Archive for January, 2013

Court Gives Insured Roofer the Bird – Late Notice is Sufficient to Deny a Claim

Tuesday, January 29th, 2013

By Todd D. McCormick, Sedgwick New York

In Atlantic Casualty Insurance Company v. Value Waterproofing, Inc., 2013 WL 152854 (S.D.N.Y., 2013), the Southern District Court of New York held that a commercial general liability insurer had no duty to defend or indemnify its insured where the insured had failed to provide timely notification of a claim.  This appears to be the first decision to address New York Insurance Law § 3420(a)(5), which provides that an insurer cannot deny coverage on late notice grounds unless it demonstrates direct prejudice.

Atlantic Casualty Insurance Company issued a commercial general liability policy to Value Waterproofing, Inc.  In early February 2010, Value was hired by Kansas Fried Chicken (KFC) to repair its roof.  Later that month, a major snow storm hit New York, leaving approximately 20 inches of snow on KFC’s roof.  KFC’s roof collapsed.

KFC immediately informed Value and its own insurance carrier, Greenwich Insurance Company,  of the collapse.  Value, however, failed to notify Atlantic.

Atlantic was first made aware of the loss some six months later by letter from Greenwich, which was seeking to subrogate against Value on behalf of KFC.  Atlantic sent a claims investigator to the property who observed that the damaged portion of the building already had been demolished.  Atlantic requested information relating to the damage and repair work from Greenwich, but its request was ignored. Upon revisiting the property, Atlantic discovered that the entire roof had been replaced.

Atlantic denied coverage for the loss, and filed suit seeking a declaration that it had no duty to defend or indemnify Value in connection with the subrogation action because it was unable to investigate the underlying loss due to late notice.

Atlantic prevailed.  The court emphasized the significance of notification provisions in allowing insurers to both investigate losses and maintain adequate loss reserves.  By delaying notification for over six months, the insured had “materially impaired” Atlantic’s ability to “ascertain potential causes of the collapse, information which would be highly relevant to an investigation and defense of [Value’s] claim.”

It was prudent for Atlantic to investigate the underlying loss as soon as it was placed on notice, even though the delay had caused it prejudice. An insurer that receives late notification of a claim should not automatically assume it will be entitled to rely upon the insured’s dilatory notice as a ground for a denial. It is advisable that an insurer seeks to protect its position by undertaking inquiries as best it can, pending determination of its coverage obligation.

The Privilege is in the Policy: Tripartite Attorney-Client Relationship Arises Where Insurer Retains Counsel Pursuant to Policy Terms—to Prosecute or Defend

Monday, January 28th, 2013

By Katherine E. Mast, Sedgwick Los Angeles

In Bank of America v. Superior Court, ___Cal.Rptr.3d ___, 2013 WL 151153 (Cal. Ct. App. Jan. 15, 2013) the California Court of Appeal for the Fourth Appellate District held that a tripartite attorney-client relationship arises, accompanied by the associated attorney-client privilege and work product protections, when an insurance carrier hires a law firm to prosecute an action on behalf of its insured pursuant to the policy terms.

Bank of America, N.A. (B of A) was the insured under a lender’s title policy issued by Fidelity National Title Insurance Company (Fidelity) to insure a deed of trust on certain real property.  Pacific City Bank (PCB) had recorded a deed of trust on the same property and, after recording a notice of default, noticed a trustee sale.  B of A tendered the claim to Fidelity, which hired counsel to institute an action on behalf of B of A to protect its interests.

In the litigation initiated by B of A, PCB served subpoenas seeking communications between B of A’s counsel and Fidelity.  B of A moved to quash the subpoenas on the grounds that they sought documents that were protected by the attorney-client privilege and constituted attorney work product.  The trial court held that, because the law firm was retained to prosecute, rather than defend, the underlying action, Fidelity did not have a “favored position” or “sacred role” in the litigation and thus there was no attorney-client relationship between Fidelity and counsel representing B of A.

The Court of Appeal reversed, holding that the trial court erred as a matter of law in making an artificial distinction based on whether the retention of counsel by the carrier was for the purpose of defending or prosecuting an action.  Rather, the court focused on whether the retention was within the scope of Fidelity’s contractual duties to B of A.  In the context of title insurance, a title insurer owes “kindred duties” to defend and initiate lawsuits to protect the integrity of the insured’s title. For this reason, the court found that there were no distinguishing factors between the prosecution and defense of an action, and it rejected the argument that a tripartite relationship is created only when counsel is retained by the carrier to defend its policyholder.  Accordingly, the court held  that a tripartite relationship was created between B of A, Fidelity, and retained counsel when Fidelity retained counsel to prosecute litigation on behalf of B of A pursuant to the terms of the insurance contract.  The court also found that the tripartite relationship existed regardless of whether there was a formal retainer agreement between the carrier and the law firm.  Further, the tripartite relationship existed even though the carrier retained counsel under a reservation of rights, because the reservation of rights did not trigger the insured’s right to independent counsel. Finally, the court rejected arguments that Fidelity or B of A had waived their rights to assert the attorney-client privilege or attorney work product doctrine.

Washington Supreme Court Articulates New Analysis of EUO Conditions

Thursday, January 24th, 2013

By Robert A. Meyers, Sedgwick Seattle

In an effort to protect insurers against fraudulent claims, many insurance policies include a condition that requires a policyholder to submit to an examination under oath (“EUO”) at the insurer’s request. In Staples v. Allstate Ins. Co., No. 86413 (Wash. January 24, 2013), an 8-1 majority of the Washington Supreme Court articulated a new analysis of insurers’ and policyholders’ respective rights and obligations under EUO conditions.

First, the Court held that an insurer may only demand an EUO if the EUO is “material to the investigation or handling of a claim.”  By so ruling, the Court expressly disapproved of the Washington Court of Appeals’ decision in Downie v. State Farm Fire & Cas. Co., 84 Wn. App. 577, 582-83, 929 P.2d 484 (1997), in which the Court of Appeals had declared that insurers have an “absolute right to at least one EUO.”

Second, the Court held that an EUO condition is a form of “cooperation clause.” As such, the Court held that a policyholder need only “substantially comply” with an EUO condition, and an insurer must demonstrate that it was actually prejudiced by any breach of an EUO condition. By so ruling, the Court again disapproved of the Washington Court of Appeals’ ruling in Downie, in which the Court of Appeals had declared that an insurer need not demonstrate that it was prejudiced by a breach of an EUO condition.

Turning to the facts of the case, the Court then reversed an order granting summary judgment in favor of Allstate under Allstate’s EUO condition. Although Allstate’s policyholder had failed to submit to an EUO after repeated requests spanning four months, the Court held that there were genuine issues of material fact with respect to whether (1) an EUO was material to Allstate’s investigation, (2) the policyholder substantially complied with Allstate’s requests for an EUO, and (3) Allstate was prejudiced by any breach of the policy’s EUO condition. Therefore, the Court held that a jury must resolve the issues.

In view of the Court’s ruling, it likely will be more difficult for an insurer to obtain relief via summary judgment because of a Washington policyholder’s breach of an EUO condition.  Indeed, in Staples, the dissenting justice even gloomily opined, “Today’s decision invites insureds to put minimal effort into complying with the terms of their insurance policies, expecting the company to pay.”

The Court’s majority and dissenting opinions can be found here and here, respectively.

Unity of Accident and Occurrence: Illinois Appellate Court Holds That One Accident Causally Produced Only One Occurrence

Thursday, January 24th, 2013

By Bryan Chapman, David Dolendi and Ji Suh Faloon, Sedgwick Chicago

In Ware v. First Specialty Ins. Corp., No. 1-11-3340, 2012 IL App (1st) 113340, 2013 WL 145017 (Jan. 11, 2013), the Illinois Appellate Court affirmed the trial court’s grant of summary judgment in favor of an insurer, holding that the injuries and deaths of some 40 individuals caused by an apartment porch collapse comprised only one occurrence. The court based its holding on the relevant policy definitions, and a causation analysis pursuant to case precedent.  In the underlying litigation, all parties had stipulated that the collapse was not interrupted by intervening human acts or by preceding or subsequent events, such that no intervening acts or circumstances were considered a cause or contributing factor to the deaths or injuries of plaintiffs. Id. at 16.

The defendant insurer was First Specialty during the relevant policy period. The trial court, in granting summary judgment to the insurer, had held that there was only one occurrence – there was “simply one source” of all plaintiffs’ injuries and resulting deaths, which was the porch collapse. As a result, the policy’s general aggregate limit of $2 million was not implicated, only its $1 million limit per occurrence. Id. at 15. On appeal, the appellate court considered the sole issue to be whether the collapse and resulting injuries and deaths comprised one occurrence. Id. at 18.

The plaintiffs contended that, because several plaintiffs’ injuries and deaths did not occur until sometime after the collapse, the collapse and resulting injuries and deaths were all separate occurrences. Id. at 17. Plaintiffs relied on the “time and space test” applied in Addison Ins. Co. v. Fay, 905 N.E.2d 747 (Ill. 2009).  The insurer, by contrast, maintained that the collapse and resulting injuries and deaths were only one occurrence, relying on the policy’s occurrence definition and Illinois precedent. Id. at 17.

The trial court examined the policy’s definitions of “occurrence” and “bodily injury,” and noted that the bodily injury definition’s reference to resulting death “at any time” critically undermined the plaintiffs’ emphasis on the injuries and deaths occurring sometime after the collapse. Id. at 21. Because of the policy language, which effectively defined an occurrence as “encompassing any injuries or deaths at any time,” the court found this lapse of time to be “immaterial.” Id.

The trial court then assessed the plaintiffs’ arguments under what it called the “cause theory,” which determined the number of occurrences by “referring to the cause or causes of the damages.” Id. at 23. Under the cause theory, the only relevant factor in determining the number of occurrences is how many separate events or conditions led to a party’s injuries. This makes the time at which the injuries manifested themselves irrelevant. Id. at 24. The “inescapable conclusion” under this theory, then, was that there was only one cause of all injuries and deaths: the porch collapse. This was the court’s understanding and the understanding to which all parties were bound by their previous stipulation. Id. at 25.

The appellate court held that the above analysis pursuant to both the cause theory and the policy definitions were sufficient to affirm summary judgment, and concluded that the porch collapse comprised a single occurrence because the collapse alone caused the underlying injuries. 

 

Washington Supreme Court Declares that Binding Arbitration Provisions in Insurance Policies are Unenforceable

Wednesday, January 23rd, 2013

By Robert A. Meyers

In State, Dept. of Transp. v. James River Ins. Co., — P.3d — , 2013 WL 174111 (Wash. January 17, 2013), an en banc panel of the Washington Supreme Court unanimously declared that binding arbitration provisions in insurance policies are void and unenforceable. The Court observed that a century-old Washington statute provides:

No insurance contract delivered or issued for delivery in this state and covering subjects located, resident, or to be performed in this state, shall contain any condition, stipulation, or agreement . . . depriving the courts of this state of the jurisdiction of action against the insurer. . . . Any such condition, stipulation, or agreement in violation of this section shall be void. . . .

RCW 48.18.200(1)(b), (2). Interpreting and applying that statute, the Court reasoned that binding arbitration provisions in insurance policies ostensibly deprive the courts of jurisdiction to review the full substance of disputes between insureds and their insurers, and thereby undermine the legislature’s intent to preserve insureds’ ability to seek recourse against their insurers in court. So, the Court held that binding arbitration provisions in insurance policies that are delivered in Washington State and that serve to cover risks in Washington State are void and unenforceable. The Court also held that the Federal Arbitration Act does not preempt RCW 48.18.200, and noted that its ruling will help to “assure the protection of Washington law to Washington insureds.”

In light of the Washington Supreme Court’s ruling, if an insurer has delivered an insurance policy in Washington State that serves to cover risks in Washington State, and if that policy includes a binding arbitration provision, a Washington court will unlikely enforce a demand for arbitration under the policy.

The Court’s opinion can be found here.

Be Prudent with Privilege: Legal Advice From Non-Lawyers is Not Privileged Under English and Bermuda Law

Wednesday, January 23rd, 2013

By Alex Potts

In its first major judgment of 2013, R (on the application of Prudential plc and another) v Special Commissioner of Income Tax and another [2013] UKSC 1, the United Kingdom Supreme Court has confirmed the common law principle that legal professional privilege only applies to communications passing between a client and its lawyers in connection with the provision of legal advice.

As a matter of English law, privilege does not apply to communications between a client and other professional service providers, such as accountants or consultants, even if their advice is legal or quasi-legal in nature (as tax, corporate, restructuring, regulatory and compliance advice often is).

The case arose out of a U.K. tax avoidance scheme devised by PricewaterhouseCoopers (‘PwC’) for the Prudential group in 2004. The U.K. tax authorities investigated the scheme, and served document requests on Prudential. Prudential refused to give disclosure of certain sensitive documents, claiming that legal professional privilege attached to communications between Prudential and PwC relating to the tax advice given by PwC, and it sought to challenge the tax authorities’ request by way of judicial review.

The English High Court and the Court of Appeal both rejected Prudential’s claim to legal professional privilege. Prudential appealed to the Supreme Court (supported by the U.K. accountancy profession), the appeal being heard by a panel of seven Supreme Court judges. By a majority of five to two (Lord Sumption notably dissenting), the Supreme Court dismissed Prudential’s appeal, and confirmed that legal professional privilege should not be extended to non-lawyers (unless Parliament enacts primary legislation to that effect).

This judgment is likely to be followed in other jurisdictions that follow English common law, such as Bermuda. Indeed, Bermuda courts have confirmed that legal professional privilege is a fundamental right, protected both at common law and by Bermuda’s constitution, which can only be specifically overridden by statute, or by the client waiving its privilege (IRS & Minister of Finance v Braswell [2001] Bda LR 41, [2002] Bda LR 51; R v Hoskins [2003] Bda LR 25; and Fidelity Advisor Series VIII v APP China Group Ltd [2006] Bda LR 70).

U.S. and international businesses should continue to ensure that they take advice from properly qualified lawyers on both English law and Bermuda law matters, if they want to keep their legal, tax, and regulatory advice privileged from inspection.

The full judgment and a summary can be found here.

Bermuda Monetary Authority Announces Principles Underpinning Use of New Powers

Wednesday, January 23rd, 2013

By Nick Miles

The Bermuda Monetary Authority (the BMA) has published a new statement of practice (SoP).  It sets out factors to which it will have regard and procedures to be followed in deciding whether and in what manner to exercise powers granted under the following four statutes that regulate financial sectors in Bermuda:

• The Insurance Act 1978
• The Banks and Deposit Companies Act 1999
• The Investment Business Act 2003
• The Trusts (Regulation of Trust Business) Act 2001

A full analysis of the SoP and the BMA’s powers can be found in our Insurance News Flash published today.

Disability Policy’s Mental Illness Limitation Upheld by Ninth Circuit in Fibromyalgia Case

Tuesday, January 22nd, 2013

By John T. Seybert and Julie Kim

In Maurer v. Reliance Standard Life Insurance Co., No. 11-16044, 2012 WL 6101903 (9th Cir. Dec. 10, 2012), the Ninth Circuit interpreted a policy provision favorably for insurers, holding that a policy’s mental nervous limitation may permissibly limit long-term disability (“LTD”) benefits where the beneficiary would otherwise be capable of working, but for the mental or nervous disorder.

Sara Maurer (“Maurer”) ceased working as an attorney and filed a claim for disability benefits based on chronic neck and back pain, and fibromyalgia.  Maurer’s insurer, Reliance Standard Life Insurance Company (“RSL”), determined that Maurer was disabled by fibromyalgia “with a significant psych component to chronic pain” and paid twenty-four months of benefits.  In connection with its concurrent review of Maurer’s benefit claim, RSL received updated treatment records indicating that Maurer suffered from depression, anxiety and “bi-polar diathesis,” indicating Maurer’s predisposition to the condition when stressed.  After paying LTD benefits for three years, RSL performed another review and concluded that without the contribution of mental nervous illness, Maurer’s medical records indicated that she was capable of performing full time sedentary work. RSL therefore notified Maurer that it was terminating her benefits.

On administrative appeal, Maurer argued that she was completely disabled by psoriatic arthritis.  RSL obtained an independent medical evaluation by a board-certified rheumatologist, who could not confirm that diagnosis and opined that Maurer’s alleged symptoms were primarily related to chronic pain and psychiatric dysfunction rather than inflammatory disease.  RSL’s administrative appeals process resulted in the conclusion that the prior termination of benefits was appropriate.  The U.S. District Court granted summary judgment to RSL, finding that RSL’s coverage determination was not an abuse of discretion.

On appeal, the Ninth Circuit considered whether Maurer’s claim for LTD benefits was limited to the twenty-four month period applicable to mental nervous disorders.  The employee welfare benefit plan provided benefits for policyholders who become “totally disabled.” The policy also included a “Mental/Nervous Limitation,” which provided that benefits for total disability “caused or contributed to by mental nervous disorders . . . will not be payable beyond an aggregate lifetime maximum duration of twenty-four (24) months. . . .”  Maurer argued that the mental nervous limitation should not apply unless RSL could demonstrate that the mental nervous condition was the sole cause of the disability.  The Ninth Circuit rejected Maurer’s argument and ruled that the insurer “permissibly interpreted the ‘mental/nervous’ limitation to preclude coverage when, in the absence of a mental or nervous disorder, a beneficiary would be physically capable of working.”

While this decision may result in other courts following the Ninth Circuit’s lead, insurers should carefully consider whether to apply a mental illness limitation in cases involving both physical and mental conditions – under Maurer, insurers must be able to show that, but for the mental illness, the claimant would be capable of working.

If it Floats, it May Not be a Boat – the U.S. Supreme Court Clarifies the Definition of a Vessel

Wednesday, January 16th, 2013

Our readers in the marine insurance industry are sure to be paying attention to Lozman v. City of Riviera Beach, Florida, an opinion issued by the U.S. Supreme Court on Tuesday.   Charles Davant, an associate in our Fort Lauderdale office who advises marine insurers and litigates cases involving various maritime and admiralty issues, has provided an analysis of the case below.

The U.S. Supreme Court settled an important conflict between the Fifth and Eleventh Circuits this week, holding a floating home, incapable of propelling itself, was not a “vessel” within the meaning of the Rules of Construction Act, 1 U.S.C. § 3.  Lozman v. City of Riviera Beach, Florida, Case No. 11-626, 23 Fla. L. Weekly Fed. S556a.  We expect this decision will have an impact, not only on individuals and their floating homes, but also on businesses that use special purpose structures in construction and other industries.  We will keep you updated as lower courts begin to digest and interpret this important decision.

In 2002, Fane Lozman bought a floating home, which “contained a sitting room, bedroom, closet bathroom and kitchen, along with a stairway leading to a second level with office space.”  Id.  “An empty bilge space underneath the main floor kept it afloat.”  Id.  Mr. Lozman moved his vessel four times in seven years, ending up at a marina owned by the City of Riviera Beach, Fla.  Id.  After failing to pay dockage fees and damages for trespass, the city invoked admiralty jurisdiction and sought a maritime lien on the vessel pursuant to the Federal Maritime Lien Act, 46 U.S.C. § 31342.  The lower courts allowed the city to maintain the maritime lien finding the home was “capable” of movement over water and the owner’s intent was to remain moored at the city’s marina indefinitely.  Id.  The U.S. Supreme Court reversed.

In reaching its decision the Court considered the definition of a vessel within the Rules of Construction Act, to wit, that a vessel is “every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water.”  Id.  The Court focused on the phrase “capable of being used…as a means of transportation on water.”  Id.  It found it must apply the definition in a practical, as opposed to theoretical, way.  Id.  Disagreeing with the Eleventh Circuit’s broad interpretation of the definition, the Court found that not every floating structure is a vessel.  Id.

In the Court’s view, a structure such as Mr. Lozman’s does not fall within the statutory definition of a vessel (thereby invoking admiralty jurisdiction) “unless a reasonable observer, looking into the home’s physical characteristics and activities, would consider it designed to a practical degree for carrying people or things over water.”  Id.  The Court’s observations of the particulars of Mr. Lozman’s floating home illustrate its general criterion: it has no rudder or other steering mechanism, it’s hull was unraked, it had a rectangular bottom just 10 inches below the water, had no capacity to generate or store electricity, its rooms looked like nonmaritime living quarters, it was equipped with French doors and ordinary windows, and was not self-propelled.  Id.  Thus, in the Court’s opinion, the characteristics of the home could not “lead a reasonable observer to consider it designed to a practical degree for transportation on water.”

Mr. Lozman may now seek a return of the $25,000 bond the city posted when it arrested the vessel.

The opinion, authored by Justice Breyer, can be found here.

By Charles S. Davant

Was That Really an “Accident”?: Northern District of California Reiterates What Constitutes an “Accident” Under a Commercial General Liability Policy

Monday, January 14th, 2013

By Benjamin E. Shiftan

In Alco Iron & Metal Co. v. American International Specialty Lines Insurance Co., No. 11-5181 CW, 2012 WL 5878391 (N.D. Cal. Nov. 21, 2012), the U.S. District Court for the Northern District of California granted summary judgment for an insurer by holding, in part, that an insured’s intentional act does not constitute an “accident” within a policy’s definition of “occurrence” even when the insured acted under the mistaken belief that it had the right to take such action.

In Alco, Caicos Investments, Inc. sued Alco Iron & Metal Company, alleging that Alco wrongfully entered Caicos’ property, removed rail spurs, and sold the rail spurs to a third party as scrap metal (the “Caicos action”).  Alco alleged that Caicos’ tenant at the time told Alco that it was authorized to do so.  Alco tendered its defense of the Caicos action to its commercial general liability insurer, American International Specialty Lines Insurance Company (now known as Chartis Specialty Insurance Company (Chartis Specialty)).  Chartis Specialty rejected Alco’s tender because, among other reasons, the Caicos action did not allege an “occurrence,” which was defined in Chartis Specialty’s policy as an “accident.”  Alco subsequently filed an insurance coverage action against Chartis Specialty, and the parties filed cross-motions for summary judgment.

In its cross-motion, Alco argued that its actions in entering the Caicos property and taking the rail spurs constituted an “accident” because the Caicos’ tenant had specifically authorized Alco to do so.  Specifically, Alco alleged that the tenant’s false representations constituted “an independent and unforeseen happening” that rendered Alco’s actions accidental in nature.  Chartis Specialty responded to this argument by noting that “Alco intended to take each step that lead [sic] to the harm,” and by pointing out that Alco’s “mistaken, but sincere, belief that it had permission to remove the rail did not make those purposeful acts accidental, even if Alco never intended to cause Caicos any harm.”

The court granted Chartis Specialty’s cross-motion for summary judgment and denied Alco’s cross-motion for summary judgment.  Siding with Chartis Specialty’s line of reasoning, the court noted that an “accident” signifies “an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause.”  The court further stated that, under California law, the term “accident” refers to the insured’s intent to commit the “act” giving rise to liability as opposed to the insured’s intent to cause the “consequences” of that act.  The court emphasized that California courts had rejected Alco’s argument that an act constitutes an “accident” whenever an insured mistakenly believes that it has the permission to act in a particular way.  Additionally, the court noted that the tenant’s false representations did not constitute an “additional, unexpected, independent and unforeseen happening” that rendered Alco’s actions accidental, because the tenant made these representations prior to Alco’s volitional acts.  In short, the court concluded that Alco was not entitled to coverage for the Caicos action because there was nothing “accidental” about its entering Caicos’ property and taking its rail spurs.

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