Archive for November, 2013

Something Borrowed, Something New, But IIGF Still Can’t Collect From Borrowing Employer’s Workers’ Comp Carrier

Friday, November 29th, 2013

Diana (Tremback) Karnes, Sedgwick Chicago

In Illinois Ins. Guaranty Fund v. Liberty Mutual Ins. Co., 2013 IL App (1st) 123345 (Nov. 12, 2013) the Illinois First District appellate court held that a borrowing employer’s workers’ compensation carrier is not required to reimburse the Illinois Insurance Guaranty Fund (“IIGF”) for benefits due to a borrowed employee.  The ruling is in line with last year’s decision in Illinois Ins. Guaranty Fund v. Virginia Surety Co., Inc., et al., 2012 IL App (1st) 113758 (Oct. 12, 2012), and represents another win for borrowing employer’s workers’ compensation carriers.

TGI Group employee, John Earley, was injured while performing work as a borrowed employee for Interlake Material Handling.  A workers’ compensation claim followed.  TGI Group’s workers’ compensation carrier, Legion Insurance Company, made workers’ compensation payments to Earley until it was liquidated in July 2003.  At that point, IIGF, which provides protection for insolvent members, stepped in and paid Earley’s benefits.

About five years later, in July 2008, IIGF filed suit seeking reimbursement for the benefits it paid Earley, naming Zurich American Insurance Company, Interlake’s workers’ compensation carrier, as a defendant in February 2009.  IIGF did not expressly frame its claim as one for “subrogation”, although this was at the heart of it.  IIGF also argued that Zurich’s policy constituted “other insurance” that had to be exhausted before IIGF’s obligations were triggered.

The appellate court upheld the trial court’s decision to grant Zurich’s motion to dismiss for failing to state a subrogation claim. For IIGF to have a valid subrogation claim, Zurich (not Legion) had to be primarily liable for the loss, which wasn’t alleged.  Further, Legion would have known that failing to reserve rights on this issue could result in a waiver.  However, there was no evidence that Legion contested or otherwise believed Zurich was responsible for the loss.

The court rejected IIGF’s argument that the Zurich policy constituted “other insurance” under the relevant statute, as Legion’s policy and Zurich’s policy covered two different Insureds, thereby affirming last year’s holding in Virginia Surety.  It also found that the action was barred by the statute of limitations.

First Circuit Enforces D&O Policy’s Known Circumstances Exclusion

Tuesday, November 26th, 2013

By Eryk R. Gettell, Sedgwick San Francisco

The First Circuit Court of Appeals recently held that a “Known Circumstances Exclusion” in an insured school’s D&O policy barred coverage for an underlying action involving misrepresentations in soliciting a donation.

In The Clark School for Creative Learning, Inc. v. Philadelphia Indem. Ins. Co., 2013 WL 5737339 (1st Cir. Oct. 23, 2013), the court found that Philadelphia Indemnity Insurance Company (“Philadelphia”) had no obligation to reimburse the insured’s defense costs or settlement payments because the underlying action was plainly excluded by the Known Circumstances Exclusion.

The insured, The Clark School for Creative Learning, Inc. (“the School”), located in Danvers, Massachusetts, had over $300,000 in debt in June 2007.  In May 2008, Marcia and Josepha Valenti (parents of three of students) donated $500,000 to the School.  In May 2009, the Valentis sued the School and its director because the School did not follow through on promises it made in soliciting the donation.  The School notified Philadelphia of the lawsuit, for which Philadelphia denied coverage based on the policy’s Known Circumstances Exclusion.

The Valentis and the School eventually resolved the lawsuit.  Shortly thereafter, the School sued Philadelphia for indemnification of its defense costs and settlement payments in the underlying action.  The trial court granted Philadelphia’s summary judgment motion based on the Known Circumstances Exclusion.  The School appealed.

The issue before the appellate court was how to interpret the policy’s “Known Circumstances Revealed In Financial Statement Exclusion,” which barred coverage for any losses “in any way involving any matter, fact, or circumstance disclosed in connection with Note 8 of the [School’s] Financial Statement.”  Note 8, entitled “Insufficient Net Assets,” provided the following:

Subsequent to the date of the accompanying financial statement, in May of 2008 the School was a recipient of a major gift totaling $500,000 (see Note 7).  The donation is unrestricted and will be used to support the School’s general operations as management’s plans for the School’s future are implemented and allowed time to succeed.  Management feels that its plans and the subsequent major gift will enable the School to operate as a going concern.

Note 7 described the Valentis’ gift in greater detail.

Despite the exclusion’s plain language, the School argued that the coverage for the underlying action should be provided because (1) the exclusion was only intended to exclude the School’s financial difficulties, and not the Valentis’ gift; (2) the canon of ejusdem generis required a different reading of the exclusion; and (3) the exclusion’s plain language must give way to the School’s reasonable expectations of coverage.  The First Circuit rejected each of these arguments.

First, the court noted that the exclusion’s plain language was not limited to losses caused by financial difficulties, and the note explicitly referenced the Valentis’ gift.  The court also refused to construe narrowly the exclusion under the canon of ejusdem generis because the School’s proposed interpretation would render certain words in the policy meaningless.  Lastly, the court rejected the School’s argument that the application of the Known Circumstances Exclusion deprived the School of its reasonable expectations of coverage.  The court noted that, “when a contract is not ambiguous, a party can have no reasonable expectation of coverage when that expectation would run counter to the unambiguous language of an insurance policy.”  The First Circuit affirmed the district court’s decision.

Although the First Circuit had little trouble enforcing the Known Circumstances Exclusion, the Clark School decision is a useful illustration of how courts will enforce broad and clear exclusionary language, despite a policyholder’s creative efforts to avoid the exclusion.

Insurer’s Defense Obligation Limited To Suits Seeking Damages

Monday, November 25th, 2013

By John S. Na, Sedgwick Los Angeles

Recently, the California Court of Appeal held that, under California law, an insurer is not obligated to defend a lawsuit that does not seek monetary damages.

In San Miguel Community Assoc. v. State Farm Gen. Ins. Co., 163 Cal. Rptr. 3d 358 (Cal. Ct. App. 2013), the Association was insured under a comprehensive business liability policy issued by State Farm providing coverage for “those sums that the insured becomes legally obligated to pay as damages because of bodily injury, property damage, personal injury or advertising injury.”  In late 2008, two of the Association’s members filed grievances against the Association stemming from its alleged failure to enforce parking restrictions.  The Association could not resolve the matter, and it quickly escalated to binding arbitration and full-fledged litigation in California state court.

The initial complaint alleged that the Association breached its conditions, covenants, and restrictions, and sought injunctive relief.  The complaint was subsequently amended on multiple occasions, and ultimately included a claim for monetary damages.  The Association tendered the matter to State Farm, seeking coverage at each step as the matter escalated from arbitration to litigation.  Until the complaint was amended to include a claim for monetary damages, State Farm denied coverage on the ground that the matter did not involve “bodily injury, property damage, personal injury or advertising injury.”  After the damages claim was added, however, State Farm agreed to defend the Association.  However, State Farm refused to reimburse the Association for its previously-incurred attorneys’ fees and costs, and the Association sued State Farm for breach of contract.

The trial court found that, until the filing of the second amended complaint, the arbitration demand and the underlying lawsuit did not seek any covered damages under the policy and State Farm was correct in not defending the Association.  On appeal, the Association argued that there was an implied claim for recovery of monetary damages in the underlying lawsuit, and State Farm was therefore obligated to infer the existence of additional allegations triggering coverage under the policy.  Rejecting the Association’s argument, the court initially noted that, under California law, an insurer has no obligation to defend proceedings that do not seek damages when a policy plainly obligates an insurer to defend the insured from actions for damages.  The court found that, until the complaint was amended to include the damages claim, the claimants’ characterized their injuries as “irreparable” and “without an adequate remedy at law,” thus implying they were not seeking monetary damages.  The court then determined that State Farm was under no obligation to infer the existence of missing allegations in the underlying lawsuit such that coverage would be triggered under the policy.  Finally, the court noted that the claimants’ own counsel in the underlying lawsuit made it clear that the gravamen of their case was to obtain injunctive relief as opposed to monetary damages.

Lance Armstrong Confession Injects New Life Into Insurance-Related Arbitration Dispute

Tuesday, November 12th, 2013

By Ryan C. Chapoteau, Sedgwick New York

Here is a cautionary tale for insurers with respect to the enforceability of settlement agreements.

SCA Promotions, Inc. (SCA), a Dallas-based company that offers prize indemnification insurance to athletes, has been in a continuous battle with Lance Armstrong since his doping allegations emerged in 2005.  Most recently, on October 29, 2013, a Texas arbitration panel agreed to hear SCA’s attempt to recoup $7.5 million in bonus prize money, attorneys’ fees, and interest it paid to Armstrong for winning the 2004 Tour de France.  This panel’s decision essentially reopens a settled matter given that, in 2006, SCA agreed both to pay the $7.5 million to Armstrong, and not attempt to challenge the award.

Due to the previous settlement agreement between SCA and Armstrong, Armstrong claimed that the arbitration panel lacked jurisdiction to hear this matter.  SCA countered, and the panel agreed, that Armstrong’s January 2013 confession to the use of illicit substances and blood transfusions should allow for SCA to reverse its prior stipulation and challenge the payment.  The panel voted 2-1 that it had, and would exercise, jurisdiction to determine a final award, if any, to resolve all issues between Armstrong and SCA.  It is unclear how or if this arbitration decision will affect a separate lawsuit between the parties in which SCA is attempting to recoup approximately $12 million it paid to Armstrong in bonus prize money throughout his career.

Although the 2006 settlement agreement was binding, this decision demonstrates how a fully-executed settlement agreement and release still may be voided by an arbitration panel, as it is not necessarily bound by substantive rules of law.  Essentially, the arbitration panel’s decision gave SCA the proverbial second bite at the apple with respect to its attempt to recoup the $7.5 million.

Allegations in Third-Party Complaint May Trigger Duty to Defend

Thursday, November 7th, 2013

By Beth E. Yoffie, Sedgwick Los Angeles

Although a personal injury complaint filed by a subcontractor’s employee alleged direct negligence only against the additional insured contractor, the vicarious liability coverage afforded the additional insured was potentially triggered by allegations in third-party complaints asserting that the named insured subcontractor was negligent.  As a result, an appellate court held in Illinois Emcasco Ins. Co. v. Waukegan Steel Sales, 2013 Ill. App. LEXIS 624 (Ill. Ct. App. Sept. 13, 2013), that the insurer had a duty to defend the additional insured under the policy’s vicarious liability coverage which expressly excluded coverage for the additional insured’s own negligence.

Waukegan Steel Sales, Inc. was hired to perform work on a high school construction project, and hired I-MAXX Metalworks, Inc. as a subcontractor.  John Walls, an employee of I-MAXX, was injured on the construction site and filed a personal injury suit alleging that Waukegan failed to properly manage, operate and maintain the premises.  Wall also sued two other companies involved in the project, both of which filed third-party complaints against I-MAXX alleging that its negligence contributed to Wall’s injuries.

Waukegan sought coverage as an additional insured under a policy issued to I-MAXX, which covered Waukegan for injuries caused by I-MAXX’s acts, but not for Waukegan’s own acts.  Emcasco sought a judicial declaration that it had no duty to defend Waukegan because the underlying lawsuit alleged direct negligence by Waukegan.

The trial court found that the third-party complaints created the potential that Waukegan could be held vicariously liable for I-MAXX’s conduct, and Emcasco appealed.

The appellate court acknowledged that the allegations of Wall’s complaint against Waukegan did not fall within the policy’s additional insured coverage for vicarious liability; however, the court held it was permissible to use the third-party complaints to determine Emcasco’s liability under the policy.  The court found that Wall’s complaint, read in conjunction with the third-party complaints, demonstrated the potential that Waukegan would be held vicariously liable for I-MAXX’s sole liability.  Accordingly, Emcasco had a duty to defend Waukegan.

Insurer’s “Premonitions” Accurate in Claim Involving Psychic Group: No Coverage for Second Suit Alleging Same Wrongful Acts as Suit Filed Prior to Policy Inception

Wednesday, November 6th, 2013

By Kathryn M. Metz, Sedgwick Chicago

In Zodiac Group, Inc. v. Axis Surplus Ins. Co., _____ Fed. Appx. _____, 2013 WL 5718439 (11th Cir. (Fla.) Oct. 22, 2013), the United States Court of Appeals for the Eleventh Circuit considered whether facts alleged in an underlying complaint filed in federal court, constituted the “Same Wrongful Act” under a professional liability policy as facts that were alleged in a prior complaint filed in Florida state court.  The Eleventh Circuit determined that the federal court complaint was based on the Same Wrongful Acts as the state court complaint, and thus there was no coverage under the policy because the state court complaint was filed prior to the inception of the policy.

The Zodiac Group was insured under consecutive, annual claims-made professional liability policies issued by Axis Surplus Insurance Company, beginning with the policy period October 1, 2008 to October 1, 2009.  In November 2001, the Zodiac Group entered into an agreement wherein Linda Georgian, a renowned psychic and co-host of the Psychic Friends Network, agreed to endorse the Zodiac Group’s services.  The endorsement agreement ended in March 2007.  In April 2008, Georgian sued the Zodiac group in Florida state court, alleging that the Zodiac Group improperly used Georgian’s name and likeness to imply that Georgian continued to endorse its services despite the termination of the endorsement agreement.  The state court suit was dismissed in November of 2009 for lack of prosecution.  Georgian then sued the Zodiac Group and its owners in federal court in January 2010.  Georgian’s federal court complaint contained allegations similar to those in her state court complaint.

Zodiac Group tendered the federal court complaint to Axis for coverage and defense, but Axis declined the tender on the basis that the claims in the complaint were “first made” before the October 2008 policy incepted.  The Eleventh Circuit agreed with Axis and rejected the Zodiac Group’s argument that the federal court complaint alleged separate wrongful acts because it named new defendants.  Instead, the court concluded that, because the policy language treated all wrongful acts related by common facts, circumstances, transactions, events, and/or decisions as one “Wrongful Act” without limitation with respect to the actor, the prior state court complaint and the later federal court complaint alleged the same single Wrongful Act, and the claim was first made at the time of the state court complaint, prior to inception of the first policy.

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