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Insurance Law Report: November 2017

November 29, 2017

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 November issue. To view, click on the titles below for full versions of the article.


Virginia Supreme Court Affirms Bar To Third-Party Direct Action Against Insurer Absent Judgment

The Supreme Court of Virginia held that when an injured party assigns its rights of recovery from a tortfeasor and its insurer, the assignee is barred from maintaining an action against the tortfeasor’s insurer until a claim against the tortfeasor is reduced to judgment. Erie Ins. Co. v. McKinley Chiropractic Center, P.C., 294 Va. 138, 803 S.E.3d 741 (2017).

A woman was injured in an automobile accident and visited a chiropractor for treatment. To satisfy any debts incurred to the chiropractor, the injured woman assigned to the chiropractor all rights stemming from the wreck against the tortfeasor and its insurer. The tortfeasor and its insurer then settled directly with the injured woman, and the chiropractor sued the tortfeasor’s insurer, claiming the insurer had failed to honor the assignment. An intermediary appellate court agreed with the chiropractor, and the Supreme Court of Virginia reversed.

The Supreme Court reasoned that an injured party has no right to recover tort damages from a tortfeasor’s insurer until the injured party’s claim against the tortfeasor is reduced to judgment. Because the injured party’s claim against the tortfeasor had not been reduced to a judgment, the injured party could not maintain an action against the insurer. And, because the injured party had no right to maintain a claim against the insurer, the Court concluded that the injured party’s assignee likewise could not maintain an action against the insurer.
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Florida Supreme Court Reaffirms That Contingency Fee Multiplier May Be Applied To An Award Of Statutory Attorneys’ Fees

The Florida Supreme Court recently held that a contingency fee multiplier can be applied unconditionally to an award of statutory attorneys’ fees. Joyce v. Federated Nat’l Ins. Co., 2017 WL 4684352 (Fla. Oct. 19, 2017).

An insurer settled its insured’s claim for wrongful denial and stipulated that the insured was entitled to recover reasonable attorneys’ fees under Florida law. The trial court calculated the amount of awardable attorneys’ fees by taking the lodestar amount—the number of hours reasonably incurred multiplied by a reasonable hourly fee—and applying a contingency fee multiplier of 2.0. The trial court concluded a multiplier of 2.0 was appropriate because the likelihood of success for the insured was “even at best.” The Florida appellate court affirmed, but reversed the use of the contingency fee multiplier, determining that the fee multiplier should be used only in “rare” and “exceptional” circumstances.

The Florida Supreme Court reversed. It determined that its precedent did not conclude that a fee multiplier may be used only in “rare” and “exceptional” circumstances, and declined to adopt the reasoning of the U.S. Supreme Court for rejecting contingency fee multipliers. The Florida Supreme Court opined that contingency fee multipliers provide trial courts with flexibility to ensure that a lawyer who takes a difficult case on a contingency fee basis is adequately compensated. Accordingly, the Florida Supreme Court held that the trial court’s decision to use a fee multiplier was proper based on competent and substantial evidence.
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Fifth Circuit Affirms Denial Of Coverage Based On Late Notice

The U.S. Fifth Circuit Court of Appeals recently affirmed a ruling in favor of an insurer that it did not owe defense or indemnity because the insurer did not receive notice of the lawsuit until over 40 days after the entry of a default judgment against its insured. Nautilus Insurance Co. v. Darwin Vargas d/b/a Houston Star Security Patrol, et al., Case No. 17-20261 (5th Cir. (Tex.) Oct. 20, 2017).

A waitress was shot while working at a nightclub where the insured contracted to provide security services. The waitress sued the security company and took a default judgment against it. Six weeks later, the claimant’s counsel sent a letter to the security company’s insurer seeking “a resolution, and payment of the judgment amount.” This was the insurer’s first notice. The insurer sought declaratory judgment. The district court concluded that, under Texas law, the delay by the insured in providing notice of the suit to the insurer before the default judgment was taken abrogated any duty to defend or indemnify the insured and the claimant could not recover against the insurer. The claimant appealed.

The Fifth Circuit affirmed because the insured did not notify its insurer of the lawsuit brought against it and the insurer had been prejudiced by the late notice because the default judgment had been taken by the time it learned of the suit.

Phelps Dunbar attorneys represented the insurer. For more information about this decision, please contact Amy Cazes Greene at amy.green@phelps.com or Ashley M. Parker at ashley.parker@phelps.com in the firm’s Houston office.
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Texas Court Of Appeals Finds Texas Lacks Jurisdiction Over Mexican Insurer And Mexican Reinsurance Broker

In two companion decisions, a Texas court of appeals held that Texas lacks specific personal jurisdiction over a Mexican insurance company that provided a fronting policy to a Mexican insured with insured locations in Mexico and Texas, as well as over a Mexican reinsurance broker who helped procure the policy. Seguros Afirme, S.A. de C.V. v. Elamex, S.A. de C.V., et al., 2017 WL 3599693 (Tex.App.—Dallas Aug. 22, 2017) and Cooper Gay Martinez Del Rio y Asociados Intermediarios de Reaseguro S.A. de C.V. v. Elamex, S.A. de C.V., et al., 2017 WL 3599690 (Tex.App.—Dallas, Aug. 22, 2017).

A Mexican company with its principal place of business in El Paso, Texas, used a Mexican insurance broker for the excess insurance for its facilities in Mexico and the United States. The broker procured a fronting policy with a Mexican insurance company almost completely reinsured by foreign insurers. The company’s facility in Juarez, Mexico, was destroyed by fire, and the company submitted a claim for the loss to both its primary and excess insurers. The Mexican excess insurer investigated the loss and attended two meetings in El Paso to discuss the loss with the insured, but later denied the claim. The insured sued the excess insurer and the broker who placed the policy. The insured also contended that Texas had jurisdiction over the excess insurer because it issued a policy covering two Texas properties, with premiums to be paid in Texas and policy benefits to be paid to Texas entities, and sent an independent adjuster to visit with the insured in Texas. The insured asserted that Texas had jurisdiction over the broker because the broker had contracted with parties in Texas. The excess insurer and Mexican broker filed special appearances, asserting lack of personal jurisdiction. The court found specific jurisdiction. The broker and excess insurer appealed.

The Court of Appeals reversed. It held that specific jurisdiction was lacking as to the excess insurer because: (1) it had not sought out a Texas insured or attempted to develop Texas business; (2) the insurer knowing of properties in Texas was insufficient to confer specific jurisdiction, particularly because the policy insured a Mexican company with a Mexican address on the policy; and (3) its independent adjuster’s attendance at two meetings in Texas was too “random and fortuitous” to constitute personal availment of Texas’s jurisdiction. The appellate court held that specific jurisdiction was lacking as to the broker because: (1) the broker did not contract with the insured, and its involvement was confined to suggesting three potential fronting insurers; (2) the broker selected only the reinsurers; (3) the broker did not seek out business in Texas, but only responded to inquiries through a series of brokers; (4) the broker did not receive commissions from the insured’s premiums, but rather received commissions from placing the excess insurer’s reinsurance; and (5) the directing e-mails to Texas was not a basis for specific jurisdiction.
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North Carolina Appellate Court Holds That Ancillary Claims Arising Out Of Sexual Molestation Are Excluded Under A Sexual Molestation Exclusion

The North Carolina Court of Appeals held that coverage for claims by a father against the molester of his daughter was excluded by a policy’s definition of “bodily injury,” which excluded bodily injury arising out of the actual, alleged or threatened sexual molestation of a person. N.C. Farm. Bureau Mut. Ins. Co., Inc. v. Phillips, 805 S.E.2d 362 (N.C. Ct. App. 2017).

An individual was charged with and plead guilty to molesting a minor girl. The father of the victim sued the molester and the molester’s wife alleging that the molestation impeded his relationship with his daughter and deprived him of services provided by the child and caused him independent injury. The molester’s homeowners’ insurer filed a declaratory judgment action seeking a ruling that coverage was excluded. The trial court ultimately held the insurer had a duty to defend and indemnify the molester and his wife. The North Carolina Court of Appeals reversed and remanded.

The court reasoned that the policy plainly excluded from the definition of “bodily injury” harm that arises out of the actual, alleged or threatened sexual molestation of a person. The court concluded that “but for” the molestation, the father’s claims would not exist. Therefore, regardless of the title of the claims, the court reasoned the claims arose out of sexual molestation and were not included within the definition of bodily injury. The court reversed and remanded for an entry of a declaratory judgment that the homeowners’ insurer had no duty to defend the molester and his wife.
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Florida Court Of Appeal Holds Insurer Waived Notice Requirement By Responding To Notice Without Challenging Timeliness In Its Response

A Florida appellate court recently held an insurer waived its objection to compliance with the notice requirement under Florida law when it responded to a civil remedy notice (“CRN”) within 60 days of the Florida Department of Financial Services (“DFS”) acceptance date without challenging the timeliness of the notice in its response. Evergreen Lakes HOA, Inc. v. Lloyd’s Underwriters at London, 2017 WL 4679597 (Fla. 4th DCA Oct. 18, 2017).

The insured made a claim and filed a CRN against the insurer, which was accepted by the DFS. The insurer responded to the CRN within the 60-day response period challenging only the sufficiency of the CRN. The insured then sued the insurer for bad faith claims handling. The trial court granted the insurer’s motion for summary judgment, finding that the insured could not prove that the insurer received the CRN on or before the DFS acceptance date, thus precluding the insured’s bad faith claim. The insured appealed.

The appellate court reversed and remanded, finding that the trial court erred in granting summary judgment in favor of the insurer based on the insurer’s lack of proper notice argument. The appellate court noted that section 624.155, Fla. Stat., does not require that the insurer be “given” a copy of the CRN before the DFS acceptance date. Regardless, the appellate court held that the insurer waived any such requirement by responding to the CRN within 60 days of the DFS acceptance date without challenging its timely receipt of the CRN.
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Eleventh Circuit, Applying Georgia Law, Holds Insurer’s Reservation Of Rights Letters Adequately Preserved Its Coverage Positions

The U.S. Eleventh Circuit Court of Appeals, applying Georgia law, held that an insurer was not estopped from asserting its coverage position because the insurer’s reservation of rights letters with respect to four underlying state court cases adequately reserved its rights before the insured undertook the insured’s defense. North American Specialty Ins. Co. v. Bull River Marina, LLC, et al., 2017 WL 4279211 (11th Cir. Sept. 27, 2017).

The insurer issued a CGL policy and a marina operators policy. It agreed to defend the insured in a suit and issued a reservation of rights letter which mentioned only the CGL policy. The insurer issued a second reservation of rights letter explaining the insurer’s position that neither policy applied but stating that it would continue to defend under a reservation of rights under both. After three other suits were filed, the insurer issued two more reservation of rights letters explaining its coverage position under both policies. The insurer filed this declaratory judgment action and moved for summary judgment arguing that neither policy required it to defend or indemnify the insured in the four underlying state cases. The underlying plaintiffs filed a cross-motion for summary judgment arguing, among other things, that the insurer was estopped from asserting its coverage defenses because it undertook the defense of the insured without adequately reserving it rights. The trial court partially granted the insurer’s motion, holding that the insurer did not have a duty to defend or indemnify any of the cases under the CGL policy, but held that the insurer was estopped from denying coverage under the marina operators policy. The insurer and underlying plaintiffs appealed.

The Eleventh Circuit affirmed the partial summary judgment for the insurer but reversed the partial summary judgment for the underlying plaintiffs. It explained that the first reservation of rights letter assumed the insured’s defense under only the CGL policy, and that estoppel did not apply to the marina operators policy because the insurer did not initially assume a defense under that policy. The Eleventh Circuit also rejected the contention that estoppel applied based on the insurer denying coverage under the marina operators policy on one ground while reserving the right to assert other defenses under that policy.
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Federal District Court In Kentucky Enforces Policy’s Lawsuit Time Limitation

A federal court in Kentucky granted summary judgment to an insurer on a breach of contract claim on the basis that the policy’s two-year limitation period to file suit for claims under the policy was enforceable under Kentucky law. Richard Lackey v. Property and Casualty Insurance Co. of Hartford, 2017 WL 4685235 (W.D. Ky. Oct. 18, 2017).

The insured’s residence was covered by a homeowner’s policy that required that any action against the insurer must be brought “within two years after the date of loss.” The insureds discovered water damage to their residence and submitted a claim to the insurer. The insurer accepted the claim and attempted to repair the property. Four years after the loss, and claiming that the property was uninhabitable, the insureds sued the insurer asserting claims including breach of contract and negligent performance of its duties under the policy. The insurer moved for summary judgment on the breach of contract claim arguing the filing was untimely under the policy’s time limitation provision. The insureds argued that the cause of action did not accrue on the date of loss because the insurer accepted the claim and did not breach the contract until it indicated that it would not agree to a restoration bid submitted by the insureds, and that the lawsuit was, therefore, timely.

The court held that the time limitation provision was valid and enforceable under Kentucky law and that the claim accrued at the time of the loss, not later. The court concluded that the insurer’s letter was an “informal settlement negotiation,” rather than a formal denial letter, and, therefore, the breach of contract claim accrued from the date of loss rendering the lawsuit untimely.
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Federal Court In Georgia Holds Insured Cannot Avoid Compliance With Policy’s Notice Provision Based On Subjective Belief It Is Not Liable

A federal court in Georgia recently held that an insured could not avoid a policy’s notice requirement by relying on a subjective belief that it was not liable for an offense and that cease and desist letters that notified the insured of an alleged offense were sufficient to trigger the insured’s duty to provide notice to the insurer. Allstate Ins. Co. v. Airport Mini Mall, LLC, 2017 WL 4280628 (N.D. Ga. Sept. 26, 2017), appeal filed (11th Cir. Oct. 26, 2017).

The insurer issued a CGL policy to a mall. The mall was raided by the Department of Homeland Security, and multiple counterfeit items were seized and some of the mall’s tenants were arrested. A retailer sent the insured two cease and desist letters relating to the sale of counterfeit sunglasses, which advised that the insured could be held liable for trademark violations. The retailer filed a contributory trademark infringement action against the insured, but the insured did not notify the insurer of the lawsuit until almost two months after the filing of the lawsuit. The insurer filed a declaratory judgment action seeking a determination that the insured failed to comply with the policy’s notice provision that required the insured to notify the insurer of an occurrence or an offense which may result in a claim “as soon as practicable.” The parties filed cross-motions for summary judgment. The insurer argued that the insured’s delay in providing notice of a potential occurrence under the policy deprived it of its opportunity to investigate the circumstances, consider pre-suit options or prepare to defend the insured in the ensuing trademark infringement lawsuit. The insured argued that it did not notify the insurer of the claim until after the lawsuit was filed because there was no indication it could be held responsible for the sale of counterfeit goods by its tenants, and it did not believe it was liable for the acts of its tenants.

The district court granted the insurer’s motion for summary judgment, noting that an insured’s failure to comply with a valid notice provision bars coverage under Georgia law as the notice requirement is a proper condition precedent to coverage. The court explained that Georgia courts have interpreted the phrase “as soon as practicable” in notice requirements as “requiring ‘immediate’ notice based on the reasonable diligence of the insured under the circumstances.” The court held that the insured could not avoid the notice requirement by relying on a subjective belief that it had no liability and that an insured’s duty to provide notice to its insurer is triggered when the insured actually knew or should have known of the possibility that it might be held liable for the offense in question. The court found that the cease and desist letters provided the insured with information sufficient to trigger the duty to provide notice.
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Federal Court In Tennessee Dismisses Direct Action Claims Against Motor Carrier Insurers

A federal court in Tennessee granted insurers’ motions to dismiss barring a shipper of goods from bringing direct action claims against the insurers of motor carriers based solely upon their status as liability insurers. Western Express, Inc. d/b/a Western Logistics v. Oscar Villaneuva d/b/a Las Marias Pallets, et al., 2017 WL 4785831 (M.D. Tenn. Oct. 24, 2017).

Insurers issued policies to motor carriers that provided coverage for cargo losses. A shipper entered into a contract with the carriers to deliver goods to a purchaser, but the goods were delivered to the wrong address and never reached the purchaser. The shipper sued the carriers under various contractual and indemnity agreements which it alleged required them to defend and indemnify the plaintiff for the losses related to the misdelivered cargo. It also sued the carriers’ insurers directly. The shipper argued that it could maintain such an action because federal commerce laws, including the Carmack Amendment to the Interstate Commerce Act, 49 U.S.C. §1407, require carriers to file an insurance policy sufficient to cover damages to cargo/property with an attached MCS-90 endorsement which memorializes the insurer’s agreement to pay a final judgment against the insured resulting from negligence. The insurers argued that neither federal statute nor the MCS-90 endorsement authorized a direct action against an insurer unless there was an unsatisfied judgment against the carrier.

The court found that federal statutes do not authorize a direct action by one not covered by a policy against an insurer prior to the adjudication of liability on the part of the insured, nor does the MCS-90 endorsement establish direct liability or authorize suit directly against an insurer by a third party. The court further held that to the extent the shipper’s claim was grounded in state law, Tennessee law does not permit direct actions by third parties against insurers whether under contract or negligence theories of liability.
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Federal Court In Tennessee Finds Theft Not Covered Due To Delay In Discovery

A federal court in Tennessee granted summary judgment to an insurer as it found coverage was not owed under an aircraft policy for the theft of avionic equipment from a covered aircraft where the theft was not discovered or noticed for three years after the loss. United States Specialty Ins. Co. v. N602DW, LLC, 2017 WL 4467481 (M.D. Tenn. Oct. 5, 2017).

An aircraft owner had an aircraft policy under which the insured was required to provide notice of a loss within 90 days of the loss and to protect damaged property to prevent further loss. The insured aircraft experienced engine failure on landing. The owner left the plane on the ramp. After initially returning to the plane to remove the defective engine, the owner did not return to check on the aircraft for four years. At some point during the time the aircraft was left unattended, someone stole electronic parts, which theft was not discovered until later. After learning of the theft, the owner filed a claim under the policy. The insurer denied coverage, and in ensuing coverage litigation moved for summary judgment on the bases that the owner failed to notify the insurer of the loss within 90 days from the loss and further failed to protect the aircraft from additional damage by leaving it unattended. The owner asserted that notice was timely because he provided notice within 90 days of discovery.

The court found that the owner breached the notice requirement and that the owner’s delay in discovering the theft for three years resulted in prejudice to the insurer. The court also noted that it would grant summary judgment to the insurer on the alternative ground that the owner did not protect the aircraft after the accident in violation of the policy’s provisions.
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Federal Court In Texas Remands Storm Damage Suit Rejecting “Improper Joinder” Argument

A federal district court remanded a suit that was removed on the basis that independent adjusters were improperly joined to defeat diversity finding that the plaintiff had stated claims against the adjusters upon which relief could be granted. Lillie Jean Hooper v. Allstate Texas Lloyd’s, et al., 2017 WL 4475931 (S.D. Tex. Oct. 6, 2017).

An insured sued her insurer and two adjusters for storm damage to her home. The two adjusters inspected the property and reported no storm damage. The insurer removed the case asserting improper joinder of the adjusters who were Texas residents.

The court noted that there are two grounds for improper joinder, namely, fraud in the pleadings or an inability of the plaintiff to establish a cause of action against the non-diverse party. The test for fraudulent joinder is whether the defendant has demonstrated that there is no reasonable basis for the court to predict that the plaintiff might be able to recover against the in-state defendant. A court can scrutinize the complaint’s allegations to see whether it states a claim upon which relief can be granted or it can “pierce the pleadings and conduct a summary inquiry.” A court can use either of these methods, but it cannot use both. Either way, if even one cause of action can be maintained against the in-state defendant, then the case must be remanded.

The court elected the first method because no evidence had yet been developed for a summary judgment review. The court found that because an adjuster is a “person” under the Insurance Code, the adjusters had potential liability for violations under the Insurance Code. The court noted that other courts had found that adjusters could not be liable for violation of provisions concerning payment because they had no authority to make payment, but pointed out that the law is not well-settled and where there is a close question, the court must remand.
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