Source: http://www.phelps.com/insurance-law-report-may-2018-6-5-2018
Timestamp: 2019-04-25 00:36:27+00:00

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The South Carolina Supreme Court held that an insurer may maintain a malpractice claim against a law firm it hired to defend an insured. Sentry Select Insurance Co. v. Maybeck Law Firm, LLC, No. 2016-001351 (S.C May 30, 2018).
A law firm engaged by an insurer to defend its insureds in a lawsuit failed to respond timely to the underlying plaintiff’s requests to admit that acknowledged responsibility on the part of the insured. The court provided no relief and the case was settled at mediation for an amount far in excess of the value of the claim previously assessed by the law firm. The insureds assigned their malpractice claim against the law firm to their insurer, and the insurer sued the law firm asserting the assigned claims and its own direct claim.
The law firm moved to dismiss both claims, and the court certified the question of whether the claim could be maintained. In a 3-2 decision, the South Carolina Supreme Court held that such claims could be maintained directly by an insurer if the insurer can prove that its damages were proximately caused by the lawyer’s malpractice (it did not address the viability of the assigned claims). The Supreme Court noted that 24 other jurisdictions already permit such action.
The North Carolina Supreme Court recently affirmed a North Carolina Court of Appeal ruling that an insurer’s mere disagreement with an insured regarding claim valuation does not amount to unfair and deceptive trade practice or bad faith on the part of the insurer. Jackson v. Century Mutual Ins. Co., 811 S.E.2d 138 (N.C. 2018).
The insureds made a claim under a homeowners’ policy after their home was damaged. The insurer acknowledged liability almost immediately, and hired an independent adjuster to review the claim. The insurer also hired two appraisers, as allowed by the policy, who valued the loss substantially below the claimed loss. The insureds failed to provide evidence substantiating their assessment of the value of the property, and the insurer eventually paid the claim as valued pursuant to the policy’s appraisal process. The insureds filed suit and asserted various claims against the insurer, including unfair or deceptive trade practices and bad faith. The insurer moved for and was granted summary judgment, which judgment was affirmed on appeal.
The Supreme Court of Texas ruled that an insurance agent could not compel arbitration of an insured’s claim against it based on an arbitration clause in a policy between the insured and the insurer to which the agent was not a party. Jody James Farms, JV v. Altman Group, Inc., 2018 WL 2168306 (Tex. May 11, 2018).
The insured sued his insurance agent for breach of fiduciary duty and deceptive-trade practices because it failed to provide timely notice of the claim to the insurer under a crop policy. The agent moved to compel arbitration pursuant to an arbitration clause in the policy. The trial court granted the agent’s motion, subsequent to which an arbitrator determined that it had the authority to resolve the dispute, and did so in the agent’s favor.
The district and appellate courts upheld the decision, but the Texas Supreme Court reversed, vacated and remanded. Though the insurance contract incorporated the rules of the American Arbitration Association, which included the intent to arbitrate arbitrability, the Supreme Court held that “when the party resisting arbitration is a signatory to an arbitration agreement, questions related to the existence of an arbitration agreement with a non-signatory are for the court, not the arbitrator.” Because the insured did not agree to arbitration with the agent, the Supreme Court held that the district court erred in having an arbitrator determine the appropriate dispute forum.
Additionally, the Supreme Court rejected the agent’s argument that the policy fell within one of the categories in which non-signatory arbitration can be compelled. It reasoned that the insurer did not have sufficient “control” over the agent to establish an agency relationship; that direct provision of benefits for the agent did not exist in the contract so as to establish it as a third-party beneficiary; that direct-benefits estoppel did not apply since the claim arose from state law independent of the terms of the contract; and that the relationship between the agent and insurer was not close enough to imply the party consent required to apply alternative estoppel theory.
The Supreme Court of Texas recently released its much-anticipated rehearing opinion in USAA Texas Lloyds Company v. Menchaca, 2018 WL 1866041 (Tex. Apr. 13, 2018). A divided Court reaffirmed its prior ruling and the five principles it set forth discussing the relationship between contract claims and tort claims for Insurance Code violations. In short: where a policy provides no coverage for a loss, there is generally no exposure for an insurer under Chapter 541 of the Texas Insurance Code. If, however, an insurer wrongfully denies coverage or otherwise withholds policy benefits, the policy benefits can serve as “actual damages” to support its claim of unfair or deceptive practices under the Insurance Code even if the insured never pursues a breach of contract claim.
The insured sued her homeowner’s insurer for damages. Questions submitted to the jury asked whether the insurer breached the policy’s terms, and the jury found it had not. The jury was also asked whether there was a statutory violation, and the jury answered “yes” and awarded damages as the difference between what was paid under the policy and what was owed. The insurer contended on appeal that the jury’s finding that the insurer complied with the policy precluded the insured from recovering under Chapter 541. The Supreme Court held that the insured’s Chapter 541 claim could be supported without a finding of breach of contract if policy benefits were improperly denied or wrongfully withheld. However, the Court held that where an insured has no right to receive benefits under an insurance policy and has not sustained injury independent of the loss of policy benefits, no extra-contractual liability under Chapter 541 exists. The Court admitted it had never encountered a case where an insured had actually proven an independent injury claim, and it refused to speculate on what circumstances may support an independent injury.
Lower courts disagreed on how these principles would apply. In recognition of this confusion, the Supreme Court agreed to a rehearing and provides additional context for these principles and makes clear that a Chapter 541 claim is not contingent upon the insured making, or prevailing on, a claim for breach of contract although such recovery is contingent upon proof of either lost policy benefits or the existence of an independent injury, a matter never before seen by the Court and less likely to be pursued by insureds given this decision.
The U.S. Court of Appeals for the Eleventh Circuit held under Florida law that an insured must give notice of a separate lawsuit for which it sought a defense even though the insurer was already aware of a similar suit in another state and that the failure to do so relieved the insurer of its duty to defend. Scott, Blane and Darren Recovery, LLC v. Auto. Owners Insurance Co., 2018 WL 1611256 (11th Cir. April 3, 2018).
The insured was sued for unfair trade practices and false advertising in Oregon, and gave notice to its insurer requesting a defense. The insurer denied coverage based on its position that the suit did not allege an “advertising injury.” The insured moved to dismiss the suit against it, but the plaintiff voluntarily dismissed the suit and refiled in California, again asserting a claim for unfair trade practices and false advertising and added a claim for violation of California’s Unfair Competition Law. The insured did not give notice of this lawsuit. Ultimately, judgment was entered in the insured’s favor, and it sought to recover its defense costs from its insurer. The district court entered judgment in the insurer’s favor after finding no coverage but also because the insured failed to comply with the notice provision in the policy. The insured appealed.
The Eleventh Circuit affirmed on all counts, and addressing that part of the judgment regarding notice, held that the notice provision’s requirement of notice of any “occurrence,” “claim” or “suit” obligated the insured to give separate notice of the separate California suit, the failure of which forfeited its right to a defense from its insurer. The Eleventh Circuit additionally rejected the insured’s argument that the California suit was not a new “claim” because the California suit contained a California state law claim that the Oregon suit had not.
The U.S. Eleventh Circuit Court of Appeal, considering Georgia law, affirmed summary judgment for an insurer that a policy’s “Computer Fraud” Insuring Agreement did not cover losses due to fraud perpetrated by “use of a computer” where the loss did not result directly from use of the computer as required by the policy. Interactive Commc’ns Int’l, Inc. v. Great Am. Ins. Co., 2018 WL 2149769 (11th Cir. May 10, 2018).
The insured, an operator of a network which allows consumers to put money onto general-purpose reloadable debit cards issued by banks, had a Crime Protection Policy which insured against a “Computer Fraud.” Pursuant to the Insuring Agreement, the insurer was obligated to pay for loss of money or securities “resulting directly from the use of any computer to fraudulently cause a transfer of that property….” During the policy period, unknown parties exploited a vulnerability in the insured’s computer system that enabled multiple redemptions of a single consumer credit, causing substantial losses. The insured sought coverage for the money lost. Its insurer denied coverage for the loss, and in ensuing coverage litigation, moved for summary judgment on the grounds that the loss was not the result of the “use of any computer,” or in the alternative, did not “result directly” therefrom. The district court granted summary judgment to the insurer and the insured appealed.
The Eleventh Circuit affirmed, agreeing that the loss did not “result directly” from the use of computer fraud. The court reasoned that the term “directly” required an immediate loss without intervention, and that the instant loss did not occur immediately after the manipulation of the insured’s computer systems to duplicate the consumer credits but only when the bank finally transferred money to the account of the consumer after several intervening events. The Eleventh Circuit found the “lack of immediacy – and the presence of intermediate steps, acts, and actors – [made] clear that the loss did not ‘result directly’ from the initial fraud,” and that coverage was not available under the policy.
The U.S. Eleventh Circuit Court of Appeals upheld an Alabama federal court’s ruling that a pollution exclusion does not apply to property damage and injuries from a sewage leak based on controlling Alabama law. Evanston Ins. Co. v. J&J Cable Constr., LLC, 719 Fed. Appx. 1002 (11th Cir. 2018).
The insured had a CGL policy containing a qualified pollution exclusion. The insured broke residential sewer pipes causing property damage and personal injury to the property owners who filed suit against the insured for the sewage backup. The insurer defended but reserved rights based on the policy’s pollution exclusion, and thereafter sought declaratory relief and filed a motion for summary judgment on that exclusion. The insured filed a cross-motion for summary judgment arguing the exclusion did not apply because the damage was due to residential and not industrial waste and was, thus, outside of the scope of the exclusion. The court agreed based on the Alabama Supreme Court’s ruling in U.S.F.&G. v. Armstrong, 479 So.2d 1164 (Ala. 1985), which under a similarly worded policy and facts held that a denial of coverage would distort the purpose of the pollution exclusion, and that raw sewage was not a “pollutant” under that exclusion.
On appeal, the Eleventh Circuit affirmed, finding that the pollution exclusion had no legally significant distinction from the exclusion considered in Armstrong, and that the involvement of residential and not commercial waste further removed it from industry-related pollution and the scope of the exclusion.
The U.S Eleventh Circuit Court of Appeals recently followed a Florida appellate court decision and held that the trial court erred in granting summary judgment to an insurer finding that the policy’s water damage exclusion was inapplicable. Cameron v. Scottsdale Ins. Co., 2018 WL 1791889 (11th Cir. Apr. 16, 2018).
The insureds made a claim under their commercial property policy for interior water damage sustained to the insured dwelling as a result of a collapsed pipe. The insurer denied the claim based on the policy’s water exclusion endorsement, and the insureds sued the insurer for breach of contract. The insurer sought summary judgment, asserting that the loss was excluded under the policy’s water exclusion endorsement, because it excludes coverage for damages caused by water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment. The trial court granted the insurer’s motion for summary judgment, holding the policy’s water exclusion endorsement applied, given that the loss was caused by a backup and overflow from a drain. The insureds appealed.
On appeal, The Eleventh Circuit followed a Florida court’s holding and held that the water exclusion endorsement did not apply since the pipe collapse caused water to backup through a drain in the plumbing system and into the premises. The Eleventh Circuit concluded that the water exclusion endorsement did not preclude coverage for the loss as the water did not originate outside the insured property's plumbing system. The Eleventh Circuit vacated the trial court’s grant of summary judgment in favor of the insurer and remanded for proceedings consistent with its holding.
A Georgia appellate court recently found the undefined term “similar” ambiguous with respect to an exclusion for the use of livestock to provide rides to any person “during a fair, charitable function, or similar type of event.” Georgia Farm Bureau Mut. Ins. Co. v. Claxton, 812 S.E.2d 167 (Ga. Ct. App. 2018).
The insured operated a mule-drawn carriage in a street parade. After the parade ended, a motor vehicle driven by a third party struck the carriage and injured a passenger riding in the carriage. The passenger sued the insured for her injuries, and the insured sought coverage under his liability policy. The insurer filed a declaratory judgment action and filed a motion for summary judgment, claiming there was no coverage available for the accident based upon an exclusion in the policy barring coverage for “the use of any livestock or other animal, with or without an accessory vehicle, for providing rides to any person for a fee or in connection with or during a fair, charitable function, or similar type of event.” The policy’s definition of the term “livestock” includes mules. The trial court denied the insurer’s motion for summary judgment, finding the exclusion did not apply because the insured did not charge the claimant a fee to ride in the carriage. The insurer appealed.
The appellate court affirmed, but on different grounds. The appellate court explained that the trial court’s order misstated the exclusion by omitting the word “or” before the phrase “similar type of event” and failing to consider whether the alternative phrase “in connection with or during a fair, charitable function or similar type of event” applied. In addition to unresolved fact issues, the appellate court reasoned that whether something is “similar” to something else is almost inherently ambiguous, requiring a multi-faceted, qualitative and subjective determination. For those reasons, the appellate court refused to enforce the exclusion.
A Florida appellate court recently held that an insurer’s payment of a claim following the statutory sixty-day cure period after a Civil Remedy Notice of Insurer Violations (“CRN”) constitutes a determination of that insurer’s liability and the extent of the insured’s damages meaning that the extra-contractual suit against the insurer was justiciable. Demase v. State Farm Fla. Ins. Co., 2018 WL 1525851 (Fla. 5th DCA Mar. 29, 2018).
The appellate court reversed and remanded for further proceedings. The appellate court held that an insurer’s payment of an insurance claim following the sixty-day cure period constitutes a determination of an insurer’s liability and the extent of an insured’s damages regardless of whether there was an underlying action. The court explained that a determination of an insurer’s liability and the extent of an insured’s damages as pre-requisites to an insured filing a statutory bad-faith action does not necessitate an underlying action on the insurance contract. It found that stipulation or payment of policy limits allows an insured to secure both a determination of an insurer’s liability and the extent of an insured’s damages. The court concluded that the insurer’s payment of policy limits after the sixty-day cure period satisfied the requirement of obtaining a determination of the insurer’s liability and the insureds’ extent of damages.
A federal judge in Oklahoma refused to expand CGL coverage to an insured’s security service under Oklahoma law because the insured security service was not included on the policy’s Declarations page. Smith v. Burlington Insurance Company, 2018 WL 1569498 (N.D. Ok. Mar. 30, 2018), appeal filed (10th Cir. Apr. 25, 2018).
An employee who worked for the insured’s security service fatally shot a person. The insured had a CGL policy that stated on its Declarations page that the insured’s “Business Description” was a “courier service,” which was expressly incorporated into the policy. The policy also included a “Representations” section, which stated, “[b]y accepting this policy, you agree: (a) [t]he statements in the Declarations are accurate and complete; (b) [t]hose statements are based upon representations you made to us; and (c) [w]e have issued this policy in reliance upon your representations.” The insured renewed the policy several times and it remained in effect through the date of the shooting. In fact, the insured did operate a security service in addition to the courier service, but the policy did not reference a security business or security services, the name of the company, the employment of armed security guards, or the existence of any employees.
The insured sought a declaratory judgement that the insurer had a duty to defend and indemnify the wrongful-death action. Both parties moved for summary judgment. The insurer argued its policy did not cover damages for wrongful death caused by an armed employee of the insured's security business because the policy expressly limited coverage to the insured's courier service business. The court agreed because the “Business Description” on the policy Declarations page described only a “courier service” and that “there is no possible reading of the ‘courier service’ description that would cover an armed security guard business,” and that the insured agreed by accepting the policy that this description was “accurate and complete.” The insurer’s motion was granted and the insured’s motion was denied.
The insured has appealed the decision to the Tenth Circuit Court of Appeals.
A federal court in Florida recently held that a subcontractor is not required to assume all obligations that a contractor assumes (such as the obligation to purchase the same insurance that the contractor was required to purchase) where the subcontract requires only that the subcontractor assume all risks that the contractor assumes. Great Divide Ins. Co. v. Amerisure Ins. Co., 2018 WL 1318340 (S.D. Fla. Mar. 14, 2018).
A contractor entered into a contract to build a convenience store and any subcontractors to obtain insurance with completed operations coverage. The contractor entered into a subcontract with a subcontractor that required the subcontractor to obtain insurance “throughout the entire performance of this agreement” and stated that the “[s]ubcontractor assumes all risk that contractor assumes toward owner within the parameters of the scope of work associated with the contract.” After the subcontractor completed its operations, a customer at the store tripped and fell over a ramp outside of the store. The customer sued the contractor, and the contractor and its insurer tendered to the subcontractor and its insurer. The subcontractor’s insurer disclaimed coverage because there was no coverage for claims arising out of completed operations. The contractor’s insurer ultimately settled the lawsuit and subsequently sued the subcontractor’s insurer for breach of the duty to defend and indemnify. The contractor’s insurer argued that because the subcontract required the subcontractor to assume all risk that the contractor assumed under its contract, the subcontractor was also required to obtain coverage that included completed operations. Both parties filed motions for summary judgment on several grounds.
The court denied the contractor’s insurer’s motion for summary judgment and granted the subcontractor’s insurer’s motion for summary judgment, finding that the subcontractor’s policy did not cover completed operations. In finding that the subcontract did not require the subcontractor to acquire completed operations coverage, the court stated that assuming the risks of a contract is not the same as agreeing to be bound by its affirmative obligations, such as the obligation to purchase a particular type of insurance.
A federal court in South Carolina held that a CGL policy does not cover a claim for economic or monetary losses. Gibbs Int’l, Inc. v. ACE American Ins. Co., 2018 WL 1566730 (D. S.C. Mar. 30, 2018).
The insured purchased copper wire from a Philippine company and sold it to a domestic recycling company. The copper was to be shipped from the Philippines to California and then subsequently transported to Texas. At some point prior to shipment or while the copper was en route to California, the copper was replaced with slag or concrete blocks. Before discovering the fraud, the domestic recycler paid the insured the full contract price. Upon discovery of the fraud, the domestic recycler sued the insured for return of its payment, which then sued its insurer (which had denied coverage), alleging breach of contract and seeking a declaratory judgment of coverage. The court concluded that the domestic recycler’s complaint alleging that it suffered damages principally in the form of the purchase price it paid to the insured did not constitute “property damage” under the terms of the CGL policy. The court also held that even if property damage had been alleged, the insured’s refusal to refund the purchase price did not constitute an “occurrence.” Instead, the court considered the insured’s refusal to refund the purchase price to be intentional rather than accidental. The court granted the insurer’s motion for summary judgment.
A federal court in Alabama dismissed an insured’s claims against his insurer for mental anguish and emotional distress arising out of the insured’s alleged breach of contract where the court found it was not foreseeable that a breach of contract would lead to emotional distress as required to meet one of Alabama’s recognized exceptions for recovery of such damages. Sabbah v. Nationwide Mut. Ins. Co., 2018 WL 1856173 (N.D. Ala. Apr. 18, 2018), appeal filed (11th Cir. May 17, 2018).
The court found that the policies at issue did not fall within one of the recognized circumstances where Alabama courts allow mental anguish damages for breach of contract, finding it was “not foreseeable that the breach of such contracts … would result in significant emotional distress” to the insured, and dismissed the insured’s claim.
A federal court in Mississippi found under Mississippi law that (1) non-assignment provisions do not bar an insured from assigning its claims to a third party after a loss; and (2) an insurer could not depreciate labor costs, as the policy’s valuation provision calling for “replacement cost value less depreciation” is ambiguous because the term “depreciation” is not defined. Titan Exteriors, Inc. v. Certain Underwriters at Lloyd's, London, 197 F. Supp.3d 268 (N.D. Miss. 2018).
This dispute arose out of hail and wind damage covered by the insurer. The policy provided that, in the event of a covered loss, the insurer would “pay the value of the lost or damaged property, or the cost of its repair or replacement, in accordance with the applicable terms of the Valuation Condition” of the policy. The Valuation Condition of the policy provided that “the value of Covered Property” would be determined at “actual cash value as of the time of loss or damage.” The policy did not, however, define “actual cash value.” Following the loss, the insurer notified the insured that it would make an actual cash value payment based on the cost to replace the damaged property less depreciation, including materials and labor.
The insured assigned its claim to its roofing contractor. The insurer refused to pay the contractor due to a non-assignment provision in the policy and the contractor sued and moved for judgment on the pleadings. The court drew a distinction between pre-loss assignments and post-loss assignments. It found that non-assignment provisions generally were not effective to bar post-loss assignments because after a loss, the right to recovery becomes personal property and any attempt to restrict the transfer of this personal property amounted to a restraint on the alienation of a property right in violation of Mississippi public policy. The court also noted that the purpose of anti-assignment clauses is to prevent an increase of risk for the insurer, so that assignment of the claim poses no additional risk to the insurer. The court found the assignment valid.
The court then considered the propriety of the insurer depreciating labor costs when determining the actual cash value of the loss. The policy defined neither “actual cash value” nor “depreciation,” and the contractor argued the policy was ambiguous. The insurer argued that the plain meaning of the term “value” unambiguously included labor depreciation because “value” means the value of the entire property, which includes both materials and labor and, thus, labor must necessarily be included. The court held that the terms “actual cash value” when defined as “replacement cost value less depreciation” and “depreciation” without further definition are ambiguous and must be construed in favor of the insured and granted the contractor’s motion.
A federal court in Texas recently held that an insurer was not required to indemnify the driver of a policyholder’s vehicle for punitive damages arising from a drunk driving accident since it did not result from an “occurrence” as defined by the policy. Frederking v. Cincinnati Insurance Company, 2018 WL 1514095 (W.D. Tex. Mar. 27, 2018).
The driver admitted to having caused the accident and pled guilty to a criminal charge of driving while intoxicated. A jury in a subsequent civil case found him liable for negligence and gross negligence, awarding both compensatory and punitive damages. When the vehicle’s auto insurer refused to pay, claiming the incident did not constitute an “accident” or “occurrence” [defined as an accident under the policy], the plaintiff sued for breach of contract. The court cited a Fifth Circuit ruling that under Texas law “a deliberate act is not an accident if … ‘the resulting damage was highly probable because it was the natural and expected result of the insured’s actions.” The jury’s verdict found that the driver had “actual, subjective awareness of [the] risk” of driving while intoxicated and proceeded to do so anyway. The court concluded that because the driver both intended to become intoxicated and to subsequently operate the vehicle, the accident was a “highly probable” result. The fact that the “collision and injury were unexpected and unintended” was deemed irrelevant.
The court also held that where a policy expressly limits coverage to accidents and occurrences, it cannot cover punitive damages resulting from other classifications of events. Though the policy stipulated that all damages awarded as a result of bodily injury must be paid, the court held that language limiting liability prevailed in defining the scope of circumstances under which the bodily injury payout provision would apply.
A federal court in South Carolina recently reinforced the principle that a plaintiff does not have standing to pursue a declaratory judgment action against a defendant’s insurer. Johnson v. Shree Radhe Corp., 2018 WL 1409973 (D. S.C. Mar. 21, 2018).
The plaintiff alleged that he suffered injury while cleaning a drainage system into which the defendant had poured an acid drain cleanser. The plaintiff filed a declaratory judgment action seeking a determination of the rights and obligations of the defendant’s insurer under a policy issued to the defendant. Recognizing the limited circumstances under which a non-party to an insurance policy has standing to file a declaratory judgment action against an insurer, the court noted such circumstances were not present and that there was not an actual controversy between the plaintiff and the insurer. The court held that the plaintiff did not have standing to bring the declaratory judgment action because he is not a party to it and has no claims under its provisions. This holding is consistent with prior South Carolina holdings that without a judgment, a non-party to a policy has no claims under another’s policy.

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