSION DOES NOT APPLY TO CLAIM FOR FAILURE TO IMPLEMENT RISK MANAGEMENT PROGRAM
The Alabama Supreme Court has held that a college fraternity’s general liability policy covers damages sustained by an assault victim as a result of the local chapter’s officers’ failure to implement a risk management program. Admiral Ins. Co. v. Price-Williams, 2013 WL 135738 (Ala. Jan. 11, 2013).
A man sustained bodily injuries after a fight at a fraternity house. He filed suit against the national organization, the local chapter and three men who allegedly beat him, two of whom were the president and vice-president of the local chapter. Judgment was rendered in favor of the victim. The court found that the two officers were liable for failing to implement a risk management program required by the national organization. Among other procedures, the program required the fraternity to use “sober monitors” for decision-making responsibilities at parties. The victim commenced a direct action against the fraternity’s liability insurer and the two officers, asserting that the damages awarded in the underlying action were covered under the liability policy. The trial court conducted a bench trial and concluded that the policy provided coverage for the two officers’ liability for failing to implement the risk management program. The insurer appealed.
The insurer argued that coverage for the claims were excluded under the assault and battery exclusion. The Alabama Supreme Court agreed that this exclusion barred coverage of any liability resulting from the conduct of the assault, but held that the exclusion did not apply to the claims arising out of the failure to implement the risk management program, which was required of local officers. The insurer also argued that the failure to implement the risk management program was not an “occurrence” under the policy, but the Supreme Court rejected this argument because the fraternity, as the named insured, expected its local officers to implement the required program. The trial court’s judgment was affirmed.
TEXAS SUPREME COURT CONSIDERS CERTIFIED QUESTIONS CONCERNING COVERAGE FOR CONSTRUCTION DEFECTS
The Texas Supreme Court has heard oral argument in Ewing Construction Co., Inc. v. Amerisure Insurance Co. on a certified question from the U.S. Fifth Circuit Court of Appeals regarding coverage for a claim of defective construction. In a declaratory judgment action, a federal district court held that the contractor’s insurer owed no duty to defend or to indemnify the contractor because its CGL policy’s contractual liability exclusion excluded coverage, and no exception to that exclusion revived coverage. On appeal, the Fifth Circuit certified to the Texas Supreme Court the following questions:
(1) Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the contractual liability exclusion?
(2) If the answer to question one is “Yes” and the contractual-liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall within the exception to the contractual-liability exclusion for “liability that would exist in the absence of contract?”
The answer to those questions will involve the Supreme Court’s analysis of Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007) and Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010). Lamar Homes held that allegations of construction defects may constitute an “accident” or “occurrence” under a CGL policy. Gilbert held that a CGL policy’s contractual liability exclusion excludes coverage for construction defects arising out of a contract with a governmental agency, where the only viable claims were for breach of contract (there because of governmental tort immunity), and where the contractor had expressly assumed contractual liability for damages to third-party property. In Ewing there was no such agreement in the contract, and the claims alleged in the underlying lawsuit were for breach of the common law agreement to perform work in a good and workmanlike manner.
The Fifth Circuit focused on the application of the holding of Gilbert to the allegations of a violation of a common law tort duty. At oral argument before the Supreme Court, the contractor’s insurer argued that because the damages sought were purely contract damages, the suit sounded in contract and that Gilbert bars coverage. The contractor argued that the claims arose from a common law liability that the insured would have in the absence of a contract, thus putting it within the exception to the contractual liability exclusion. It also argued that for the court to find no coverage would eviscerate the holding of Lamar Homes.
The case is under submission. The case number is 12-0661. An opinion is expected in the Fall.
FIFTH CIRCUIT UPHOLDS POLICY’S CLAIMS-REPORTING REQUIREMENT AGAINST DIRECT ACTION PLAINTIFF UNDER LOUISIANA LAW
The U.S. Fifth Circuit Court of Appeals has held that a Louisiana direct action plaintiff has no right to proceed against an insurer that issued a claims-made and reported policy which did not receive a timely report of suit from its insured. First American Title Ins. Co. v. Continental Cas. Co., 2013 WL 757655 (5th Cir. Feb. 28, 2013).
The insured title company was sued by a title insurer for negligently issuing a title policy. The lawsuit was filed during the period of the title company’s claims-made and reported professional liability coverage, but it was not reported until after the period ended. The title insurer joined the professional liability insurer as a direct action defendant in the suit. That insurer moved for summary judgment, arguing that no coverage was available because the claim was not timely reported. The district court granted the motion, and the title insurer appealed.
The Fifth Circuit affirmed, rejecting the title insurer’s argument that under the Direct Action Statute the failure of the insured to report a claim timely cannot inure to the detriment of a direct action plaintiff and deprive it of its direct action rights. The Fifth Circuit held that the Direct Action Statute must be applied “in a manner that gives effect to the bargained-for claims reporting obligations in the policy.” This ruling represents an exception to the otherwise universal rule under Louisiana law that no conduct of an insured subsequent to injury to a direct action plaintiff can abrogate the rights of a direct action plaintiff, whose rights vest at the moment of injury.
FIFTH CIRCUIT HOLDS UNDER TEXAS LAW THAT SCOPE OF COVERAGE FOR ADDITIONAL INSURED IS DETERMINED SOLELY BY TERMS OF POLICY, NOT BY CONTRACT CREATING ADDITIONAL INSURED STATUS
The U.S. Fifth Circuit Court of Appeals, applying Texas law, held that when a named insured agrees to indemnify and secure insurance for an additional insured, the terms of the policy—not the indemnity agreement—determines the insurers’ coverage obligations. In re Deepwater Horizon, 2013 WL 776354 (5th Cir. Mar. 1, 2013).
The issue involved the extent to which an offshore drilling contractor’s policies cover liabilities not assumed by the contractor, in this case “above surface” pollution. The drilling contract required the drilling contractor to maintain insurance naming the oil company as an additional insured and to indemnify it for certain liabilities.
In the oil company’s motion for judgment on the pleadings, the parties conceded that the contract was an “insured contract” under the policies that qualified the oil company as an additional insured under the policies. However, the parties disputed whether the scope of coverage available to the oil company as an additional insured was to be determined by only the policies or also by the obligations assumed by the named insured in the contract. The district court entered judgment on the pleadings finding that the oil company was an additional insured only as to liabilities the drilling contractor explicitly assumed under the drilling contract.
In reversing, the Fifth Circuit held that under Texas Supreme Court jurisprudence only the policy itself may establish the extent to which an additional insured has coverage. The Fifth Circuit observed that the oil company was not seeking indemnity, but was seeking coverage from the drilling contractor’s insurers. It also found that the additional insured provision was a “discrete requirement” in the drilling contract and therefore separate from and additional to the indemnity provisions. The Fifth Circuit found that the oil company is entitled to unlimited coverage as an additional insured under the policies. A petition for rehearing en banc and/or certification to the Texas Supreme Court is pending.
Phelps Dunbar attorneys act for some of the insurers. Please contact Richard Dicharry at firstname.lastname@example.org for more information regarding the opinion.
FLORIDA APPELLATE COURT HOLDS INSURER OWES SEPARATE DEFENSE COUNSEL TO INSURED AND ADDITIONAL INSURED
A Florida appellate court has held that an insurer is required for the insurance carrier to appoint separate independent defense counsel for a named insured and an additional insured. University of Miami v. Great American Assurance Co., 2013 WL 616156 (Fla. 3d DCA Feb. 20, 2013).
A child enrolled at the named insured’s summer camp was injured and hospitalized after he was found unresponsive at the bottom of a swimming pool on the additional insured’s property. The claimant’s parents filed a lawsuit against the named insured and additional insured, claiming that the injuries were due to lack of supervision and that both were negligent. The camp’s insurer retained one law firm to defend both the named insured and the additional insured. On the day the named insured filed its answer and affirmative defenses, the additional insured sent the insurer a letter claiming that there was a conflict of interest in the single representation of both the named and additional insureds, and the additional insured demanded that the insurer pay for separate counsel of its choosing. The insurer took the position that there was no conflict because the named insured was contractually bound to indemnify the additional insured for any liability that arose out of the use of its facilities. The additional insured retained its own counsel at its expense. After the underlying lawsuit was settled, the additional insured filed a declaratory action against the insurer, in which it alleged breach of contract based on the insurer’s failure to provide separate defense counsel. The trial court entered summary judgment in favor of the insurer and the additional insured appealed.
The court of appeal concluded (erroneously) that the parties had advanced mutual claims against the other (the camp had not and the additional insured never pursued claims against the camp). It nonetheless concluded that “[t]here exists no factual dispute that … [defense counsel] would have had to argue conflicting legal positions, that each of its clients was not at fault, and the other was, even to the extent of claiming indemnification and contribution for the other’s fault,” which created a conflict of interest. The court’s opinion was countered by a strong dissent, which stated that there was no real conflict, and that the effect of the court’s decision will result in a substantial increase in defense costs in cases involving more than one insured. A motion for rehearing is expected.
Phelps Dunbar attorneys are involved for the insurer in the case. For more information on the opinion, please contact Bart Hall at email@example.com.
UNDER KENTUCKY LAW, POLICY EXCLUDING COVERAGE FOR DAMAGES COVERED BY OTHER INSURANCE IS PRIMARY TO POLICY WITH "EXCESS" OTHER INSURANCE CLAUSE
The U.S. Sixth Circuit Court of Appeals has held that a general liability policy with an exclusion for damages covered by other insurance is primary to a professional liability policy containing an “excess” other insurance clause. Great American Ass. Co. v. American Cas. Co. of Reading, Pennsylvania, 2013 WL 85826 (6th Cir. Jan. 9, 2013).
Two nurses working at a daycare facility were sued following the death of a child. The nurses were insured under a professional liability policy which contained an other insurance clause that stated the policy applies only to amounts which exceed the limits of all other insurance. The insured and the nurses were covered under a general liability policy which contained an exclusion for damages covered by other insurance. The general liability insurer denied coverage to the nurses based on this exclusion, and their professional liability insurer eventually settled the claims against them. The general liability insurer settled the claims against the daycare facility only.
The general liability insurer sought a declaration that it was not obligated to defend or to indemnify the nurses and also sought contribution from the professional liability insurer for the amounts it paid to settle the suit against the daycare facility. The professional liability insurer counterclaimed, asserting that the general liability policy was primary to the professional liability policy for the two nurses and sought all amounts it paid to defend and indemnify the nurses. Summary judgment was granted in favor of the professional liability insurer, and the general liability insurer appealed.
The Sixth Circuit held that the general liability policy’s exclusion of damages covered by other insurance should be classified as a standard “escape” other insurance clause under Kentucky law and should not be given effect. The Sixth Circuit, applying Kentucky law, held that the “general rule” is that a policy with a standard “escape” clause is not relieved of its obligation to provide primary coverage. It concluded that the general liability policy was primary and affirmed the judgment of the district court.
FEDERAL COURT IN KENTUCKY CONCLUDES THAT DEFENSE COSTS INCURRED BY INSURERS WITH CONSECUTIVE YEARS OF COVERAGE SHOULD BE ALLOCATED BASED ON "TIME ON THE RISK," NOT "EQUAL SHARES"
A federal district court in Kentucky has held that two liability insurers providing insurance over multiple policy periods for a continuous exposure claim must allocate defense costs based on “time on the risk” instead of by “equal shares.” Kentucky League of Cities Ins. Services Ass’n v. Argonaut Great Central Ins. Co., 2013 WL 120013 (W.D. Ky. Jan. 8, 2013).
The insured was sued for injuries allegedly sustained by residents exposed to “faulty water” it supplied over eight years. The insured had insurance for this time period through two insurers, the first providing six years of insurance and the second providing insurance for two years. The first insurer defended and sought contribution from the second based on an “equal shares” allocation. The insurers failed to reach an agreement on allocation of defense costs, and the first insurer filed suit against the second. The parties filed cross‑motions for summary judgment.
The district court noted that no Kentucky court had addressed allocation of defense costs among insurers in continuous exposure cases. Looking to federal case law, the court noted that the “time on the risk” method of allocation had been adopted by various panels of the Sixth Circuit. Comparing the two alternatives, the court concluded that to require the second insurer to defend claims for injuries in years in which it did not have policies would extend its obligation beyond the temporal boundaries of its policies. It therefore rejected the “equal shares” approach in favor of a “time on the risk” allocation. The first insurer’s motion was denied and the second insurer’s motion was granted.
FOURTH CIRCUIT HOLDS IMPROPER STORAGE OF ELEVATOR FLUID, LEADING TO MULTIPLE SURGICAL MISHAPS, CONSTITUTED SINGLE OCCURRENCE
The U.S. Fourth Circuit Court of Appeals upheld a lower court’s ruling that an insurer has no further duty to defend or indemnify its insured after paying its per occurrence limit for claims relating to the alleged improper storage of hydraulic fluid that resulted in multiple surgical mishaps that followed the hydraulic fluid being mistaken for surgical lubricant used to wash surgical instruments. Mitsui Sumitomo Ins. Co. of America v. Duke University Health System, Inc., 2013 WL 491942 (4th Cir. Feb. 11, 2013).
The insured left two barrels of hydraulic fluid in a designated storage area after completing elevator repairs in a hospital parking deck. A hospital employee mistook the barrels for surgical detergents and lubricants, and they were delivered to a medical storage facility and eventually resold to a sister hospital where the fluid was used to clean surgical instruments. By the time the error was discovered, over 3,500 surgical patients may have come into contact with affected instruments, many of whom asserted claims against the hospital, the medical storage facility, and the elevator repair company. The latter’s insurer paid its per occurrence limit to settle the claims. The hospital thereafter sued the elevator company for breach of contract, indemnity and negligence. Its insurer sought a declaratory judgment that it owed no further defense or indemnity to the elevator company because it had satisfied its per occurrence limit. After a federal district court found in favor of the insurer, the hospital appealed.
The hospital argued that multiple occurrences were involved, entitling the elevator company to more than a single limit of coverage. The Fourth Circuit disagreed, noting that North Carolina courts have adopted a “cause” test to determine how many occurrences an event encompassed in determining trigger. The Fourth Circuit found that the proximate cause of the injuries – as viewed from the perspective of the insured – was the single instance of the improper storage and concluded that it could not look to the number of surgeries or instances of using the hydraulic fluid to wash surgical instruments to determine the number of occurrences as this would turn the focus of the case from the insured’s actions to another’s. The Fourth Circuit affirmed.
FIFTH CIRCUIT AFFIRMS SUBROGATION VERDICT FOR INSURER HOLDING REPLACEMENT VALUE IS APPROPRIATE MEASURE OF DETERMINING FAIR MARKET VALUE UNDER TEXAS LAW
The U.S. Fifth Circuit Court of Appeals recently upheld a subrogation verdict for a property insurer based on replacement cost as a determination of the fair market value of destroyed property. Factory Mut. Ins. Co. v. Alon USA L.P., 2013 WL 257134 (5th Cir. Jan. 23, 2013).
After indemnifying its insured when a waste treatment facility was destroyed, a property insurer sued the operator of the oil refinery on which the waste treatment facility was located. The operator stipulated to liability, leaving the issue of damages. The parties agreed that the damages would be determined by the fair market value of the facility; however, the insurer contended it was entitled to the replacement cost and the operator contended recovery was limited to the value of the component parts. The district court, finding that there was no market for the facility, held that the fair market value was determined by the replacement cost less improvements and depreciation. The operator appealed, challenging the district court’s ruling and the two figures that went into calculating the replacement cost—the depreciation figure and the multiplier for anticipated costs of construction, i.e., installation, startup, overhead, and testing.
In affirming, the Fifth Circuit determined that there was ample evidence to support the district court’s finding that no market existed for the type of facility involved, and, thus, replacement cost was the appropriate measure of damages. The Fifth Circuit further determined that the insurer’s expert was entitled to rely upon the hearsay statement of the facility’s employees in determining his depreciation figure, especially in light of the fact that the facility had been destroyed and scrapped after the explosion, and that the multiplier used by the district court was within the range presented by the evidence.
FEDERAL COURT IN GEORGIA FINDS LESSOR’S LIABILITY POLICY DOES NOT COVER LESSEES AS "REAL ESTATE MANAGERS"
A federal court in Georgia held that lessees were not “insureds” under a lessor’s liability policy because they did not meet the policy’s definition of “real estate managers,” which implicates real estate transactions rather than routine maintenance of the property, and the insurer had no duty to defend the lessees in the underlying negligence action. Moon v. Cincinnati Insurance Co., 2013 WL 300872 (N.D. Ga. Jan. 25, 2013).
The insured owned residential property, which he leased to his daughter and her husband. While the lessees were babysitting several children at the property, a child drowned in the pool in the backyard. The decedent’s parents and estate sued the lessees alleging they were negligent for failing to maintain the property. The insurer initially defended the lessees under a reservation of rights. Ultimately, the insurer denied coverage and withdrew its defense.
After judgment was entered against the lessees, they filed a bad-faith action against the insurer, and all parties moved for summary judgment. The insurer argued that it was entitled to summary judgment because the lessees were not “real estate managers” under the policy and there was no allegation in the underlying complaint that they were acting as real estate mangers at the time of the accident. The district court looked to the policy’s definition of “insured” and the sub-definition, which stated that an insured was any person acting as a “real estate manager.” The court found that the term “real estate manager” is unambiguous and implicated real estate transactions rather than mere occupancy and maintenance of the insured property. Thus, the court entered summary judgment in favor of the insurer, finding that it did not have a duty to defend the lessees in the underlying lawsuit.
FEDERAL COURT IN SOUTH CAROLINA FINDS NO PROFESSIONAL LIABILITY COVERAGE FOR CLAIMS ARISING OUT OF UNSOLICITED FACSIMILE ADVERTISEMENTS
A federal court in South Carolina recently found that a professional liability insurer had no duty to defend or indemnify its insured where the insured was accused of violating federal law by sending unsolicited facsimile advertisements. BCS Ins. Co. v. Big Thyme Enterprises, Inc., et al., 2013 WL 594858 (D. S.C. Feb. 14, 2013).
After an insurance agent was sued for violations of the Telephone Consumer Protection Act, 47 U.S.C. § 227, for allegedly sending unsolicited facsimile advertisements to potential clients, its professional liability insurer sought a declaration of no coverage for the claims. The policy generally covered only “wrongful acts” in rendering or failing to render “professional services . . . to or for a client.” Granting summary judgment in favor of the insurer, the court agreed that an agent or broker sending unsolicited faxes to potential clients is not a “professional service” under the policy. Moreover, the court found that even if sending unsolicited faxes were a “professional service,” such services would not have been rendered to a client, rejecting the insured’s argument that the term “client” should be read to include potential future clients.
FEDERAL COURT IN OKLAHOMA READS GYNECOLOGY AS SEPARATE FROM OBSTETRICS, REJECTING COVERAGE UNDER PROFESSIONAL LIABILITY POLICY FOR LIABILITY ARISING OUT OF DELIVERY OF BABY
A federal court in Oklahoma granted summary judgment in favor of a medical malpractice insurer, finding that obstetrics falls outside the scope of coverage for the practice of gynecology, and held that the insurer was not required to provide a defense for alleged medical malpractice during child birth. Admiralty Insurance Company v. Thomas, et al., Case No. Civ-12-0198-C (W.D. Okla. Jan. 28, 2013)
The policy covered “medical incidents,” which arose out of “professional services,” to include “gynecology.” The definition of “professional services” did not include obstetrics. In its declaratory judgment action, the insurer moved for summary judgment that the policy was unambiguous as a matter of law. The court agreed and held that the definitions of the terms “obstetrics” and “gynecology” are not ambiguous and that the practice of gynecology does not include the delivery of a child. Even though the insured presented evidence his broker indicated the policy covered both obstetrics and gynecology, the court held that the insurer is not bound by any such communications under Oklahoma law.
FEDERAL COURT IN VIRGINIA HOLDS INSURER HAS NO DUTY TO DEFEND OR INDEMNIFY DUE TO LATE NOTICE AS A MATTER OF LAW
A federal court in Virginia recently held that an insurer has no duty to defend or indemnify its insured after the insured failed to give the insurer notice of an accident for almost three years on the mistaken belief that coverage would not be implicated. Nationwide Mut. Ins. Co. v. Sandbridge Properties, Inc., 2013 WL 209490 (E.D. Va. Jan. 17, 2013)
After the insured was notified that a guest had fallen out of a bunk bed in one of the vacation rental properties it managed, it notified the property owners, who in turn notified their homeowners’ liability insurer. The insured did not notify its own liability insurer, whose coverage would be excess over the property owners’ liability policies. Almost three years later, the insured was sued for damages, and it then notified its insurer, which sought a declaration that it had no duty to defend or indemnify the insured due to the insured’s failure to give notice of the occurrence “as soon as practicable” as required by the policy.
Granting the insurer’s motion for summary judgment, the court noted that under Virginia law policy provisions requiring notice of an accident “as soon as practicable” are reasonable and enforceable and that an insured’s substantial compliance with such notice provisions is a condition precedent to recovery under the policy. Although the question of whether notice is given within a reasonable time is normally a question for the jury, the court recognized that under some circumstances a long delay in notifying the insurer of an occurrence may constitute a violation of a notice provision as a matter of law. Here, without a cognizable justification for the delay, the court found itself compelled to conclude, as a matter of law, that the insured failed substantially to comply with the notice provisions and therefore was barred from recovery under the policy.
FEDERAL COURT IN NORTH CAROLINA HOLDS SUPPLEMENTAL EXTENDED REPORTING PERIOD RUNS FROM CONCLUSION OF BASIC EXTENDED REPORTING PERIOD AND NOT EXPIRATION OF POLICY
A federal court in North Carolina recently held that a 12-month supplemental extended reporting period purchased by an insured ran from the termination of the policy’s 60-day basic extended reporting period and not the policy expiration date, and that the insured’s notice of claim was timely made. Anderson v. Cincinnati Ins. Co., 2013 WL 445998 (W.D. N.C. Feb. 5, 2013)
After the Federal Deposit Insurance Company sued former directors of a bank for negligence and breach of fiduciary duty, the directors gave notice to the bank’s insurer. The insurer disclaimed coverage, contending that notice was after a 12-month supplemental extended reporting period purchased by the bank had expired. The policy contained a general 60-day basic extended reporting period, which combined with the 12‑month supplemental reporting period would have resulted in a reporting period within which the notice was made. However, the insurer contended that the automatic 60-day basic extended reporting period was forfeited through the purchase of the 12-month supplemental reporting period. The directors sought a declaration that the supplemental reporting period was in addition to the basic extended reporting period, and that the claim was timely tendered.
Granting summary judgment to the directors, the court determined that the starting and ending dates of the supplemental extended reporting period were ambiguous, and thus should be construed in favor of coverage. Moreover, the court found that the insurer clearly intended to sell the bank a 12-month supplemental reporting period as evidenced by it charging the bank a 12-month premium for the same. The court concluded that if it were to have accepted the insurer’s argument, it would mean that the insurer essentially sold only 10 months of extended reported period (with the automatic 60-day basic extended reporting period eliminated by or subsumed into the extended period) for the price of 12 months of an extended reporting period. The court held that the supplemental extended reporting period ran after the standard 60‑day extension expired, and thus the notice of claim was timely.
FEDERAL COURT IN SOUTH CAROLINA HOLDS NO COVERAGE FOR DIMINUTION IN VALUE AND LOSS OF USE ARISING OUT OF DEFECTIVE SEPTIC SYSTEM
A federal court in South Carolina recently held that an insurer had no duty to defend or indemnify its insured in an action brought by homeowners seeking recovery for diminution in value and loss of use arising out of the insured’s installation of a defective septic system. State Auto Property and Cas. Ins. Co. v. Howard, 2013 WL 227769 (D. S.C. Jan. 22, 2013)
The insured was sued by homeowners for injuries relating to an allegedly defective septic system which the insured installed during the construction of the home. The defective septic system itself had been replaced, but the homeowners sought recovery for alleged diminution in value in, and loss of use of, their home because of the difficulties with the septic system preceding its replacement. The insured’s insurer sought a declaration that it had no duty to defend or to indemnify the insured. Granting summary judgment in favor of the insurer, the court recognized that diminished value of tangible property does not constitute “property damage” as defined by the standard CGL policy under South Carolina law, and therefore found no coverage for the alleged diminution in value. Similarly, the court found that the homeowners’ loss of use claim had been resolved when the septic system was replaced, such that any outstanding loss of use was the result of “impaired property,” coverage for which was plainly excluded by the “impaired property” exclusion. The court rejected the homeowners’ argument that the problems with the septic system arose out of sudden and accidental injury such that the “impaired property” exclusion did not apply, noting that the underlying lawsuit specifically alleged that the system was defective from the outset, causing continuous exposure to untreated sewage.
FEDERAL COURT IN ARKANSAS FINDS INSURER ENTITLED TO REFORMATION
A federal district court in Arkansas has held an insurer entitled to reform a policy that was erroneously issued without a law enforcement exclusion. Harleysville Worchester Ins. Co. v. Diamondhead Property Owners Ass’n, Inc., 2013 WL 392478 (W.D. Ark. Jan. 31, 2013).
The insured property owners association sought to obtain a commercial liability policy. The insured’s agent advised the insurer that the policy need not cover law enforcement activities because the association had law enforcement coverage under a separate policy, and the insured’s application expressly excluded law enforcement coverage. The insurer submitted a quote that excluded law enforcement coverage. For unknown reasons, the policy was issued without the law enforcement exclusion. An incident involving law enforcement officers occurred resulting in claims against the association, and a claim was made against the policy. The insurer filed a declaratory judgment action and moved for partial summary judgment seeking reformation of the policy to include the law enforcement exclusion.
The court held that the policy issued did not reflect the parties’ intent at the time of contracting. Considering the evidence of the negotiations, including undisputed testimony from the association’s agent that it never sought law enforcement coverage, the court held that the parties’ intent at the time of contracting was clear. The only evidence submitted by the association was a comment posted on the internet by a community member after the policy was issued, expressing a belief that the policy included law enforcement coverage. The court held that this evidence did not reveal the parties’ intent at the time of contracting and was inadmissible hearsay. The court rejected the argument that the agent was not acting on behalf of the association when the policy was procured and also held that there was no issue of ambiguity to consider because the question of reformation did not turn on any policy language. The court granted the motion to reform the policy to incorporate the law enforcement exclusion.
FEDERAL COURT IN ALABAMA FINDS NO DUTY TO DEFEND IN MOTION FOR DEFAULT JUDGMENT AGAINST INSURED
A federal district court in Alabama has held in a motion for default judgment that an insurer has no duty to defend coverage for Chinese drywall claims. Penn. National Mut. Cas. Ins. Co. v. Snead Door, LLC, 2013 WL 550483 (N.D. Ala. Feb. 12, 2013).
The insured sold Chinese drywall to a homeowner. The homeowner sued the insured for alleged health problems and property damage sustained as a result of sulfur compounds emitted by the Chinese drywall. The insured tendered the claim to its CGL insurer which provided a defense under a reservation of rights. The CGL insurer was denied leave to intervene and filed a separate declaratory judgment action in federal court against the insured and the homeowner. The insured failed to appear in that suit, and the insurer moved for a default judgment.
The court “assumed without deciding” that the allegations against the insured were sufficient to constitute an “occurrence” under the policy, but concluded that three separate exclusions barred coverage and, therefore, the insurer had no duty to defend or indemnify the insured. The court concluded that the policy’s total pollution exclusion barred coverage because the claims against the insured involved allegations about pollutants stemming from the use of Chinese drywall. It held that the drywall was the insured’s product and that coverage was barred under the “your product” exclusion. Finally, the court held that because the drywall was recalled from the market, the exclusion of any loss, cost or expense associated with the repair, replacement or disposal of a withdrawn or recalled product also applied. The court granted the motion for entry of default.
TEXAS APPELLATE COURT THREATENS MANDAMUS IF TRIAL COURT DOES NOT VACATE DENIAL OF INSURER’S MOTION TO COMPEL APPRAISAL
An appellate court in Texas recently granted a conditional writ of mandamus ordering the trial court to vacate an order denying an insurer’s motion to compel appraisal prior to the scheduled trial date, holding that denying appraisal would deprive an insurer of a contractual right under the policy. In Re GuideOne Mutual Insurance Company, 2013 WL 257371 (Tex. App.—Beaumont Jan. 24, 2013).
The insured had a property policy that included appraisal. The insurer invoked appraisal two months before trial on the insured’s claim and filed a motion to compel appraisal. The insured contended that the insurer had waived appraisal and that it had been prejudiced because it incurred litigation expenses due to the insurer’s delay in invoking appraisal. Texas courts hold that a party seeking to establish waiver must show that the party compelling appraisal failed to invoke the appraisal provision within a reasonable time after an impasse was reached and that the delay caused prejudice. The trial court found an impasse occurred when the insurer answered the insured’s lawsuit and that the insurer failed to demand appraisal within a reasonable time thereafter and that its failure prejudiced the insured. It denied the insurer’s motion to compel appraisal. The insurer sought mandamus relief.
The appellate court stated that it would issue mandamus if the trial court did not vacate its denial of the insurer’s motion to compel. The appellate court distinguished the existence of a dispute and the development of an impasse, which occurs when the parties reach a mutual understanding that neither will negotiate further. Here, the parties engaged in mediation, discovery and negotiations for years after the suit was filed. Hence, it concluded an impasse could not have occurred at the time the insurer filed its answer. Further, the court found that the policy placed no time limit on making a demand for appraisal and held the insured was not prejudiced because it would have incurred similar costs in fact gathering regardless of when the appraisal occurred. The appellate court also concluded that the insured’s right to sue was unaffected by its insurer’s demand for appraisal and, therefore, the contractual rights the parties had under the policy were not waived.
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