In its recent decision in Pizter College v. Indian Harbor Ins. Co., 2017 U.S. App. LEXIS 668 (9th Cir. Jan. 13, 2017), the United States Court of Appeals for the Ninth Circuit had occasion to consider the applicability of a New York choice of law provision in the context of late notice disclaimer of coverage. Indian Harbor insured Pitzer College under a pollution liability policy containing a choice of law provision stating that “all matters … related to the validity, interpretation, performance and enforcement of this Policy shall be determined in accordance with the law and practice of the State of New York … .” At issue was Pitzer’s right to coverage for a pollution condition it discovered and remediated several months before giving first notice to Indian Harbor. The Indian Harbor policy contained a condition stating that except for actions undertaken on an emergency basis, Indian Harbor’s prior consent was required before Pitzer could undertake any remedial efforts. Indian Harbor subsequently denied coverage to Pitzer on the basis that it failed to give timely notice of the pollution condition and also that it failed to obtain consent prior to undertaking remedial efforts. On motion for summary judgment, the United States District Court for the Central District of California held in Indian Harbor’s favor, concluding that as a result of the policy’s choice of law provision, New York law governed the coverage dispute and that under New York law, Pitzer’s untimely notice and its failure to have obtained Indian Harbor’s consent before undertaking remedial efforts vitiated its right to coverage under the policy. Central to the court’s ruling was that California did not have a fundamental public policy interest in applying its own notice-prejudice law to the coverage dispute that would require the court to reject the policy’s New York choice of law provision. On appeal, the Ninth Circuit observed that under California law, a contractual choice of law provision should be enforced unless it conflicts with a fundamental public policy of the state. Thus, reasoned the court, application of the New York choice of law provision in the Indian Harbor provision should be enforced unless California’s notice-prejudice rule qualifies as a fundamental public policy. The court acknowledged that this was a crucial question to the underlying dispute, since under California law, Indian Harbor likely would not be able to establish that it was prejudiced as a result of Pitzer’s late notice. Given the uncertainty as to whether California’s notice-prejudice rule constitutes a fundamental public policy, the Ninth Circuit certified the following questions to the California Supreme Court: Is California’s common law notice-prejudice rule a fundamental public policy for the purpose of choice-of-law analysis? May common law rules other than unconscionability not enshrined in statute, regulation, or the constitution, be fundamental public policies for the purpose of choice-of-law analysis? If the notice-prejudice rule is a fundamental public policy for the purpose of choice-of-law analysis, can a consent provision in a first-party claim insurance policy be interpreted as a notice provision such that the notice-prejudice rule applies? Add to Flipboard Magazine.
In its recent decision in FDIC v. BancIsure, Inc., 2017 U.S. App. LEXIS 452 (Jan. 10, 2017), the United States Court of Appeals had occasion to consider the scope of an insured vs. insured exclusion in the context of malfeasance claims brought by the FDIC in its capacity as a receiver. BancInsure insured Security Pacific Bank under a D&O policy containing an exclusion applicable to: 11. a Claim by, or on behalf, or at the behest of, any other Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company except for: (a) a shareholder’s derivative action brought on behalf of the Company by one or more shareholders who are not Insured Persons and make a Claim without the cooperation or solicitation of any Insured Person or the Company. . . . Security Pacific ceased operations and FDIC was appointed by the State of California as the bank’s receiver. FDIC subsequently asserted claims against the former directors and officers of the bank for the alleged losses they caused to the bank. These individuals sought coverage for the FDIC claims under the BancInsure policy. BancInsure, in turn, denied coverage on the basis of the policy’s insured vs. insured exclusion. FDIC acknowledged that on its face, the exclusion applied to the claims it brought in its capacity as a received of the bank. It nevertheless contended that the exception for shareholder derivative actions should apply since its claims were similar to those asserted in shareholder derivative suits, and because the FDIC in addition to succeeding to the interests of the bank also succeeded to the interests of Security Pacific’s shareholders. The Ninth Circuit disagreed, noting that malfeasance claims such as those brought by FDIC against Security Pacific’s directors and officers “belong to the corporation – not to the shareholders – and the board of directors is primarily responsible for enforcing the corporation’s rights.” The court distinguished such a claim from a shareholder derivative suit, which it explained is a suit that can be brought only when a board of directors fails or refuses to enforce a corporation’s rights. The court reasoned that the insured vs. insured exclusion is not rendered ambiguous merely because the FDIC, in addition to succeeding to the rights of Security Pacific’s board also succeeds to the rights of its shareholders. The court found such a conclusion contrary to the plain language of the exclusion: Interpreting the shareholder-derivative-suit exception to provide coverage to the FDIC’s claims may very well read the term ‘receiver’ out of the insured-versus-insured exclusion. We think the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of Security Pacific. Add to Flipboard Magazine.
In its recent decision in Selective Ins. Co. v. Target Corp., 2016 U.S. App. LEXIS 23370 (7th Cir. Dec. 29, 2016), the United States Court of Appeals for the Seventh Circuit, applying Illinois law, had occasion to consider whether a written contract must remain in effect at the time of an accident in order to trigger coverage for an additional insured. At issue in Selective was an underlying personal injury suit brought by an individual injured at a Target store when a fitting room door came off its hinges and fell on her. The fitting rooms had been supplied to Target by Harbor Industries. Target sought coverage for the suit as an additional insured under Harbor’s general liability policy, which was issued by Selective. Selective denied the tender and brought a coverage suit against Target seeking a declaration that it had no duty to defend or indemnify. Relevant to the coverage dispute were two contracts entered into between Target and Harbor. The first, a supplier agreement, was entered into between the parties in April 2001, and stated that the agreement would be deemed incorporated into all subsequent agreements entered into between the parties. Among other things, the supplier agreement required that Harbor maintain general liability coverage under which Target would be named as an additional insured. The supplier agreement also stated that it would remain in effect until terminated. The second agreement, entered into in April 2009, was a program agreement whereby Harbor was contracted to supply fitting rooms to Target stores. Notably, the program agreement expired on July 1, 2010. The underlying accident happened on December 17, 2011 and suit was filed in May 2012. Selective argued that because the program agreement expired over a year prior to when the underlying injury happened, there was no written contract in effect that would trigger its additional insured obligations to Target. The Seventh Circuit disagreed, observing that while the program agreement had expired, the supplier agreement remained in force, and this agreement required, among other things, that Harbor maintain products/completed operations coverage for any goods or services later provided to Target. The court therefore agreed that Selective could not disclaim coverage on the basis that there was no written contract in effect. Having so concluded the court agreed that Target was entitled to additional insured status for the underlying suit, and that it was entitled to a defense and indemnification under the Selective policy. Add to Flipboard Magazine.
In its recent decision in Johnson v. Federal Rural Electric Ins. Ex., 2016 U.S. Dist. LEXIS 173037 (D. Mont. Dec. 14, 2016), the United States District Court for the District of Montana had occasion to consider a D&O insurer’s defense obligations under a duty to advance policy. Federated insured Global Net, Inc. under a directors, officers and management liability policy. One of Global’s officers, Scott Johnson, was sued in connection with a business-related dispute which among other things included a claim for conversion. Federal agreed to provide a defense under a reservation of rights and reimbursed defense costs as they were incurred. When the underlying plaintiff was granted summary judgment against Johnson on the conversion claim amounting to some $14,000, Federal denied coverage for this loss and also asserted that per the terms of its policy, it was not obligated to reimburse defense costs until after the end of the underlying suit at which time it would be determined whether any damages sought in the case qualified for coverage. In an ensuing coverage litigation, Federated argued that its policy was not a duty to defend policy, but instead a duty to reimburse policy, and that as such, it was not required to reimburse its insured for defense costs as they were incurred. Notably, the Federated policy expressly stated that Federated “does not under the terms of this policy, assume any duty to defend” and that “costs, charges and expenses of defense payable by the Company are a part of, and not in addition to, the Limit of Liability.” In considering this issue, the court noted that there was no Montana guidance on insurance policies containing a duty to indemnify defense costs. The court agreed that general duty to defend case law was inapplicable, and therefore looked to Ninth Circuit case law for guidance on the issue. From this case law, the court concluded that the Federated policy imposed a duty to advance defense costs associated with all potentially covered claims. While Federated contended that its duty to pay defense costs could wait until the conclusion of the underlying suit, the court disagreed, concluding that Federated was obligated to pay defense costs as they were incurred. As the court explained, “Federated is obligated to pay defense costs at the time they are incurred because that is when Johnson is legally obligated to pay them.” The court agreed that the policy exclusion applicable to ill-gotten gains precluded coverage for the underlying conversion claim. It nevertheless concluded that the exclusion did not plainly apply to several of the other claims asserted in underlying suit that had not been resolved on motion for summary judgment. The court concluded, therefore, that Federated had an ongoing to to advance defense costs associated with the remaining claims in the underlying suit pending resolution as to whether or not those claims were excluded from coverage under the Federated policy. Add to Flipboard Magazine.
In John Robert Sebo, etc. v. American Home Assurance Company, Inc., Supreme Court case number SC14-897, the Florida Supreme Court reversed a Second District Court opinion which found the efficient proximate cause doctrine applicable to cases involving multiple perils and a first-party insurance policy. In 2005, Mr. Sebo purchased a four-year-old home in Naples, Florida. He subsequently purchased a “manuscript” homeowner’s insurance policy (not a standard form, but rather created specifically for the Sebo residence) through American Home Assurance Company (“AHAC”). This policy insured against “all risks” and provided $8,000,000.00 in coverage. Soon after purchasing the property, water began to intrude during rainstorms. After months of leaks – including storm damage from Hurricane Wilma – Sebo finally reported the water intrusion to AHAC on December 30, 2005. After investigating the claim, AHAC denied coverage for most of the damage (AHAC did tender its $50,000.00 mold limit). The majority of the claim was denied because, according to AHAC, the damage was caused by improper construction. Mr. Sebo later filed suit against multiple defendants, including the sellers of the property, the architect who designed the residence, the construction company that built the residence, and AHAC. After Mr. Sebo settled out with the other defendants, trial proceeded against only AHAC. The jury ultimately found in favor of Sebo. AHAC appealed the judgment, and the Second District reversed and remanded for a new trial. According to the Second District, when multiple perils – some covered, some excluded – combine to create one loss, causation should be examined under the efficient proximate cause theory, not the concurrent cause doctrine. On secondary appeal, the Florida Supreme Court reversed, concluding that “when independent perils converge and no single cause can be considered the sole or proximate cause, it is appropriate to apply the concurring cause doctrine.” The Court examined the two disparate theories, favoring the conclusion previously reached by the Third District in Wallach v. Rosenberg (“[w]here weather perils combine with human negligence to cause a loss, it seems logical and reasonable to find the loss covered by an all-risk policy even if one of the causes is excluded from coverage.”). According to the court, if AHAC wished to avoid the application of the concurrent cause doctrine, it could have done so within the policy, as it had done in other sections. Thus, since there was no dispute that the rainwater and hurricane winds combined with the defective construction to cause the damage to the Sebo property, and the policy did not preclude the application of the concurrent cause doctrine, the loss was covered. Add to Flipboard Magazine.
In Nazario v 222 Broadway, LLC, 2016 N.Y. LEXIS 3534 (N.Y. Nov. 21, 2016), plaintiff was performing electrical work as part of a retrofitting or renovation, and was reaching up while standing on the third or fourth rung of a six-foot A-frame wooden ladder, when he received an electric shock from an exposed wire and fell to the floor, holding the ladder, which remained in an open, locked position when it landed. According to the Appellate Division, First Department, plaintiff established prima facie that the ladder from which he fell did not provide adequate protection pursuant to Labor Law § 240(1). See Nazario v 222 Broadway, LLC, 135 A.D.3d 506, 507 (1st Dep’t 2016). However, on November 21, 2016, the Court of Appeals disagreed and found that plaintiff was not entitled to summary judgment on his Labor Law §240(1) claim, remitting the case back to the Appellate Division and stating that questions of fact existed as to whether the ladder plaintiff was using failed to provide proper protection, and whether plaintiff should have been provided with additional safety devices. This appears to be a departure from prior case law such as Vukovich v 1345 Fee, LLC, 61 A.D.3d 533 (1st Dept 2009) (summary judgment granted on Labor Law § 240(1) where plaintiff fell from an unsecured ladder after receiving electric shock while working as a pipe fitter), and suggests that the First Department will now require plaintiffs to show that the safety device provided was either defective or that the plaintiff required additional safety devices to conduct the work they were performing at the time of the incident. Add to Flipboard Magazine.
In its recent decision in J & C Moodie Properties, LLC v. Deck, 2016 MT 301 (Mont. Nov. 22, 2016), the Supreme Court of Montana had occasion to consider what constitutes a breach of an insurer’s duty to defend in a co-insurance situation, and what the ramifications are of breaching the duty to defend. The J & C Moodie decision involved an insured – Haynie Construction – covered under successively issued general liability policies: one by Farm Bureau and a subsequent policy issued by Scottsdale Insurance Company. Haynie was hired to perform construction work that commenced while the Farm Bureau policy was in effect and that was completed while the Scottsdale policy was in effect. Hayniewas later sued for alleged construction defects. While Farm Bureau agreed to provide a defense under a reservation of rights, Scottsdale denied coverage on the basis of an exclusion in its policy applicable to operations performed prior to its policy’s inception date. Haynie later entered into a joint stipulation with the underlying plaintiff whereby the two agreed to a settlement of $5.65 million and an assignment of the insured’s rights against Scottsdale. In the ensuing coverage litigation, Scottsdale conceded that the basis for its denial of coverage had been improper. It nevertheless contended that it did not breach its duty to defend because its coverage obligation was excess over the coverage afforded Haynie under the Farm Bureau policy. Scottsdale also argued that even if it did breach its duty to defend, it was entitled to discovery into the reasonableness of the underlying settlement. Scottsdale lost on all issued before the trail court, which held that Scottsdale breached its duty to defend and that it was not entitled to any discovery on the reasonableness of the settlement. With respect to the duty to defend issue, Scottsdale essentially argued that because Farm Bureau provided Haynie a defense by competent counsel, the duty to defend was not breached. Scottsdale reasoned that only one defense can be afforded to an insured, and as such, an insurer can satisfy its defense obligations through the actions of any co-insurer. The Court rejected this reasoning, noting that at the very least, Scottsdale should have attempted to assist or participate in the defense of Haynie with Farm Bureau. The Court reasoned that Scottsdale’s failure to even contact Farm Bureau to offer participation in the defense precludes it from credibly arguing that it fulfilled its duty to defend obligation. As the Court explained: Scottsdale made no effort to contact the co-insurer to further understand the claims, offered no coordination, and provided no other defense support pending a ruling that would affirmatively confirm whether coverage existed under the policy. It simply made the unilateral decision that it was done. An insurer must ensure an insured is defended … even as it disputed coverage. Scottsdale did nothing to honor the contractual benefit that Haynie had secured under the policy, or to confirm that it had no obligation to do so. When an insurer defends the insured, it also defends itself against a duty to defend claim. Scottsdale’s decision to “roll the dice” on its opinion that Haynie was not insured under the policy exposed Haynie, and itself, to great risk. While the Court concluded that Scottsdale breached its duty to defend, the Court nevertheless agreed that Scottsdale was only obligated the amount of the underlying settlement to the extent it was reasonable. Based on tax records referenced by Scottsdale in the coverage litigation, the Court found reason to believe that the value of the property constructed by Haynie was far less than $5.65million, thus suggesting that the settlement amount was not reasonable. The Court agreed, therefore, that the lower court erred in denying Scottsdale the opportunity to conduct a reasonableness hearing that that the court further erred in denying Scottsdale the opportunity Add to Flipboard Magazine.
From 1999 to 2008, a registered investment representative worked for Hantz Financial Services (“Hantz”). From 2000 to 2008, that same representative embezzled client funds. In March 2008, a client filed a FINRA arbitration demand against the representative and Hantz. The representative committed suicide days later, and thereafter, Hantz’s investigation revealed the extent of the representative’s embezzlement. In July 2009, Hantz settled the customer’s claim that prompted its investigation. By that same time, Hantz had also settled twenty other client claims without litigation. Another client pursued FINRA arbitration against Hantz. In that matter, FINRA issued a July 2009 award, which a Michigan trial court confirmed in December 2010, and an appellate court affirmed in January 2012. In May 2008, Hantz tendered a proof of loss to National Union Insurance Company, its fidelity bond company. The bond, effective for the period January 26, 2008 to January 26, 2009, provided indemnity for “loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.” With respect to litigation losses, the bond imposed a twenty-four month period from the date of a “final judgment or settlement” to sue National Union to recover such losses. National Union investigated Hantz’s claim until March 2011, when it disclaimed coverage. In March 2013, Hantz sued National Union for breach of contract and statutory penalties under Michigan law. The District Court granted National Union’s summary judgment motion, finding that Hantz’s claim were not “direct losses” covered by the bond. The Sixth Circuit affirmed but on the alternative ground that Hantz had failed to sue National Union in the twenty-four month limitation period. The Sixth Circuit noted that there was no dispute that the limitations period applied to all claims settled by July 2009. With respect to the FINRA arbitration award, which was confirmed by a judgment in December 2010, the court rejected Hantz’s arguments that a final judgment had not been entered until January 2012 when the appellate court affirmed the trial court’s judgment. In rejecting Hantz’s argument, the Sixth Circuit applied the Michigan rule of construction that when a policy employs a legal term of art, the term is given its legal meaning. In this case, that meant that “final judgment” meant a judgment entered by a trial court. The Sixth Circuit also rejected Hantz’s estoppel/waiver argument, noting that throughout its two and a half year claim investigation, National Union repeatedly reserved its rights to deny coverage. Accordingly, the Sixth Circuit affirmed the District Court’s Order, holding that National Union did not have to pay first party benefits to Hantz under the fidelity bond. Hantz Financial Services v. American International Specialty Lines Insurance Co., No. 15-2237, 2016 U.S. App. LEXIS 20352 (6th Cir. Mich. Nov. 9, 2016). Add to Flipboard Magazine.
In its recent decision in Camp Richardson Resort, Inc. v. Philadelphia Indemnity Ins. Co., 2016 U.S. Dist. LEXIS 155707 (E.D. Cal. Nov. 9, 2016), the United States District Court for the Eastern District of California had occasion to consider the scope of coverage afforded under a liquor liability policy and its intersection with California Dram shop laws. Philadelphia’s insured, Camp Richardson Resort, ran a year-round resort in the Lake Tahoe area on property owned by the U.S. Forest Service. Camp Richardson was sued by a neighboring landowner over rights to the property on which the resort was located. The suit alleged causes of action such as trespass, violation of constitutional protections, quiet title, inverse condemnation and unjust enrichment. The lawsuit also included causes of action for nuisance, and among other things, the alleged that patrons at the Camp Richardson resort were often loud, boisterous and drunk and frequently trespassed onto claimant’s property while inebriated. In particular, the pleading alleged that Camp Richardson allowed for patrons to become intoxicated by securing a liquor license for a bar on its property, by creating a party-oriented spot, and by allowing the patrons to enter claimant’s property. Philadelphia denied coverage for the underlying suit under its general liability policy as well as a liquor liability endorsement to the policy. The liquor liability coverage part insured’s liability for damages because of an ‘injury” resulting from the selling, serving or furnishing of any alcoholic beverages. Camp Richardson argued that Philadelphia had a duty to defend because of allegations of drunk patrons entering on the underlying claimant’s property. In considering the issue, the court noted that under California law, a “person who sells, furnishes, gives or causes to be sold, furnishes or given away, any alcoholic beverage” is immune from liability for having done so. The only exception to this is when alcohol is sold or given to an obviously intoxicated minor, and this exception is limited to situations where the act of serving alcohol to an obviously intoxicated minor is the proximate cause of the underlying injury. The court reasoned, therefore, that this is the only potential liability covered under a liquor liability coverage form, at least in California. Applying this law to the underlying complaint, the court observed that while the underlying suit alleged that plaintiffs were responsible for over-selling alcohol to patrons, these allegations did not contain any allegations that Camp Richardson furnished alcohol to an obviously intoxicated minor. The court concluded that in the absence of any such allegations, the liquor liability coverage part did not apply since there was no possibility of Camp Richardson having liquor liability, and as such, Philadelphia had no duty to defend. Add to Flipboard Magazine.
In its recent decision in Johnson v. GeoVera Specialty Ins. Co., No. 15-30803, 2016 U.S. App. LEXIS 17530 (5th Cir. September 27, 2016), the United States Court of Appeals for the Fifth Circuit explored whether or not certain alleged breaches of a policy’s “cooperation clauses” precluded policy coverage. GeoVera insured Johnson under a homeowner’s insurance policy. Johnson’s house sustained windstorm damage in a hurricane. Johnson’s house sustained fire damage in a separate event nearly two years later. Johnson sought coverage for both losses. GeoVera, alleging that Johnson violated the policy’s “cooperation” clauses, denied coverage. GeoVera’s policy imposed the following duties of cooperation on Johnson: (1) “cooperate with GeoVera in the investigation of a claim,” (2) “prepare an inventory of damaged personal property showing the quantity, description, actual cash value and amount of loss,” (3) “attach all bills, receipts and related documents that justify the figures in the inventory,” (4) “show the damaged property as often as GeoVera reasonably required,” (5) “provide GeoVera with requested records and documents,” and (6) “submit to examination under oath.” The policy provided that GeoVera would owe no coverage if Johnson’s breach of any cooperation duty prejudiced GeoVera. The Court found Johnson in violation of numerous cooperation duties. Johnson invoked her contractual appraisal right under GeoVera’s policy, but demolished and remodeled a significant portion of the house before GeoVera could conduct its appraisal. Johnson “almost completely gutted the interior, performed extensive framing repairs, and then terminated the appraisal process.” GeoVera, after invoking its own contractual appraisal right, subsequently requested that Johnson produce “several videos and thousands of photos of the fire damage” known to be in Johnson’s possession. Johnson refused to provide the requested videos and photographs until well after the coverage litigation had commenced. Johnson refused to testify under oath regarding the incident until over a year following the loss. Johnson further refused to provide documentation justifying the figures in her proof-of-loss list. The Court concluded that Johnson had clearly not complied with Johnson’s cooperation duties under GeoVera’s policy. The Court further held that Johnson’s non-compliance had prejudiced GeoVera. The Court held that noncompliance prejudices an insurer when an insured’s noncompliance frustrates two basic purposes of a policy’s cooperation clause: (1) “to enable the insurer to obtain relevant information concerning the loss while the information is fresh,” and (2) “to protect the insurer against fraud, by permitting it to probe into the circumstances of the loss.” The Court identified several manifestations of prejudice against GeoVera. Johnson, in “significantly altering the state of [her] house before GeoVera’s agent could appraise it,” precluded GeoVera from accurately assessing the economic magnitude of the claimed fire damage. Johnson, by significantly delaying submission of probative videos and photographs depicting the claimed damage, forced GeoVera to “engage in an unorthodox, more expensive inspection process.” Johnson also prejudiced GeoVera by initially refusing to submit to examination under oath, because Johnson’s significant delay “caused Johnson to forget information vital to protect GeoVera from fraud during the claims process.” The Court concluded that Johnson failed to comply with her duty to cooperate under GeoVera’s policy, and that Johnson’s noncompliance had prejudiced GeoVera. The Court accordingly denied coverage. Add to Flipboard Magazine.