Archive for February, 2013

Business Pursuits Exclusion of a Professional Liability Policy Found To Preclude Coverage for the Insured Law Firm and Its Attorney

Friday, February 22nd, 2013

By Ekaterina Levy, Sedgwick San Francisco

An Illinois appellate court held that a lawyers professional liability policy’s business pursuits exclusion barred coverage for an underlying civil conspiracy action against a law firm and one of its attorneys.  American Zurich Ins. Co. v. Wilcox & Christopoulos, LLC, 2013 Ill. App. LEXIS 23 (Jan. 17, 2013).  The underlying suit alleged that the attorney, through the services of his own company, prepared fraudulent documents in order to obtain a liquor license for a restaurant.  The court found that the exclusion was not rendered ambiguous solely because the attorney acted “for” two companies (his own and the restaurant) in procuring the liquor license.

An investor filed a civil conspiracy lawsuit against the Wilcox law firm, attorney Wilcox, and other defendants, alleging that the defendants were involved in a conspiracy to open and operate a restaurant by illegal means.  The company that was to operate the restaurant, Panacea Partners, allegedly retained attorney Wilcox and his company, Liquor License Solutions, to obtain the liquor license.  The complaint alleged that Liquor License Solutions was involved in the fraudulent scheme, Wilcox prepared false corporate documents, and Wilcox acted both individually and in the scope of his employment with Liquor License Solutions.

The Wilcox firm requested coverage for the lawsuit from American Zurich pursuant to a lawyers professional responsibility claims-made policy.  At issue before the appellate court was whether a “business pursuits” exclusion operated to preclude coverage.  Specifically, the exclusion provided that the policy did not afford coverage for “any claim based upon or arising out of in whole or in part, from the alleged acts or omissions by any Insured, with or without compensation, for any business enterprise, whether for profit or not-for-profit, in which any Insured has a controlling interest.”

The court rejected the insured’s argument that the exclusion applies only when an insured attorney does work for an entity in which any insured has a controlling interest, whereas the underlying complaint alleged that Wilcox’s work was done for Panacea Partners and not for Liquor License Solutions.  Relying on the dictionary definition, the court found that the term “for” is unambiguous, and in the context of the entirety of the exclusion the term meant “for the benefit of.”  Because Wilcox, an insured, acted for the benefit of his company, Liquor License Solutions, while working to obtain a liquor license for Panacea Partners, the court held that the business pursuits exclusion was triggered, and American Zurich had no duty to defend attorney Wilcox or the Wilcox law firm.

Under this decision, the business pursuits exclusion will bar coverage as long as an insured’s work benefitted its own company, even if the insured simultaneously performed legal work for a third party.

Texas Court – Appraisal Award Insufficient to Defeat Insured’s Breach of Contract Claim

Wednesday, February 20th, 2013

By Kimberly L. Steele, Sedgwick Dallas

A recent federal opinion from Judge Sam Lindsay of the Northern District of Texas, Dallas Division, found that an insurer’s payment of an appraisal award was insufficient to defeat the insured’s breach of contract claim, and that the insured’s statutory and common-law bad faith claims remained viable as well. In the case of Church On The Rock North d/b/a North Church v. Church Mutual Ins. Co., No. 3:10-CV-0975-L (N.D. Tex. Feb. 11, 2013), North Church sued Church Mutual over its handling of a claim for damages arising out of an April 2010 thunderstorm. The parties agreed on the cost of a number of repairs, but differed on others, including the amount to be paid for replacement of North Church’s roof. Church Mutual invoked the appraisal process, and while appraisal was ongoing, North Church sued.

Church Mutual removed the lawsuit to federal court, and the case was administratively closed (subject to a potential future motion to re-open) so that appraisal could be completed. Upon receipt of the appraisal award, Church Mutual issued two checks, one for the remaining unpaid balance of the loss owed, and a second for the withheld depreciation. Church Mutual later moved to re-open the lawsuit and for summary judgment on North Church’s claims for breach of contract, common law bad faith, and violations of the Texas Insurance Code and the Deceptive Trade Practices Act. According to Judge Lindsay’s order, “[b]oiled down to its essence, [Church Mutual’s] contention is that without a viable contract claim, North Church’s other claims necessarily fail, and North Church cannot succeed on its contract claim because it is estopped by the alleged binding appraisal award and [Church Mutual’s] timely payment of that award from pursuing a contract claim[.]”

Judge Lindsay rejected Church Mutual’s position in all respects. Specifically, he concluded that Church Mutual had failed to establish as a matter of law that the appraisal award was binding and enforceable, but only assumed that it was true. Moreover, Church Mutual did not present sufficient evidence to prove that North Church intended to be bound by the award, failed to prove that its payments were timely, and did not establish as a matter of law that its calculations of deductible, depreciation, and prior payments were correct. Thus, Church Mutual’s motion for summary judgment on the contract claims was denied.

Judge Lindsay likewise denied Church Mutual’s summary judgment in relation to the insured’s extra-contractual claims. He did so not only because their contract claims remained viable and because mere payment of an appraisal award, without more, did not preclude an award for pre-appraisal violations of the Insurance Code. He also noted that North Church’s statutory claims were based on timing of payment and purported misrepresentations, not allegedly wrongful underpayment or denial of policy benefits, so the statutory claims would not stand or fall with the common-law bad faith claim. In closing, Judge Lindsay expressly stated that he was not commenting on the strength or weakness of North Church’s case, but only that Church Mutual had not met its summary judgment burden.

The Insurance Law Blog has looked at appraisal awards in Texas in earlier posts.  Please click here for a post from December regarding appraisal clauses and the disputes in Texas over the appraisal process.

 

Fracking Decision in New York Delayed Once Again

Tuesday, February 19th, 2013

By Dirk Haarhoff, Sedgwick New York

In late December 2012, we reported that the New York Department of Environmental Conservation (DEC) was in the process of preparing an environmental impact statement (EIS) regarding well permits for extracting oil and natural gas through horizontal drilling and high-volume hydraulic fracturing – i.e., “fracking.”  The final draft of the EIS was due last Wednesday.  However, the DEC allowed that deadline to pass without issuing its final draft, meaning that the four-year moratorium on shale gas drilling in New York could extend into 2014 or even longer.

According to the DEC, the decision to delay finalizing the report was made in order to allow the state’s health commissioner more time to study fracking’s potential health effects.  The moratorium has been in place because of concerns that fracking may contaminate water supplies.  The Joint Landowners Coalition, a pro-fracking group, plans to sue the DEC as a result of the missed deadline on the ground that delaying the drilling is a “de facto taking of property rights.”  Meanwhile, anti-fracking groups are planning to litigate if regulations are drafted and drilling is allowed to proceed.  As such, whether fracking is permitted in New York ultimately may be decided by the courts.

We are also continuing to watch developments in fracking-related litigation in California and elsewhere.  The current edition of Sedgwick’s Hydraulic Fracturing Digest discusses pending litigation filed in CA by several environmental groups.  Please click here to read this issue.

Twin Towers: Two Events, Two Occurrences under English law

Friday, February 15th, 2013

By Alex J. Potts, Sedgwick Bermuda

In the recent case of Aioi Nissay Dowa Insurance Company Ltd v Heraldglen Ltd & Advent Capital (No 3) Ltd [2013] EWHC 154 (Comm), 8 February 2013, the English Commercial Court upheld an arbitration tribunal’s award that the 9/11 terrorist attacks on the Twin Towers of the World Trade Center were properly described as two separate occurrences arising out of two separate events, for the purposes of an aggregation clause under a retrocession excess of loss reinsurance programme governed by English law.

Applying the ‘unities’ doctrine to the facts of the case, the arbitration tribunal (made up of Mr Ian Hunter QC as Chairman, Mr David Peachey and Mr Richard Outhwaite) concluded that the losses arising on the 10 inward reinsurances were caused by two separate occurrences arising out of separate events. The Commercial Court agreed with the tribunal’s reasoning and its conclusions on the agreed primary facts, which had been taken from the Final Report of the National Commission on Terrorist Attacks upon the United States.

The ‘unities’ doctrine is an English law test that derives from Mr Michael Kerr QC’s award in the Dawson’s Field Arbitration in 1972. It has been applied and developed by Rix J in Kuwait Airways Corporation v Kuwait Insurance Co SAK [1996] 1 Lloyd’s Rep 664, and subsequently affirmed by the English Court of Appeal in Mann v Lexington Insurance Co [2001] 1 Lloyd’s Rep 1 and Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] Lloyd’s Rep IR 696. The ‘unities’ test of aggregation has been stated to depend on the position and viewpoint of an informed observer (placed in the position of the insured), and it involves consideration of the degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible. The ‘unities’ test must be assessed by finding and considering all the relevant facts carefully, and then conducting an exercise of judgment and analysis. The exercise should be performed on the basis of the true facts (even if they are only discovered subsequently), and not simply on the basis of the facts as they may have appeared at the time.

Although specifically dealing with reinsurance contracts subject to LSW (London Standard Wording) 351, this judgment of the Commercial Court, and the underlying arbitration award, provide some welcome certainty to the reinsurance market generally on the issue of aggregation under English and Bermuda law.

A copy of the judgment can be found here: http://www.bailii.org/ew/cases/EWHC/Comm/2013/154.html

S.B. 112 – Proposed Property Insurance Reform Bill in Texas

Monday, February 11th, 2013

By Lisa M. Henderson, Sedgwick Dallas

A Texas State Senator has introduced legislation that would require residential property insurance carriers to include on the declarations page a dollar amount and explanation for every deductible.  The Senator, Eddie Lucio Jr., believes the bill is necessary to eliminate the confusion caused by deductibles that are listed as percentages, as opposed to a certain dollar amount.  Mr. Lucio believes that policyholders often assume that the deductible is a percentage of their loss when, in fact, the deductible is a percentage of the insured value of the residence.  The bill would require that declarations pages: (1) list and explain each type of deductible under the residential insurance policy; and (2) list the exact dollar amount of each deductible under the residential property insurance policy.  The bill was approved by the Business & Commerce Committee on February 6, 2013.  If enacted, the bill will apply to all residential property insurance policies issued in Texas on or after January 1, 2014. 

We will continue to track S.B. 112 and post any developments.

Introducing Construction Defect Coverage Quarterly, and an Analysis of “Occurrence” in Defect Coverage Actions

Thursday, February 7th, 2013

We are pleased to introduce the inaugural issue of Sedgwick’s Construction Defect Coverage Quarterly.  In our first issue, we discuss the definition of an “occurrence” in the construction defect action context, and analyze a recent Colorado case which applied the “business risk exclusion” to preclude coverage.

As we note in the newsletter, one of the largest issues litigated in today’s construction defect coverage actions is whether defective construction constitutes an “occurrence” (and, therefore, may be covered) under liability insurance policies.  In addition to the analysis in the newsletter, we thought our readers would be interested in this case from the Ohio Supreme Court which held that faulty construction work does not qualify as an “occurrence” within the meaning of a general liability policy.

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Through its recent opinion in Westfield Ins. Co. v. Custom Agri Systems, Inc., 2012 WL 4944305 (Ohio Oct. 16, 2012) (“Westfield”), the Ohio Supreme Court joined the majority of states in holding that faulty construction work does not qualify as an “occurrence” within the meaning of a general liability policy.  

In Westfield, Younglove Construction (“Younglove”) contracted with PSD Development (“PSD”) to construct a feed manufacturing plant.  After PSD withheld payment, Younglove sued PSD for breach of contract in Ohio federal court.  In its answer, PSD alleged that one of Younglove’s subcontractors, Custom Agri Systems, Inc. (“Custom”), defectively constructed a steel grain bin, but did not allege that Custom’s defective construction work damaged PSD’s other property.  Younglove then sued Custom for contribution and indemnity, and Custom sought a defense and indemnity from its general liability insurer, Westfield Insurance Company (“Westfield”).  Westfield intervened in the action, seeking a declaration it was not obligated to provide coverage to Custom because Younglove’s claim against Custom did not seek damages arising out of “property damage” caused by an “occurrence.”  Westfield and Custom cross-moved for summary judgment on the issue.

In deciding the motions, the court acknowledged that Ohio law did not address whether defective construction work qualifies as an “occurrence” within the meaning of a liability policy.  Rather than decide the issue, however, the court found that a contractual liability exclusion in Westfield’s policy precluded coverage and granted summary judgment to Westfield.  Custom appealed to the Sixth Circuit, and Westfield filed an unopposed motion to certify two questions of state law to the Ohio Supreme Court:  whether a property owner’s claims of defective construction allege “property damage” caused by an “occurrence” under a commercial general liability policy, and, if so, whether contractual liability exclusions nevertheless preclude coverage for such claims.  The Sixth Circuit granted Westfield’s motion, and the Ohio Supreme Court accepted certification.

Addressing only the first question because the court believed it was dispositive, the Ohio Supreme Court held that defective construction does not constitute an occurrence.  The court reasoned that general liability policies are “not intended to protect business owners against every risk of operating a business,” nor are they “intended to insure the risks of an insured causing damage to the insured’s own work.”  The court also looked at court decisions in other jurisdiction, and found the majority view is that claims of defective construction are not claims for “property damage” caused by an “occurrence” within the meaning of general liability policies.  The court then analyzed whether Custom’s defective construction of the grain bin was an “occurrence,” noting the policy defined “occurrence” as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.”  Although the policy did not define “accident,” the court noted that the term has an inherent “fortuity principle” under which losses must be “unexpected, as well as unintended,” and concluded that Custom’s defective work on the steel grain bin was not an “occurrence.”

by Aaron F. Mandel and Stevi A. Raab

The Seventh Circuit Holds That the “In Care of” and “Business” Exclusions Preclude Coverage Under a Homeowner’s Policy

Wednesday, February 6th, 2013

By Christina Ahn, Sedgwick San Franciasco

In Nationwide Insurance Co. v. Central Laborers’ Pension Fund, No. 12-1784 (7th Cir. Jan. 11, 2013), the United States Court of Appeals for the Seventh Circuit affirmed that a homeowner’s insurer was entitled to deny coverage on grounds that the “in care of” and “business” exclusions applied.

Jeanne Hentz worked as an accountant with Kevin W. Bragee, CPA, LLC.  Among the firm’s clients were a group of investment funds (the Funds).  Hentz placed a CD containing confidential information relating to participants and beneficiaries of the Funds into her laptop.  The laptop was stolen from her car and the CD was lost. 

The Funds brought a state action in Illinois against Hentz, alleging that she had negligently breached her duty to safeguard the information contained on the CD.  Hentz tendered the defense of the action to her homeowner’s insurance carrier, Nationwide.

Nationwide brought a federal diversity action seeking a declaration that it did not have a duty to defend or indemnify Hentz.  It argued that Hentz’s claim was not covered because of an “in care of” exclusion, which precluded coverage for damage to property “in care of the insured.” Nationwide also argued that the policy’s “business” exclusion applied, which precluded coverage for property damage arising out of, or in connection with, a business.  Nationwide filed a motion for summary judgment. 

The district court granted Nationwide’s motion, concluding that the policy’s “in care of” exclusion applied, but it did not address Nationwide’s argument regarding the “business” exclusion.  The Funds appealed.

The Seventh Circuit affirmed the district court’s judgment in relation to the “in care of” exclusion.  Under Illinois law, an “in care of” exclusion applies if the following two conditions are met: the property lost or stolen was both (1) within the exclusive possessory control of the insured at the time of the loss, and (2) a necessary element of the work performed by the insured. 

Regarding the first element, the court reasoned that Hentz’s possession of the CD and her duty to safeguard it amounted to the “exercise [of] some type of possessory control over the” CD, which became exclusive when Hentz placed the CD in her car.  Regarding the second element, the court concluded that the CD was necessary to her ordinary employment activities because the handling and care of confidential information was vital to her work as an accountant.

The Seventh Circuit went on to find that the “business” exclusion applied because Hentz’s failure to safeguard the CD was an omission amounting to a breach of duty arising in connection with her employment with the audit firm.

State of Washington v. James River Insurance Company – What Impact on Bermuda Insurers?

Friday, February 1st, 2013

By Richard J. Geddes, Sedgwick Chicago

The short answer is – none.

State of Washington, Dept. of Transportation v. James River Insurance Company, – P.3d –, 2013 WL 258877 (Wash. January 24, 2013), a January 2013 decision of the Washington State Supreme Court, upheld a Washington statute prohibiting insurance contracts from depriving Washington policyholders from access to state courts, due to the insurer’s contract provisions calling for arbitration to resolve contract disputes. [The Insurance Law Blog reported on the decision shortly after the court ruled on January 17th.]

James River represents a purely U.S.-domestic dispute. All parties to the dispute were U.S. residents, such that the NY Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the NY Convention”), which is the source of enforcement of international arbitration agreements, did not apply. The NY Convention applies to arbitration agreements between parties of different nations, each of which is signatory to the NY Convention, and requires those nations to enforce the arbitration agreements between those parties.

The law in the U.S. dealing with conflicts between international arbitration agreements and state insurance law is not uniform, but if a trend is apparent, it is to recognize the primacy of these international contractual agreements via the NY Convention over contrary state law. The question: whether the McCarron Ferguson Act, granting the states the right to regulate insurance except in cases where Congress has expressed a contrary intent, would be trumped by Federal law recognizing the enforceability of international arbitration agreements. The issues controlling these decisions are complex, and require consideration beyond the space available here. However, of the three Circuit Courts that have considered this question, two,¹ and importantly, the most recent two, have found in favor of enforcing the arbitration agreement, while only one,² the earliest, has not.

The lesson here is that U.S. state court decisions about purely domestic disputes say nothing about the enforceability of international arbitration agreements as are typically included in Bermuda form policies. The U.S. federal courts have generally favored the enforcement of these agreements. Equally important to Bermuda insurers is the fact that Bermuda and U.K. courts have routinely been receptive to applications to issue anti-suit injunctions to bar lawsuits filed in contravention of arbitration agreements. In short, Bermuda insurers may continue to rely on the enforceability of their chosen Bermuda- or London-based arbitration selection. 

 


¹ Safety National Casualty Corp. v. Certain Underwriters at Lloyds, 587 F.3d 714 (5th Cir. 2009); ESAB Group v. Zurich Insurance PLC, 685 F.3d 376 (4th Cir. 2012).

² Stephens v. American International Ins. Co., 66 F.3d 41 (2d. Cir. 1995).

 

Boom or Bust: Third Party Rights Against Liability Insurers of Bankrupt Entities in Bermuda and the U.K.

Friday, February 1st, 2013

By Alex J. Potts, Sedgwick Bermuda

In the recent case of Re Kingate Management Limited (in Provisional Liquidation) [2012] SC (Bda) 52 Com, the Supreme Court of Bermuda considered the statutory rights of third party claimants to assert direct claims against liability insurers of insolvent and bankrupt insureds in Bermuda.

This is the first occasion that the Court has considered and applied Bermuda’s Third Parties (Rights Against Insurers) Act 1963, a piece of legislation modeled on the U.K.’s Third Parties (Rights Against Insurers) Act 1930.  The Court confirmed that the effect of Bermuda’s legislation is that the benefit of insurance policies taken out by an insolvent company (or bankrupt individual) with respect to third party liabilities are directly transferred to any third party to whom the company is liable, by operation of law.  The transfer of rights takes place when a winding-up order is made or a liquidator is appointed.

The Court also confirmed that the Act imposes discovery obligations on an insolvent insured and its liquidator, receiver or trustee in bankruptcy, as well as its insurer.  A third party who asserts a disputed claim against an insolvent company which is insured against the relevant liability is entitled to obtain from the insolvent insured, and its insurer, such documents and information as may reasonably be required for the purpose of ascertaining and enforcing such rights, if any.

Importantly, the Bermuda Court followed and applied the English Court of Appeal’s decision in Re OT Computers Ltd (in administration) [2004] 3 WLR 886, which made clear that, under English law, a third party claimant did not need to have conclusively established liability before it was entitled to documents and information relating to the insurance position.

It should be noted that the U.K. Act is due to be significantly reformed by the Third Parties (Rights Against Insurers) Act 2010. However, the implementation date for the U.K. reforms has been delayed, and the new legislation is not currently expected to come into force until later this year.

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