CaseWatch: Insurance – Decisions from The Insurance and Reinsurance Report – May 23, 2011

CaseWatch: Insurance – Decisions from The Insurance and Reinsurance Report – May 23, 2011 subscribers may access the enhanced versions of the cases above. Non-subscribers may access the free, unenhanced versions on lexisONE, if available.


Bad Faith

Miller v. Hartford Life Ins. Co.
2011 U.S. Dist. LEXIS 38347 [] (D. Haw., Apr. 7, 2011)
Bad Faith and Punitive Damages Questions Certified to Hawaii Supreme Court

The defendant insurer issued a long-term care insurance policy. Under a reinsurance agreement, it transferred certain obligations of administering the policy, including receiving, investigating and processing of claims, to a third-party insurer. After the third-party insurer terminated then reinstated benefits to an insured, the insured file a bad faith claim against both insurers, alleging emotional distress and seeking punitive damages. The District Court certified case-dispositive questions to the Hawaii Supreme Court, including whether, under Hawaii law, if an insurer commits bad faith, must the insured prove she suffered economic or physical loss caused by the bad faith in order to recover emotional distress damages caused by the bad faith? Pending an answer to this question, the District Court reserved a decision on whether an insurer can be liable for punitive damages based on vicariously liability for the actions of its agent who administered the claim and terminated policy benefits.


Oskar v. IDS Property Cas. Ins. Co.
2011 U.S. Dist. LEXIS 31065 [] (E.D.N.Y., March 23, 2011)
No Private Cause of Action For Violation Of New York Vehicle And Traffic Law 313

A policyholder sought to file a class action claim against insurer claiming that it cannot cancel its policies because it failed to have valid certificates of mailing, and therefore could not prove effective notice of cancellation.  Court held that a valid certificate of mailing is only one way in which insurer can prove effective notice of cancellation.  Failing to have a valid certificate of mailing does not, however, obviate the possibility of effective notice.  In addition, NYVTA 313 is silent on whether or not a private cause of action exists, and the court does not believe creating such a private cause would promote the legislative purpose of the statute, nor the legislative scheme.

Duty to Defend/Trigger of Coverage

Alliance Mutual Insurance Company v. Guilford Insurance Company
2011 N.C. App. LEXIS 473 [ / lexisONE] (N.C. Ct. of App., March 15, 2011)
Duty to Defend Arises When Damage Occurs, Not When Faulty Work Is Performed
A plumber installed water supply lines at a home under construction.  Eight months after the home was purchased, it flooded with water. The homeowner filed a claim with his insurer, who determined that the flooding was called by the defective installation of a water supply line.  After paying the claim, the homeowner’s insurer subrogated against the plumber, who was covered under two insurance polices.  The insurer that covered the plumber when the damage was discovered defended the subrogation action and sued the other insurer, which denied coverage because its policy was not in effect when the leak and damage were discovered.   The court agreed, holding that the date the water supply line was installed does not determine which insurer is responsible for defense and indemnity; rather, the date the property damage or event occurred.  The panel rejected the argument that the "occurrence" was the improper installation.

Innovative Hospitality Systems, LLC v. Abraham
2011 La. App. LEXIS 400 [ / lexisONE] (L.A. App., April 6, 2011)
Suit to Recover Funds from Fraudulent Checks is a Suit for Tangible Property
A company filed an action to recover losses from the cashing of over 100 fraudulently presented checks by a convenience store.  The store was issued a CGL policy and the insurer sought a declaration that it did not provide coverage because they were not bodily injury or property damage as defined by the policy.  As the funds withdrawn from the company’s bank account were not physical items, the insurer argued that the object of the suit was to recoup intangible things.  The appellate court held that once the policyholder presented cash in exchange for the check, the check was converted into actual funds, which was a “corporeal movable” for which the policy provided coverage.

Kraus-Anderson Construction Co. v. Transportation Ins. Co., et al.
2011 Minn. App. Unpub. LEXIS 324 [ / lexisONE] (Minn. Ct. of App., April 12, 2011)
Excess Insurer Has No Duty to Defend
A policyholder and one of its primary insurers sought a declaration that a follow form excess insurer was obligated to defend the policyholder and must equally share any liability for defense costs already incurred.  Recognizing that the duty to defend is contractual, the court held that the follow form excess insurer had no duty to defend because, by its plain terms, defense obligation did not arise unless the policy limits of all scheduled underlying insurance were exhausted. Because only one of two designated policies was actually exhausted by settlement of underlying construction claims, the court reversed judgment against the excess insurer.

Northern Security Ins. Co. v. Connors
2011 N.H. LEXIS 37 [ / lexisONE] (N.H., March 31, 2011)
Insurer Must Defend When it is Unclear Whether Claims are Actually Covered
A handy man was murdered at the policyholder’s home. The policyholder’s associates believed the handy man stole personal property from him, allegedly conspired over a two-year period to kill him.  He was eventually lured to the policyholder’s home and murdered.  The victim’s estate brought a civil suit.  The claims against the policyholder alleged civil conspiracy, wrongful death, intentional infliction of emotional distress and negligent infliction of emotional distress.  The homeowner’s insurer denied coverage because the conduct attributed to the policyholder was not an “occurrence” and was excluded under the policy.  The court disagreed, and held the insurer had a duty to defend the civil conspiracy and negligent infliction of emotional distress counts.  The court found that the facts alleged in the underlying suit did not show, as a matter of law, that the policyholder’s conduct was intertwined with the alleged murder conspiracy.  Any doubt must be resolved in favor of the policyholder, the court said.


Allstate Ins. Co. v. Croom
2011 Ohio App. LEXIS 1471 [ / lexisONE] (Ohio App., April 7, 2011)
Policy Excludes Coverage for Lead Exposure
The homeowner’s policy excluded coverage for any injury resulting from lead at the residence.  Defendant claimed that the insurer did not provide adequate notice of the lead exclusion when it was added to the policy, rendering the exclusion unenforceable.  The court disagreed, stating that defendant’s failure to read the policy defeats any right to reform the policy.

Federal Ins. Co. v. Cherokee Ardell, LLC.
2011 U.S. Dist. LEXIS 32516 [] (D.N.J., March 28, 2011) (unpublished)
Remediation Costs Incurred Before Termination Date But Expended After Are Not Covered

Under a Cost Cap Policy, in order for costs to be covered, environmental remediation expenses must be incurred, expended, paid for and reported before the Termination Date. A Cost Cap Policy was only intended to cover expenses in excess of the SIR within the fixed policy period.

House Of Clean, Inc. v. St. Paul Fire and Marine Ins. Co.
2011 U.S. Dist. LEXIS 37298 [] (D. Mass., April 5, 2011)
Delay in Investigation Claim Denied by Court
The court held that the policyholder did not show good cause for adding a defense costs claim at the eleventh hour shortly before trial and discredited policyholder’s argument that it was prevented from discovering earlier relevant information.  Moreover the court held that policyholder’s proposed amendment would be futile.

Markel Insurance Co. v. Burns et. al.
2011 U.S. Dist. LEXIS 39190 [] (E.D. Okl., April 8, 2011)
Policy’s Pollution Exclusion Held Unambiguous Regarding Contamination Of Municipal Water System

This environmental coverage dispute arose from the contamination of a municipal water supply by a pest control service company when defendant was filling a truck-mounted chemical tank from a hose connected to his residence without a backflow preventer.  When a break in the city water main occurred, it siphoned the chemicals from the tank into the municipal water system.  The insurer denied coverage for the underlying suit based on the policy’s pollution exclusion.  The defendant-policyholder maintained that the CGL policy was ambiguous at to the terms premises, location and occupied as well as to the endorsements affecting the pollution exclusion.  The court held that based on Oklahoma Supreme Court precedent analyzing this exclusion, there was no ambiguity in the exclusion.

Matter of the Liquidation of Midland Ins. Co.
2011 N.Y. LEXIS 564 [ / lexisONE] (N.Y., April 5, 2011)
Individual Choice of Law Analysis Must Be Conducted for Each Policy
The court held that where an insurer was adjudged insolvent and placed into liquidation in New York, New York law need not apply and held that for each insurance policy in dispute, an individual choice-of-law analysis must be conducted to determine which jurisdiction’s law should govern.


Builders Mut. Ins. Co. v. Mitchell
2011 N.C. App. LEXIS 601 [ / lexisONE] (N.C. Ct. of App., April 5, 2011)
Claim for Damages to Previously Undamaged Property Covered
A homeowner sued a contractor for damages caused by the faulty repair of his home between 2003 and 2006.  The contractors CGL insurer defended and settled the suit and then sought indemnity against the contractor's prior CGL insurer for a portion of the settlement and defense costs.  The prior insurer argued that the homeowners alleged damages were due to faulty workmanship and thus were not an occurrence under its CGL policy. The court held that there was an issue of material fact as to whether there was property damage as defined by the policy as there were allegations of damage to previously undamaged property that could constitute an accident, which would be an occurrence under the policy and which were not barred by the your work exclusion as they were not damages to the contractor's work product itself.

Rotella v. Cutting
Allstate Ins. Co. v. Croom
2011 Tex. App. LEXIS 2645 [ / lexisONE] (Tex. App., April 7, 2011)
Casualty Insurance Proceeds are Not Exempt from Garnishment Actions & Proceeding
A homeowner won a multi-million dollar judgment against a custom home building company for defective home construction and unscrupulous billing practices.  The company then sued its CGL insurer for refusing to defend it in the lawsuit filed by the homeowner.  The insurer agreed to pay the company $200,000 in satisfaction of the claim.  When the homeowner sought garnishment, and the insurer deposited the funds into the trial court's registry, the company and its attorney argued that the funds were exempt from seizure under Texas statutory law.  The court held that the statute did not specifically exempt casualty insurance proceeds and declined the opportunity to expand the scope of the law.

Professional Liability

Bryan Bros., Inc. v. Continental Casualty Co.
2011 U.S. App. LEXIS 6131 [ / lexisONE] (4th Cir. (Va.), March 24, 2011)
Court Deems Prior Knowledge Provision a Condition Precedent to Coverage
The insurer issued a professional liability policy to plaintiff to cover liabilities arising from accounting services.  The policy agreed to provide coverage provided that prior to the effective date of the policy, none of “you” had any basis to believe that a claim may be asserted.  The policy also included an exclusion precluding coverage for any fraudulent or criminal acts but also provided a savings clause reinstating coverage for individuals that were not personally aware of such acts. In February 2009, the policyholder discovered that one of its employees, the firm’s account clerk, had stolen funds from eight clients beginning in 2002 with the last theft occurring in July 2008. The victims subsequently asserted claims. The Fourth Circuit concluded that the plain language and structure of the policy established that the prior knowledge provision is a condition precedent to coverage.  The court stated that the insurer agreed to cover liability on claims made during the policy “provided that” no one covered under the policy had knowledge of a potential claim.  Because the employee had prior knowledge, there was a failure to fulfill a condition upon which the insurer’s obligation was dependent.  In closing, the court upheld the denial of coverage.

Hirsch v. Schiff Benefits Group, LLC
2011 U.S. Dist. LEXIS 35588 [] (E.D. Pa., March 28, 2011)
Plaintiffs Prohibited From Maintaining Professional Negligence Claim Against Insurance Broker
In this case, plaintiffs brought claims against an insurance broker and its principal.  Plaintiffs claimed that the Defendants misled them so that they would create and invest in a premium-financed insurance trust.  Plaintiffs purchased a premium financed life insurance policy financed the premium payments through a lender.  Plaintiffs executed a guaranty in favor of the lender pledging personal collateral.  The Plaintiffs asserted that the Defendants assured them there would be a secondary market for the life insurance policy that would provide a market value exceeding any outstanding obligation to the lender.  The Plaintiffs alleged that there was actually no secondary market for the policy and as a result they had to pay over $238,000 for the debt to the lender.  One of the claims brought was for professional negligence.  Plaintiffs alleged that the broker, as a licensed insurance broker, is liable for professional negligence based on his assurances.  The court found that Pennsylvania courts have only allowed professional negligence claims against certain licensed professionals not to include insurance brokers.

Zurich Specialties London Limited v. Bickerstaff, Whatley, Ryan & Burkhalter, Inc.
2011 U.S. App. LEXIS 6383 [ / lexisONE] (9th Cir. (Cal.), March 28, 2011)
Bankruptcy Exclusion Bars Coverage for Alleged Malpractice Claim
The policyholder was insured under a professional liability policy issued by plaintiff.  The policy included an exclusion that eliminated coverage for “claims or costs, charges, or expenses arising out of. . .the insolvency or bankruptcy of the insured or any other person, firm or organization.”  The underlying action arose from the insolvency of a medical malpractice self-insurance fund.  The receiver initially sued another entity.  That entity then filed the underlying action against the policyholder seeking contribution and alleging that the policyholder’s reserve reviews and rate level recommendations directly impacted and caused the insolvency citing the bankruptcy exclusion, the insurer denied coverage for the claim.  While the court did note the broad duty to defend, it also concluded that none of the allegations in the complaint or extrinsic facts known to the insurer gave rise to any potential liability under the policy.


Munich Reinsurance America, Inc. v. American Nat’l Ins. Co.
2011 U.S. Dist. LEXIS 41826 [] (D. N.J., Apr. 18, 2011)
In Reinsurance Dispute, Court orders Reinsured to Provide Detailed Discovery Responses as to Dates of Reserves
Plaintiff reinsured was party to a Workers Compensation Per Occurrence Excess of Loss Retrocession Agreement. Plaintiff alleged the Reinsurer failed to fully indemnify it for losses in accordance with the parties’ retrocessional agreement. In a discovery dispute, the court ordered plaintiff to provide detailed information regarding the dates on which plaintiff was aware, for each claim was reserved at 50% of the reinsured attachment point as well as information pertaining to notice provided relating to each such claim. Further, the court ordered the plaintiff to designate a corporate witness to testify on behalf of the company regarding the dollar amounts of each claim, the handling of each claim including how reserves were set and subsequently modified, plaintiff’s demands for payment, and plaintiff’s claimed damages. Plaintiff had sought to avoid designating a corporate witness on these issues arguing that individuals of the company had already been deposed concerning these topics, but plaintiff had consented that such individual testimony would apply to corporate knowledge.


Garcia v. American United Life Ins.
2011 U.S. App. LEXIS 7662 [ / lexisONE] (5th Cir. (Tex.), April 13, 2011) (unpublished)
Providing A False SSN On An Insurance Policy Is Grounds For Rescission
A policyholder’s misrepresentation is material if the facts that were misrepresented or omitted would have affected the insurer’s decision to issue the policy.  A SSN is an integral part of the process by which a party’s identity can be verified.  Because the policyholder provided a false SSN, it inhibited the insurer’s ability to verify the policyholder’s identity.  Without being able to obtain accurate information about a proposed policyholder’s identity, an insurer cannot properly assess its business risk involved in issuing the policy.

Pioneer Ind. Inc. v. Hartford Fire Ins. Co.
2011 U.S. App. LEXIS 7139 [ / lexisONE] (8th Cir. (Minn.), April 8, 2011)
Providing A False SSN On An Insurance Policy Is Grounds For Rescission
A policyholder’s misrepresentation is material if the facts that were misrepresented or omitted would have affected the insurer’s decision to issue the policy.  A SSN is an integral part of the process by which a party’s identity can be verified.  Because the policyholder provided a false SSN, it inhibited the insurer’s ability to verify the policyholder’s identity.  Without being able to obtain accurate information about a proposed policyholder’s identity, an insurer cannot properly assess its business risk involved in issuing the policy.

This edition of CaseWatch: Insurance was originally published in the The Insurance and Reinsurance Report blog.

CaseWatch: Insurance provides timely summaries of and access to insurance law decisions and legislation. It is distributed bi-weekly. For ease of reference, the cases are organized by topic. CaseWatch is the collaborative effort of Goldberg Segalla LLP’s Global Insurance Services Practice Group, as is its blog The Insurance and Reinsurance Report. Goldberg Segalla’s Global Insurance Service Group is comprised of over 25 attorneys throughout 10 offices in the firm’s four states (New York, New Jersey, Connecticut, and Pennsylvania). The Global Insurance Services Group routinely handles matter of national and international importance for both domestic and foreign insurers, cedents and reinsurers. This includes: comprehensive audits, policy reviews, regulatory advice,  positioning dispute for resolution at the business level (either through interim funding or non-waiver agreements), negotiations among counsel, mediation or fully-involved arbitration or litigation.

Daniel Gerber and Sarah Delaney   The editors, Daniel W. Gerber and Sarah J. Delaney appreciate your interest and welcome your feedback.

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