Archive for January, 2012

Don’t Sign It Until You’ve Read It: Signature of Subscription Documents Binds Insured to Undesirable Policy Terms

Tuesday, January 31st, 2012

United States Court of Appeals for the Seventh Circuit

In National Production Workers Union Ins. Trust v. Cigna Corp., ___ F.3d ___, 2011 WL 6880650 (7th Cir. (Ill.) Dec. 30, 2011), the U.S. Court of Appeals for the Seventh Circuit held that an insured (the “trust”) was bound by the terms of an insurance policy despite a conflict between the actual policy terms and those the insured sought when procuring the policy.

The trust had sought group accident and group life insurance with terms that designated it as both the owner of the policy and a beneficiary entitled to 50 percent of a union member’s death benefit.  The trust’s insurance broker omitted the required terms during the procurement of coverage and secured coverage through defendant Life Insurance Company of North America (“LINA”) that did not contain the required terms.  The trust’s chairman signed a group insurance application and subscription agreements accepting LINA’s offer of coverage.

The trust made a claim under the policy for 50 percent of the death benefit from a union member’s death.  LINA refused, referring the trust to the terms of the policy that required LINA to pay the full death benefit to the decedent’s beneficiary.  The trust then sued LINA and its parent company, Cigna, seeking a declaratory judgment and rescission of the policy.   LINA filed a counterclaim for unpaid premium and moved for a summary judgment on the trust’s causes of action.  The district court found that an enforceable insurance contract existed as a matter of law, granting LINA’s motion for summary judgment and dismissing Cigna for lack of personal jurisdiction.

The Seventh Circuit affirmed.  The court found that the trust was bound to the terms of the policy, relying upon the following facts: (1) the trust’s chairman signed copies of the insurance application and subscription agreements; (2) the trust paid premiums without objecting to the policy terms; and (3) LINA provided coverage pursuant to the terms of the issued policy.  The Seventh Circuit rejected the trust’s argument that it never received a final copy of the issued policy, charging the trust with notice of its contents based on its knowledge that LINA had issued it the policy.

You Can’t Insure What’s Not Yours: NY Court Determines SEC Disgorgement Payment Not Insurable Loss as Matter of Public Policy

Tuesday, January 31st, 2012

New York’s Appellate Division, First Department    

In J.P. Morgan Securities, Inc. v. Vigilant Ins. Co., ___ N.Y.S.2d ___, 2011 WL 6155586 (N.Y. App. Div. Dec. 13, 2011), New York’s Appellate Division, First Department, held that a disgorgement payment made as part of a settlement with the Securities and Exchange Commission (SEC) does not constitute an insurable loss under New York law.

In the underlying action, the SEC had alleged that between 1999 and 2003, Bear Stearns violated securities law by knowingly facilitating deceptive market timing for large, hedge-fund clients, assisting them in evading detection, and enabling them to earn hundreds of millions of dollars at the expense of mutual fund shareholders.  Bear Stearns disputed the SEC’s findings, but settled with the SEC and, without admitting or denying SEC’s charges, agreed to disgorge $160 million and pay $90 million in civil money penalties.

Bear Stearns’ insurance covered “loss” that it was legally obligated to pay as a result of any claim for any wrongful act.  “Loss” was defined broadly to include compensatory damages, settlements and costs, and charges and expenses incurred in connection with any governmental investigation.  “Loss” excluded fines, penalties, matters not insurable under law, and claims based upon or arising out of any deliberate, dishonest, fraudulent or criminal act or omission or based upon or arising out of the insured gaining in fact any personal profit or advantage to which the insured was not legally entitled.

Bear Stearns sought indemnification from Vigilant for the SEC disgorgement payment.  Vigilant denied coverage on the grounds that the disgorgement payment was not a loss or was excluded from coverage.  Bear Stearns argued that it was entitled to coverage, since its disgorgement payment actually constituted compensatory damages.

The trial court denied Vigilant’s motion to dismiss, but the Appellate Division reversed.  Rejecting Bear Stearns’ argument, the court held that disgorgement of ill-gotten gains or restitutionary damages is not insurable as a matter of public policy, which prohibits wrongdoers from shifting liability for disgorgement payments to insurers, as that would impermissibly allow the wrongdoers to retain the benefit of their illegal acts and would severely undermine the intended deterrent effect of disgorgement.

“Extraordinary” Expenses Decrease Income in Disability Benefits Calculation

Tuesday, January 31st, 2012

U.S. Court of Appeals for the Fourth Circuit    

In Fortier v. Principal Life Ins. Co., ___ F.3d ___, 2012 WL 76021 (4th Cir. (N.C.) Jan. 11, 2012), the U.S. Court of Appeals for the Fourth Circuit held that a disability insurer had reasonably calculated “predisability earnings” when it reduced the insured income by the business expenses that the insured had deducted on his federal income tax returns, including a reduction for extraordinary expenses.

Fortier, the insured and owner of a medical practice, brought an action against his disability insurer under ERISA, alleging that the administrator had misconstrued the policy and undercalculated his predisability earnings when determining benefits.  Under the policy, predisability benefits are defined as gross income less business expenses.  Business expenses are (1) “usual and customary,” (2) “incurred on a regular basis,” (3) “essential to the established business operation,” and (4) “deductible for Federal Income Tax purposes.”  The ERISA administrator held that because Fortier claimed his extraordinary expense as deductions on his federal tax returns, they were “ordinary and necessary”, and therefore “usual and customary,” “incurred on a regular basis,” and “essential to the established business operation.”  After having deducted the extraordinary expenses, Fortier’s predisability earnings were significantly lower than Fortier claimed.  Fortier appealed, arguing that the administrator’s interpretation rendered the policy’s definition of business expenses repetitive and superfluous, and that each criterion was a further limitation that distinguished expenses deductible for tax purposes from expenses defined in the policy. The district court held that the administrator’s interpretation was reasonable, and Fortier appealed again.

Applying an abuse of discretion standard, the Fourth Circuit concluded that the insurer’s denial of benefits was based on a reasonable reading of the policy language.  The court did question why the policy chose to include the criteria “usual and customary,” “incurred on a regular basis,” and “essential to the established business operation,” when the phrase “deductible for Federal Income Tax purposes” arguably was the only criterion needed to accomplish the policy’s purposes under the administrator’s interpretation.  The Fourth Circuit nonetheless held that based on the overall policy language, including two references to the Internal Revenue Code and the policy’s grant of “complete discretion” to the insurer to resolve ambiguities and to determine benefits, the policy permitted the administrator to interpret the policy’s definition of business expenses as coextensive with the federal tax code.

Minor’s Alcohol-Related Death Forseeable: No “Occurrence” Within the Meaning of a Homeowner’s Policy Court of Appeals of Ohio

Tuesday, January 31st, 2012

Court of Appeals of Ohio

In Sheely v. Sheely, 2012 WL 34451 (Ohio Ct. App. Jan. 9, 2012), the Court of Appeals of Ohio held that a 16-year-old girl’s death caused by alcohol that had been provided by her father did not qualify as an “occurrence” within the meaning of a homeowner’s policy, precluding coverage.

On May 13, 2007, Ivy Sheely died of alcohol-induced asphyxiation after she drank almost an entire bottle of vodka that she brought to a friend’s party.  Ivy’s father, Dan Sheely, had purchased the vodka earlier that day, although accounts differed as to whether Dan purchased it specifically for Ivy or simply as part of his “house supply.”  Dan admitted that he generally permitted Ivy and her friends to drink alcohol in his house, but claimed he did not know that Ivy had taken the vodka to her friend’s party the night that she died.

Ivy’s mother and Dan’s ex-wife, Tabatha, filed a wrongful death action against Dan.  Dan accepted responsibility for Ivy’s death, and entered into a consent judgment in the amount of $300,000.  Tabatha then sued Dan’s homeowner’s insurer, Lightning Rod Mutual Insurance Company, seeking coverage for the consent judgment.  The Lightning Rod policy provided coverage for “bodily injury” caused by an “occurrence.”  The policy defined “bodily injury” to include death, and “occurrence” to mean “an accident, including continuous or repeated exposure to substantially the same general conditions, which results, during the policy period in … bodily injury.”  Lightning Rod filed a summary judgment motion, arguing that Ivy’s death did not qualify as an “occurrence.”  The trial court agreed, and Tabatha appealed.

The Court of Appeals of Ohio affirmed.  The court determined that there was no genuine issue of material fact upon which reasonable minds could conclude that Ivy’s death was an unexpected, unforeseeable event such that it was an “occurrence” under the Lightning Rod policy.  The court noted that it was undisputed that Dan knowingly engaged in a “repeated pattern of conduct” of permitting Ivy and her friends to consume alcohol that he either purchased for them or otherwise made available to them.  The court also observed that courts in other jurisdictions have held that “the unintended harm resulting from an adult furnishing alcohol to a minor is not an ‘occurrence’ covered by an insurance policy.”  Thus, the court held that Lightning Rod was entitled to judgment as a matter of law.

Second Circuit Affirms Dismissal of Suit Over Reimbursement Practices for Property Damage

Wednesday, January 25th, 2012

United States Court of Appeals for the Second Circuit

In Woodhams v. Allstate Fire & Cas. Co., 2012 U.S. App. LEXIS 3 (2d Cir. N.Y. Jan. 3, 2012), the Second Circuit Court of Appeals affirmed the dismissal of a lawsuit filed against Allstate Fire and Casualty Company over its reimbursement practices for property damage.  Specifically, the court ruled that Allstate’s practices had not violated either New York law or the policy itself.

After fire damage to their home, plaintiffs Thomas D. Woodhams and Charlene Connors (the insureds) filed a claim with Allstate.  Under the terms of the Allstate policy issued to the insureds, Allstate paid the insureds the actual cash value of their damaged property.  The pertinent policy language stated as follows:

b)  Actual Cash Value

If you [the insured] do not repair or replace the damaged, destroyed or stolen property, payment will be on an actual cash value basis. This means there may be deduction for depreciation. Payment will not exceed the limit of liability shown on the Policy Declarations for the coverage that applies to the damaged, destroyed or stolen property, regardless of the number of items involved in the loss.

You may make a claim for additional payment as described in paragraph c . . . if you repair or replace the damaged, destroyed or stolen covered property within 180 days of the actual cash value payment.

c)  Building Structure Reimbursement

. . . [W]e will make additional payment to reimburse you for cost in excess of actual cash value if you repair, rebuild or replace damaged, destroyed or stolen covered property within 180 days of the actual cash value payment. This additional payment includes the reasonable and necessary expense for treatment or removal and disposal of contaminants, toxins or pollutants as required to complete repair or replacement of that part of a building structure damaged by a covered loss.

However, after paying the actual cash value of the damaged property, Allstate denied the insureds’ additional reimbursement for repairs because the repairs were not made within 180 days of the actual cash value payment.   The insureds filed suit, alleging that (1) Allstate’s policy is inconsistent with New York law, and (2) Allstate’s denial of payments for repairs in excess of the actual cash value of the damaged property is inconsistent with the terms of the Allstate policy itself.  The district court found that the insured’s claims failed as a matter of law.  On appeal, the Second Circuit affirmed the dismissal of the insureds’ complaint.

In affirming the district court, the Second Circuit rejected the insureds’ claim that Allstate’s policy failed to comply with New York law.  Specifically, the insureds alleged the Allstate policy’s requirement that repairs be completed within 180 days did not allow for “a reasonable time after such loss” to repair or replace their property, as required by N.Y. Ins. Law §3404(e). However, the court noted this argument ignores the fact that New York requires only that an insurer pay the “lesser amount” of the actual cash value of the property, the cost of repair or replacement, or an otherwise fixed limitation of liability amount.  See Id.  The court found that because Allstate paid insureds the actual cash value of their property at the time of loss, Allstate satisfied its statutory obligation to provide “no less favorable coverage” than that set forth in NY Ins. Law §3404.

Additionally, the court rejected the insureds’ argument that Allstate’s policy could reasonably be interpreted to mean that an insured need only commence or undertake repairs within 180 days of the actual cash value payment in order to receive the additional reimbursement for full repair costs, regardless of when those repairs are completed.  The insureds based this argument on the failure to include the word “complete” in the following sentence: “. . .[W]e will make additional payment to reimburse you for cost in excess of actual cash value if you repair, rebuild or replace damaged, destroyed or stolen covered property within 180 days of the actual cash value payment.”

The court dismissed this argument, noting that the insureds did not even allege that they undertook any repair, rebuilding or replacement of damaged property within 180 days of the actual cash value payment.  The court went on to state, “However understandable these reasons for delay in the undertaking of repairs, [insureds]  can point to no policy language obligating Allstate to reimburse for repairs not yet commenced –let alone completed—within the 180-day period.”




Sedgwick Attorneys
Sedgwick’s insurance attorneys regularly present to clients and other industry professionals on a wide range of topics. For a complete list of our attorneys, click here.
Our Firm
The most complex and high-stakes legal challenges facing the insurance industry demand the highest level of expertise and commitment, delivered by a coordinated team across all areas of insurance law. We deliver a personal, partner-led service to achieve the resolution of international and domestic liability and insurance business issues that are sensitive to the relationship between insurers, insureds and brokers, read more.

Subscribe via RSS Feed
Receive email updates: