“Related Acts” Reduce Insurer’s Exposure by Half

April 22nd, 2014

By John Na, Sedgwick Los Angeles

              The Eighth Circuit Court of Appeals recently held that, under Minnesota law, multiple wrongful acts by a financial advisor to four plaintiffs are “interrelated” and “logically connected” within the meaning of the policy’s “Interrelated Wrongful Acts” limitation.  In Crystal D. Kilcher v. Continental Casualty Co., 2014 WL 1317296 (8th Cir. April 3, 2014), the Eighth Circuit reversed the district court’s ruling that the policy’s $1 million coverage limit for a single claim did not apply, instead finding that the insured’s wrongful acts in selling life insurance policies and unsuitable investment products to the plaintiffs constituted a single claim, reducing Continental’s exposure.

The four plaintiffs in Kilcher were clients of financial advisor Helen Dale of Transamerica Financial Advisors, Inc.  Continental insured Transamerica and Dale under a claims made, professional liability policy providing $1 million in coverage per claim up to an aggregate amount of $2 million.

Starting in 1999, Dale advised each plaintiff to purchase whole life insurance policies.  In addition, she instructed plaintiffs to invest in various annuities, some with surrender charges for early withdrawals.  In 2007, plaintiffs learned their investments and portfolios were not suitable for their age, background, and investment goals.  Plaintiffs ultimately consolidated their claims and filed a single suit against Dale and Transamerica alleging breach of fiduciary duty, negligent misrepresentation, fraudulent misrepresentation, fraud, unsuitability, and violation of state securities laws. In January 2012, the parties entered into a settlement wherein Continental agreed to pay $1 million to settle plaintiffs’ claims against Dale, and submit to the district court for a ruling on whether plaintiffs’ claims constituted a single claim or multiple claims.

The policy provides that multiple claims “involving the same Wrongful Act of Interrelated Wrongful Acts shall be considered as one Claim.”  The policy defines “Interrelated Wrongful Acts” as “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.”  The district court did not find Dale’s wrongful acts logically or causally connected to one another, holding that plaintiffs submitted at least two different claims because Dale’s wrongful acts included not only selling life insurance policies but also unsuitable annuities as well.  Continental appealed the district court’s ruling.

The Eighth Circuit reversed the district court’s ruling, holding that plaintiffs’ claims are interrelated as they are logically connected to a common set of “fact, circumstance, situation, transaction or event.”  The court noted that, although Dale may have made different misstatements, omissions, or promises to each plaintiff on different dates, the analysis does not stop there.  The court stated that a logical connection exists between all of Dale’s wrongful acts, such as her desire to earn commissions by advising plaintiffs to purchase life insurance policies and investments not suitable for them.  In addition, the court found that the plaintiffs are all young, unsophisticated investors who presented the same opportunity to Dale: an investor who trusted in Dale to act in his or her best interest.  The court refused to engage in “micro-distinguishing” between the different acts involved in selling different types of life insurance policies and annuities, instead finding that they are all logically connected by Dale’s  instructions that plaintiffs make inappropriate purchases and unsuitable investments.

California Court: Commercial Crime Policy Rescinded Due To Insured’s Material Misrepresentation Concerning Handling of Funds

April 18th, 2014

Kurtz v. Liberty Mutual Insurance Co., et al., Case No. 2:11-cv-7010 (C.D.Cal. April 14, 2014), was an insurance coverage dispute arising out of the downfall of Los Angeles businessman Ezri Namvar who has also been referred to as the “Bernie Madoff of Beverly Hills.” The Chapter 7 Bankruptcy Trustee for one of Namvar’s companies, Namco Financial Exchange Corp. (NFE), sued its primary and excess insurers seeking to recover over $35 million in client funds misappropriated from NFE.

The Commercial Crime Policy’s application asked, “Are proceeds from 1031 transactions held in bank accounts segregated from those of your operating funds?” NFE answered “Yes,” to this question, representing that it did in fact segregate its client funds from operating funds. In their motion for summary judgment, the insurers asserted that they were entitled to rescind their respective policies on the ground that NFE’s response to the segregation question constituted a material misrepresentation that the insurers relied upon in issuing the policies.

The insurers’ joint motion cited testimony from NFE’s own employees, as well as NFE’s broker and the underwriters, concerning the segregation requirement. The evidence demonstrated that, instead of segregating client funds, NFE maintained both client funds and operating funds in one comingled bank account. NFE argued that, because it accounted for each client’s funds separately in its internal ledgers, it answered the segregation question honestly. The court disagreed. It rejected the insured’s argument that differences between the policy provisions and the application questions created an ambiguity, and held that the question on the application was unambiguous and subject to only one reasonable construction – i.e. whether NFE maintained client funds and operating funds in segregated bank accounts. Because NFE misrepresented that it segregated operating funds from client funds on the application, and the evidence also established that this misrepresentation was material, the court held that rescission was proper.

The court rejected two additional arguments from the NFE Trustee. First, the court rejected the Trustee’s argument that the insurers were estopped from denying coverage for failure to comply with insurance regulations concerning timely responses to claims. The court held that even if the insurers did violate the regulations (which the insurers denied), estoppel did not apply because the Trustee had failed to present evidence of any reliance on the insurers’ conduct, and the Trustee could not demonstrate any harm as the policy was void ab initio due to the material misrepresentation on the application. Second, the court rejected the Trustee’s claim that the insurers could not raise rescission as a defense for failure to allege it as an affirmative defense or first tender the premiums earlier. The court held that the insurers had properly raised rescission as a defense in their answers, and that under California law an insurer may properly allege rescission as a defense to a suit filed by the insured without first tendering the premiums.

Accordingly the court granted judgment for the insurers. Sedgwick’s Michael R. Davisson, Susan Koehler Sullivan and Ira Steinberg represented one of the defendant insurers.

Offshore Professional Risk in 2014

April 16th, 2014

By Mark Chudleigh, Chen FoleyNick Miles, and Alex J. Potts, Sedgwick Bermuda

From the Cayman Islands to Hong Kong, there’s a lot going on in the world of offshore litigation and law reform. In this report, Sedgwick’s Offshore Professional Risks practice offers a global perspective on professional risk, with unique expertise and solutions valuable to providers and users of offshore services and insurance carriers operating in offshore jurisdictions, including Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, and the Isle of Man.

Learn more about new laws changing the future of this business, collective investment schemes, issues relating to cybercrime and cyberliability, and the dangers of being an offshore lawyer.

 Read the full news report here.

Eleventh Circuit Recognizes Important Exception to the Eight Corners Rule

April 15th, 2014

By Eryk Gettell, Sedgwick San Francisco

Florida courts generally adhere to the Eight Corners Rule when determining whether an insurer has a duty to defend its insured.  Under this rule, the duty to defend determination is made by looking only at the terms within the four corners the insurance policy and the allegations within the four corners of the complaint.  Extrinsic evidence may not be considered.  Recently, however, in Composite Structures, Inc. v. Continental Insurance Co., 2014 WL 1069253 (11th Cir. March 20, 2014) (unpublished), the United States Court of Appeals for the Eleventh Circuit (applying Florida state law) recognized an important exception to the Eight Corners Rule – when an insurer’s coverage denial is based on factual issues that ordinarily would not be alleged in the complaint, the insurer may consider extrinsic evidence outside of the complaint.

The underlying lawsuit was brought by two seamen who sustained carbon monoxide poisoning while aboard a boat.  The seamen sued the insured boat manufacturer for negligence and strict liability, and the insured tendered its defense to Continental Insurance Co.  Continental disclaimed coverage for the underlying suit because the insured first discovered the occurrence more than 72 hours after its commencement.  As a result, the insured had not satisfied the conditions of the pollution buyback endorsement that created exceptions to the pollution exclusion in the two general liability policies at issue. 

In the declaratory judgment action brought by the insured, Continental successfully argued in the district court that the conditions in the pollution buyback endorsement were not satisfied because the insured did not first discover the occurrence within 72 hours after its commencement, and because the occurrence was not timely reported to Continental.  On appeal from the district court’s summary judgment ruling, the insured argued that the district court erred in considering evidence outside of the underlying complaint in determining Continental’s coverage obligations.

The Eleventh Circuit affirmed the district court’s decision.  The appellate court recognized that Florida courts generally follow the Eight Corners Rule.  However, the court also noted that the Florida Supreme Court has recognized certain exceptions to this rule, including that insurers may look to facts outside of the underlying complaint when the basis for the insurer’s declination involves facts that normally would not be alleged in the complaint.  Here, the court observed that the underlying complaint involved negligence and strict liability claims, neither of which required the plaintiffs to allege the date of when the insured notified its insurer of the occurrence.  Thus, the Eleventh Circuit held that, “[u]nder Florida law, Continental was permitted to consider the uncontroverted date of written notice when determining its duty to defend because the date of written notice to the insurance company is not a fact that would normally be alleged in the complaint.” 

On April 7, 2014, Continental filed a motion for publication with the Eleventh Circuit and urged the court to publish its decision.  The insured has not opposed Continental’s motion at this time.  Interested readers should stand by, as a published opinion would have a significant impact on lower courts in the Eleventh Circuit.

In January 2014, we looked at the Eight Corners Rule as it applies in Texas.  Click here to read more.

Florida High Court Liberally Construes Self-Insured Retention Endorsement

April 10th, 2014

By Robert C. Weill, Sedgwick Fort Lauderdale

The Florida Supreme Court has taken a liberal view of self-insured retentions (SIRs), recently holding that an insured can apply indemnification payments from a third party to satisfy its SIR under a general liability policy. See Intervest Constr. of Jax, Inc. v. Gen. Fid. Ins. Co., 39 Fla. L. Weekly S75, 2014 WL 463309 (Fla. Feb. 6, 2014) (to read the slip opinion click here). The Court decided the case on two certified questions from the Eleventh Circuit Court of Appeals.

General Fidelity issued a general liability insurance policy to a homebuilder with a SIR of $1 million. The SIR endorsement indicated that General Fidelity would provide coverage only after the insured had exhausted the $1 million SIR. The homebuilder contracted with a third-party to, among other things, install attic stairs in a house under construction. The contract between the homebuilder and the subcontractor contained an indemnification provision requiring the subcontractor to indemnify the homebuilder for any damages resulting from the subcontractor’s negligence.

After the house was built, the homeowner fell while using the attic stairs and sued only the homebuilder for her injuries. The homebuilder sought indemnification from the subcontractor. Following mediation the parties and their insurers agreed to settle the homeowner’s claim for $1.6 million with the subcontractor’s insurer paying the homebuilder $1 million to settle the homebuilder’s indemnification claim against the subcontractor; the homebuilder would then pay the $1 million to the homeowner. A dispute then arose as to whether the homebuilder or its insurer was responsible for paying the $600,000 settlement balance.

The homebuilder argued that the $1 million contribution from the subcontractor’s insurer satisfied its SIR obligation, and General Fidelity was required to pay the remaining $600,000. General Fidelity, on the other hand, argued that the $1 million payment to settle the indemnity claim did not reduce the SIR because the payment originated from the subcontractor, not its insured. Thus, General Fidelity maintained that the terms of the policy required its insured—the homebuilder—to pay the additional $600,000 to settle the homeowner’s claim.

The Court adopted the position advanced by General Fidelity. Although the SIR endorsement required the payment to be “made by the insured,” the court looked to other policies’ SIR provisions that contained more restrictive language. These other policies specify that the SIR must be paid from the insured’s “own account” or make clear that payments from additional insureds or insurers could not satisfy the SIR. Because the General Fidelity policy did not employ this more restrictive language, the court took a more expansive view of General Fidelity’s SIR endorsement.

The second prong of the dispute centered around whether the transfer of rights provision in the General Fidelity policy gave General Fidelity priority over its insured to the $1 million that the subcontractor’s insurer paid. If it did, then the homebuilder could not claim the $1 million as satisfying the SIR. The majority found that the provision did not give General Fidelity priority over its insured. The majority rested it conclusion on the fact that the provision “does not address the priority of reimbursement nor does the clause provide that it abrogates the ‘made whole doctrine.’”

Justices Polston and Canady dissented. They believed the majority had “rewritten” the SIR provision “to allow satisfaction of the self-insured retention limit in a manner other than the manner specifically provided for in the policy.” They also characterized the majority’s reasoning as creating a “legal fiction” that “effectively reads the phrase ‘by you’ out of [the SIR endorsement].”

 

New Jersey Legislature Passes Superstorm Sandy Bill of Rights

March 31st, 2014

By Ryan Chapoteau, Sedgwick New York

We previously reported on the New Jersey legislature’s attempt to pass reform bills as a response to Superstorm Sandy.  Although New Jersey Assembly Bill A3710 died when referred to the Financial Institutions and Insurance Committee, the legislature recently passed Senate Bill S1804 (combined with S1306), which details how the state can distribute Superstorm Sandy federal aid relief, and established a Bill of Rights for Superstorm Sandy victims.

In relevant part, the Bill of Rights helps to ensure that victims of Superstorm Sandy can seek compensation from multiple recovery programs as well as through any applicable insurance.  If a victim is not wholly compensated through their insurance carrier, the Bill of Rights can apply to a governmental recovery program to aid in the victim’s effort to be made whole for any losses resulting from the storm.  According to this law, the State cannot deny applicants seeking aid merely because they have other applications pending for financial relief.  Now, victims have multiple avenues to be compensated for the damage occurred by Superstorm Sandy.

In June 2013, we reported on the 12 new insurance reform bills bassed by the New York State Assembly in response to Superstorm Sandy. 

Interrupted by Sandy

March 28th, 2014

By Benjamin E. Shiftan, Sedgwick San Francisco

In Johnson Gallagher Magliery, LLC v. The Charter Oak Fire Insurance Company, 2014 WL 1041831 (S.D.N.Y. Mar. 18, 2014), the United States District Court for the Southern District of New York, granting a motion for partial summary judgment, held that a law firm was not entitled to certain lost business income caused by Superstorm Sandy.

The law firm leased office space at 99 Wall Street in New York City.  The building was supplied electricity from the Consolidated Edison of New York Bowling Green Network.  On the evening of October 28, 2012, due to the looming storm, the office space at 99 Wall Street was evacuated.  The next night, on October 29, 2012, ConEd preemptively shut down the Bowling Green Network to prevent major customer and network damage.  When Superstorm Sandy hit, flooding damaged the Bowling Green Network equipment.  The Bowling Green Network was re-energized on November 3, 2012, but 99 Wall Street did not actually receive electricity until November 11, 2012.

The law firm filed a claim with its business casualty insurer, The Charter Oak Fire Insurance Company, for, amongst other things, lost business income.  Charter Oak denied the claim, citing the water exclusion in its policy.  In the ensuing insurance coverage litigation, Charter Oak filed a motion for partial summary judgment which asserted that the policy’s water exclusion barred coverage for the law firm’s lost business income when that loss was due to the interruption of electrical service by way of the Bowling Green Network, which had suffered water damage.

The Southern District of New York ruled that Charter Oak was not obligated to pay for business losses that the law firm sustained during the time period when the Bowling Green Network was shut down, from October 29, 2012 through November 3, 2012.  The court held, in part, that the water exclusion applied to business losses stemming from the shutdown of the Bowling Green Network, which suffered water damage that prevented the re-energizing of the network until November 3, 2012.  In so ruling, the court relied on deposition testimony from a ConEd senior engineer who confirmed that there was extensive water damage to the Bowling Green Network.

Homeowners Beware: Fraud in Claims Process Can Lead to Judicial Sanctions in Bad Faith Action

March 13th, 2014

By Beth E. Yoffie, Sedgwick Los Angeles

A federal court for the Southern District of Texas has sanctioned a pro se litigant for making fraudulent misrepresentations to his homeowner’s insurer following a fire, and for bringing a bad faith action against the insurer.

In Alexander v. State Farm Lloyds, 4: 12-CV-490, 2014 WL 549389 (S.D. Tex. Feb. 11, 2014), Tony Alexander sued State Farm Lloyds (“State Farm”) for breach of contract, violations of the Texas Insurance Code, violations of the Texas Deceptive Trade Practices Act, and bad faith.  He sought more than $1 million under the policy’s Dwelling Coverage as well as $77,000 for the cost of additional living expenses, personal property damage, and securing of the residence.  He did so despite concealing material facts and making misrepresentations to State Farm during the claims process.

Mr. Alexander abandoned the case three days into the jury trial after his fraudulent conduct had become apparent.  Following that, State Farm moved for sanctions to be levied against him.  Mr. Alexander retained counsel, who argued that he could not be sanctioned because his “foolishness” had taken place before he had filed the lawsuit.  Counsel asserted that Mr. Alexander had not lied during the trial, and so had not displayed contempt for the judicial process.  The court disagreed.

Mr. Alexander’s decision to file suit was itself contemptuous.  The court found that he was a sophisticated individual, given he had worked in the finance industry, possessed an advanced degree, and previously operated multiple businesses; and, that he had connived to use the judicial system as a continuation of his lawless efforts to exploit the July 24, 2005 fire to squeeze additional money from State Farm.

The court concluded that, although Rule 11 did not permit sanctions on the facts before it, attorney’s fees could be awarded to State Farm under Texas Rule 13 and Chapter 10 of the Civil Remedies and Practices Code.  Accordingly, it awarded attorney’s fees to State Farm.

Fourth Circuit Holds that Contingent Business Interruption Endorsement Does Not Extend to Indirect Suppliers

March 10th, 2014

By Mari C. Spears, Sedgwick Washington, D.C.

On February 20, 2014, the United States Court of Appeals for the Fourth Circuit held that a contingent business interruption endorsement did not extend coverage to claims arising out of a business interruption caused by an indirect supplier.  Millennium Inorganic Chemicals Ltd. v. National Union Fire Insurance Co. of Pittsburgh, PA, 13-1194, 2014 WL 642993 (4th Cir. Feb. 20, 2014).

Millennium Inorganic Chemicals Ltd. and Cristal Inorganic Chemicals Ltd. (collectively, “Millennium”) was in the business of processing titanium dioxide, a compound often used for its white pigmentation, at its processing facility in Western Australia.  Millennium’s titanium dioxide processing operation was fueled by natural gas through the Dampier-to-Bunbury Natural Gas Pipeline (the “DB Pipeline”), Western Australia’s principal gas transmission pipeline.  Millennium purchased the gas under a contract with Alinta Sales Pty Ltd (“Alinta”), a retail gas supplier, which had purchased the gas from a number of natural gas producers, including Apache Corporation (“Apache”).  Millennium’s contract for the purchase of natural gas was solely with Alinta.

On June 3, 2008, an explosion occurred at Apache’s Varanus Island facility, causing its natural gas production to cease.  As a result of the explosion, Millennium’s gas supply was disrupted, and it was forced to shut down its titanium dioxide manufacturing operations for a number of months.

On June 5, 2008, Millennium tendered its claim to National Union Fire Insurance Company of Pittsburgh, PA and ACE American Insurance Co. (the “Insurers”), seeking contingent business interruption (“CBI”) coverage for losses incurred when the titanium dioxide manufacturing operation was shut down.  The policies included a CBI Endorsement that insured Millennium against certain losses resulting from the disruption of the supply of materials to Millennium caused by damage to certain “contributing properties.”  The term “contributing properties” was defined as “the insured’s prime suppliers of materials, parts and services.  If the insured depends upon one or, at most, a few manufacturers or suppliers for the bulk of materials and supplies necessary to conduct its business operations, then these suppliers are said to be “contributing properties.”  The Endorsement further defined “contributing property” by reference to the policy schedules, which indicated that covered locations “must be direct suppliers of materials to [Millennium’s] locations.”

The Insurers denied Millennium’s claim on the ground that Apache was not a direct supplier to Millennium as required under the policies.  Millennium subsequently sued the Insurers in the U.S. District Court for the District of Maryland, contending that the Insurers wrongfully denied Millennium’s claim for coverage under the CBI Endorsement.

The district court concluded that coverage under the policies extended only to “direct contributing properties”; however, the district court also held that none of the evidence “speaks to the specific meaning the parties intended by the use of the word ‘direct.’”  The district court ruled that the term “direct” was ambiguous in the context of an entity that provides a direct physical supply of material to the insured, but has no direct contractual relationship with the insured.  Accordingly, the district court, construing the term in favor of the insured, held that Apache qualified as a “direct” supplier to Millennium, and Apache’s natural gas production facility was a “direct contributing property” within the meaning of the policies “because Apache’s facility physically provided a direct supply of natural gas to Millennium’s premises, despite the fact that Apache and Millennium had no direct contractual relationship.”

On appeal, the Fourth Circuit reversed the judgment of the district court and remanded the case for entry of summary judgment in favor of the Insurers on the ground that neither Apache nor Apache’s facilities on Varanus Island could be considered a “direct contributing property” of Millennium.  The Fourth Circuit held that the term “direct” meant “proceeding from one point to another in time or space without deviation or interruption,” “transmitted back and forth without an intermediary,” or “operating or guided without digression or obstruction.”  It was undisputed that Millennium received its gas from Alinta, and Alinta, not Apache, had the sole ability to control the amount of gas directed to Millennium.  It also was undisputed that Millennium received its gas by way of the DB Pipeline, and that the DB Pipeline was neither owned nor operated by Apache and Apache relinquished both legal title and physical control over the gas when it entered the DB Pipeline.  Therefore, the court concluded that the relationship between Apache and Millennium, if any, was clearly interrupted by “an intermediary,” Alinta, who took full physical control of Apache’s gas before delivering indistinguishable commingled gas to Millennium.

“FAIR” is Fair: California Policyholders Not Entitled to Recovery Beyond Specified Policy Limits for Fire Losses

March 7th, 2014

By Michael A. Topp, Sedgwick San Francisco

Recently, the California Court of Appeal held that recovery under a standard California fire policy is limited to the specified policy limits, even if the actual cash value of the loss exceeds those limits.

The California FAIR Plan Association (the “FAIR Plan”) was established by the California legislature in 1968 to make available “basic property insurance” to property owners who are unable to procure such insurance through normal channels from an admitted insurer.  The FAIR Plan is an involuntary joint reinsurance association of all insurers authorized to write property insurance in California.  The governing statutes require the FAIR Plan to provide insurance for the peril of fire which is equivalent to, or more favorable than what is contained in, the standard form fire insurance policy set forth in Insurance Code § 2071.

In St. Cyr v. California FAIR Plan Assn., ___ Cal.App.4th ___, 2014 WL 346074 (2d Dist. Jan. 31, 2014), the plaintiffs were policyholders who lived in high fire risk areas and whose homes were destroyed in a wildfire.  Despite having been paid the full amount of their policy limits for destruction of their properties, the policyholders sued the FAIR Plan for breach of contract, bad faith, and unfair business practices.  Specifically, the policyholders argued that, although standard fire policies require payment for actual cash value of dwelling loss and the actual cash value of their homes exceeded their policy limits, the FAIR Plan limited payment to the policy limits.

The court rejected the policyholders’ argument based on the express language of Section 2071, and sustained the trial court’s dismissal of the action.  The court noted that the statutorily-required policy language provides that fire coverage is afforded “to the extent of the actual cash value of the loss,” but also that coverage is provided “to an amount not exceeding _____ dollars.”  Thus, the stated limit of insurance “fixes the maximum amount due under the policy.”  The court also noted that, under Insurance Code § 2051, which specifies the “measure of indemnity” under an “open” policy, loss payment is determined based on the lesser of the policy limit or the cost to repair and/or replace the damaged property.  Therefore, “[a]s appellants were paid the full amount of their policy limits, they were paid the amount due.”

It should be noted that, under California Insurance Code § 10102(e) and (f), a policy issued as “guaranteed replacement cost coverage” may not limit coverage to a specified amount.  The policy at issue in the St. Cyr case was described by the court as “bare bones” coverage, and did not implicate Section 10102.

 

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