Archive for August, 2013

California Allows Contractors Formed As LLCs To Access Surplus Lines Carriers

Tuesday, August 20th, 2013

By Dennis G. Rolstad, Sedgwick San Francisco

On August 16, 2013, California Governor Jerry Brown signed AB1236, a bill that allows contractors organized as limited liability companies to obtain liability insurance from non-admitted surplus lines carriers.  California Business & Professions Code § 7071.19 requires that limited liability companies carry liability insurance.  AB1236, sponsored by the Association of California Insurance Companies, amends Section 7071.19 to allow such insurance to be acquired from surplus lines carriers.

California has been amending its statutes to allow various forms of businesses to form as limited liability companies.  As of a 2010 statute, contractors may now obtain LLC status, but a licensed contractor must maintain liability insurance at specified dollar levels issued by a state licensed insurer.  Since January 1, 2011, hundreds of California contractors have been licensed as LLCs; however, over 68,000 other licensed contractors have general liability coverage obtained from surplus lines carriers that are not regulated by the California Department of Insurance.

Effective January 1, 2014, a contractor licensed as an LLC may obtain its liability policy from an eligible surplus line insurer, which is an insurer that has met certain standards including reserve requirements.  The requirements for a non-admitted insurer are found at California Insurance Code § 1765.1.  It is believed that AB1236 will increase access to insurance for contractor LLCs, have a positive effect on premium pricing, and increase the viability of LLC status for contractors.

A copy of the bill can be found here.

In Florida, General Contractor Overhead and Profit are Part of Replacement Cost Policies Even When Repairs Have Not Yet Been Made

Thursday, August 15th, 2013

Last month, the Supreme Court of Florida issued an opinion in Trinidad v. Florida Peninsula Ins. Co., — So.3d —, 2013 WL 3333823 (Fla. July 3, 2013), addressing a Florida statute that required the insurer of a replacement cost policy to pay for the “replacement cost, without reservation or holdback of depreciation in value, whether or not the insured replaces or repairs the dwelling or property.”  Fla. Stat. § 627.7011(3) (2008).  Although this statute was amended effective May 17, 2011, to eliminate the requirement that payment be made irrespective of whether repairs have been undertaken, this opinion will apply to all cases arising under the previous version of the statute and may impact the interpretation of policy language in future cases.

In the underlying breach of contract suit, the insured’s home was damaged by fire on February 11, 2008. The insurer admitted coverage and made partial payment of the repair cost, but because the insured had not undertaken any repairs or replacement, the insurer withheld payment of general contractor overhead or profit. The trial court granted summary judgment in favor of the insurer, which was affirmed by the intermediate appellate court. The Supreme Court of Florida reversed and held that, under the plain and unambiguous language of both the statute and the at-issue policy, the insurer could not withhold general contractor overhead and fees if they were reasonably necessary.

The insurer argued that the statute’s silence regarding overhead and profit allowed the insurer to withhold these general contractor fees when the insured had not undertaken repairs. The court disagreed and held that the statute requires payment of replacement costs for the covered loss, meaning what it would have cost the insured to rebuild – including general contractor profit and overhead if a general contractor would reasonably be necessary. Cf. Goff v. State Farm Florida Ins. Co., 999 So.2d 684 (Fla. 2d DCA 2008) (overhead and profit included in scope of an actual cash value policy where insured is reasonably likely to need a general contractor).

The court also rejected the insurer’s argument that a provision in the policy permitted the insurer to withhold profit and overhead. The provision limited the insurer’s liability to the least of: (1) the policy’s limit of liability applicable to the building; (2) the replacement cost of that part of the building damages for like construction and use on the same premises; or (3) the necessary amount actually spent to repair or replace the damaged building. Section (3) of the provision did not allow the insurer to withhold profit and overhead because the insurer had admitted making partial payment under section (2), and because the insured had not actually expended any money on repairs. As under the statute, section (2) of this provision required payment of profit and overhead if it was reasonably likely that the insured would need a general contractor.

Insured Seeking Defense and Indemnity Forced to “Go Fish” After Failing to Satisfy Policy’s Condition Precedent

Tuesday, August 13th, 2013

By Jason Chorley, Sedgwick San Francisco

In Petco Animal Supplies Stores, Inc. v. Insurance Co. of North America, ___ F.3d ___, 2013 WL 3942889 (8th Cir. Aug. 1, 2013) (Minn.), Meiko Pet Corporation, a Taiwan company, purchased a products liability insurance policy from INA which extended coverage to Meiko’s vendors, including PETCO and its subsidiaries. In 2007, an aquarium heater, manufactured by Meiko and sold by Petco, started a fire at a Medtronic, Inc. plant. Medtronic sued Petco, from whom it had purchased the heater, seeking approximately $1.8 million in damages. Petco tendered the defense of the action to INA, but INA denied the claim, causing PETCO to seek a declaration that it was entitled to defense costs and indemnity in the Medtronic action.

The INA policy contained a condition precedent that stated: “It is warranted, and a condition precedent to recovery hereunder, that Air Pumps, Heater, Filters, Heating Stone, Heated Mat, Heated Bowl and Heated Bucket Heater are UL/CSA approved and/or complied with the mandatory and/or voluntary safety standards of importing countries.” The aquarium heater that started the fire was not “UL/CSA approved,” so INA was required to defend and indemnify PETCO only if the heater complied with “the mandatory and/or voluntary safety standards” of the United States, the importing country. The U.S. Court of Appeals for the Eighth Circuit upheld summary judgment in favor of INA on the basis that PETCO failed to identify any mandatory or voluntary safety standard with which the heater complied.

PETCO argued that the phrase “voluntary safety standards” was ambiguous and reasonably could be interpreted to mean “optional.” The Eighth Circuit reasoned that such an interpretation would mean that the standard would be satisfied irrespective of whether one chooses to comply with it, because it would be “optional.” The Eighth Circuit found that such a reading would render the warranty clause of the policy superfluous. Petco alternatively argued that the heater complied with the mandatory standards of the United States because the Customs authorities would have seized the heater if it did not comply with the government’s mandatory safety standards. The Eighth Circuit held that, although Customs authorities did not seize the heater, it does not follow that the heater necessarily complied with mandatory safety standards of the United States.

Because Petco failed to identify any mandatory or voluntary safety standards with which the heater complied, it did not satisfy the condition precedent under the INA policy, and coverage was precluded as a matter of law.

Washington Insurers May Be Liable for Agent’s Unlawful Solicitation

Monday, August 12th, 2013

In Chicago Title Insurance Co. v. Washington State Office of the Insurance Commissioner, ___ P.3d ___, 2013 WL 3946060 (Wash. Aug. 1, 2013), the Supreme Court of Washington held that Chicago Title Insurance Company was liable for regulatory violations committed by its agent, Land Title Insurance Company.

Land Title was a duly appointed agent of Chicago Title in Washington for the purpose of selling Chicago Title’s title insurance policies.  Pursuant to a contract between Land Title and Chicago Title, Land Title was authorized to sign, countersign, and issue Chicago Title’s title assurances in certain designated counties in Washington.

After an investigation by Washington’s Office of the Insurance Commissioner, Land Title was found to have violated anti-inducement statutes by offering favors to real estate agents, builders, and mortgage lenders, in the form of meals, golf outings, auction purchases, and tickets to sporting events.  Chicago Title refused to sign and pay a proposed consent following the investigation, arguing that it was not liable for Land Title’s violations.  Litigation commenced shortly thereafter.  An Insurance Commission review judge and the trial court held for the Insurance Commissioner, but the Washington Court of Appeals reversed, holding that Chicago Title was not vicariously liable for Land Title’s statutory violations.

The Supreme Court of Washington disagreed, finding that Land Title’s violations of the anti-inducement statutes were a form of solicitation for which Chicago Title was liable as principal.  The court noted that, under the Washington Insurance Code, an agent has a statutory duty to solicit policies for its principal.  The court explained, “Land Title is doing what [Chicago Title] appointed it to do pursuant to the statute.  When Land Title solicits in an unlawful way, [Chicago Title] is responsible.

The court rejected Chicago Title’s argument that Land Title was a “limited” agent with no authority to market for Chicago Title, explaining that “authority to solicit necessarily includes the authority to market.”  The court noted that it is well established that an agent has implied authority to perform acts necessary toward achieving the principal’s objective or which are customary for agents performing the work.  Thus, Land Title was Chicago Title’s general agent under common law and had implied authority to solicit applications, as this was customary for insurance agents.

California Court Rules that D&O Insurer Not Obligated to Reimburse Screen Actors Guild for Underlying Attorneys’ Fee Award

Wednesday, August 7th, 2013

By Eryk R. Gettell, Sedgwick San Francisco

In Screen Actors Guild Inc. v. Federal Insurance Company, et al., 2013 WL 3525273 (C.D. Cal. July 11, 2013), the United States District Court for the Central District of California held that Federal Insurance Company (“Federal”) was not obligated to reimburse an attorneys’ fee award against the Screen Actors Guild Inc. (“SAG”) which was paid as part of a settlement in a breach of contract suit because the breach of contract claim did not involve a “Wrongful Act” as defined by the Federal policy.

The suit against SAG was filed in September 2007, and brought by Ken Osmond, who previously played Eddie Haskell on the popular television show Leave it to Beaver.  He sued on behalf of himself and other SAG members, and alleged that SAG had collected over $8 million in royalties that should have been distributed to the SAG members.  The suit sought restitution, compensatory and punitive damages, an accounting, a constructive trust, attorneys’ fees and costs, prejudgment interest, and injunctive relief.

SAG tendered the suit to Federal in October 2007.  Federal agreed to reimburse SAG’s defense costs in the suit, but denied indemnity coverage.  In September 2010, SAG entered into a settlement agreement that required it to use reasonable efforts to allocate and pay 90% of the royalties to the class participants.

In March 2011, the court approved the settlement, and awarded a $15,000 enhancement payment to Osmund, and a $315,000 award for class counsel fees and costs, for a total award of $330,000.  SAG tendered the judgment to Federal for reimbursement, which Federal declined.  SAG sued Federal for breach of contract and bad faith.  The parties eventually brought cross-motions for summary judgment on the issue of whether Federal had a duty to reimburse SAG for the $330,000 judgment.

The court ruled in Federal’s favor.  SAG had acknowledged it had a preexisting duty to distribute the royalties.  If a party to a contract fails to pay amounts due under the agreement and is sued, it cannot obtain a windfall by having its payments covered by an insurance policy covering only “wrongful acts”.

The SAG decision is relevant to the commonly disputed issue of whether coverage is afforded for attorneys’ fee awards when the underlying causes of action are not covered.  As the SAG court explained, if the underlying action does not allege covered wrongful acts, coverage cannot be bootstrapped based solely on a claim for attorneys’ fees.

California Supreme Court Holds that Insurers May Be Held Liable for Violations of California’s Unfair Competition Law

Thursday, August 1st, 2013

In Zhang v. Superior Court, __ Cal.3d __ (2013), the California Supreme Court held that Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 does not preclude insureds from maintaining a claim for violations of California’s Unfair Competition Law (UCL) against insurers. In Moradi-Shalal, the court held that, when the Legislature enacted California Insurance Code 790.03(h) (UIPA), it did not intend to create a private cause of action for commission of the various unfair insurance practices set forth in the UIPA. Thereafter, a split of authority developed in the California Courts of Appeal concerning whether an insurer could be subject to liability for UCL violations based upon conduct that was also a violation of the UIPA. The court has resolved the disagreement finding that an insurer may be held liable for violations of the UCL even when the insurer’s conduct also violates the UIPA.  The court issued its decision today.

In Zhang, the plaintiff alleged causes of action for false advertising under the UCL and insurance bad faith based upon the insurer’s alleged misleading advertising, which included false promises that the insurer would timely pay proper coverage in the event the insured suffered a loss. The insurer demurred based upon the grounds that plaintiff’s false advertising claim was barred by Moradi-Shalal, and the trial court sustained the demurrer. The Court of Appeal disagreed with the trial court, and the California Supreme Court affirmed the Court of Appeal’s decision.

As a result of the decision, insurers may now be subjected to claims for violations of the UCL.  Insureds may recover under the UCL if they can show that they were likely to be deceived, and that they suffered economic injury as a result of that deception. The court also held that insurers may be liable under the UCL for conduct which also supports a bad faith claim, such as unreasonable claims handling practices, withholding of policy benefits, etc.

If an insured prevails on its UCL claim, it may be entitled to restitution (i.e., return of premiums) and injunctive relief. Damages are not available under the UCL. Although there is no provision for attorney’s fees under the UCL, the court noted that a prevailing plaintiff may seek attorneys’ fees as a private attorney general under Code of Civil Procedure section 1021.5. Additionally, insurers may now be subjected to class actions for violations of the UCL. Insurers should also expect insureds to use the decision to attempt to expand the scope of discovery.

Click here to review the decision issued today.

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