Contributors

Labels

Applying The Peppers Doctrine, Illinois Appellate Court Affirms Stay Of Insurer’s Declaratory Judgment Action

In Sentry Ins. v. Cont’l Cas. Co., 2017 IL App (1st) 161785, the Appellate Court of Illinois, First District had occasion to consider whether a trial court properly entered a stay on an insurer’s declaratory judgment action when interpreting the applicability of coverage exclusions would determine an ultimate fact in the underlying litigation.

The underlying cases involve approximately 65 consolidated claims against Northwestern Memorial Hospital. The underlying plaintiffs provided semen and testicular tissue samples to Northwestern for safekeeping. The plaintiffs stored their samples with Northwestern between April and June 2012. Allegedly their samples thawed and were irreversibly damaged due to the failure of a cryopreservation tank.

Northwestern maintained a commercial general liability policy with Sentry Insurance and an excess policy with Continental. On October 16, 2014, Sentry filed a declaratory judgment against Northwestern and Continental, arguing that the Sentry policy did not provide coverage for the underlying claims against Northwestern. Pointing to discovery and various pleadings from the underlying suit, Sentry argued that the “care, custody, or control” and “professional services” exclusions established that the Sentry policy did not afford coverage for the underlying suits. On that basis, Sentry sought a declaratory judgment that it owed no duty to defend or indemnify Northwestern. Sentry further sought reimbursement of the amount spent thus far in defending the underlying lawsuits. Continental was also named a defendant in the declaratory judgment action. Continental filed an answer and counterclaim against Sentry and Northwestern, which contained substantially identical factual allegations as Sentry’s complaint.

On May 19, 2016, the trial court stayed the matter, finding it was too early in the litigation to decide whether Northwestern had exclusive control over the damaged samples or if professional services were required to handle and care for them. Sentry and Continental appealed.  Prior to the appellate court’s decision on the matter, Sentry settled with Northwestern and asked the trial court to dismiss its appeal, leaving only Continental on appeal.

On March 24, 2017, the appellate court affirmed the stay. The appellate court noted that the trial court correctly applied the ruling from the 1976 Illinois Supreme Court case, Maryland Casualty Co. v. Peppers.

In Peppers, the trial court was asked to determine whether an insurer owed a duty to defend its insured in a personal injury action that alleged intentional, negligent, and willful and wanton conduct. After a bench trial, the trial court found that the insured’s actions were intentional and, therefore, there was no coverage under the policy. In reversing the trial court’s decision, the Illinois Supreme Court stated that, under the principle of collateral estoppel, the finding in the declaratory judgment action that the injury was intentionally inflicted “could possibly establish the allegations of the assault count in the complaint and might preclude [the underlying plaintiff’s] right to recover under the other theories alleged.” Later cases aptly referred to this ruling as the Peppers doctrine. Under the Peppers doctrine, “it is generally inappropriate for a court considering a declaratory judgment action to decide issues of ultimate fact that could bind the parties to the underlying litigation.”

The appellate court in Sentry stated that a ruling that either the “care, custody, or control” or the “professional services” exclusion applied would be prejudicial with respect to the underlying case because it could, in effect, serve to estop the underlying plaintiffs from raising a theory of recovery. The court also noted that deciding the applicability of the “care, custody, or control” or the “professional services” exclusions would decide an issue crucial to the insured’s liability in the underlying case. Thus, the appellate court held that a stay was appropriate.

The appellate court also addressed Continental’s argument that, even if the court granted a stay, the trial court should have found there was no duty to defend Northwestern in the underlying matter. In rejecting Continental’s argument, the court noted the possibility of coverage leads to an insurer’s duty to defend. Since there was no way to determine whether the policy exclusions apply (without running afoul of the Peppers doctrine, as discussed above), there was still a possibility of coverage. The court noted the applicably of the policy exclusions “is not free and clear from doubt” and “we must resolve any doubts as to coverage in favor of [Northwestern].” Thus, Continental continued to owe Northwestern a duty to defend.



Add to Flipboard Magazine.

Connecticut Court Holds No Coverage for Late Notice Under D&O Policy

In Zahoruiko v. Fed. Ins. Co., No. 3:15-cv-474 (VLB), 2017 U.S. Dist. LEXIS 28204 (D. Conn. Feb. 28, 2017), the United States District Court for the District of Connecticut had occasion to consider whether an insured’s late notice of a pending lawsuit can preclude D&O coverage.

Graham Zahoruiko was an officer of SpaceWeb Corporation, which was later known as Refresh Software Corporation. The company and Zahoruiko were covered under two Directors and Officers (D&O) insurance policies.

In 1999, Zahoruiko executed a debt note for a line of credit on behalf of the company. Zahoruiko also executed a personal guaranty to secure the note. The company subsequently defaulted on the note. In 2002, the note creditor filed a lawsuit against the company and Zahoruiko. In 2003, Zahoruiko and the company entered into a settlement agreement with the note creditor, which required the company and Zahoruiko to execute a second promissory note as consideration for releasing all claims under the 1999 note. Zahoruiko executed a personal guaranty on the second promissory note.

The company began missing loan payments again in May 2008. On April 29, 2010, the note creditor sent the company a demand letter regarding the debt. On July 10, 2010, the note creditor filed a second lawsuit alleging a breach of the second promissory note.

On February 3, 2012, the creditor notified the company that it intended to seek summary judgment. Ten days later, on February 13, 2012, Zahoruiko and the company notified their D&O insurer of the pending lawsuit. On February 28, 2012, the note creditor filed its motion for summary judgment, which was subsequently granted. On March 8, 2012, the D&O insurer denied coverage.

Three years later, on April 1, 2015, Zahoruiko filed suit against the company’s D&O insurer. The D&O insurer filed a motion for summary judgment, offering seven separate grounds for excluding coverage under the D&O policy. The court addresses only two: (1) pending or prior litigation exclusion; and (2) timely notification of claim.

First, the insurer argued that the 2010 and 2002 claims were related and should be treated as a single claim, and therefore coverage would be excluded by the prior litigation exclusion in the D&O policy. The court found the claims were not related because the 2002 claim was “definitively resolved and any obligations under that note were extinguished” by the prior settlement agreement. Thus, the court held that the claims were not related, and coverage for the 2010 claim was not barred by the prior litigation exclusion.

Second, the insurer argued Zahoruiko’s notice to the insurer was untimely within the meaning of the D&O policy. The court agreed, stating that “…an unexcused, unreasonable delay by an insured in notification of a [claim] … entirely discharges an insurance carrier from any further liability…” The court added that an insurer will only be discharged if it was prejudiced by the lack of notice. The court noted that Zahoruiko did not notify the company’s D&O insurer of any claims until February 13, 2012 – “ten days after learning that [the creditor] intended to move for summary judgment, sixteen months after being served the 2010 complaint, [and] 20 months after receiving a demand letter…” The court noted that Zahoruiko offers “no legitimate explanation for his failure to promptly notify [the insurer] of the claim.”

According to the court, this lack of timely notice also prejudiced the insurer because Zahoruiko executed a forbearance agreement, in which he waived defenses to suits for non-payment of the loan, and insured litigation costs defending the 2010 lawsuit – all without any participation of the insurer. The court stated, “[Zahoruiko] not only failed to comply with the prohibition against assuming contractual obligations and defense costs, he also prevented [the insurer] from negotiating better repayment terms or from settling the lawsuit before the defense costs were incurred.” The court therefore ruled in favor for the D&O insurer, finding that Zahoruiko unreasonably delayed notifying the insurer of the claim, and the delay prejudiced the insurer.



Add to Flipboard Magazine.

California Appellate Court Holds D&O Insurer Must Pay Cost of Insured’s Appeal Despite Criminal Conviction

In Stein v. Axis Ins. Co., No. B265069, 2017 Cal. App. Unpub. LEXIS 1628 (Ct. App. Mar. 8, 2017), the Second District California Court of Appeal had occasion to consider whether a criminal conviction is a “final adjudication” such that it could bar coverage for appeal expenses under a willful misconduct exclusion.

In November 2007, Heart Tronics and its de facto officer, Mitchell Stein, purchased a $5 million director and officer (D&O) liability insurance policy from Houston Casualty Company (“HCC”). The original terms of the policy did not provide coverage for criminal acts. Nor did the original terms include coverage for “de facto” directors or officers. Because Mitchell Stein managed the company full-time without pay or a formal position or title, he was unsatisfied with the original HCC policy.

Stein and Heart Tronics obtained an amended policy from HCC that (1) changed the definition of “claim” to include criminal proceedings, up to and specifically including appeals; and (2) expanded the definition of “wrongful act” to include acts committed by those acting in their capacity as the “functional equivalent” of an officer or director. HCC allegedly represented to Stein and Heart Tronics that Stein would “absolutely” covered under the amended HCC policy.

On December 13, 2011, a federal grand jury indicted Stein on 14 counts of mail, wire, and securities fraud; money laundering; and obstruction of justice. The grand jury charged that Stein engaged, among other things, in an illegal “pump and dump” scheme. On May 20, 2013, a jury found Stein guilty on all counts. He was sentenced to 17 years in prison. Stein appealed the judgment to the Eleventh Circuit. In January 2017, the Circuit Court affirmed his conviction, but vacated the sentence and remanded the matter for resentencing. On February 7, 2017, Stein moved for an en banc rehearing before the Circuit Court.

Following his criminal conviction, Stein tendered his appeal to HCC. HCC denied coverage on the grounds that Stein was not the “functional equivalent” of a Heart Tronics officer.  HCC also invoked the willful misconduct exclusion of the policy, which stated that “Except for Defense expenses, the Insurer shall not pay loss in connection with any claim” occasioned by willful misconduct.  The exclusion made clear that it could be invoked “only if there has been a final adjudication adverse the Insured Person in the underlying action … establishing that the Insured Person” committed willful misconduct.

On June 25, 2014, Stein and Heart Tronics sued HCC in the California Superior Court of Los Angeles County alleging, among other things, fraud and breach of contract. HCC demurred to the complaint, contending that Stein was not an insured person under the policy and Stein’s defense expenses did not constitute covered losses under the policy. The trial court sustained the demurrer without leave to amend. Stein appealed.

On appeal, the appellate court rejected the trial court’s determination that Stein’s defense expenses on appeal were not covered losses. The appellate court held the trial court’s rationale that Stein’s criminal conviction was “final … until it is reversed” was erroneous because the HCC policy clearly and explicitly obligated HCC to cover an insured’s defense expenses as a result of an appeal from a criminal proceeding, even if a trial court determined the insured was guilty or liable for fraud.

The court distinguished the language in the willful misconduct exclusion in the HCC policy from that same provision in other policies that barred coverage for a “judgment or other final adjudication.”  As the exclusion in the HCC policy only applied to a “final adjudication,” the exclusion could not apply to preclude coverage.  The court’s ruling further explained that “a thing that is ‘final until reversed’ is not final.”  In other words, “[a]n appellate court can render an adjudication as well as a trial court can, with the added benefit [of] greater finality.”  The court concluded that the HCC’s policy “covers an insured’s litigation expenses incurred in directly appealing a conviction” because the policy specifically required HCC to pay defense costs.  The court therefore reversed the judgment against Stein.



Add to Flipboard Magazine.

Seventh Circuit Finds Faulty Work Not a Covered “Occurrence”

In Allied Prop. & Cas. Ins. Co. v. Metro North Condo. Ass’n, No. 16-1868, 2017 U.S. App. LEXIS 4107 (7th Cir. Mar. 8, 2017), the Seventh Circuit had occasion to consider whether claims of faulty workmanship could constitute “property damage” caused by an “occurrence” as required by the insuring agreement of a CGL policy.

Metro North Condominium Association (“Metro North”) hired a developer to build a condominium in Chicago. The developer hired a subcontractor, CSC, to install the building’s windows, and CSC allegedly installed the windows defectively. As a result, common elements of the building purportedly suffered significant water damage and individual condominium owners allegedly suffered damage to their personal property.

Metro North sued the developer, which was insolvent. Metro North then amended its complaint and added a claim against CSC for the breach of the implied warranty of habitability. Metro North also brought a negligence claim, which was untimely and subsequently dismissed with prejudice.  The suit proceeded with only the implied warranty claim pending against CSC.  CSC tendered the suit to its CGL carrier, Allied Property & Casualty Insurance Company (“Allied”), but Allied denied coverage.

In 2015, CSC and Metro North reached a settlement agreement. The agreement required Metro North to dismiss its pending lawsuit against CSC. In return, CSC assigned to Metro North all of its rights to payment of insurance coverage from Allied. The language of the agreement specified that the right to payment had to “arise out of the claims asserted against CSC” in the underlying suit. At the time of the settlement, the only count pending against CSC was a claim for breach of implied warranty of habitability.

Upon learning of the settlement agreement, Allied brought a declaratory judgment action against Metro North seeking a judgment that it was not liable for the damages claimed in the settlement agreement.  The U.S District Court for the Northern District of Illinois granted judgment in favor of Allied, and Metro North appealed to the U.S. Circuit Court of Appeals for the Seventh Circuit.

In its opinion, the Seventh Circuit stated that Allied would only be liable if the legally recoverable damages stemming from Metro North’s claim were covered by the policy. The court, in affirming the District Court’s decision, found that the measure of damages for a breach of implied warranty of habitability claim is the cost of repairing the “defective conditions.” Under Illinois law, CGL policies do not cover the cost of repairing the insured’s defectively completed work.  As such, the insuring agreement of the policies was not satisfied.

Additionally, the Seventh Circuit held that Metro North did not have standing to assert a right on behalf of unit owners for the loss of their personal property. The court held that the Illinois Condominium Property Act only allows a condominium association to act on behalf of its unit owners when the claim involves common elements or more than one unit – not personal property. Thus, the court held, Metro North did not have standing to seek recovery for its unit owners’ loss of personal property.



Add to Flipboard Magazine.

Illinois Appellate Court Finds Duty To Defend Property Owner Based On Potential For Vicarious Liability For Subcontractor’s Negligence

In Pekin Ins. Co. v. Centex Homes, 2017 IL App (1st) 153601, the Illinois Appellate Court Circuit had occasion to consider whether an insurer had an obligation to defend two putative additional insureds when its named insured was not a defendant in the suit and the policy only conferred additional insured coverage where the additional insureds were vicariously liable for the acts or omissions of the named insured.

In June 2009, Centex Homes, the owner of a construction project, entered into a contract with McGreal as the contractor. The contract required McGreal to maintain insurance for Centex Homes and Centex Real Estate Corporation.

Pekin issued a CGL policy to McGreal, which contained an additional insured endorsement that provided that an additional insured was “any person or organization for whom you are performing operations, when you and such person or organization have agreed in a written contract effective during the policy period … that you must add that person or organization as an additional insured on a policy of liability insurance.” The endorsement stated that coverage was available to such entities “only with respect to vicarious liability for ‘bodily injury’ … imputed from [the named insured] to the Additional Insured.” The endorsement further stated that coverage was excluded for liability “arising out of or in any way attributable to the claimed negligence or statutory violation of the Additional Insured, other than vicarious liability which is imputed to the Additional Insured solely by virtue of the acts or omissions of the Named Insured.”

During the effective period of the Pekin policy, an employee of McGreal, Scott Nowak, was injured while working on the construction of the building. He filed suit against Centex Homes and Centex Real Estate Corporation, the owners of the building. Both entities tendered the suit to Pekin, but Pekin denied coverage and filed a declaratory judgment action. Pekin argued that McGreal did not have a written contract with Centex Real Estate, and so it owed no coverage to that entity. Pekin also argued that McGreal was not performing work pursuant to its contract with Centex Homes, and so it owed no duty to defend that entity. Finally, Pekin argued in the alternative that neither entity qualified for coverage as they were sued for their own direct negligence, as opposed to vicarious liability for the acts or omissions of McGreal.

The trial court found that Centex Real Estate was not an additional insured pursuant to the policy. The trial court also held that Centex Homes was not entitled to a defense because the underlying suit alleged only direct, and not vicarious, liability against that entity.

The appellate court affirmed the trial court’s ruling as to Centex Real Estate. The court held that although Centex Real Estate signed the contract, it only did so as the managing partner of Centex Homes. As it did not sign the contract on its own behalf, Centex Real Estate and McGreal were not parties to a contract that required McGreal to procure insurance for that entity.

Turning to Centex Homes, the court found that the contract between the parties did encompass the work being performed by McGreal at the time of Nowak’s injury. The contract recognized that Centex Homes would issue a purchase order to McGreal if it elected to authorize McGreal to perform work under the contract. Although Centex Homes did not issue a purchase order for the project at issue, the court found that fact to be irrelevant to the validity of the contract and its insurance requirement. This was especially true given the fact that the parties performed the work called for in the contract.

Pekin nevertheless insisted that Centex Homes was not entitled to coverage as it was not being sued for vicarious liability for the acts of McGreal. The court rejected that argument and overturned the trial court’s ruling in that regard. The court recognized that Illinois law prohibits an employee, like Nowak, from suing its employer, McGreal, in these circumstances. Thus, the insurer’s duty to defend in this scenario hinged on two factors: (1) a potential for finding that the named insured was negligent; and (2) a potential for holding the additional insured vicariously liable for that negligence.

As to the first issue, the court examined prior decisions which focused on whether the underlying complaint contained allegations suggesting potential negligence by the named insured. In the absence of such allegations, a duty to defend was not owed. In examining Nowak’s complaint, the court found that it alleged that McGreal was charged with erecting the subject wall that fell and struck him. Even though there could be additional facts that support a theory of liability against Centex Homes, the allegations within the complaint were sufficient to create the potential for a finding of negligence against McGreal.

The court then held that the second component of the test was satisfied for a number of reasons. Initially, the court recognized that vicarious liability could exist where a general contractor exercises sufficient control over the operative detail of the work performed by a subcontractor. Applying that standard, the court first found that it was not necessary to parse the underlying complaint for specific allegations of control as all that was required was the potential that such control existed, which can be satisfied by mere general allegations that do not eliminate the possibility of vicarious liability. Second, the court did not desire to rule on issues that would overlap with liability issues to be addressed in the underlying suit, and those issues were likely to be addressed in Nowak’s claims against Centex Homes.

Third, the court found that the underlying complaint would not contain sufficient detail to differentiate between a general contractor’s direct negligence as opposed to its vicarious liability, as both concepts depended on the extent of its control over the subcontractor. Fourth, the complaint against Centex Homes contained allegations that were broad enough to impose vicarious liability on it for McGreal’s acts or omissions. Finally, given the fact that Nowak likely lacked knowledge concerning the degree of control exercised by Centex over McGreal, it was unlikely that he would include allegations that would establish vicarious liability against Centex Homes. As the complaint alleged that Centex Homes had control of operations and was liable for the acts of its agents, there was a potential basis asserted for vicarious liability, and Pekin owed a duty to defend Centex Homes.



Add to Flipboard Magazine.

Oklahoma Supreme Court Holds Indoor Air Exclusion Permissible

In its recent decision in Siloam Springs Hotel v. Century Sur. Co., 2017 Okla. LEXIS 15 (Okl. Feb. 22, 2017), the Supreme Court of Oklahoma, on certified question from the United States District Court for the Western District of Oklahoma, had occasion to consider the enforceability of an indoor air exclusion in a general liability policy.

Century insured Siloam Springs Hotel under a general liability policy with an exclusion applicable to:

“Bodily injury”, “property damage”, or “personal and advertising injury” arising out of, caused by, or alleging to be contributed to in any way by any toxic, hazardous, noxious, irritating pathogenic or allergen qualities or characteristics of indoor air regardless of cause.

Siloam sought coverage under its policy for with claims brought by hotel guests claiming to have suffered injury as a result of carbon monoxide poisoning.  Century denied coverage for the suit on the basis of the indoor air exclusion.  In the ensuing coverage litigation, the United States Western District for the District of Oklahoma granted summary judgment in Century’s favor, holding that the exclusion unambiguously applied.  On appeal, the Tenth Circuit remanded the case based on a potential jurisdictional defect, but in doing so concluded that the lower court should consider whether the indoor air exclusion ran afoul of Oklahoma public policy.  The district court subsequently certified the following question to the Supreme Court of Oklahoma:

Does the public policy of the State of Oklahoma prohibit enforcement of the Indoor Air Exclusion, which provides that the insurance afforded by the policy does not apply to “‘Bodily injury’, ‘property damage’, or ‘personal and advertising injury’ arising out of, caused by, or alleging to be contributed to in any way by any toxic, hazardous, noxious, irritating pathogenic or allergen qualities or characteristics of indoor air regardless of cause”?

In considering this question, the Supreme Court of Oklahoma observed that the freedom of contract is not absolute and is limited by the public policy of the State of Oklahoma, which can only be articulated by the Oklahoma legislature.  The Court also observed that Oklahoma statutory law evidences that “a contract violations public policy only if it clearly tends to injure public health, morals or confidence in the administration of law, or if it undermines the security of individual rights with respect to either personal liability or private property.”  An example of this in the insurance context, noted the Court, was a loaned vehicle exclusion contained in an auto policy, which the Court previously had found violative of Oklahoma’s statutory compulsory liability insurance law.

Siloam argued that the indoor air exclusion violated Oklahoma public policy, at least in the context of a carbon monoxide claim, by negating compensation to victims for loss that a reasonable person would expect to be insured under a general liability policy.  The Court rejected this argument, finding no public policy articulated by Oklahoma’s legislature that would preclude such an exclusion in the context of a general liability policy, unlike the case with auto insurance where the legislature expressed a public policy in favor of extremely broad coverage.  In the absence of such a public policy, explained the Court, it would be improper to disallow the exclusion, regardless of Siloam’s reasonable expectations of coverage.  As the Court explained:

Siloam would have us greatly circumscribe the freedom of contract principles articulated above by finding a coverage exclusion violates public policy if there is no public policy justification for its existence, and if it excludes coverage under circumstances where a responsible person would expect that liability insurance would be available to compensate for an injury. There is no precedent for such an encroachment into parties’ freedom to contract for liability coverage …

The Court, therefore, held that Siloam and Century were free to have negotiated the contract “as they  saw fit,” and that Century, therefore, could apply the exclusion without running afoul of Oklahoma public policy.

 

 



Add to Flipboard Magazine.

Legal Malpractice Insurer Has No Duty to Defend Contempt Proceeding

In its recent decision in Jones, Foster, Johnston & Stubbs, P.A. v. Prosight-Syndicate 1110 at Lloyd’s, 2017 U.S. App. LEXIS 2550 (11th Cir. Feb. 14, 2017), the United States Court of Appeals for the Eleventh Circuit, applying Florida law, had occasion to consider whether a legal professional liability insurer had a coverage obligation with respect to an underlying contempt proceeding.

Prosight insured the Jones Foster law firm under a professional liability policy insuring “all sums which the Insured shall become legally obligated to pay as damages for claims … arising out of any act, error, [or] omission … in the rendering of or failure to render Professional Services by any Insured covered under this policy.”  The policy required Prosight to defend “any suit seeking damages to which the policy applied.”  The policy defined the term “damages” as “compensatory judgments, settlements or awards [not including] punitive or exemplary damages, sanctions, fines or penalties assessed directly against any insured.”  The policy also contained an exclusion for claims “[a]rising out of any dishonest, fraudulent, criminal or malicious act or omission, or deliberate misrepresentations,” although the exclusion required that Prosight provide a defense until an adjudication of such conduct.

In connection with its representation of a client prosecuting a defamation suit, Jones Foster was alleged to have misused confidential information and to have filed a client affidavit containing knowingly false information.  The defendant filed a motion to show cause against Jones Foster as to why it should not be held in contempt and punished for its misconduct.  Among other things, the motion sought sanctions in the form of having the claim filed by Jones Fosters’ client stricken, with prejudice, as well as an award of attorneys’ fees and costs.  Prosight denied coverage for the contempt proceeding on the basis that it did not seek relief coming within its policy’s coverage.  The United States District Court for the Southern District of Florida agreed, granting summary judgment in Prosight’s favor.

On appeal, the Eleventh Circuit agreed that Prosight had no duty under its policy to defend against proceedings seeking sanctions or non-pecuniary relief, explaining:

There is simply no suggestion that the Contempt Motion underlying this action involved anything other than an attempt to sanction lawyers employed by Jones Foster for “their contumacious and outrageous conduct.” And, the Policy makes crystal clear that only suits seeking “compensatory judgments, settlements, or awards” trigger a duty to defend on the part of Prosight. In the words of the District Court below, “[b]ecause the contempt motion sought sanctions . . . [rather than compensatory damages], [Prosight] did not have a duty to defend [Jones Foster].”

In reaching this conclusion, the court acknowledged that while monetary awards in a civil contempt proceeding can serve a compensatory purpose, they primarily serve the purpose of punishing the wrongdoer for “contemptuous behavior.”  Thus, the court rejected Jones Foster’s argument that the award of fees and sanctions qualified as damages in the form of compensatory judgments.

The court also rejected Jones Foster’s argument that the “defense until adjudication” language in the dishonest acts exclusion required Prosight to provide a defense in the contempt proceedings, finding that Prosight had no duty to defend a claim not seeking damages.  In reaching this conclusion, the court reasoned that the exclusion “does not fashion new obligations,” on Prosight, i.e., it does not require a defense to “proceedings that allege dishonest or fraudulent acts … when those proceedings would not otherwise be covered by the Policy.”

 

 

 

 



Add to Flipboard Magazine.

Eleventh Circuit Holds Employee Entitled to Permissive User Status Despite Violation of Company Policy

In its recent decision in Great American Alliance Ins. Co. v. Anderson, 2017 U.S. App. LEXIS 2277 (11th Cir. Feb. 8, 2017), the United States Court of Appeals for the Eleventh Circuit, applying Georgia law, had occasion to consider whether an employee’s violation of company policy regarding operation of a vehicle while impaired eliminated his status as an insured permissive user under the employer’s commercial auto policy.

Great American’s insured, Looper Cabinet Co. (“LLC”), allowed its employee, Brian Hensley, to drive a pickup truck for work and personal reasons, including transportation to and from a lake house owned by Mr. Hensley’s father.  At issue was Mr. Hensley’s right to insured status for an accident that happened while he was driving from the lake house while under the influence.   LLC had a company policy in effect stating that an impaired employee was not allowed to drive.

Great American denied coverage to Mr. Hensley for the underlying suit on the basis that he had exceeded the scope of the permissive use granted by LLC by driving while under the influence.  The United States District Court for the Southern District of Georgia granted summary judgment in favor of Great American, concluding that the decision by a Georgia state appellate court in Barfield v. Royal Ins. Co. of Am., 492 S.E.2d 688 (Ga. Ct. App. 1997) stood for the proposition that by violating LLC’s internal policies, Hensley exceeded the scope of his permitted use of the vehicle, and thus negating his right to insured status.

On appeal, the Eleventh Circuit observed that the decision in Barfield conflicted with a 1968 decision by the Georgia Supreme Court in Strickland v. Georgia Cas.& Sur. Co., 162 S.E.2d 421 (Ga. 1968), in which the Court held that a finding of permissive use under an auto policy “only required permission for the purpose served by the vehicle and that the operational aspects were unimportant.”  In other words, an employee’s violation of express company rules is not a relevant coverage consideration so long as the individual was operating the vehicle for the original use or purpose intended.

The Eleventh Circuit observed that the Barfield decision did not reference Strickland and could not be reconciled with it either.  Concluding that Strickland had not been overruled, the Eleventh Circuit held that Strickland, not Barfield, represented Georgia controlling law on the issue and that as such, the lower court erred in holding in Great American’s favor.  Citing to evidence in the record that Brian Hensley was operating the vehicle for a permitted use at the time of the accident, even if in violation of the company alcohol, the court held that Hensley was an insured for the purpose of the underlying action.



Add to Flipboard Magazine.

California Court Holds Continuous Progressive Injury Exclusion Applicable to Construction Defect Claim

In its recent decision in Saarman Construction, Ltd. v. Ironshore Specialty Ins. Co., 2017 U.S. Dist. LEXIS 13633 (N.D. Cal. Jan 31, 2017), the United States District Court for the Northern District of California had occasion to consider the application of a continuous and progressive injury exclusion in the context of a construction defect claim.

The underlying suit arose out of Saarman’s work as a general contractor at a condominium complex performed in 2006 and 2007 to address pre-existing water intrusion problems.  In 2011, a lessee of one of the units sued the unit owner, claiming that her unit suffered from several defects, including mold, plumbing leaks and water intrusion.  The unit owner, in turn, sued several parties, including Saarman based on the theory that it failed to remedy the defects, which contributed to the mold growth.

Ironshore insured Saarman under a general liability policy issued for the period June 30, 2010 to June 30, 2011.  The policy contained an exclusion applicable to any claim alleging bodily injury or property damage “arising out of, in whole or in part, the actual, alleged or threatened discharge … of any mold, mildew, bacteria or fungus.”  The policy also contained an exclusion applicable to any bodily injury or property damage:

  1. which first existed, or is alleged to have first existed, prior to the inception of this policy. “Property damage” from “your work,” or the work of any additional insured, performed prior to policy inception will be deemed to have first existed prior to the policy inception, unless such “property damage” is sudden and accidental and takes place within the policy period [sic]; or
  1. which was, or is alleged to have been, in the process of taking place prior to the inception date of this policy, even if such “bodily injury” or “property damage” continued during this policy period; or
  1. which is, or is alleged to be of the same general nature or type as a condition, circumstance or construction defect which resulted in “”bodily injury” or “property damage” prior to the inception date of this policy.

Ironshore relied on both exclusions to deny coverage.

On motion for summary judgment, Saarman argued that the mold exclusion did not apply, at least for duty to defend purposes, because the claim against it alleged harms other than mold, such as water intrusion and water damage.  Ironshore countered that the exclusion, on its face, applied to any claim alleging any mold damage, even if that suit includes other damages attributable to other causes.  In considering the issue, the court reasoned that Ironshore’s broad interpretation of the exclusion clashed with California law requiring an insurer to defend a lawsuit that includes covered and uncovered claims, and that California does not permit an insurer to contract around this obligation:

As the California Supreme Court explained in Buss, “in a ‘mixed’ action, the insurer has a duty to defend the action in its entirety.” … Here, Ironshore has attempted to circumvent that principle by hinging its duty to defend on the presence of any allegations of non-covered damage in the “suit”—no matter how small or inconsequential those allegations may be. However, the court in Buss suggested that insurers could not contract around their duty to defend mixed actions in this way. …. In short, Ironshore cannot contract around California law that requires insurers to defend the entire action if there is any potentially covered claim. Because the language in the mold exclusion barring coverage for “any claim, demand, or ‘suit’ alleging [damage] arising out of, in whole or in part, the . . . alleged . . . existence of any mold” tries to do precisely that, it is unenforceable.

Thus, finding that the underlying suit alleged damages that were independent of mold, i.e. water intrusion and water damage, the court concluded that the mold exclusion did not apply to the entirety of the underlying claim and thus did not operate to preclude a duty to defend.

Turning to the policy’s continuous or progressive injury exclusion, referred to by the court as the CP exclusion, Saarman agreed that it finished its work prior to the policy’s issuance, and thus fell within the first paragraph of the exclusion.  Saarman nevertheless argued that the damage at issue in the underlying was not continuous but instead intermittent based on rainfall events.  The court rejected this argument, noting that the exclusion only requires the completion of work prior to the policy’s issuance for the exclusion to apply and does not focus on when or under what circumstances the property damage occurs.  In so concluding, the court considered but rejected Saarman’s argument that the exclusion rendered the policy’s completed operations coverage illusory, finding that the policy still provided coverage for operations completed during the policy period, just not operations completed prior to the policy period.



Add to Flipboard Magazine.

Indiana Federal Court Holds No E&O Coverage for Overdraft Fees Class Action

In its recent decision in BancorpSouth, Inc. v. Fed. Ins. Co., 2017 U.S. Dist. LEXIS 10817 (S.D. Ind. Jan. 26, 2017), the United States District Court for the Southern District of Indiana, applying Mississippi law, had occasion to consider the application of a fees or charges exclusion in a bankers’ professional liability policy.

Bancorp sought coverage an underlying class action lawsuit seeking monetary damages, restitution and declaratory relief arising from its practice of charging allegedly excessive overdraft fees imposed on its customers.  The suit claimed that Bancorp engaged in various schemes in an effort to ensure that such fees would be maximized.  Bancorp sought coverage for the underlying suit, but Federal denied coverage on the basis of an exclusion in its policy applicable to loss arising from any claim “based upon, arising from, or in consequence of any fees or charges.”

In the ensuing coverage litigation, Bancorp contended that Federal applied the exclusion in too broad a fashion.  Specifically, Bancorp argued that because the underlying lawsuit alleged that its policies and procedures caused the harms alleged by the class, one of which was the imposition overdraft fees.  In other words, Bancorp claimed that was at stake in the suit was its policies that resulted in overdraft fees, not the imposition of the fees itself.   Bancorp also argued that the exclusion was ambiguous since it was not clear whether the exclusion applied to fees payable by Bancorp or fees paid to Bancorp.

In considering the exclusion, the court noted two unpublished and diverging opinions: one from the Third Circuit, applying Texas law, in PNC Fin. Servs. Group, Inc., 647 Fed. Appx. 112 (3d Cir. 2016) and another by the Fifth Circuit, ironically applying Pennsylvania law, in First Comm. Bancshares v. St. Paul Mercury Ins. Co., 593 Fed. Appx. 286 (5th Cir. 2014).

In First Community, the court held that the class action complaint alleged overdraft fees, but that “the primary harm stemming from these allegations is that customers could not ascertain their account balances and could not plan spending, withdrawals, and deposits.”  The BancorpSouth court noted, however, that the facts and policy before it were factually distinguishable from First Community.  Whereas the class action in First Community sought damages as a result of the bank customers only having access inaccurate balances, the suit against Bancorp was targeted at specific practices allegedly in furtherance of Bancorp’s scheme to impose and maximize overdraft fees.

The court further noted, by contrast, that the class action at issue in PNC was factually similar to that filed against Bancorp.  There the Third Circuit rejected arguments similar to those raised by Bancorp; namely, that the underlying suit sought damages for PNC’s allegedly improper practices, not for the fees themselves.  The BancorpSouth court found this reasoning persuasive, concluding “there is no other way for us to construe [the exclusion] than to encompass the claims here.”

The court also considered Bancorp’s argument that the failure to distinguish between payments to or by Bancorp rendered the exclusion ambiguous.  The court rejected this argument, observing that the exclusion applied to both types of payments, but that its breadth should not be equated with ambiguity.



Add to Flipboard Magazine.