Insurance Law Report: May 2020

May 12, 2020

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 Addresses Exception To “Eight-Corners” Rule

The Texas Supreme Court has issued two opinions in cases where it was asked to recognize an exception to the “eight-corners” rule, which it has on prior occasions declined to recognize. In the first opinion, and in response to a certified question from the U.S. Fifth Circuit Court of Appeals, the court rejected the exception articulated in B. Hall Contracting, Inc. v. Evanston Ins. Co.,447 F. Supp.2d 634 (N.D. Tex. 2006) that the “eight-corners” rule does not apply if the policy does not require the insurer to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent.” Richards v. State Farm Lloyd’s, No. 19-0802, 2020 Tex. LEXIS 236 (Tex. Mar. 20, 2020).

The insurer sought to introduce extrinsic evidence which would trigger the “use of a motor-vehicle” exclusion included in a homeowner’ policy. The district court held that the “eight-corners” rule did not apply since the policy did not contain language that the insurer had a duty to defend groundless, false or fraudulent claims. The court held that the presence or absence of such a clause has rarely played a role in a Texas court’s analysis of an insurer’s duty to defend. Further, it had never suggested or held such a perquisite existed, and noted that Texas appellate courts have consistently applied the “eight-corners” rule even where policies did not include a broad duty to defend groundless, false or fraudulent claims. The court did not completely rule out that other exceptions to the “eight-corners” rule may be valid but refused to comment further.

In the second opinion, the court did recognize an exception to the rule. Loya Ins. Co. v. Avalos, No. 18-0837, 2020 Tex. LEXIS 373 (Tex. May 1, 2020). Citing Richards v. State Farm Lloyds, the court noted that it has not recognized an exception to the rule but has left open the question and that this is the appropriate case for such an exception. An excluded driver was operating a vehicle at the time of an accident. The insured and the injured party colluded, agreeing to tell both the responding police officer and the insurer that the insured (and not the excluded driver) was operating the vehicle. The insurer defended the insured but withdrew its defense after discovering that the insured and the injured party lied to trigger a duty to defend. The injured party obtained a judgment and an assignment of rights to proceed against the insurer which it did by filing suit against the insurer.

The court recounted its decisions in GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305 (Tex. 2006) and Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650 (Tex. 2009) in which it had touched on the possibility for an exception when fraud and collusion were at issue. There was no factual dispute that an excluded driver was operating the vehicle, and the record showed conclusively that the insured and the injured parties conspired to lie about who was driving to trigger coverage. The court held the “eight-corners” rule does not bar courts from considering extrinsic evidence regarding collusive fraud by the insured, because the duty to defend applies to fraudulent allegations against the insured by third parties, not to fraud by the insured. The court also held that an insurer faced with undisputed evidence of collusive fraud is not required to pursue a declaratory judgment action before withdrawing its defense because there is no justiciable controversy and a declaratory judgment action would not promote prompt and efficient dispute resolution in such case, but cautioned against improvidently withdrawing from defending in less than clear-cut cases, suggesting that insurers can be held liable for bad faith and Deceptive Trade Practices Act violations in such cases.

Author: Chris Gabriel & Julien Petit

***********************************************************************

Mississippi Supreme Court Holds Blanket Waiver Of Subrogation Precludes Subrogation For Damages Paid In Respect Of “Non-Work” Property

In an issue of first impression certified by the U.S. Fifth Circuit Court of Appeals, the Mississippi Supreme Court held that a waiver of subrogation in a contract prevents an insurer from recovering for payments made for damage to work beyond the scope of a contractor’s work. Liberty Mut. Fire Ins. Co. v. Fowlkes Plumbing, L.L.C., 290 So.3d 1257, 2020 Miss. LEXIS 44 (Miss. 2020).

A school district entered into a contract for work on an attendance center. During construction, a fire broke out which consumed the entire attendance center which the school district’s insurer paid to replace. The insurer filed a subrogation claim against three contractors involved in the work. The district court held that despite the waiver of subrogation, the insurer was permitted to proceed against the contractors as to “non-work” property damage, i.e., damage to work outside the scope of the contracts. The Fifth Circuit Court of Appeals permitted interlocutory appeal for the purpose of certifying to the Mississippi Supreme Court whether a waiver of subrogation prevents an insurer from subrogating to recover “non-work” property damage.

The American Institute of Architects Form A201-2007 includes two subparagraphs that have split courts across the country. The first subparagraph (11.3.7) is:

The Owner and Contractor waive all rights against ... each other and any of their subcontractors ... for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary.

The second subparagraph (11.3.5) is:

If during the Project construction period the Owner insures properties, real or personal or both, at or adjacent to the site by property insurance under policies separate from those insuring the Project,... the Owner shall waive all rights in accordance with the terms of Subparagraph 11.3.7 for damages caused by fire or other causes of loss covered by this separate property insurance.

Two approaches have emerged regarding the construction of these paragraphs. The majority approach holds that whether subrogation is waived depends on the source of the insurance proceeds. If the proceeds are paid by a policy issued pursuant to the work contract, then damage to both work and non-work property are covered by the waiver. The minority approach considers the type of property damage and holds that subrogation is waived only as to damage to work property and permits insurers to proceed regarding non-work damage. The Mississippi Supreme Court held that there is no ambiguity in the subject paragraphs and joined the majority of courts in holding that the waiver serves as a “blanket waiver” of subrogation for property damage to the extent it is covered by insurance. According to the Supreme Court, the phrase “to the extent the property is covered by insurance” means that any damage paid for by insurance proceeds is covered, and the phrase “applicable to the work” only means insurance that insures the work.

Author: Scott Ellzey

***********************************************************************

Eighth Circuit Holds Alienated Premises Endorsement Does Not Reinstate Coverage

The U.S. Eighth Circuit Court of Appeals affirmed an Arkansas federal court grant of summary judgment that there was no coverage for a breach of an asset purchase agreement based on an indemnity provision in the agreement and that an alienated premises endorsement did not reinstate coverage. Murphy Oil Corp. v. Liberty Mutual Fire Ins. Co., No. 19-1140, 2020 U.S. App. LEXIS 12694 (8th Cir. Apr. 21, 2020).

The insured sold a refinery, following which a fire occurred at the refinery. The purchaser sued the insured alleging that the insured misrepresented the condition of certain equipment believed to have caused the fire, invoking an indemnity provision in the purchase agreement. The insured’s insurer declined to defend, and the insured sued. The district court granted the insurer’s motion for summary judgment, holding the policy’s contractual liability exclusion precluded a duty to defend. The insured appealed.

The insured argued on appeal that the claim against it was essentially one for property damage but the Eighth Circuit, relying on an Arkansas Supreme Court opinion involving similar facts, i.e., that a breach of a lease does not convert what is fundamentally an economic loss (and one for which coverage is excluded by a contractual liability exclusion) into a property damage claim where, as here, the statute of limitations on the property damage claim had run, Unigard Security Ins. Co. v. Murphy Oil USA, 962 S.W.2d 735 (Ark. 1998), rejected the insured’s claim. The Eighth Circuit then concluded that the alienated premises endorsement did not reinstate coverage excluded by the contractual liability exclusion.

Author: Bart Hall

***********************************************************************

Fifth Circuit Narrowly Construes “Client” Under Bank’s Professional Liability Policy

The U.S. Fifth Circuit Court of Appeals issued an opinion narrowly interpreting the scope of professional liability coverage in the context of lenders that participate in government programs, affirming a lower court holding that the U.S. government is not a “client” of a financial institution that underwrites loans on behalf of the government. Iberiabank Corp. v. Illinois Union Insurance Co., 953 F.3d 339 (5th Cir. 2020).

The insured bank participated in a government program that insures approved lenders against losses on mortgages for single-family homes. The program relies on the approved lenders applying the government’s underwriting requirements in determining whether a borrower represents an acceptable credit risk. Whistleblowers brought a qui tam action on behalf of the United States against the bank alleging violations of the False Claims Act in falsely certifying loans, paying mortgage underwriters commissions to generate loans and refusing to self-report known fraudulent loans, all of which caused the government to pay insurance claims that it would not have paid if the bank had conducted appropriate underwriting due diligence. The bank settled with the government and made a claim on its professional liability insurance for payment of the settlement.

The insuring agreement of the professional liability policy covered claims from third-party clients against the bank for wrongful acts in rendering or failing to render “Professional Services,” defined as:

[S]ervices performed by or on behalf of the insured for a policyholder or third party client of the insured. The Professional Services must be performed pursuant to a written contract with such policyholder or client for consideration inuring to the benefit of the insured.

The bank’s insurers denied coverage on the basis that the government was not the bank’s “client,” and the bank filed suit for breach of contract. The district court, persuaded by opinions from the Ninth and Tenth Circuits, concluded that the policy does not extend coverage to the settlement. The district court rejected the bank’s argument that it provided “Professional Services” to the government as its “third-party client” by underwriting mortgages and concluded that it was the bank that was the client – of the government’s. The district court granted the insurers’ motion to dismiss, and the bank appealed.

The Fifth Circuit affirmed, reasoning that the bank did not engage in “Wrongful Acts” in providing mortgage loans to borrowers; rather, the bank engaged in “Wrongful Acts” when it certified borrowers’ creditworthiness to the government when those borrowers did not meet the requirements. Accordingly, the Fifth Circuit concluded that the government was not the “client” and did not become a “client” as a result of the program and that the settlement is not covered. This opinion narrowly interprets the term “client” under professional liability policies for providers of professional services, and, more broadly, serves as a reminder that financial service providers “must turn square corners when they deal with the Government.” Rock Island, Arkansas & Louisiana R.R. Co. v. United States, 254 U.S. 141, 143, 41 S.Ct. 55, 65 L.Ed. 188 (1920).

Author: Chris Gabriel & Mark Broom

***********************************************************************

Eleventh Circuit Finds Amusement Devices Exclusion Unambiguous And Bars Coverage For Loss Involving Inflatable Beach Ball

The U.S. Eleventh Circuit Court of Appeals held that an Amusement Devices Exclusion providing a non-exhaustive list of devices that require a user to “strike, punch, or kick” to be unambiguous and that it precluded coverage for injuries to a festival patron attempting to push away an extra-large beach ball before it struck him. Princeton Excess & Surplus Lines Ins. Co. v. Hub City Entrs., No. 19-14193, 2020 U.S. App. LEXIS 9744 (11th Cir. Mar. 30, 2020).

A festival patron allegedly sustained injuries at the insured’s festival when he attempted to push an extra-large beach ball away from him to prevent it from striking him on his head. The patron sued the insured for the injuries he sustained, and its insurer sought a declaration that it owed no duty to defend because of an Amusement Devices exclusion, which barred coverage for any loss arising out of the use of an amusement device, a term defined by a non-exhaustive list of devices that require a user to “strike, punch, or kick.” The court granted summary judgment to the insurer.

In affirming, the Eleventh Circuit found that the exclusion is not ambiguous despite the fact that an extra-large inflatable beach ball was not listed in the exclusion because the allegations in the underlying complaint were sufficient to determine that the inflatable beach ball was being used as an amusement device since it was being struck or pushed by other festival attendees. The Eleventh Circuit therefore concluded that the claimant’s claims were not covered.

Author: Amanda Keller

***********************************************************************

Louisiana Court Rejects Direct Action For Failure To Demonstrate a “Distinct Tortious Act”

A Louisiana Court of Appeal affirmed a trial court order granting insurers’ exception of no right of action to a plaintiff’s amended petition which restyled contractual claims (which had been dismissed) as tort claims so as to plead a direct action against the insurers under Louisiana’s Direct Action Statute because the underlying duties of the insured were based on contract, and not separate tort obligations. Rain CII Carbon, L.L.C. v Turner Indus. Grp., L.L.C., 2019-0403 (La. App. 3 Cir 3/18/20); 2020 La. App. LEXIS 483.

The plaintiff contracted to build a waste recovery unit at its plant to reduce electrical costs. It sued the contractor under the contract for excessive costs due to delay and brought a direct action against the contractor’s insurers. The insurers filed exceptions of no right of action on the basis that purely contractual claims cannot be pursued under the Direct Action Statute. The trial court granted the exceptions. To revive its direct action, the plaintiff restyled its claim as a tort claim and filed an amended petition alleging that the contractor negligently expedited and sequenced delivery of materials for the project. The insurers again filed exceptions of no right of action on the same basis, which were sustained, and the plaintiff appealed.

The court of appeal affirmed, stating that even though the same facts may provide remedies in contract and tort, the alleged negligent conduct, failure to properly expedite and sequence, is one and the same with the plaintiff’s contractual obligations to do so. The court stated that characterization of the claims as tort claims did not present a “distinct tortious act” that was not otherwise included in the contractor’s general duties provided by contract law.

Author: Gabriel R. Crane

***********************************************************************

North Carolina Appellate Court Holds Lawsuit Properly Stayed Pending Appraisal

The Court of Appeals of North Carolina held that a homeowner’s policy that granted either party the right to appraisal justified a pre-trial order staying a lawsuit and compelling appraisal even when the insured alleged bad faith on the part of the insurer. Buchanan v. N.C. Farm Bureau Mut. Ins. Co., No. COA19-887, 2020 N.C. App. LEXIS 199 (N.C. Ct. App. Mar. 17, 2020).

The plaintiff’s home was damaged by fire. The plaintiff’s and his insurer’s respective repair estimates each set forth significantly different costs. The insurer also was unwilling to satisfy a personal property claim for which the plaintiff would not provide supporting inventory. The plaintiff thereafter filed claims for breach of contract and unfair and deceptive trade practice seeking damages caused by the fire. The case proceeded to trial, and the plaintiff appealed several unfavorable orders issued by the trial court before and during trial. Among those was a pre-trial order staying the case and compelling appraisal.

On that issue on appeal, the Court of Appeals observed policy language stating: “No action can be brought against us unless there has been full compliance with all of the terms under Section I of this policy.” Section I provided, inter alia, that either party could demand appraisal after a failure to agree on the value of any item or loss. Even though the plaintiff alleged bad faith on the insurer’s part in handling the claim, the Court of Appeals nevertheless held that this policy language required appraisal as a condition precedent to a lawsuit. Accordingly, the court of Appeals affirmed the order staying the case and compelling appraisal.

Author: Jared Burtner

***********************************************************************

Florida Court Limits Who Is An Insured’s Agent Or Representative

A Florida appellate court held that insureds were not required to produce a handyman and a water restoration company for an examination under oath, as neither are “agents” or “representatives” of the insureds. Avatar Prop. & Cas. Ins. Co. v. Castillo, No. 4D18-3154, 2020 Fla. App. LEXIS 5466 (Fla. 4th DCA Apr. 22, 2020).

A pipe leak caused water damage to the insureds’ home. The insureds retained a handyman to repair the pipe and a water restoration company to mitigate the water damage. The insureds notified their insurer of the loss, and the insurer requested that the insureds produce themselves, the handyman and the water restoration company for an examination under oath, contending that the handyman and water restoration company were agents or representatives of the insureds under the policy. The insureds sought a declaratory judgment to determine whether the handyman and water restoration company were agents or representatives of the insureds, and the trial court entered judgment in favor of the insureds, finding that neither individuals retained by an insured to furnish estimates of the damage nor companies retained by an insured to mitigate damages fit within the meaning of “agent” or “representative.” The insurer appealed.

The appellate court focused on the plain meaning of the terms and held that the handyman and water restoration company were not authorized to act for or in the place of the insureds and were thus not “agents” or “representatives.” The appellate court further opined that to the extent the policy was ambiguous, it should be construed against the insurer, as the insurer could have added language to the policy to broaden the definition of an insured’s “agent” or “representative.”

Author: Kelly Hallisey

***********************************************************************

Florida Court Holds Insurer Not Required To Plead Exclusions As Affirmative Defenses To Preserve Defenses To Coverage

A Florida appellate court held that under a named perils policy, an insurer need not plead a policy exclusion as an affirmative defense in order to present evidence that an insured’s damage was the result of a non-covered cause of loss. Citizen’s Prop. Ins. Corp. v. Kings Creek South Condo, Inc., No. 3D18-661, 2020 Fla. App. LEXIS 3493 (Fla. 3d DCA Mar. 18, 2020).

An insured made a claim for wind damage to its property under a named perils insurance policy. The insurer denied the claim as the damage was not caused by wind but was instead a result of multiple causes of loss not covered by the policy. The insured filed a breach of contract action. During the trial, the insurer attempted to present evidence that the damage was caused by improper maintenance, but the insurer objected, arguing that the insurer was relying on the policy’s Existing Damage Exclusion, which the insurer did not plead as an affirmative defense. The trial court agreed and granted a directed verdict in favor of the insured. The insurer appealed.

The appellate court focused on the definition of affirmative defense and the fact that the insured’s policy was a named perils policy. The appellate court explained that when an insurer presents an affirmative defense, it is advising that there would be coverage if not for the pled exclusion. The appellate court held that the insured had the burden to prove that a covered cause of loss caused damage to its property under the named perils insurance policy, so the insurer was simply presenting evidence that the damage was caused by non-covered causes of loss to rebut the insured’s evidence of a covered cause of loss. Accordingly, the appellate court reversed and remanded, finding that the insurer did not need to plead the exclusion as an affirmative defense.

Author: Kelly Hallisey

***********************************************************************

Florida Court Holds Insurer Entitled To Appraisal Regarding Matching As It Did Not Wholly Deny Coverage

A Florida appellate court held that an insurer was entitled to enforce a policy’s appraisal provision for a dispute over matching because the insurer did not wholly deny coverage for the insured’s claim. State Farm Florida Ins. Co. v. Speed Dry, Inc. a/a/o Ortiz, No. 5D18-3581, 2020 Fla. App. LEXIS 4420 (Fla 5th DCA Apr. 3, 2020).

The insureds executed an assignment of benefits for payment of insurance proceeds to the assignee in exchange for services to repair damage caused by a storm. The assignee filed a declaratory judgment action against the insurer and alleged that there was a dispute regarding the repair of the roof of the insured property. The assignee alleged that the insurer’s position was that it could replace damaged or missing shingles with replacement shingles that did not match the undamaged shingles. The assignee argued that this was a matching dispute, and that the insureds were entitled either to matching shingles or a full roof replacement. The insurer subsequently filed a motion to compel appraisal, seeking to enforce the insurance policy’s appraisal provision. The appraisal provision provided that if the parties were unable to agree on the amount of loss, either party could demand that the amount of loss be set by appraisal. The trial court denied the insurer’s motion to compel appraisal, finding that the issue regarding matching was a coverage question that required the declaratory judgment action.

The appellate court reversed, finding that the trial court’s order was inconsistent with established Florida caselaw regarding appraisal. The appellate court noted the insurer conceded that there was a covered loss and that when an insurer admits that there is a covered loss, causation is an amount-of-loss question for appraisal, not a coverage question for a court. The appellate court held that the dispute over whether the insurer had to match the replacement shingles on the roof was an amount-of-loss dispute and that the insurer was thus entitled to compel appraisal.

Author: Derek Lenzen

***********************************************************************

Florida Court Holds Prior Claim File Retains Work Product Protection

A Florida appellate court held that a claim file for a prior insurance claim remains protected from discovery as work product, even though the prior insurance claim was settled and did not result in litigation. Progressive Am. Ins. Co. v. Herzoff, 290 So. 3d 153 (Fla 2nd DCA 2020).

An insured had a policy covering a boat. The insured made a claim under the policy in 2015 for damage to the boat, and the insurer paid the claim. The insured made another claim for damage to the boat in 2018, and the insurer denied the claim. The insured sued for breach of contract. The insured sought discovery of the 2015 claim file and the insurer objected, asserting that it was work product. The insurer argued that Florida law protects an insurer’s claim handling documents unless there has been a bad-faith claim asserted. The insured argued that the 2015 claim file did not have work product protect because the claim never resulted in litigation. The trial court ordered the insurer to produce the file.

The appellate court quashed the trial court’s order, noting that materials within an insurer’s claim file frequently fit within the definition of work product in Florida. The appellate court disagreed that a claim file could not be work product if the claim is settled without litigation. The appellate court held that the work product doctrine protects documents created in anticipation of litigation that never materializes because the test is not whether an action was commenced, but whether there was a prospect of litigation.

Author: Derek Lenzen

***********************************************************************

Federal Court In Texas Holds Policyholder Could Maintain Causes of Action for Insurance Code Violations Against Building Consultant

A federal court in Texas found that an insured could state a cause of action against a building consultant used on a claim, thwarting the insurer’s removal of the matter to federal court. Hazari, L.L.C. v. Everest Indemnity Insurance Company and Chris Hartman, No. H-19-4071, 2020 U.S. Dist. LEXIS 73915 (S.D. Tex. Apr. 14, 2020).

The insured made a claim for property damage to its hotel. The insurer retained an independent adjusting company who utilized a third-party building consultant. The building consultant had an adjusting license, but his contract with his employer as a building consultant prohibited him working as an adjuster. The building consultant took photos and prepared an estimate of the damages, which was less than the deductible. When the insurer adopted that position, the policyholder sued, and included the consultant as a defendant. The insurer removed, arguing fraudulent joinder of the consultant (the parties would have been diverse except for the building consultant being named as a defendant).

The key issue was whether a consultant is exempt from liability under Chapter 541 of the Texas Insurance Code because he is not an adjuster. Chapter 541 allows a claim against any person “engaged in the business of insurance,” and the insured argued that Insurance Code Section 101.051 listed acts constituting “the business of insurance” as “inspecting a risk” and ‘investing or adjusting a loss.” The insurer argued that Chapter 4101 exempts from licensing requirements anyone who is only furnishing technical assistance to a licensed adjuster such as an engineer or estimator, and there is precedent that an engineer is not a person engaged in the business of insurance. The court held that while Chapter 4101 exempts an engineer or estimator from licensing requirements, it does not exempt them from Chapter 541, concluding that its finding is consistent with prevailing precedent concerning engineers because while the building consultant was not an engineer, he performed many of the same functions as the adjuster.

Author: Peri H. Alkas

(return to top)

***********************************************************************