Archive for May, 2012

Watch your Greenhouse Gases

Wednesday, May 30th, 2012

In AES Corp. v. Steadfast Ins. Co., Record No. 100764, 2012 WL 1377054 (Va. April 20, 2012), the Supreme Court of Virginia found that a lawsuit alleging damages caused by the insured’s emission of greenhouse gases was not an occurrence and, therefore, not covered by the insured’s comprehensive general liability policy.

In 2008, a community located on an Alaskan barrier island filed suit against a Virginia-based energy company, AES, alleging its emission of greenhouse gases in the generation of electricity made the village uninhabitable (the underlying lawsuit).  In particular, the underlying lawsuit alleged that AES intentionally emitted carbon dioxide and other greenhouse gases, and AES knew or should have known that such emissions would impact coastal Alaskan villages.

AES tendered the underlying lawsuit under comprehensive general liability policies issued to it by Steadfast Insurance Company.  The policies issued by Steadfast provided coverage, in relevant part, for damages caused by an “occurrence,” defined as an accident.  Steadfast argued that the underlying lawsuit alleged AES intentionally (and not negligently or accidentally) released greenhouse gases, and therefore did not seek damages caused by an occurrence.

AES countered that, because the underlying plaintiffs alleged that AES both intentionally and negligently created the “global warming nuisance,” the allegations of negligence necessarily implied accidental conduct.  AES also argued that the allegation that AES “knew or should have known” that the emission of gases would damage the underlying plaintiffs suggested that the consequences of AES’ emissions were unintended and, therefore, accidental.

The court, however, agreed with Steadfast and held that, “[w]here the harmful consequences of an act are alleged to have been not just possible, but the natural or probable consequences of an intentional act, choosing to perform the act deliberately, even if in ignorance of that fact, does not make the resulting injury an ‘accident’ even when the complaint alleges that such action was negligent.” Id. at *6.  Thus, the court was not persuaded that the underlying lawsuit sought damages caused by an occurrence, simply because AES was allegedly unaware of the consequences of its greenhouse gas emissions.

Accordingly, the court found that Steadfast owed no duty to defend or indemnify AES in the underlying lawsuit on the basis that it did not seek damages caused by an occurrence.

Insured’s Failure to Pay Contract Benefits Due and Related Attorneys’ Fees Are Not Covered Under Errors and Omissions Policy

Thursday, May 24th, 2012

By Susan Koehler Sullivan

In Health Net, Inc. v. RLI Insurance Company, et al., Cal. Ct. App. Case N. B224884 c/w B240833, the California Court of Appeal clarified that contract benefits owed by an insured are not covered by a liability insurer because the obligation to pay contractual amounts is not a loss due to a “wrongful act.” 

The appellate court reversed summary judgments granted by the trial court based upon the application of a “dishonesty” exclusion, finding instead that most (and potentially all) of the underlying ERISA class action claims brought against the insured did not fall within the scope of the insuring agreements.  The insured, Health Net, had been sued in two class actions for underpaying out-of-network claims, and had settled those claims for $215 million, inclusive of plaintiff’s attorney’s fees and various business practice changes.  The insured sued four of its insurers seeking payment of its defense expenses and the settlement of the class actions.  The appellate court concluded that “there is no coverage for the vast bulk of the claims asserted in these actions.  Specifically, there is no coverage for the actions to the extent they sought:  (1) unpaid [contractual] benefits; (2) injunctive relief; (3) civil penalties; (4) damages arising out of claims subject to the willful act and other policy exclusions; and (5) attorney’s fees arising out of any of the above.”

The appellate court held that even absent a breach of contract exclusion, the Insuring Agreement of the applicable policies did not provide coverage for the insured’s contractual obligations – whether the insured committed a wrongful act in its failure to pay such benefits.  Quoting August Entertainment, Inc. v. Philadelphia Indemnity Ins. Co., 146 Cal.App.4th 565, the court explained “[P]erformance of a contractual obligation – – – is a debt the [insured] voluntarily accepted.  It is not a loss resulting from a wrongful act within the meaning of the policy.”  Id. at pp. 581-582.   

The court rejected the insured’s argument that the underlying settlement consisted of amounts paid to resolve disputed claims, and therefore “does not establish such amounts were owed under contract.”  In footnote 24, the court stated:  “[W]e determine coverage by the allegations of the underlying actions.  To the extent the underlying actions sought coverage for unpaid benefits, the underlying actions were not covered by the policy —  thus no amounts paid to settle those claims were covered by the policy.  An insured cannot transform an uncovered contract claim into a potentially covered one simply by settling it prior to any decision being made on its merits.”   The court explained that even where breach of contract claims involve alleged negligence or breach of fiduciary duties,  it is required to “consider the nature of the damage and the risk involved, not the name of the causes action pleaded” in determining insurability.  Citing Vandenberg v. Superior Court, 21 Cal.4th 815, 838-839 (1999).  Thus, whether or not Health Net’s conduct was negligent or violated ERISA, the nature of the claims asserted involved the failure to pay contract benefits, and those unpaid benefits were not the responsibility of the insurers. 

The court also rejected the insured’s argument that the plaintiffs’ fee award, which comprised $70 million of the underlying settlement, constituted an independent claim for damages, apart from the unpaid benefits or other settlement amounts.  The court ruled that “if the entire action alleges no covered wrongful act under the policy, coverage cannot be bootstrapped based solely on a claim for attorney’s fees.”  The court stated that if “a complaint alleges some covered wrongful acts and some acts which are not covered, the claim for attorney’s fees is covered only to the extent it arises out of the covered wrongful acts.”

The appellate court concluded that the “dishonest acts” exclusion relied upon by the trial court excluded some but not all of the underlying claims, some of which might potentially allege a covered loss, and remanded the case to the trial court “to determine whether and to what extent there is any merit to the claim of coverage.”


U.S. Treasury Looks to States to Share Information as Part of Insurance Anti-Money Laundering Efforts

Wednesday, May 23rd, 2012

The U.S. Treasury Department’s criminal enforcement arm, the Financial Crimes Enforcement Network (FinCEN), has reached individual agreements with the states of Louisiana and California which will allow state insurance regulators to share information on insurance companies lacking mandatory anti-money laundering procedures or programs, and notify the federal agency of possible fraud.

FinCEN intends to form similar partnerships with every state.  To that end, it has been reaching out to individual state regulators through the National Association of Insurance Commissioners.  Individual partnership agreements are necessary because each state has different statutory requirements governing the sharing of information in its respective insurance industry.   This relationship also will facilitate sharing of information among states, such as information on new frauds and scams that could be used to launder money.

For insurance companies, these partnership agreements signal a more focused effort by FinCEN to (1) enforce anti-money laundering regulations in existence since 2005, (2) require insurance companies to establish anti-money laundering programs, and (3) file suspicious activity reports.

Illinois Court Holds Statutory Damages in TCPA Claims ‘Uninsurable’

Tuesday, May 22nd, 2012

In Standard Mut. Ins. Co. v. Lay, — N.E.2d —-, 2012 WL 1377599 (Ill. Ct. App. Apr. 20, 2012), the Appellate Court of Illinois, Fourth District, held that the $500 in liquidated damages available under the federal Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, is a penalty and punitive, and therefore not insurable under Illinois law.

In the underlying class action, Theodore Lay dba Ted Lay Real Estate Agency allegedly violated the TCPA by faxing an advertisement without the recipients’ permission.  Lay’s insurance carrier agreed to defend subject to a reservation of rights and filed an action for declaratory relief.  Lay settled with the class action plaintiff for the full amount sought (in excess of $1.7 million) and assigned its rights against its insurance carrier in exchange for a promise not to execute against Lay’s property or assets.  The district court approved the settlement as made in reasonable anticipation of liability, the amount being fair and reasonable in that Lay sent 3,478 unsolicited faxes, believing it had the consent of the fax recipients and without intent to injure.

In upholding the carrier’s motion for summary judgment in the declaratory relief action, the court held that the statutory damages available under the TCPA are punitive in nature, which is dispositive of coverage under Illinois law.  The TCPA permits recovery of actual monetary loss or $500 for each violation, which may be trebled for willful or knowing violations.  Observing that the TCPA is a strict liability statute, the court reasoned that the provision permitting recovery of $500 for each violation of the TCPA is a penalty to the sender in that the actual cost to the recipient of unwanted faxes is far below that amount.  The court determined this statutory penalty serves two of the purposes of punitive damages—the purpose of deterring the defendant as well as others from similar conduct—and, because it far exceeds the actual harm suffered, would constitute a windfall, contrary to the purpose of compensatory damages.  Shifting payment of these amounts to an insurance carrier would defeat the deterrent and preventative effect of the statutory award by removing any incentive for compliance with the TCPA.

The Lay court acknowledged mixed rulings in other jurisdictions—some finding the remedies available under the TCPA are remedial, some that they are penalties.  However, the Lay court determined that a statute is remedial only when actual damage results from a violation and liability is contingent on damage proven by the plaintiff.  A penal statute imposes liability automatically when there is a violation, without regard for damage proven by the plaintiff.  Under this rationale, the court held the $500 in liquidated damages available under the TCPA is a penalty and punitive, and is not insurable as a matter of Illinois law and public policy.

Following the rationale of the Lay court, even in the context of TCPA claims where there is a potential duty to defend, a carrier may have no obligation to indemnify under Illinois law, absent the underlying plaintiff’s proof of actual damages from receipt of an unsolicited fax.

Prospective Insureds, Do Your Homework: Flood Insurer Has No Duty to Provide Advice to Potential Policyholders

Tuesday, May 22nd, 2012

In Grissom v. Liberty Mut. Fire Ins. Co., No. 11-60260, 2012 WL 1383069 (5th Cir. Apr. 23, 2012), the U.S. Court of Appeals for the Fifth Circuit overturned a jury verdict in the U.S. District Court for the Southern District of Mississippi, holding that under Mississippi law, a purchaser of flood insurance cannot maintain a negligent misrepresentation cause of action against a flood insurer simply because the insurer failed to inform the consumer that he was eligible for a “preferred risk” policy.

In 1977, plaintiff James Grissom purchased flood insurance for his home in Mississippi through the Federal Emergency Management Agency’s Write Your Own (WYO) flood insurance program.  Defendant Liberty Mutual Fire Insurance Company acted as Grissom’s WYO insurance provider.  In 1989, a preferred risk flood insurance policy became available for the “flood zone” on which Grissom’s home sat.

In 2004, Grissom renewed his Liberty Mutual policy with covered total loss of up to $121,200 for a $531 premium.  The 2004 policy renewal notice noted that preferred risk policies existed, but did not indicate whether Grissom was eligible for such a policy.  If Grissom had enrolled as a policyholder under the preferred risk policy, he would have had $350,000 in total covered loss for only a $317 premium.

In August 2005, Hurricane Katrina struck the Gulf Coast, destroying Grissom’s home.  Liberty Mutual paid the full $121,200 under Grissom’s policy.  Grissom then sued Liberty Mutual in Mississippi state court to recover the difference between the proceeds he received ($121,200) and the proceeds he could have received under the preferred risk policy ($350,000).  Liberty Mutual removed the case to the Southern District of Mississippi. The federal trial court denied Liberty Mutual’s motions to dismiss and for summary judgment and the matter went to the jury.  At trial, a jury awarded Grissom $212,900 in compensatory damages.

The Fifth Circuit reversed.  It reasoned that Mississippi law does not recognize a negligent misrepresentation cause of action under the facts alleged.  The appellate court’s ruling hinged upon whether, under Mississippi law, insurers owe a fiduciary duty to insureds when insurance is purchased.  The Fifth Circuit rejected Grissom’s argument that insurers have a “duty to use reasonably prudent diligence and care in ‘business transactions.’”  The court found that under state law no such duty existed, holding that “the purchase of insurance is an arms-length transaction and no fiduciary duty arises between an insurance company or its agents and the purchaser of the insurance.”

Relying on a recent Mississippi Supreme Court decision, the Fifth Circuit reasoned that the insured bore the burden of researching better options for insurance:  “[I]mposing liability on agents for failing to advise insureds regarding the sufficiency of their coverage would remove any burden from the insured to take care of his or her own financial needs.”  The Fifth Circuit concluded that “Liberty Mutual [was] not required to provide advice to insurance customers” and that Mississippi law does not recognize a negligent misrepresentation cause of action for failure to disclose that a less expensive policy with better coverage exists, and remanded the matter to the trial court to dismiss Grissom’s negligent misrepresentation claim.

Unambiguous Policy Language Precludes Coverage for More Than $15 Million in Losses Due to Madoff’s Ponzi Scheme

Tuesday, May 8th, 2012

In Bleznak Black, LLC v. Allied World Nat’l Assurance Co., No. A-6107-09T2, 2012 N.J. Super. Unpub. LEXIS 879 (N.J. Super. Ct. App. Div. Apr. 20, 2012), the Superior Court of New Jersey, Appellate Division, affirmed the trial court’s grant of summary judgment in favor of Allied World National Assurance Company, Westchester Surplus Lines Insurance Company, United States Fire Insurance Company, and Axis Surplus Insurance Company.  The appellate court held that the policies’ language unambiguously excluded the insured’s claim.

Plaintiff Bleznak Black (BB), an estate planning investment entity, filed suit against the insurers to compel coverage for losses exceeding $15 million, which BB alleged it incurred as a result of Bernie Madoff’s investment fraud.  BB had purchased property insurance from the insurers for the June 30, 2008 to June 30, 2009 policy period.  The Allied policy extended coverage up to the first $5 million in claims, and the U.S. Fire policy provided $5 million of excess over that available under the Allied policy.   Westchester and Axis extended portions of an additional $25 million in additional excess coverage, with policies that “followed the form” of the Allied and U.S. Fire policies.

The Allied policy insured against “all risk of direct physical loss of or damage to property described herein,” but excluded the loss of money or securities.  While the policy did not define “money,” the policy defined “securities” as “all negotiable and nonnegotiable instruments or contracts representing either money or other property, [including] revenue and other stamps in current use, tokens, and tickets but does not include money.”

The U.S. Fire policy limited coverage to claims in which the Allied policy had admitted liability for its limits. The U.S. Fire policy also contained a fidelity exclusion, which excluded losses incurred as a result of fraudulent or dishonest acts, intended to result in financial gain, and committed by certain individuals (including officers of corporations) “engaged by the [i]nsured to render any service or perform any act in connection with property insured under th[e] [p]olicy.”

In its complaint for breach of contract and declaratory judgment, BB argued that Madoff did not steal money or securities (as defined in the policies), but rather stole an “account” valued at approximately $16.3 million.  In their motion for summary judgment, the insurers argued that BB did not sustain a loss to covered property. U.S. Fire also argued that the fidelity exclusion in its policy precluded coverage for the loss.    The trial court granted the defendants’ motion, rejecting BB’s attempt to distinguish “account” from “money” or “securities” because accounts are comprised of the money contained within them.   The trial court also found that the U.S. Fire fidelity exclusion applied.

Affirming the trial court, the New Jersey appellate court reasoned that the terms at issue were unambiguous and the plain language of the policies excluded BB’s claim.  It agreed with the trial court’s observation that it was unreasonable to suggest that “money” or “securities” did not include the accounts that Madoff managed.  The appellate court also affirmed the trial court’s application of the U.S. Fire fidelity exclusion, finding it unambiguously excluded Madoff’s fraudulent and dishonest acts.  The court reasoned that BB had engaged BLMIS, a corporation, to render services with respect to the account, and Madoff, the company’s chief financial officer, engaged in fraudulent or dishonest acts with respect to the account.

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