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Coverage Opinions
Effective Date: November 11, 2015
Vol. 4, Iss. 11
 
   
 
   
 
 

Declarations: The Coverage Opinions Interview With John Grisham
The Southern Lawyer And Grit; Grisham’s New Novel; You Must Be Stupid, Stupid, Stupid; The Criminal Justice System; A Short, Nerdy, Bow-Tie Wearing Insurance Lawyer As A John Grisham Character

The Definitive Reservation Of Rights Checklist: 50 Things That Every ROR Needs

Randy Spencer’s Open Mic
Uncomfortable Thanksgiving Tables:
Insurance Coverage And Relatives Who Hate Each Other

What Does An Insurance Company Taste Like?

Thanksgiving And Insurance Coverage: They Go Together Like Peas And Carrots

What Is This A Picture Of?

General Liability Insurance Coverage – Key Issues In Every State
Save 40% Off The Amazon Price

Reservation Of Frights:
Harsh Consequences For Getting The Reservation Of Rights Wrong

Very Interesting “Expected Or Intended” Case

Unique Look At One Of The Newest Aspects Of Construction Defect Coverage (And A Broker Warning)

One Zany “Business Pursuits” Exclusion Case

Prevailing Party Attorney’s Fees: The Sometimes Overlooked, Critically Important Coverage Issue

Appeals Court Holds That A Primary Insurer Need Not Initiate Settlement Efforts In A Bad Case

Tapas: Small Dishes Of Insurance Coverage News And Notes
· Supreme Court Addresses Cooperation Clause
· Two Supreme Courts -- On The Same Day -- Agree To Address Construction Defect Coverage Issues

 
 
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Vol. 4, Iss. 11
November 11, 2015

 

Uncomfortable Thanksgiving Tables: Insurance Coverage And Relatives Who Hate Each Other

 

[Randy Spencer is on vacation (a well-deserved one he mumbled as he left)]. This Open Mic column originally appeared in the November 27, 2013 issue of Coverage Opinions

The reason why the first Thanksgiving was so successful was because the people sitting around the table didn’t know each other well enough to dislike one another. At lots of tables in America a few Thursdays from now that won’t be the case. There will be plenty of “pass the stuffing” [thought bubble – you pompous know-it-all] and “ooh, delicious sweet potatoes” [thought bubble – you moron who couldn’t earn a living if you hadn’t married into your wife’s family business.] As the saying goes you can choose your friends but you can’t choose your relatives. For many, what they give thanks for on Thanksgiving is that the holiday comes but once a year.

By its nature, insurance coverage often involves people that don’t get along. And sometimes those people are related. There is a significant amount of insurance coverage litigation involving family fights. And the disputes can arise under a host of policies. But since Coverage Opinions focuses on liability policies, the following are some examples of liability coverage cases involving people who will be having uncomfortable dinners later this month. These cases often involve the applicability of intentional acts or similar exclusions. There are so many more, but relatives that simply shoot or stab each other are not that exciting.

The idea for this column came from the first two paragraphs of the Georgia federal court’s November 8, 2013 decision in Nationwide v. O’Neill (2013 WL 5972471): “‘In-laws’ do not always get along, but acrimony rarely escalates to the point that a daughter-in-law sues her own father-in-law. Even rarer are cases in federal court arising from such disputes. But thanks to the possible existence of insurance coverage, this is one. ¶ After a night on the town, John Joseph O’Neill and his daughter-in-law, Jessica Marie O’Neill, got in an altercation in the front seat of Mr. O’Neill’s pick-up truck upon leaving a bar. Jessica sued her father-in-law in state court for personal injuries she allegedly suffered. In that action, Jessica alleges that Mr. O’Neill, while intoxicated, placed her in a headlock, hit her on the head, choked her, and shoved her out of his pick-up truck.” [Are you thinking what I’m thinking? How many father-in-laws and daughter-in-laws do you know who go out drinking together. What’s up with that?]

Preston v. State Farm, 517 So. 2d 1125 (La. Ct. App. 1988): Ex-husband tries to break into his ex-wife’s home and encounters her brother. The two get into a struggle and ex-husband chops off his ex-brother-in-law’s hand with a machete. Well, we know which one will get the job of carving the turkey.

Remy v. Travelers, 2013 WL 2573952 (N.D. Ill. June 11, 2013): Mom out shopping and sisters arguing. Sixteen year old Francesca retaliates against thirteen year old sister, Gabriella, by pushing a lit piece of paper into a vent connecting their bedrooms. Get this -- the house caught fire and was extensively damaged. Francesca was charged with aggravated arson in a juvenile proceeding and pleaded guilty to a reduced charge of criminal damage to property. [I’m thinking that no cell phone for a year was also part of the punishment.]

Alabama Farm Bureau Mutual Casualty v. Dyer, 454 So. 2d 921 (Ala. 1984): Brothers, while drinking vodka, got into a dispute about a prior sale between themselves of a $20 water ski. One brother pulled a .38 revolver out of his pocket, pointed it at his brother, fatally shot him and then fatally shot himself. A friend that witnessed the dispute did not intercede because there was nothing unusual about the brothers arguing or the one brother pointing a gun at the other.

Curtain v. Vanguard Ins. Co., 589 S.W.2d 61 (Mo. Ct. App. 1979): Insured, in the dark, mistook his brother-in-law for an intruder outside his home and struck him with a crowbar – twice. The victim, after being knocked to the ground, called out “Charlie, this is Jim.”

If you are not looking forward to seeing some relatives on Thanksgiving, just think how much worse it could be.


That’s my time. I’m Randy Spencer. Contact Randy Spencer at

Randy.Spencer@coverageopinions.info

 

 

 


Vol. 4, Iss. 11
November 11, 2015

What Does An Insurance Company Taste Like?

As you can imagine, I got quick a kick out of seeing this billboard on I-95 in Philadelphia a couple of weeks back. [I was in the passenger seat so it was safe to take this picture.]

 

It raises the obvious question – what does an insurance company taste like anyway? Chicken I’m sure.

 

Of course, eating an insurance company for breakfast need not only be some plaintiff’s attorney’s way of expressing his toughness. You really can eat an insurance company for breakfast:

 
 


Vol. 4, Iss. 11
November 11, 2015

Thanksgiving And Insurance Coverage: They Go Together Like Peas And Carrots

[This article originally appeared in the November 27, 2013 issue of Coverage Opinions. I know. I’m two weeks early for Thanksgiving -- but the next issue of CO will be too late for the holiday. I decided better early than late.]

You would think that Thanksgiving is one of a few days a year when insurance coverage could just take a break. A day when insurance policies and claims could just sit down on the sofa and drift into a deep turkey-induced nap. But insurance coverage gets no rest – even on one of the most restful and lazy days of the year. Consider the amount of coverage litigation over the years involving Thanksgiving and its many symbols. [These are real. Sometimes I make stuff up in CO. This isn’t one of them.]

Jenkins v. Mayflower Insurance Exchange, 380 P.2d 145 (Ariz. 1963)

State Insurance Fund v. David A. Gobble, 755 P.2d 653 (Ok. 1988)

Essex Insurance Co. v. The Great Pumpkin, LLC, 2008 WL 550038 (D.S.C. Feb. 26, 2008)

Hodgate v. Pilgrim Insurance Company, 2013 WL 812178 (Conn. Super. Ct. Feb. 1, 2013)

John Smith v. Lexington Insurance Co., 2007 WL 4374229 (E.D. La. Dec. 13, 2007)

Duryee v. Pie Mutual Insurance Co., 1998 WL 832180 (Ohio Ct. App. Dec. 1, 1998)

Thanksgiving Home, Inc. v. U.S. Distributing, Inc. v. St. Paul Travelers Companies, 2006 WL 2726139 (N.D.N.Y. Dec. 15, 2006)

Farmers Mutual Hail Insurance Co. v. Fox Turkey Farms, Inc., 301 F.2d 697 (8th Cir. 1962)

Corn v. Farmers Insurance Co., 2013 WL 5946942 (Ark. Nov. 7, 2013)

Puritan Insurance Co. v. County of Wayne, 536 N.W.2d 777 (Mich. 1995)

Irwin Potato Farms v. Mutual Service Casualty Ins., 2003 WL 21419427 (Mich. Ct. App. June 19, 2003)

Capel v. Plymouth Rock Assurance Corp., 62 A.3d 582 (Conn. Ct. App. Apr. 2, 2013)

MISR Insurance Co. v. El-Yam Bulk Carriers, 80 F.R.D. 438 (1978)

Hartford Insurance Co. v. Ocean Spray Cranberries, 1999 WL 529302 (E.D. Pa. July 23, 1999)

Thursday A. Booker v. Classified Insurance Corp., 568 N.W.2d 320 (Wisc. Ct. App. 1997)

New World Frontier, Inc. v. Mount Vernon Fire Insurance Co., 676 N.Y.S.2d 648 (App. Div. 1998)

Mom’s Old Fashioned Gravy v. USF&G, 784 P.2d 936 (Mont. 1989)

National Farmers Union Ins. Companies v. Crow Tribe of Indians of Montana, 560 F.Supp. 213 (D. Mont. 1983)

American Traditions Ins. Co. v. Whirlpool Corp., 2013 WL 4648476 (M.D.Fla. Aug. 29, 2013)

 


Vol. 4, Iss. 11
November 11, 2015

What Is This A Picture Of?

A new retail center is going up near my home in the Philadelphia suburbs. New commercial construction means opportunity for employment. So consider how many people this project will keep busy – A construction defect suit, followed by a coverage claim, then a denial based on no “occurrence,” giving way to coverage litigation, ending with an opinion that no coverage is owed based on Kvaerner and Gambone and finally an article about it all in Coverage Opinions. Gotta be at least two dozen here.

 

 

 


Vol. 4, Iss. 11
November 11, 2015

Reservation Of Frights:
Harsh Consequences For Getting The Reservation Of Rights Wrong

 

Please forgive the shameless plug here, but it fits in really well with this article.

I hope you’ll check out the webinar that I will be presenting on November 18th:

The Definitive Reservation of Rights Checklist: 50 Things That Every ROR Needs.

https://www.eiseverywhere.com/ehome/rorwebinar/325590/

It’s a peculiar fact. Liability insurance is an industry built on standardization of policy forms. And at no time are those forms more important than in the context of a claim. Yet the critical document whose purpose is to explain to policyholders how those forms may apply to their claim – the reservation of rights letter – is anything but standardized. Simply put, reservation of rights letters resemble fingerprints.

This lack of set guidelines for drafting reservation of rights letters means that, no matter how much experience a person has doing so, it is still easy to miss something. And courts have been penalizing insurers for issuing what they see as inadequate reservation of rights letters. And this penalty can be severe -- the loss of otherwise applicable coverage defenses.

What makes a letter a “reservation of rights” letter? Is it enough to simply label it a reservation of rights letter? Is it enough to say, sometimes many times over, that the insurer is reserving its rights to deny coverage? In some cases, the answer is no.

There are countless reasons why a reservation of rights letter can be found to be deficient. It may have been prepared based on an erroneous choice of law determination. It may not have been sent to the correct insureds. It may not have been sent timely. It may not comply with certain statutory obligations. It may not properly address the handling of the insured’s defense. It may omit certain coverage defenses.

But the most common – yet easiest to prevent - reason why a reservation of rights letter may be declared inadequate is that the explanation provided to the insured, of why coverage may not be owed for some claims or damages, was not sufficiently specific to be adequate. In other words, the reservation of rights letter did not “fairly inform” the insured why, despite a defense being provided, coverage for any damages, in whole or in part, may not be owed.

We have all seen reservation of rights letters that set forth a brief factual summary of the claim, followed by several pages of policy language – some completely irrelevant – and then a concluding statement that, viola, the insurer reserves its rights. Some courts have concluded that such letters, lacking an explanation why coverage may not be owed, do not cut the mustard, no matter how many times they may use the words reservation of rights. See Safeco Ins. Co. of Am. v. Liss, No. DV 29-99-12, 2005 Mont. Dist. LEXIS 1073, at *41 (Mont. Dist. Ct. Mar. 11, 2005) (“In this case, the Court finds that Safeco’s reservation of rights letter did not ‘fairly inform’ Liss of the reasons it was reserving its rights and that the letter was inadequate as a matter of law to preclude application of the estoppels doctrine. The only factual reference contained within the policy is: ‘As you are aware, this lawsuit arises out of a gunshot incident on July 10, 1997.’ More importantly, the letter sets forth pages of policy provisions but does not explain why Safeco believed the insurance policy would possibly not cover Liss for the shooting incident. In other words, Safeco did not ‘apply’ the sole fact stated to the policy’s legal terms.”); Osburn, Inc. v. Auto Owners Ins. Co., No. 242313, 2003 WL 22718194, at *3 (Mich. Ct. App. Nov. 18, 2003) (“[W]e conclude that, because Auto Owners’ reservation of rights letter was not sufficiently specific to inform plaintiffs of the policy defenses the insurer might assert, the letter did not constitute ‘reasonable notice.’”); Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012) (explaining that a “reservation of rights is not valid if it does not fairly inform the insured of the insurer’s position,” and holding that insurer’s letter was inadequate because it “did not unambiguously inform [the insured] that [insurer] intended to pursue a defense based on untimely notice of the claim”).

In Advantage Builders & Exteriors, Inc. v. Mid-Continent Casualty Co., 449 S.W.3d 16 (Mo. Ct. App. 2014), a Missouri trial court found that an insurer, after undertaking its insured’s defense, owed no coverage. But that decision went by the wayside at the appeals court because the reservation of rights letters – despite containing a lot of pages, setting out the facts at issue, voluminous policy language and a statement that the insurer was reserving its rights – were found to be not effective. The court put it like this: “The letters generally discussed the nature of the underlying lawsuit and set forth various provisions of Advantage’s general liability policy. Neither letter clearly and unambiguously explained how those provisions were relevant to Advantage’s position or how they potentially created coverage issues.”

The best way to approach drafting a reservation of rights letter is this – remember its purpose. The insured-recipient may have never seen a reservation of rights letter – or ever heard of it. Just because you deal with them day in and day out does not mean that the insured has any familiarity with them. What’s more – the insured is being provided with a defense. That may create an impression that its insurer is taking care of the matter -- lock stock and barrel. Thus, the reservation of rights letter needs to make it abundantly clear to the insured that, just because the insurer is defending, it should not get a false sense of security when it comes to coverage for any damages. To achieve this, a thorough and clear explanation of why coverage may not be owed should be provided. In other words, fairly inform the insured.

 

 


Vol. 4, Iss. 11
November 11, 2015

Very Interesting “Expected Or Intended” Case

 

It is a safe bet that if a person fires a gun, and then seeks coverage for any resulting injuries, coverage issues, especially “expected or intended,” will ensue. It is also a safe bet that the person seeking coverage will come up empty. When it comes to wayward guns, it can be a challenge to secure coverage.

This is what makes Allstate v. Canell, No. 13-1182 (N.D. Ind. Sept. 22, 2015) an interesting, albeit sad, case. A gun was fired and coverage may still be owed.

David Canell was an aging and ill veteran. While on a waiting list for hospice care his family hired defendant Angela Campoli to care for Canell in his home. On her first day Campoli assisted Canell with getting around the house and taking care of his needs. While in his bedroom, Canell was getting agitated and acting erratically. He opened the top drawer of his dresser and pulled out a gun and ordered Campoli to “get the hell out of here.” Canell, after holding the gun to his head, then pointed it at Campoli and pulled the trigger. The bullet hit the dresser next to Campoli. She fled the room and got her foot stuck under a recliner in the living room. Campoli fell to the floor, crawled to the front door and dialed 911 when she got outside. Canell died of a self-inflicted gunshot wound.

Campoli sued Canell in Indiana state court for compensation for injuries to her back, leg and knee from the fall and emotional distress. Canell had a homeowner’s policy with Allstate and the insurer brought a declaratory judgment action asking the court to declare, as a matter of law, that it owed no duties under Canell’s policy. At issue in the coverage action was the policy’s exclusion for injury resulting from intentional acts of Canell.

With Canell deceased, and no ability to learn his subjective intent, the case focused on “inferred intent.” The court undertook a thorough analysis of several Indiana “inferred intent” coverage cases. They are fact-intensive decisions and the court sought to reconcile them.

The Canell court observed that “[i]n cases where the facts suggest the possibility that the action was an attempt to warn others of the undesirability of their actions, the Indiana courts are less likely to infer intent to injure.” Based on this standard, the Canell court held that intent to injure by Canell could not be inferred:

Under Harvey [Auto-Owners Ins. Co. v. Harvey, 842 N.E.2d 1279 (Ind. 2006)] (the case that this court believes controls on this issue), intent to injure can be inferred only where reason mandates that from the very nature of the act, harm to the injured party must have been intended. The act in this case was Canell shooting a bullet from a gun in the same room as Campoli, with approximately an arm’s length of distance between them. Reason does not mandate that, from the very nature of Canell’s act, he must have intended to harm Campoli. Indeed, when taking the facts in a light most favorable to the Estate, reason could suggest other intentions on Canell’s part; given the fact that Canell ordered Campoli out of the room, shot the gun, and ordered her out again, reason could lead to the conclusion that Canell’s act of shooting was actually intended to motivate Campoli to leave the room so he could be alone, not to harm her at all. Perhaps firing a weapon with another person in the room suggests a disregard for the safety of the other person, but it does not “mandate” a finding of an intent to harm that person. Taking the facts in a light most favorable to the Estate, Canell’s act of shooting the gun in this case was more like firing a warning shot near trespassers, or shooting a gun at a lower portion of a door concealing a suspected burglar, and less like a direct punch in the face. Thus, the court finds that it is unable to infer as a matter of law that Canell intended to injure Campoli, and the court cannot determine as a matter of law that Allstate is free from its burden of providing coverage under the policy issued to Canell due to the intentional acts exclusions in the policy.” (citations and internal quotes omitted) (emphasis in original).

The Canell court gets high marks for its thorough job in analyzing, and attempting to reconcile, Indiana case law in reaching its decision. The court rejected Allstate’s urging that it consider cases from other states, calling that unnecessary because “Indiana jurisprudence provides ample guidance.” But speaking of other states, I believe that courts in many of them would have reached a different decision. Pointing a gun at someone, and firing it, is just too much of a disregard for the safety of the other person to not “mandate” a finding of an intent to harm that person.

 

 


Vol. 4, Iss. 11
November 11, 2015

Unique Look At One Of The Newest Aspects Of Construction Defect Coverage
(And A Broker Warning)

 

If you do construction defect coverage work, then you’ve definitely seen an endorsement, on a general liability policy, that is along the lines of this (but with more detail): If liability arises out of the insured’s use of a sub-contractor, no coverage is owed to the insured if the sub-contractor did not agree to defend and indemnify the subcontractor; and the sub-contractor did not carry liability insurance naming the insured as an additional insured. In general, courts have been enforcing these types of endorsements to preclude coverage to insureds who failed to satisfy these provisions.

An endorsement of this nature is what was at issue in Thomas v. Dion (N.J. App. Div. Oct. 23, 2015). Plaintiff, Michael Thomas, was injured when he fell off a scaffold while employed by Golden Hands, Inc., a subcontractor retained by general contractor, Prestigious Homes, Inc. Thomas was working as a plasterer on a housing project in Atlantic City. Thomas obtained a $750,000 default judgment against Prestigious.

Prestigious’s general liability insurer disclaimed coverage because Prestigious failed to comply with the terms of a policy endorsement--Prestigious failed to procure an indemnification agreement from Golden Hands and Prestigious was not named as an additional insured on Golden Hands’s policy.

Unable to collect on the judgment, Thomas commenced an action against Fetterman, Millinghausen & McNutt, Inc., the insurance broker that procured Prestigiouss policy, as well as Michael Dion, an insurance producer employed by FMM. Thomas alleged that the insurance broker defendants “were negligent in failing to make Prestigious [ ] aware that it needed to have certain insurance terms and requirements in the contracts it had with its subcontractors.”

Putting aside the merits – which I’ll get to in a second – I’m not surprised by a claim like this. Whenever I see an endorsement, that requires an insured to obtain a hold harmless agreement from subcontractors, and be named as an AI on its subcontractors’ policies, I always wonder if the insured knows this -- and complies. I suspect that lots of contractors, other than large ones, do not place insurance issues high on their list of things to worry about, once they have a policy in place.

This was essentially the issue here in the malpractice case against the brokers. However, the brokers were relieved of any liability because the court concluded that they did a good job of establishing that they made Prestigious aware of the policy requirements concerning the hold harmless agreement and additional insured rights.

The court stated: “Defendants provided additional explanations of the policy to Lansman and Prestigious beyond the plain language of the endorsement, further fulfilling their fiduciary duties. Dion’s unrebutted testimony was that he explained ‘the exclusion and warranty in the policy regarding the contractors and the additional insured and the hold harmless agreements ... during the quotation process’ and that Lansman ‘was made aware of the warranty in the policy’ that ‘he had to have certificates of insurance from his subcontractors and he had to have contracts and hold harmless agreements, which he said he had in the applications.’ Dion also testified that he ‘sent [Lansman] a letter reminding him to read his policies and to especially read these warranties, because that would affect his coverage.’”

The court held: “Defendants breached no duty to Prestigious, and hence they were not negligent. Since Prestigious could have no claim against defendants, plaintiff’s third-party beneficiary claim based on breach of that relationship similarly fails.”

The take-away here for brokers is obvious. Look at how much the brokers here did to make their client aware of the subcontractor requirements in its policy.

 

 


Vol. 4, Iss. 11
November 11, 2015

One Zany “Business Pursuits” Exclusion Case

 

It is not unusual for cases involving the “business pursuits” exclusion, under a homeowner’s policy, to have interesting facts. Houses are for living. But lots of people also operate businesses out of them. And in this situation things sometimes happen that may not have if the business were being run out of an office of retail store. Insurers do not want to be providing general liability coverage under their (low priced) homeowner’s and personal umbrella policies. So such policies very likely preclude coverage for bodily injury or property damage arising out of an insured’s operation of a business.

While Nationwide Mutual Insurance Company v. Pasiak, No. 36922 (Ct. App. Conn. Nov. 10, 2015) does not involve an unusual use of a home for a business, it still qualifies as a zany “business pursuits” exclusion case.

I’ll borrow liberally from the court’s telling of the facts since I can’t improve on it.

“Sara Socci was an employee of the defendant’s company, Pasiak Construction Services, LLC, and worked out of an office located on the second floor of the defendant’s [Jeffrey Passiak] home. On May 9, 2006, while she was working alone at the office, a masked intruder entered the office carrying a gun and demanded that she open the safe. Unaware that a safe even existed in the home, she could not provide the intruder with the safe’s combination. The intruder led her into a bedroom, where he tied her hands, gagged her and blindfolded her. At one point, he pointed a gun at her head and threatened to kill her family if she did not give him the combination.

[Pasiak] returned home during the incident and was attacked by the intruder. During the ensuing struggle, [Pasiak] pulled off the intruder’s mask, revealing him to be Richard Kotulsky, a friend of [his]. [Pasiak] began talking to Kotulsky and inquired about Sara Socci. Kotulsky led [Pasiak] to the bedroom, where the defendant found Sara Socci on the floor, crying and hysterical. [Pasiak] picked her up and removed her restraints, all the while conversing with Kotulsky. She asked to leave, but [Pasiak] told her to stay and sit down. After further discussions with Kotulsky, the defendant allowed him to leave the house. Sara Socci then told [Pasiak] about the threats that Kotulsky had made to her and her family, but the defendant would not call the police. He told Sara Socci to stay with him and refused to let her call the police or to discuss the incident further. She remained with [Pasiak] for several hours, in fear that, if she left, she or her family might be harmed. Only after [Pasiak] drove Sara Socci to Greenwich to discuss the incident with a mutual friend did he allow her to leave. Eventually, the police were contacted, ultimately leading to Kotulsky’s arrest and subsequent conviction.

Sara Socci developed post-traumatic stress disorder, requiring extensive therapy, and was unable to return to work. In March, 2008, she and her husband, Kraig Socci, filed a civil action against the defendant alleging causes of action for false imprisonment, negligence, intentional, reckless, and negligent infliction of emotional distress, and loss of consortium. On February 23, 2010, a jury returned a general verdict in favor of the Soccis. It awarded Sara Socci compensatory damages of $628,200 and punitive damages of $175,000, and awarded Kraig Socci $32,500 for loss of consortium.”

A coverage case ensued and at issue was the applicability of the business pursuits exclusion in Pasiak’s personal umbrella policy. The trial court concluded that the business pursuits exclusion did not apply. It did so on the basis that Pasiak was attempting to protect his lifelong friend rather than furthering his business pursuits.

The Connecticut appeals court saw it differently. It focused on the term “arising out of” contained in the business pursuits exclusion (“arising out of the business pursuits or business property of the insured”). Determining that such term calls for an expansive standard of causation, the appeals court rejected the trial court’s reliance on Pasiak’s state of mind in the motivation for his actions – keeping his friend out of jail -- and held as follows:

“Applying this broad standard to the facts of the present case, we agree with the plaintiffs that Sara Socci’s injuries arose out of the defendant’s business pursuits. The trial court found, and no party disputes, that at the time that Kotulsky assaulted her, Sara Socci was at the office location [of the defendant’s construction business] performing duties for [the business] .... The defendant arrived thereafter and, after initially struggling with Kotulsky, assisted him in concealing his actions by detaining Sara Socci until she agreed to refrain from contacting the police. Thus, the sine qua non of the defendant’s tortious conduct was Sara Socci’s presence at his business office fulfilling her responsibilities as his employee. See 9A L. Russ & T. Segalla, supra, at 128:17, pp. 128–39 through 128–40 (“liabilities in connection with workplace altercations have been held to necessarily involve the insured’s business pursuits and therefore fall within the business pursuits exclusion”). Stated alternatively, had Sara Socci not been at the office performing her duties as an employee of the defendant’s business, there is no reason to believe that she would have been assaulted by Kotulsky and, consequently, detained by the defendant. Indeed, there was no other reason for Sara Socci’s presence on the premises, and her acquiescence in obeying the defendant’s commands to wait and not leave were, in part, a function of their employer-employee relationship. Accordingly, we conclude that the defendant’s conduct, and Sara Socci’s resulting injuries, were connected with, had their origins in, grew out of, flowed from, or were incident to the defendant’s business pursuits.”

 

 


Vol. 4, Iss. 11
November 11, 2015

Prevailing Party Attorney’s Fees:
The Sometimes Overlooked, Critically Important Coverage Issue

 

When an insurance company is evaluating whether to file a declaratory judgment action or defend one filed against it, the principal issues under consideration are likely to be its chance of success and the amount of attorney’s fees that it will incur to achieve the desired result. But there is another factor that should also be included in the risk evaluation: possibly having to pay the policyholder’s attorney’s fees. I sometimes see this consideration overlooked, or not given enough weight, in the calculus.

Despite our legal system’s bedrock principle, that the losing party is not obligated to pay the prevailing party’s attorney’s fees, insurance coverage litigation is often-times an exception. In the vast majority of states -- almost all in fact -- the possibility exists, in some way, shape or form, that the insurer may be obligated to pay some, or all, of a successful policyholder’s attorney’s fees in addition to the amount of the claim.

One commonly cited rationale for this exception is that, if the insured must bear the expense of obtaining coverage from its insurer, it may be no better off financially than if it did not have the insurance policy in the first place. The specific approaches to this “insurance exception” vary widely by state and can have a significant impact on the likelihood of the insurer in fact incurring an obligation for its insured’s attorney’s fees.

Some states have enacted statutes that provide for a prevailing insured’s recovery of attorney’s fees in an action to secure coverage. Other states achieve similar results, but do so through common law. But whichever approach applies, the most important factor is the same: whether the prevailing insured’s right to recover attorney’s fees is automatic or must the insured prove that the insurer’s conduct was unreasonable or egregious in some way.

In those states where the prevailing insured’s right to recover attorney’s fees is not automatic, but tied to the insurer’s conduct in denying coverage, collateral litigation is likely to take place to determine whether the prevailing insured is entitled to recover such fees. This was the situation before the Montana Supreme Court in Mlekush v. Framers Insurance Exchange, No. 15-66 (Mont. Oct. 20, 2015).

Mlekush involved a UIM claim. Tanya Mlekush was in an auto accident. She recovered the at-fault driver’s $50,000 policy limit and then pursued an underinsured motorist claim against her insurer – Farmers (Bum ba-dum bum bum bum). The policy had a $200,000 limit. Mlekush’s counsel and Farmers went back and forth for a while on the claim and Mlekush eventually filed suit. The parties exchanged settlement offers for seventeen months but no deal got done. The case went to trial and a jury awarded Mlekush $450,000. She stipulated to a judgment against Farmers for $200,000.

Mlekush sought to recover her attorney’s fees. The court noted that Montana generally follows the “American Rule” regarding attorney fees. This means that each party is required to bear his or her own litigation expenses -- absent a contractual or statutory provision to the contrary. However, Montana, and other states, recognize some narrow exceptions to the American rule. “Mlekush sought attorney fees under the ‘insurance exception,’ which entitles an insured to recover attorney fees ‘when the insurer forces the insured to assume the burden of legal action to obtain the full benefit of the insurance contract.’” This gets back to the concept that, if the insured must bear the expense of obtaining coverage from its insurer, it may be no better off financially than if it did not have the insurance policy in the first place.

The lower court concluded that Mlekush was not entitled to recover her attorney’s fees. It’s reason was that, because Farmers did not deny Mlekush’s UIM coverage and Mlekush filed her complaint before the evidence was sufficiently developed, “Mlekush initiated legal action prematurely and, therefore, was not ‘forced to assume the burden of legal action.’”

However, the Montana Supreme Court did not see it so simply: “Consistent with our precedent, a district court must consider the entirety of the litigation in determining whether, and to what extent, an insured was forced to assume the burden of legal action in order to recover the full benefit of the insurance contract.”

Turning to this totality of the circumstances requirement, the court looked at a lot of factors: “Mlekush filed her complaint in January 2013. Farmers answered on February 26, 2013, admitting that McGoldrick was negligent and acknowledging Mlekush’s potential entitlement to UIM benefits. The jury returned its verdict approximately seventeen months later, in July 2014. During that seventeen-month period, Mlekush continued to receive medical treatment for her injuries, including additional surgery, and incurred wage loss from missed time from work. The District Court noted that, as Farmers continued to collect additional information, it extended increasing settlement offers to Mlekush. In denying Mlekush’s motion for attorney fees, however, the District Court did not consider—and the record does not reflect—information such as the amounts of the settlement offers, when they were made during the course of the litigation, whether they required a full and final release, what Mlekush's responses to the offers were, and what relationship, if any, the increasing settlement offers bore to Mlekush's increasing economic damages. The record also does not reflect whether Mlekush made demands for advance payments or requested partial payments during the pendency of the litigation which were denied. In her brief on appeal, Mlekush repeatedly references Farmers’ October 7, 2013 offer of judgment for $60,000; this, likewise, is not in the record. The record was not developed below, and the District Court did not consider these factors because it found dispositive the facts that Farmers did not deny Mlekush’s UIM coverage and Mlekush filed her complaint before the evidence was sufficiently developed. If that was all the analysis required, the District Court’s conclusion would be correct. Determining whether an insured was forced to assume the burden of legal action to obtain the full benefit of the insurance contract, however, requires more than focusing on one static point in the litigation process.”

The high court remanded for a determination whether Farmers “forced Mlekush to assume the burden of legal action to obtain the full benefit of her UIM policy, thus entitling her to attorney fees under the insurance exception.”

No doubt courts that automatically award attorneys fees to a prevailing insured are not inclined to see the matter drawn out by such fact-based collateral litigation.

 

 


Vol. 4, Iss. 11
November 11, 2015

Appeals Court Holds That A Primary Insurer Need Not Initiate Settlement Efforts
In A Bad Case

 

The last issue of Coverage Opinions discussed SRM, Inc. v. Great American Insurance Co., No. 14-6160 (10th Cir. Aug. 25, 2015), where the court addressed whether primary and excess insurers have an affirmative duty to initiate settlement negotiations if an insured’s liability is clear and the claimant’s injuries are so severe that a judgment in excess of policy limits is likely. The answer was a split decision – the primary insurer has such a duty; the excess insurer does not.

That was the Tenth Circuit. The Fifth Circuit, in Hemphill v. State Farm Mutual Insurance Co., No. 15-60058 (5th Cir. Oct. 16, 2015), saw the primary insurer’s obligation differently.

The point here is not to address the facts at issue (low limit auto policy; clear liability on the insured; very serious damages) but to simply demonstrate that, within such a short period of time, two federal circuits reached opposite conclusions on the existence of this affirmative duty.

[Even if you do no auto coverage work, auto cases cannot be ignored when it comes to studying bad faith. They are the petri dish of bad faith for all liability policies.]

The Fifth Circuit in Hemphill held that a primary insurer did not have an affirmative duty to initiate settlement negotiations, even in a bad case: “Hemphill [insured] solely relies on a statement by the Mississippi Supreme Court in its 1983 Hartford opinion, which said that ‘there is authority for the proposition that in dangerous cases it is the duty of the insurance carrier to initiate settlement offers on its own,’ with citation to cases in other states. However, this statement is just dictum, and no Mississippi court since Hartford has discussed this dictum or cited to the non-binding cases that the court in Hartford cited. Subsequent applications of Hartford by the Mississippi Supreme Court in a duty-to-settle context have either imposed a duty to settle when the claimant made a settlement offer, or found ‘no evidence that the [i]nsurers breached any duty in failing to settle th[e] claim at an earlier time’ when the claimant did not initially make a settlement offer and the insurer sufficiently evaluated the claim. None of the Mississippi cases that have applied Hartford have found an insurer has a duty to make a settlement offer when the claimant has not made a settlement offer. Indeed, over the thirty-three years since Hartford, no case from either the Mississippi Supreme Court or a Mississippi intermediate appellate court has suggested or even hinted that the Mississippi Supreme Court would hold that an insurer has a duty to make a settlement offer absent a settlement offer by the claimant. Therefore, this Court makes an Erie guess that the Mississippi Supreme Court would not impose such a duty under the circumstances presented herein.” (citations omitted).

 

 
 
Vol. 4, Iss. 11
November 11, 2015
 
 

Supreme Court Addresses Cooperation Clause
In Chandler v. Concord Insurance Group, No. 2015–236 (Vt. Oct. 1, 2015), the Vermont high court held that a liability insurer was relieved of its obligations, for a slip and fall claim, because its insured breached the cooperation cause. However, the breach was so egregious that the case’s value is diminished for both sides looking for guidance. Nonetheless, when a Supreme Court addresses a coverage issue it is always good to take notice. The court held: “On the basis of these facts, we conclude that Chandler forfeited his coverage under the Concord policy by failing to comply with the cooperation requirement. The cooperation clause protects the insurer by obligating the insured not to intentionally and deliberately take any action which would substantially affect adversely the insurer’s defense, settlement or other handling of the claim. Where an insured enters into a settlement with the injured party without the prior approval of the insurer, the company is under no obligation to contribute to the settlement. Chandler’s act of admitting liability and entering into a settlement with Ainsworth in the personal injury suit before Concord had completed its investigation and before it had made a determination on coverage denied Concord the opportunity to investigate facts applicable to the lawsuit and to dispute them before trial, causing prejudice by placing Concord “in a substantially less favorable position than it would have been had the insured fully cooperated.” (citations and internal quotes omitted). Not to mention, the court pointed to several other things that Chandler did to stymie the insurer’s investigation.

Two Supreme Courts -- On The Same Day -- Agree To Address Construction Defect Coverage Issues
Columbia Ins. Group v. Cenark Project Management Services, Inc., No. 15-804 (Ark. Oct. 29, 2015) (“Having reviewed the certifying court’s explanation of the need for this court to answer the question of law pending in that court, we accept certification of the following questions: 1. Whether faulty workmanship resulting in property damage to the work or work product of a third party (as opposed to the work or work product of the insured) constitutes an “occurrence”; and 2. If such faulty workmanship constitutes an “occurrence,” and an action is brought in contract for property damage to the work or work product of a third person, does any exclusion in the policy bar coverage for this property damage?”)

Cypress Point Condominium Association Inc. v. Adria Towers Inc., No. 76348 (N.J. Oct. 29, 2015) (granting certification where the Appellate Division held that “the unintended and unexpected consequential damages caused by the subcontractors’ defective work constitute ‘property damage’ and an ‘occurrence’ under the policy. We base this holding in part on the developer’s reasonable expectation that, for insurance risk purposes, the subcontractors’ faulty workmanship is to be treated differently than the work of a general contractor. We reach that conclusion by viewing the policy as a whole and distinguishing Weedo v. Stone–E–Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979), and Firemen's Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J.Super. 434, 904 A.2d 754 (App. Div.2006), two opinions construing ISO’s 1973 standard CGL form.”)