Archive for June, 2012

Affordable Care Act

Friday, June 29th, 2012

Yesterday was a historic day as the US Supreme Court ruled 5-4 to uphold the Affordable Care Act.  As political pundits and news outlets continue to parse through the opinion and  dissents, we wanted to share this link to an annotated version of the decision that highlights various sections from the majority opinions and dissents.

Click here to see more of an inside look at the health care ruling.

Liability Insurers Owe No Duty To Defend Insureds Alleged To Have Engaged In A Corrupt Scheme To Incarcerate Youth Offenders For Money

Wednesday, June 27th, 2012

In a pair of opinions filed on June 20 and 21, 2012, the Third Circuit Court of Appeals emphasized Pennsylvania’s “firmly established” public policy against providing insurance coverage for criminal and other intentional acts. In Travelers v. Mericle, et al., 2012 WL 2335984 (3d Cir. 2012) and Colony Insurance Co. v. Mid-Atlantic Youth Services, 2012 WL 2354435 (3d Cir. 2012), the Circuit Court affirmed the lower court’s opinions holding that the insurers owed no duty to defend or indemnify the insureds.

Both cases arose from a scheme in which two county judges, in Luzerne County, Pennsylvania, accepted money from the owner of two private juvenile facilities. In exchange, the judges imposed harsh sentences on juveniles in cases before them, in order to ensure that the facilities would be used. When the scheme was uncovered, the aggrieved juveniles sued various defendants including the insureds.

The defendant-insureds were a construction company and its owner (in Mericle), and a company that managed the juvenile detention facilities and its owner (in Mid-Atlantic). Each tendered the tort complaint against him to his general liability insurer, seeking defense and indemnity. The insurers filed declaratory judgment actions, asking the Court for declarations that they owed no duty to defend or indemnify the insureds in the underlying actions. In each case, the District Court granted the insurers’ motions for summary judgment, relieving them of liability under the policies.

The Third Circuit held that, under Pennsylvania law, the duty to defend is determined solely by the allegations contained within the four corners of the complaint, with a focus on the facts alleged in the complaint rather than the causes of action pled. On this basis, the Circuit Court held that the allegations of the underlying complaints included only claims of intentional conduct by the insureds for their financial benefit, not negligence, thereby not triggering any duty on the part of the insurer to defend. Next, the Court held that there was no “accident” or “occurrence” alleged that might trigger coverage under the policies.  It agreed with the lower court that “[r]eckless, malicious, or purposeful conspiratorial activities are not ‘negligent’ and cannot be considered ‘accidents’ under the plain language of an occurrence-based [policy].”

The Circuit Court then held that coverage was excluded under two separate policy exclusions: first, coverage was excluded for any personal injury “arising out of the willful violation of a penal statute or ordinance committed by or with the consent of the insured.” The Court emphasized Pennsylvania’s public policy against providing insurance coverage for intentional acts and added that “Mericle ‘should not be able to avoid financial responsibility by shifting the penalty for his criminal act to an insurance carrier.’” The Court reached the same result as to the insureds in the companion case. Second, coverage was excluded as to injuries “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another,” because the tort complaints alleged that the insureds knowingly violated the juveniles’ rights.

On this basis, the Circuit Court affirmed the District Court’s decisions denying a defense and indemnity to each of the insureds under their general liability policies.

Premature Exhaustion Leaves Insured Feeling Unsatisfied

Friday, June 22nd, 2012

In JP Morgan Chase v. Indian Harbor Insurance Company, No. 603766/08, 2012 N.Y. Slip Op. 04702 (June 12, 2012), the First Department of New York’s Appellate Division recently held that, under Illinois law, an excess insurer is not obligated to provide coverage when an insured settles with an underlying insurer for less than the underlying insurer’s policy limits.  The First Department’s decision is consistent with recent case law addressing the issue of whether an excess insurer must pay when the primary settles for less than policy limits in the wake of the California Court of Appeal’s decision in Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 161 Cal. App. 4th 184 (2008).

Click here to read a detailed discussion of the case.

Ninth Circuit Rules on Insurer’s Duty to Settle Within Policy Limits

Thursday, June 21st, 2012

By Sean R. Simpson

In Yan Fang Du v. Allstate Insurance Co., No. 10-56422, 2012 U.S. App. LEXIS 11755 (9th Cir. June 11, 2012), a panel of the U.S. Court of Appeals for the Ninth Circuit held that, under California law, an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.  However, there must be a reasonable opportunity to settle within policy limits. 

The claimant, Yang Fang Du, filed suit for bad faith after having received an assignment of insured Joon Hak Kim’s rights against Allstate and its subsidiary, Deerbrook Insurance Co. (collectively, “Deerbrook”).  The policy at issue had a limit of liability of $100,000 per person and an aggregate limit of $300,000 per accident.  Du argued that Deerbrook did not attempt to reach a settlement of Du’s claim after Kim’s liability in excess of that policy limit became reasonably clear, resulting in a verdict against Kim in the amount of $4,126,714.46. 

In ruling on the propriety of the district court’s rejection of Du’s proposed jury instructions, the Ninth Circuit concluded that an insurer has a duty to effectuate settlement when liability is reasonably clear, even in the absence of a settlement demand.  The court held, however, that there must be “a reasonable opportunity to settle within those limits.”  In this case, prior to litigation, Du’s counsel had made an early demand of $300,000 to settle all four injured parties’ claims, but did not provide any of the documents that would reasonably be necessary to evaluate that demand.  The Ninth Circuit held that Deerbrook could not settle within limits in those early stages because Deerbrook lacked corroborating proof of the extent of Du’s injuries and medical expenses.  Deerbrook also had no proof of the injuries of the other three individuals who were injured in the incident.  After the documentary evidence was provided respecting Du’s claim, Deerbrook offered the $100,000 individual limit to Du, which was rejected as “too little, too late.”  In finding for Deerbrook, the Ninth Circuit held that there was no evidence that Deerbrook should or could have made an earlier settlement offer to Du.

The Ninth Circuit’s ruling in this case is not binding on California courts, which have made several statements in the past reflecting that a settlement demand within policy limits is a requirement for bad faith exposure.  See Coe v. State Farm Mutual Automobile Ins. Co., 66 Cal.App.3d 981 (1977) (“actionable ‘bad faith’ arises not from an insurance carrier’s obligation ‘to settle,’ but from unwarranted failure to accept a reasonable settlement offer”); Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858 (1973) (a conflict of interest “only develops when an offer to settle an excess claim is made within policy limits”).  In its ruling, the Ninth Circuit distinguishes these prior statements of law as “dicta.”   Whether California courts ultimately agree with the Ninth Circuit on this issue is uncertain at best.

Supreme Court of Georgia Allows Recovery of Damages for Diminution of Value Under Real Property Policy

Thursday, June 21st, 2012

By Marcos Cancio

In Royal Capital Development LLC v. Maryland Cas. Co., ___ S.E.2d ___, 2012 WL 1909842 (Ga. May 29, 2012), the Supreme Court of Georgia, on a certified question for the U.S. Court of Appeals for the Eleventh Circuit, held that a real property insurer can be liable for both the costs to repair a building and for the post-repair diminution of the building’s value resulting from damage.  In Royal Capital, Maryland Casualty Company had issued a policy providing coverage for “direct physical loss or damage to” a building, and allowed Maryland Casualty the option of paying either “the cost of repairing the building” or “the loss of value” of the building.  The insured’s building suffered physical damage caused by construction activity on an adjacent property.  The insured submitted a claim to the insurer seeking both the cost of repair of the building and post-repair diminution in value resulting from the damage.  Maryland Casualty acknowledged that the damage to the building was a covered loss under the policy and paid approximately $1.1 million to compensate the insured for the estimated costs of repair, but declined to compensate the insured for the alleged diminution in value. The insured thereafter sued Maryland Casualty in Georgia state court, and Maryland Casualty removed the case to the federal district court.  The parties then filed cross-motions for summary judgment on the narrow issue of whether the insurance policy, under Georgia law, allowed recovery of diminution of value damages in addition to the cost of repair. The trial court granted the insurer’s motion for summary judgment, and the insured appealed. 

The U.S. Court of Appeals for the Eleventh Circuit certified the question to the Georgia Supreme Court, asking whether the rationale of State Farm Mut. Auto. Ins. Co. v. Mabry, 274 Ga. 498 (2001) – a case holding that automobile insurers are required to pay for diminution in value of the repaired vehicle – also applied in the context of first-party property policies.  The Supreme Court of Georgia held that it did.  In extending the Mabry rule to property policies, the court stated that the Mabry rule “is not limited by type of property insured, but rather speaks generally to the measure of damages an insurer is obligated to pay.”  The court recognized the longstanding principles under Georgia law that diminution in value is an element in determining the proper measure of damages to real property.  Additionally, the court recognized that, under Georgia law, “cost of repair and diminution in value can be alternative, although often interchangeable, measures of damages with respect to real property.”  Having found that the Mabry rule applied, the court held that whether damages for diminution of value are recoverable under the insurance policy depends on the “specific language of the contract itself and can be resolved through application of the general rules of contract construction.”

Can D&O Insurance Cover Banks Anymore?

Tuesday, June 12th, 2012

In early June, Representative Barney Frank of Massachusetts introduced H.R. 5860.  This new bill, entitled the “Executive Compensation Clawback Full Enforcement Act,” seeks to prohibit insurance coverage for regulatory clawbacks of an employee’s compensation from a failed financial institution as well as civil penalties imposed by governmental authorities on corporate executives of financial institutions.  The legislation complements the Dodd Frank Act, the principal financial reform law currently being implemented, which allows the FDIC to act as the receiver of failed “systemically important” financial institutions and recover clawback damages from individuals responsible for such failure.

If H.R. 5860 passes, insurance companies may not provide such coverage to directors and officers, as well as employees.  Rep. Frank is trying to bolster the sanctions within the Dodd Frank Act receivership provisions and make individuals accountable for their risky financial transactions rather than permitting risk-shifting to their insurance providers.  Besides bankruptcy clawbacks, this bill also forbids coverage for monetary penalties issued by the FDIC.

So can D&O policies even cover banks anymore?  Of course.  While these new Dodd-Frank regulations seem to hinder coverage, standard D&O policies should not be affected.  For example, a clawback may arise in connection with a significant accounting restatement under Dodd Frank Act §954; 15 U.S.C. § 78j-4.  If this type of clawback is considered a penalty or fine imposed by a regulatory agency, then such a loss is usually not covered already, either due to an exclusion within the policy or as a matter of public policy under disgorgement principles.  While it would be prudent for financial institutions to seek coverage for these matters, if H.R. 5860 passes, it will only reinforce that these specific losses are not covered losses.  It will be interesting to watch how this encompassing financial reform bill will define and regulate other coverage matters for the financial industry.


Hydraulic Fracturing Digest

Tuesday, June 12th, 2012

Our Hydraulic Fracturing Task Force recently issued its June newsletter.  We think the readers of this blog who work with insureds involved in this industry will find of interest this issue’s articles about the potential for fracking to lead to silicosis claims, the EPA’s new rules regarding air pollution from natural gas wells and proposed fracking regulation in Illinois.  Please click here to read the full issue.

Florida Supreme Court Hands Down Important Decision For First-Party Property Insurers

Monday, June 4th, 2012

By Alfred C. Warrington

Just in time for hurricane season, the Florida Supreme Court has issued an opinion clarifying the state’s law on a number of important insurance issues, including whether Florida recognizes an implied warranty of good faith and fair dealing in the first-party context, and whether an insurer’s failure to comply with the language and type-size requirements established under Florida statute section 627.701(4)(a) for hurricane deductibles negates the deductible provisions.  QBE Insurance Corp. v. Chalfonte Condominium Apartment Association, No. SC09-441 (May 31, 2012).  The Court’s decision on the issue of the implied warranty of good faith and fair dealing could have the most impact for insurers.  Under  current Florida case law, both the existence of liability and the extent of damages are elements of a cause of action for bad faith that must be determined before a statutory cause of action for bad faith will lie. In addition, an insured usually is not entitled to discover an insurer’s claim file or documents relating to the insurer’s business policies or claims practices until coverage has been determined.   To circumvent these rules and press a bad faith case along with the breach of contract case, policyholder attorneys sometimes argue that an insurer breaches its insurance contract by violating its implied warranty of good faith and fair dealing, thereby conflating the claims.  Chalfonte’s finding that a claim for first-party bad faith may be brought only under the statute, and pursuant to its established rules, should hopefully block this strategy in the future.   

Chalfonte involved a dispute in federal court over claims stemming from Hurricane Wilma.   Chalfonte, the insured, became dissatisfied with QBE’s investigation and processing of its claims.  A jury found for Chalfonte, awarding it $7.9 million for QBE’s alleged failure to provide coverage. The jury also awarded Chalfonte an additional $271,888 for breach of the implied warranty of good faith and fair dealing, for a total award of $8.1 million.   On appeal, the Eleventh Circuit Court of Appeals certified the following five questions to the Florida Supreme Court: 

1. Does Florida law recognize a claim for breach of the implied warranty of good faith and fair dealing by an insured against its insurer based on the insurer’s failure to investigate and assess the insured’s claim within a reasonable period of time?
2. If Florida law recognizes a claim for breach of the implied warranty of good faith and fair dealing based on an insurer’s failure to investigate and assess its insured’s claim within a reasonable period of time, is the good faith and fair dealing claim subject to the same bifurcation requirement applicable to a bad faith claim under Florida Statute § 624.155?
3. May an insured bring a claim against an insurer for failure to comply with the language and type-size requirements established by Florida Statute § 627.701(4)(a)? 

4. Does an insurer’s failure to comply with the language and type-size requirements established by Florida Statute § 627.701(4)(a) render a noncompliant hurricane deductible provision in an insurance policy void and unenforceable? 

5. Does language in an insurance policy mandating payment of benefits upon “entry of a final judgment” require an insurer to pay its insured upon entry of judgment at the trial level? 

In a unanimous decision, the Court answered “no” to the first, third, fourth, and fifth questions. The decision on the first issue rendered the second question moot. The Court concluded that under Florida law: (1) the first-party claims were actually statutory bad-faith claims that could only be brought under section 624.155; (2) there is nothing in the text of section 627.701(4)(a) from which one could deduce that the Legislature intended an insured to have a private right of action against an insurer for failure to follow the notice requirements; (3) an insurer’s failure to comply with the language and type-size requirements established in that section did not render a noncompliant hurricane deductible provision void and unenforceable; and (4) a contractual provision in an insurance policy mandating payment of benefits upon “entry of a final judgment” did not waive the insurer’s procedural right to post a bond and stay the execution of a money judgment pending resolution of appeal. 

The First Circuit Relies on the Plain and Unambiguous Language of the Policy to Deny Coverage

Monday, June 4th, 2012

In Certain Interested Underwriters At Lloyd’s, London v. Perry Stolberg, ___F.3d ____, 2012 WL 1699931 (1st Cir. May 16, 2012), the First Circuit Court of Appeals affirmed the district court’s holding that the insurer was not obligated to defend or indemnify the insured based upon the plain and unambiguous meaning of the contractors exclusion.

A worker, injured at the construction site while working for a subcontractor, sued the project developer in Massachusetts state court for injuries allegedly sustained in the course of construction work.  The developer tendered the defense of the underlying lawsuit to the insurer of a commercial general liability policy.  The insurer provisionally agreed to furnish a defense, reserving the right to disclaim coverage and withdraw should it be determined that the policy did not apply.  The insurer instituted this action seeking a declaration that it had no obligation to defend or indemnify the developer in connection with the underlying injured worker’s lawsuit.  The insurer and developer filed cross-motions for summary judgment.  The district court issued a declaratory judgment in favor of the insurer that it was not required to indemnity or defend.

The First Circuit noted that the interpretation of an insurance policy is a matter of law.  The First Circuit also noted that ambiguity must be real to be construed against the drafter and that a policy provision is ambiguous only if it is susceptible of more than one meaning and reasonably intelligent persons would differ as to which meaning is the proper one.

During the appeal, the insurer argued that the contractors exclusion was directly on point with the facts of the underlying lawsuit and that it unambiguously dictated that no coverage is afforded to the worker’s claims.  The contractors exclusion precluded coverage for any injuries “arising out of operations performed for [the insured] by independent contractors.”  The developer never disputed the clarity of the language of the contractors exclusion and that the worker was working for the subcontractor when he fell at the construction site and the worker’s injuries arose out of the subcontractor’s operations.  The developer, rather, argued that a separate exclusion should be read to restore coverage for the worker’s injuries.  The First Circuit found that the developer’s attempt to argue that the separate exclusion restored coverage depends on a finding that if the exclusion does not apply in a given situation, then the policy must afford coverage for that situation regardless of other provisions of the policy.  The First Circuit refused to agree with the developer’s interpretation of the policy exclusion and noted that the purpose of a policy exclusion is to narrow the scope of coverage, not to expand coverage.

Accordingly, the First Circuit affirmed the district court’s decision, holding that the contractors exclusion provision was unambiguous and precluded coverage for any injuries arising out of operations performed for the insured by independent contractors.

Sedgwick Attorneys
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