Insurance Law Report: October 2018


Florida Supreme Court Finds Insurer In Bad Faith Despite Its Having Tendered Limits Within Nine Days After Accident

The Florida Supreme Court recently found that an insurer acted in bad faith in settling a claim against its insured despite the insurer notifying the insured of settlement opportunities, advising the insured of potential excess exposure, recommending personal counsel, and tendering policy limits nine days after a motor-vehicle accident giving rise to the claim against the insured. Harvey v. Geico General Ins. Co., 2018 WL 4496566 (Fla. Sept. 20, 2018).

The insured was involved in a fatal motor-vehicle accident, which the insured immediately reported to his insurer. Three days later, the insurer advised the insured of his potential exposure above policy limits and his right to retain personal counsel. Six days after the accident, the decedent’s estate’s counsel contacted the insurer and requested a recorded statement from the insured to determine, among other things, the extent of the insured’s assets. The insurer did not immediately relay this request to the insured, but three days later tendered policy limits to the estate’s counsel. The estate’s counsel acknowledged receipt of the check but also the insurer’s refusal to provide the requested statement. The insurer forwarded the response to the insured who had not known of a requested statement. The next day, the insured advised the insurer that he had retained personal counsel but could not meet with him regarding his financial situation for several days and asked the insurer to tell the estate’s counsel that he was working on providing the information. The insurer did not relay that message to the estate’s counsel. Approximately one month after the initial request for the statement, the estate’s counsel returned the insurer’s check and filed suit against the insured, which resulted in an excess verdict against the insured. The insured subsequently filed a bad-faith action against the insurer, and after the trial court denied the insurer’s motion for a directed verdict, the jury found that the insurer had acted in bad faith. The insurer appealed, and the appellate court reversed. The insured appealed to the Florida Supreme Court.

The Florida Supreme Court reversed, holding that the appellate court erroneously concluded that the evidence was insufficient to show that the insurer acted in bad faith in failing to settle and that the insurer’s actions did not cause the excess judgment. The Florida Supreme Court found that the insurer had not fulfilled its obligations to the insured merely by notifying the insured of settlement opportunities, advising him of potential excess exposure, recommending that he retain personal counsel and tendering policy limits. The Court also rejected the appellate court’s emphasis on the insured’s conduct in its analysis because the focus is on the actions of the insurer.

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Kentucky Supreme Court Finds Trespass Not An Accident

The Kentucky Supreme Court, in a split decision, reversed an appellate decision for the insured, ruling that the insurer of an insolvent mining company that wrongly extracted coal from a farmer’s property did not owe coverage for the loss. Am. Mining Ins. Co. v. Peters Farms, LLC, 2018 WL 3913781 (Ky. Aug. 16, 2018).

A landowner who owned property adjacent to a coal company’s operation sued the company for trespass onto its property to mine and remove coal and for conversion. The company’s insurer denied coverage for lack of an “occurrence” based on the allegation of the insured’s “willful and wanton trespass” and conversion as an intentional act. The policy provided coverage for “property damage” caused by an “occurrence,” defined as an “accident including continuous or repeated exposure to substantially the same general harmful condition[s].” Following the insured’s insolvency, the landowner was allowed to amend its complaint to add the company’s insurer. At a bench trial, the court concluded that the plaintiff’s injuries were the result of an “occurrence” which stemmed from an “accident” due to the insured’s mistake as to the property boundary with the landowner. An appellate court affirmed the ruling, and the insurer appealed to the Kentucky Supreme Court.

The Kentucky Supreme Court reversed, finding that the conduct could not be considered an “accident” under applicable principles of trespass law, regardless of whether the insured intended to encroach on the landowner’s property. The Court noted that although it may not have been the insured’s intent to mine the landowner’s coal, “[r]egardless of whether its trespass was willful or innocent, [the insured] intended to act,” and thus, the removal and conversion of the coal was not an “accident” constituting an “occurrence” under the policy.

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Georgia Supreme Court Holds Risk Retention Groups Formed Pursuant To Federal Law Not Subject To State Direct Action Statutes

The Georgia Supreme Court held that the federal Liability Risk Retention Act of 1986 (“LRRA”) preempts application of Georgia’s motor carrier and insurance carrier direct action statutes against risk retention groups. Reis, et al. v. OOIDA Risk Retention Grp., Inc., 303 Ga. 659, 814 S.E.2d 338 (2018).

The insured, a motor carrier, was involved in a motor-vehicle accident with the claimants. The claimants sued the insured, the truck owner and the risk retention group that insured the motor carrier for damages arising out of the accident. The risk retention group moved for summary judgment, claiming that Georgia’s direct action statutes, which allow motor carrier’s insurers to be added as parties to personal injury lawsuits, are preempted by the LRRA. The court granted the motion and the claimants appealed.

The Georgia Supreme Court affirmed, finding that the LRRA preempts state direct action statutes. Focusing on the interplay between federal and state law when federal law regulates an area traditionally regulated by the states, such as insurance, the Supreme Court explained that state law must yield to a conflicting federal law if the federal law specifically requires it. The Court explained that the LRRA provides that risk retention groups are exempt from state law to the extent such state law would “regulate, directly or indirectly, the operation of a risk retention group.” The Supreme Court found that direct action statutes both directly and indirectly regulate the operations of insurers in that they subject insurers to lawsuits as parties, and thus, directly expose them to liability and any resulting damages. The Supreme Court held that while this regulation may be permissible with respect to traditional insurers, it is not permissible with respect to risk retention groups formed pursuant to the LRRA.

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South Carolina Supreme Court Holds Guaranty Association Act Requires Set Off Against Total Damages

The South Carolina Supreme Court recently held that the Property and Casualty Insurance Guaranty Association Act requires that settlement amounts be offset from the total amount of an injured party’s damages and not from the statutory per claim cap. Buchanan v. S.C. Prop. & Cas. Ins. Guar. Ass’n, 2018 WL 4212101 (Sept. 5, 2018).

A wrongful death suit was settled by the defendant but its insurer had become insolvent while the action was pending and the decedent’s estate asserted a claim against the Guaranty Association. By the time the decedent’s estate brought its claims against the Guaranty Association, the estate had recovered a portion of the settlement amount from third parties, but since the recovery exceeded the $300,000 statutory cap under the Act, the Guaranty Association took the position that that amount should be set off from the statutory cap thereby relieving it of any obligation to pay. The estate argued that any set-off should be deducted from the settlement amount rather than the statutory cap, so that the Guaranty Association remained obligated to pay $300,000.

Considering the Act’s provisions to be ambiguous, the Supreme Court interpreted the Act as requiring any third-party recovery to be deducted from the total amount of the damages rather than from the cap.

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Tenth Circuit Finds Exclusion Ambiguous After Oklahoma Supreme Court Finds It Does Not Violate Oklahoma Public Policy

The U.S. Tenth Circuit Court of Appeals considered an “indoor air pollution” exclusion after the Oklahoma Supreme Court found, in response to a certified question from the district court, that the exclusion was not against public policy but found notwithstanding that it is unenforceable because it is ambiguous. Siloam Springs Hotel, L.L.C. v. Century Surety Co., No. 17-6208 (10th Cir. Oct. 16, 2018).

Hotel guests sustained injuries due to carbon monoxide poisoning stemming from an indoor pool heater and sued the hotel. Its insurer denied coverage based on an exclusion for “qualities or characteristics of indoor air.” The district court granted summary judgment to the insurer in the ensuing coverage litigation, and the hotel appealed. Following remand and resolution of a federal jurisdictional question raised by the Tenth Circuit, the district court certified to the Oklahoma Supreme Court the question of whether public policy prohibited enforcement of the exclusion. The Supreme Court, with three justices dissenting, found that it did not, but did not address whether the exclusion actually excluded coverage for the claim. On the insurer’s motion to administratively close the case, the district court held the case was already administratively closed and that there was no need to reopen since the Supreme Court’s ruling did not alter the summary judgment. The hotel appealed again.

The Tenth Circuit concluded that it was proper to hear the appeal and to address the applicability of the exclusion and found that because the Oklahoma Supreme Court had not reached the merits of the coverage question, it must predict how it would; it declined to certify the question. Influenced heavily by an earlier unanimous Nevada Supreme Court decision that the exclusion is ambiguous as it could be construed in more than one reasonable way, the Tenth Circuit agreed with one of the dissenting Oklahoma Supreme Court justices that the exclusion could refer only to an inherent feature of the air, and not to any transitory presence of a contaminant, and concluded that the Oklahoma Supreme Court would not depart from the reasoning of one of its justices and the holding of the only other state court on the subject. The judgment of the district court against coverage was reversed.

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Sixth Circuit Finds Insured’s Notice Insufficient Under Tennessee Law

The U.S. Sixth Circuit Court of Appeals, considering Tennessee law, affirmed a district court ruling that a group of insurers were not required to cover a False Claims Act settlement between the insured and the federal government because the insured failed to provide a notice of claim sufficient to constitute proper notice. First Horizon Nat’l Corp. v. Houston Cas. Co., 2018 WL 3359555 (6th Cir. Jul. 10, 2018).

The insured was a mortgage lender that purchased “wrongful acts” insurance from multiple insurers to cover claims made during a the policy period. The insured filed a notice of circumstance that may give rise to a claim under the policy during the policy period of wrongful acts that had led to a federal investigation and settlement under the False Claims Act. The notice of circumstance did not disclose that the government made a settlement offer earlier in the year, nor did it reveal that the insured and the government had engaged in a series of tolling agreements under which the government had agreed to push back the date by which it would file a civil suit as they pursued a settlement. More than 90 days after the policy period ended, the insured asked the insurers to fund a settlement with the government. The insurers, all of which had reserved rights, denied the claim for lack of notice and the insured filed suit seeking a declaration of coverage. The district court held that the insurers were not obligated to participate in the settlement because the insured did not provide sufficient notice of the claim.

On appeal, the Sixth Circuit affirmed, finding that district court properly ruled that the insured’s “boilerplate” notice of circumstances it submitted to the insurers regarding the federal investigation was insufficient to constitute proper notice of a claim under the policy terms and that the insurers had no duty to cover the insured’s settlement with the government.

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Texas Appellate Court Refuses To Consider Extrinsic Evidence Of Insured’s Own Fraud And Finds Duty To Defend

A Texas Court of Appeals reversed a summary judgment for an auto insurer that it did not owe a duty to defend its insured who had lied that she had been driving a vehicle involved in an accident when it was really an excluded driver who had been driving. Avalos v. Loya Insurance Co., 2018 Tex. App. LEXIS 5629, 2018 WL 3551260 (Tex.App.—San Antonio, July 25, 2018).

The insured’s husband moved his wife’s vehicle and struck the underlying claimants’ vehicle. Because the insured’s husband was an excluded driver on the policy, the insured and the claimants told the police that the insured had been driving at the time. The claimants sued the insured, and her insurer defended. However, defense counsel learned before the insured’s deposition that she had lied about having been driving. The insurer then denied coverage and withdrew from the defense.

In a later suit against the insurer, the insurer relied upon the evidence of the fraud, and the trial court held there was no duty to defend. The appellate court reversed, refusing to consider the evidence because it was extrinsic to the eight corners of the policy and pleadings. The appellate court noted that the Texas Supreme Court had recognized that some courts have adopted exceptions to the eight-corners rule but that it had not so, and that the U.S. Fifth Circuit Court of Appeals has stated that if the Texas Supreme Court were to recognize such an exception, it would do so only when it is impossible to discern from the pleadings whether coverage is potentially implicated, the evidence does not go to the merits of the underlying claim, and does not directly contradict the allegations in the underlying petition. Here, the extrinsic evidence of fraud directly contracted the allegations in the underlying petition, and the court therefore concluded that it could not be considered.

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Florida Appellate Court Holds Insurance Policy Requiring An Assignment Of Benefits To Be Agreed Upon By All Insureds And Mortgagees Is Enforceable

A Florida appellate court recently held that an insurance policy that requires an assignment of benefits to be agreed upon by all insureds and mortgagees is enforceable. Restoration 1 of Port St. Lucie v. Ark Royal Ins. Co., 2018 WL 4211750 (Fla. 4th DCA Sept. 5, 2018).

An insurer issued a homeowner’s insurance policy to two insureds and a mortgagee that contained a condition that no assignment of claim benefits, regardless of whether made before a loss or after a loss, shall be valid without the written consent of all insureds, all additional insureds, and all mortgagee(s) named in the policy. After the insureds’ home sustained water damage, a water mitigation company completed clean up of the home in exchange for an assignment of benefits assigning the water mitigation company rights under the policy. The agreement was signed by only one of the insureds. The water mitigation company submitted a claim for its invoice associated with the water mitigation, but the insurer refused to pay because not all of the insureds and mortgagees had signed the assignment. The water mitigation company sued the insurer for breach of contract and sought declaratory judgment that the assignment of benefits condition breached public policy. The insurer moved to dismiss arguing that the assignment of benefits was valid. The trial court granted the motion. The water mitigation company appealed.

The appellate court affirmed, finding that the assignment of benefits condition under the policy is enforceable. It explained that the policy does not prohibit an assignment, but rather imposes a condition, requiring the approval of the assignment by all insureds and the mortgagee, and held that the assignment of benefits provision cannot be superfluous as all insureds and mortgagees have a vested interest in who performs repairs on the home. The court rejected the water mitigation company’s public policy argument, concluding that the provision imposes a reasonable condition and suggesting that, ultimately, the public policy concerns are best addressed by the legislature, not the courts.

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Louisiana Appellate Court Holds Insurer’s Duty To Defend Terminates Upon Judicial Finding Of No Coverage

A Louisiana Court of Appeal reversed a trial court’s denial of summary judgment to an insurer, finding that the insurer no longer owed a duty to defend when it was judicially determined that there could be no coverage for indemnity. Pontchartrain Natural Gas System, et al. v. Texas Brine Company, LLC, 2018 WL 4940693 (La. App. 1 Cir. Oct. 11, 2018).

An insurer of a brine well operator moved for summary judgment on the basis that it owed no duty to defend or indemnify its insured in connection with a claim for a damaged pipeline and storage facilities resulting from a sinkhole that occurred after the expiration of the insurer’s policies. The insurer argued that there was no proof of speculative damage caused by pre-sinkhole subsidence. The district court agreed, finding that the plaintiff had not proven any pre-sinkhole damage and ruled that no indemnity was owed on this basis. However, the district court denied the insurer’s motion with respect to its duty to defend, finding that the insurer owed a duty to defend against the possible manifestation of pre-sinkhole damage based on the allegations.

On appeal, the court affirmed the district court’s grant of summary judgment in favor of the insurer with respect to indemnity, finding that no coverage was owed under the insurer’s policy because there was no evidence of damage during the effective dates of the policies. The court reversed the district court’s denial of the insurer’s motion for summary judgment with respect to its duty to defend, holding that once it was judicially determined that the insurer had no coverage for indemnity, the insurer’s defense obligation ended. The court explained that the undisputed facts precluded the possibility of a duty to indemnify, thereby terminating a duty to defend because there no longer was a potential that covered damages could be proven.

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Florida Appellate Court Holds Trial Court Did Not Err In Dismissing Insurer’s Intervention

A Florida appellate court recently held that the trial court did not abuse its discretion when it dismissed an insurer’s intervention, finding that the insurer’s speculative or contingent interest in the underlying lawsuit did not support intervention. Houston Specialty Ins. Co. v. Vaughn, 2018 WL 3795785 (Fla. 2d DCA Aug. 10, 2018).

The insurer issued a policy to a company in the roofing business. While applying a protective coating to a mobile home’s roof for the company, the claimant fell and injured himself. The claimant subsequently sued the company and others. Relying on an exclusion that excluded coverage for bodily injury to the company’s employees and an endorsement that limited coverage if the plaintiff were an independent contractor, the insurer filed a declaratory judgment action seeking a determination as to its duty to defend and indemnify the company as well as a declaration that the claimant was an employee of the company. The insurer also moved to intervene in the underlying lawsuit. The insurer argued that limited intervention was proper to avoid conflicting finding or verdicts and inconsistent results. The company opposed intervention and argued that the insurer’s intervention would potentially inflate any damages award. The trial court granted the insurer’s motion to intervene. However, as a result of a verdict in the declaratory judgment action finding that the claimant was an independent contractor, the claimant filed a second motion to dismiss the insurer’s intervention, which the court granted. The insurer appealed.

The appellate court affirmed, finding that the trial court’s decision did not constitute an abuse of discretion. The appellate court found that the insurer lacked the necessary direct and immediate interest in the underlying lawsuit to intervene because the insurer possessed only a speculative or contingent interest that would come to fruition only if the trial court entered a judgment against the company and then either the claimant or the company sought enforcement of that judgment through a separate action against the insurer. The appellate court stated that the intervention would eviscerate Florida’s non-joinder statute which instructs that an injured third party may not file a direct action against a liability insurer without first obtaining a settlement or verdict against the insured.

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Court Considering Tennessee Law Rejects American Law Institute Restatement

A Delaware court, considering Tennessee law, issued a decision considering but ultimately diverging from the American Law Institute’s (“ALI’s”) recent adoption of the revised Restatement of the Law of Liability Insurance which stated the modern trend is to disallow the reimbursement of defense costs to an insurer where coverage is not owed, finding it not binding authority and contrary to Tennessee precedent allowing an insurer reimbursement of such costs. Catlin Specialty Ins. Co. v. CBL & Assocs. Properties, Inc., 2018 WL 3805868 (Del. Super. Aug. 9, 2018).

The insured was sued in a class action lawsuit for which the insured sought a defense. Its insurer first denied coverage but agreed to advance defense costs after an amended complaint was filed. The insurer sent a letter to the insured stating that it would provide a defense under a full and complete reservation of rights, including the right to seek reimbursement of defense costs in the event it was determined that the insurer did not have a duty to defend in the underlying suit. The court ultimately found the insurer owed no duty to defend and the insurer moved for supplementary relief in the form of reimbursement of defense costs under Tennessee law. The insurer relied on a Tennessee case which established the right of an insurer to seek reimbursement of defense costs under a quasi-contract theory of unjust enrichment where the insurer gives timely notice. The insured argued that the case relied upon by the insurer did not reflect the modern trend away from that position as espoused by the recent revision of the ALI’s Restatement of the Law on Liability Insurance. The court held that while the recent Restatement revisions do reflect a shift away from the trend allowing an insurer to seek reimbursement of defense costs, it is not controlling until formally adopted by a court in the jurisdiction, which the court found Tennessee had not done and thus does not override controlling case law.

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Federal Court In Virginia Holds Cause Of Action For Failure To Procure Insurance Runs From Placement Of Policy

A federal court in Virginia held that a claim for an insurance broker’s failure to procure proper insurance was barred by an applicable statute of limitations that began to run at policy placement. Penn v. 1st Southern Insurance Services, Inc., 324 F. Supp.3d 703 (E.D. Va. Jul. 18, 2018).

A trucking company sought insurance that complied with all statutory requirements. Despite federal requirements that the company procure insurance with specific endorsements and at least $750,000 in liability insurance, its broker procured insurance with the required endorsements and only $100,000 in liability coverage. Subsequently, the trucking company was sued after one of its trucks was involved in a collision. The trucking company’s insurer refused to meet the federal minimum requirement of coverage, the trucking company assigned rights to the underlying plaintiffs, and the underlying plaintiffs sued the broker for failing to procure insurance that complied with federal minimum requirements.

The broker argued that the cause of action had accrued and the statute of limitations began to run when the inadequate policy was issued. The injured individuals argued that the cause of action accrued when the insured was required to pay judgments because, prior to that point, the insurance company had fulfilled all obligations. The court reasoned that Virginia law only requires minimal injury for a cause of action to accrue. It also noted that a failure to procure insurance involves a fixed violation of a duty. In concluding that the cause of action accrued when the insurance broker failed to procure insurance, the court noted that the slight injury of failing to receive the coverage sought was sufficient to constitute injury which triggered the applicable statute of limitations.

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Federal Court In North Carolina Holds That Statute Of Limitations For Insurance Agent’s Breach Of Fiduciary Duty Begins To Run When Policy Is Issued

A federal court in North Carolina held a cause of action for breach of fiduciary duty against an insurance agent began to accrue when the policy was issued. Catlin Specialty Insurance Company v. Tegol, Inc., 2018 WL 4329293 (W.D. N.C. Sept. 11, 2018).

An insured requested insurance that specifically covered trademark and copyright infringement, but the policy secured by its broker included an endorsement that excluded coverage for claims for trademark and copyright infringement. The insured sued the broker for failure to procure trademark and copyright insurance, and the broker moved to dismiss arguing that it was time barred. The court reasoned that a cause of action for breach of fiduciary duty accrues when the breach is discovered or could have been discovered through reasonable diligence. The insured argued that the date of accrual was later than when the policy was issued because the policy’s list of exclusions differed from the actual policy issued and the insurance policy was “byzantine” and therefore excused the insured from reading it. The court noted that the insured could have apprised itself of the contents of the policy by simply reading its policy. Therefore, the breach of fiduciary duty by the insurance agent to procure insurance covering trademark and copyright infringement could have been reasonably discovered when the policy was issued. The court determined that the cause of action was time barred.

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Federal Court In South Carolina Maintains Rigid Reservation Of Rights Requirements

A federal court in South Carolina recently enforced South Carolina jurisprudence that unless an insurer reserves its rights on non-covered damages and seeks an allocation of damages in an underlying action, the entire verdict is potentially subject to coverage. Stoneledge at Lake Keowee Owners Ass’n, Inc. v. Cincinnati Ins. Co., No. 8:14-cv-01906 (D. S.C. Sept. 28, 2018).

An underlying suit alleged that the insureds performed defective construction work on dwelling units. After obtaining a judgment against the insured, the plaintiff sued the insured’s insurers seeking to satisfy the judgment. The insurers contested coverage on various grounds, namely that the policies did not provide coverage for defective work and/or that certain losses might not have occurred at the time of the loss. Plaintiff argued, in part, that because the insurers never sought an allocation of covered and uncovered damages in the underlying action, the insurers were bound to indemnify their insureds for the entire verdict.

Granting plaintiff’s motion for summary judgment, the court found that (1) the insurers waived their rights to contest coverage under some of the later policies because the reservation of rights letters issued failed to inform the insureds of the need to allocate damages between covered and non-covered losses. The court held that because at least a portion of the underlying verdict was subject to coverage, the entire verdict was subject to coverage.

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Adam Jacob

Military veteran and medically trained.

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