Archive for March, 2014

New Jersey Legislature Passes Superstorm Sandy Bill of Rights

Monday, March 31st, 2014

We previously reported on the New Jersey legislature’s attempt to pass reform bills as a response to Superstorm Sandy.  Although New Jersey Assembly Bill A3710 died when referred to the Financial Institutions and Insurance Committee, the legislature recently passed Senate Bill S1804 (combined with S1306), which details how the state can distribute Superstorm Sandy federal aid relief, and established a Bill of Rights for Superstorm Sandy victims.

In relevant part, the Bill of Rights helps to ensure that victims of Superstorm Sandy can seek compensation from multiple recovery programs as well as through any applicable insurance.  If a victim is not wholly compensated through their insurance carrier, the Bill of Rights can apply to a governmental recovery program to aid in the victim’s effort to be made whole for any losses resulting from the storm.  According to this law, the State cannot deny applicants seeking aid merely because they have other applications pending for financial relief.  Now, victims have multiple avenues to be compensated for the damage occurred by Superstorm Sandy.

In June 2013, we reported on the 12 new insurance reform bills bassed by the New York State Assembly in response to Superstorm Sandy. 

Interrupted by Sandy

Friday, March 28th, 2014

In Johnson Gallagher Magliery, LLC v. The Charter Oak Fire Insurance Company, 2014 WL 1041831 (S.D.N.Y. Mar. 18, 2014), the United States District Court for the Southern District of New York, granting a motion for partial summary judgment, held that a law firm was not entitled to certain lost business income caused by Superstorm Sandy.

The law firm leased office space at 99 Wall Street in New York City.  The building was supplied electricity from the Consolidated Edison of New York Bowling Green Network.  On the evening of October 28, 2012, due to the looming storm, the office space at 99 Wall Street was evacuated.  The next night, on October 29, 2012, ConEd preemptively shut down the Bowling Green Network to prevent major customer and network damage.  When Superstorm Sandy hit, flooding damaged the Bowling Green Network equipment.  The Bowling Green Network was re-energized on November 3, 2012, but 99 Wall Street did not actually receive electricity until November 11, 2012.

The law firm filed a claim with its business casualty insurer, The Charter Oak Fire Insurance Company, for, amongst other things, lost business income.  Charter Oak denied the claim, citing the water exclusion in its policy.  In the ensuing insurance coverage litigation, Charter Oak filed a motion for partial summary judgment which asserted that the policy’s water exclusion barred coverage for the law firm’s lost business income when that loss was due to the interruption of electrical service by way of the Bowling Green Network, which had suffered water damage.

The Southern District of New York ruled that Charter Oak was not obligated to pay for business losses that the law firm sustained during the time period when the Bowling Green Network was shut down, from October 29, 2012 through November 3, 2012.  The court held, in part, that the water exclusion applied to business losses stemming from the shutdown of the Bowling Green Network, which suffered water damage that prevented the re-energizing of the network until November 3, 2012.  In so ruling, the court relied on deposition testimony from a ConEd senior engineer who confirmed that there was extensive water damage to the Bowling Green Network.

Homeowners Beware: Fraud in Claims Process Can Lead to Judicial Sanctions in Bad Faith Action

Thursday, March 13th, 2014

By Beth E. Yoffie, Sedgwick Los Angeles

A federal court for the Southern District of Texas has sanctioned a pro se litigant for making fraudulent misrepresentations to his homeowner’s insurer following a fire, and for bringing a bad faith action against the insurer.

In Alexander v. State Farm Lloyds, 4: 12-CV-490, 2014 WL 549389 (S.D. Tex. Feb. 11, 2014), Tony Alexander sued State Farm Lloyds (“State Farm”) for breach of contract, violations of the Texas Insurance Code, violations of the Texas Deceptive Trade Practices Act, and bad faith.  He sought more than $1 million under the policy’s Dwelling Coverage as well as $77,000 for the cost of additional living expenses, personal property damage, and securing of the residence.  He did so despite concealing material facts and making misrepresentations to State Farm during the claims process.

Mr. Alexander abandoned the case three days into the jury trial after his fraudulent conduct had become apparent.  Following that, State Farm moved for sanctions to be levied against him.  Mr. Alexander retained counsel, who argued that he could not be sanctioned because his “foolishness” had taken place before he had filed the lawsuit.  Counsel asserted that Mr. Alexander had not lied during the trial, and so had not displayed contempt for the judicial process.  The court disagreed.

Mr. Alexander’s decision to file suit was itself contemptuous.  The court found that he was a sophisticated individual, given he had worked in the finance industry, possessed an advanced degree, and previously operated multiple businesses; and, that he had connived to use the judicial system as a continuation of his lawless efforts to exploit the July 24, 2005 fire to squeeze additional money from State Farm.

The court concluded that, although Rule 11 did not permit sanctions on the facts before it, attorney’s fees could be awarded to State Farm under Texas Rule 13 and Chapter 10 of the Civil Remedies and Practices Code.  Accordingly, it awarded attorney’s fees to State Farm.

Fourth Circuit Holds that Contingent Business Interruption Endorsement Does Not Extend to Indirect Suppliers

Monday, March 10th, 2014

On February 20, 2014, the United States Court of Appeals for the Fourth Circuit held that a contingent business interruption endorsement did not extend coverage to claims arising out of a business interruption caused by an indirect supplier.  Millennium Inorganic Chemicals Ltd. v. National Union Fire Insurance Co. of Pittsburgh, PA, 13-1194, 2014 WL 642993 (4th Cir. Feb. 20, 2014).

Millennium Inorganic Chemicals Ltd. and Cristal Inorganic Chemicals Ltd. (collectively, “Millennium”) was in the business of processing titanium dioxide, a compound often used for its white pigmentation, at its processing facility in Western Australia.  Millennium’s titanium dioxide processing operation was fueled by natural gas through the Dampier-to-Bunbury Natural Gas Pipeline (the “DB Pipeline”), Western Australia’s principal gas transmission pipeline.  Millennium purchased the gas under a contract with Alinta Sales Pty Ltd (“Alinta”), a retail gas supplier, which had purchased the gas from a number of natural gas producers, including Apache Corporation (“Apache”).  Millennium’s contract for the purchase of natural gas was solely with Alinta.

On June 3, 2008, an explosion occurred at Apache’s Varanus Island facility, causing its natural gas production to cease.  As a result of the explosion, Millennium’s gas supply was disrupted, and it was forced to shut down its titanium dioxide manufacturing operations for a number of months.

On June 5, 2008, Millennium tendered its claim to National Union Fire Insurance Company of Pittsburgh, PA and ACE American Insurance Co. (the “Insurers”), seeking contingent business interruption (“CBI”) coverage for losses incurred when the titanium dioxide manufacturing operation was shut down.  The policies included a CBI Endorsement that insured Millennium against certain losses resulting from the disruption of the supply of materials to Millennium caused by damage to certain “contributing properties.”  The term “contributing properties” was defined as “the insured’s prime suppliers of materials, parts and services.  If the insured depends upon one or, at most, a few manufacturers or suppliers for the bulk of materials and supplies necessary to conduct its business operations, then these suppliers are said to be “contributing properties.”  The Endorsement further defined “contributing property” by reference to the policy schedules, which indicated that covered locations “must be direct suppliers of materials to [Millennium’s] locations.”

The Insurers denied Millennium’s claim on the ground that Apache was not a direct supplier to Millennium as required under the policies.  Millennium subsequently sued the Insurers in the U.S. District Court for the District of Maryland, contending that the Insurers wrongfully denied Millennium’s claim for coverage under the CBI Endorsement.

The district court concluded that coverage under the policies extended only to “direct contributing properties”; however, the district court also held that none of the evidence “speaks to the specific meaning the parties intended by the use of the word ‘direct.’”  The district court ruled that the term “direct” was ambiguous in the context of an entity that provides a direct physical supply of material to the insured, but has no direct contractual relationship with the insured.  Accordingly, the district court, construing the term in favor of the insured, held that Apache qualified as a “direct” supplier to Millennium, and Apache’s natural gas production facility was a “direct contributing property” within the meaning of the policies “because Apache’s facility physically provided a direct supply of natural gas to Millennium’s premises, despite the fact that Apache and Millennium had no direct contractual relationship.”

On appeal, the Fourth Circuit reversed the judgment of the district court and remanded the case for entry of summary judgment in favor of the Insurers on the ground that neither Apache nor Apache’s facilities on Varanus Island could be considered a “direct contributing property” of Millennium.  The Fourth Circuit held that the term “direct” meant “proceeding from one point to another in time or space without deviation or interruption,” “transmitted back and forth without an intermediary,” or “operating or guided without digression or obstruction.”  It was undisputed that Millennium received its gas from Alinta, and Alinta, not Apache, had the sole ability to control the amount of gas directed to Millennium.  It also was undisputed that Millennium received its gas by way of the DB Pipeline, and that the DB Pipeline was neither owned nor operated by Apache and Apache relinquished both legal title and physical control over the gas when it entered the DB Pipeline.  Therefore, the court concluded that the relationship between Apache and Millennium, if any, was clearly interrupted by “an intermediary,” Alinta, who took full physical control of Apache’s gas before delivering indistinguishable commingled gas to Millennium.

“FAIR” is Fair: California Policyholders Not Entitled to Recovery Beyond Specified Policy Limits for Fire Losses

Friday, March 7th, 2014

By Michael A. Topp, Sedgwick San Francisco

Recently, the California Court of Appeal held that recovery under a standard California fire policy is limited to the specified policy limits, even if the actual cash value of the loss exceeds those limits.

The California FAIR Plan Association (the “FAIR Plan”) was established by the California legislature in 1968 to make available “basic property insurance” to property owners who are unable to procure such insurance through normal channels from an admitted insurer.  The FAIR Plan is an involuntary joint reinsurance association of all insurers authorized to write property insurance in California.  The governing statutes require the FAIR Plan to provide insurance for the peril of fire which is equivalent to, or more favorable than what is contained in, the standard form fire insurance policy set forth in Insurance Code § 2071.

In St. Cyr v. California FAIR Plan Assn., ___ Cal.App.4th ___, 2014 WL 346074 (2d Dist. Jan. 31, 2014), the plaintiffs were policyholders who lived in high fire risk areas and whose homes were destroyed in a wildfire.  Despite having been paid the full amount of their policy limits for destruction of their properties, the policyholders sued the FAIR Plan for breach of contract, bad faith, and unfair business practices.  Specifically, the policyholders argued that, although standard fire policies require payment for actual cash value of dwelling loss and the actual cash value of their homes exceeded their policy limits, the FAIR Plan limited payment to the policy limits.

The court rejected the policyholders’ argument based on the express language of Section 2071, and sustained the trial court’s dismissal of the action.  The court noted that the statutorily-required policy language provides that fire coverage is afforded “to the extent of the actual cash value of the loss,” but also that coverage is provided “to an amount not exceeding _____ dollars.”  Thus, the stated limit of insurance “fixes the maximum amount due under the policy.”  The court also noted that, under Insurance Code § 2051, which specifies the “measure of indemnity” under an “open” policy, loss payment is determined based on the lesser of the policy limit or the cost to repair and/or replace the damaged property.  Therefore, “[a]s appellants were paid the full amount of their policy limits, they were paid the amount due.”

It should be noted that, under California Insurance Code § 10102(e) and (f), a policy issued as “guaranteed replacement cost coverage” may not limit coverage to a specified amount.  The policy at issue in the St. Cyr case was described by the court as “bare bones” coverage, and did not implicate Section 10102.


Developments in the Hydraulic Fracturing Industry

Wednesday, March 5th, 2014

For our readers who are keeping tabs on developments in the hydraulic fracturing (“fracking”) industry, you may be interested in our recent “news flashes” concerning the fracking industry in California.

The first is regarding a bill, introduced last Thursday, February 27th, that would halt all types of fracturing both on- and off-shore California until the completion of a multiagency review of the economic, environmental and public health impacts. SB 1132 would not only halt the use of high pressure injection of water and fracturing fluids into oil and gas reservoirs, the process most often thought of as “fracking” by the public, but would also prevent the use of acids to enhance permeability in “pay zones” to increase the flow of oil and gas into wells until the report is finished. To view a PDF copy the news flash, click here. 

Just one day later, on February 28th, the Los Angeles City Council’s unanimously voted to draft a new municipal ordinance banning hydraulic fracturing and other well-stimulation activities, such as acidizing, within the city confines. The ordinance would place a moratorium on “all activity associated with well stimulation, including, but not limited to, hydraulic fracturing, gravel packing, and acidizing, or any combination thereof, and the use of waste disposal injection wells.”  The ordinance would make Los Angeles the only oil-producing city in California to ban hydraulic fracturing. The moratorium would remain in place until the city verifies that hydraulic fracturing will not harm public safety or compromise drinking water.  The ordinance must still be drafted and is subject to additional public input before being presented to the City Council for a final vote. To view a PDF copy of this news flash, click here.

5th Circuit Says the Issue is Liability, Not Damages

Tuesday, March 4th, 2014

In Carl E. Woodward, L.L.C. v. Acceptance Indem. Ins. Co.,  2014 WL 535726, No. 12–60561 (5th Cir. Feb. 11, 2014)  the 5th Circuit Court of Appeals held that, when analyzing coverage under an additional insured endorsement that excludes completed operations, the focus of the inquiry is when the additional insured’s liability arose, not when the damage occurred.

In Woodward, Pass Marianne contracted with a general contractor, Woodward, for the construction of condominiums on the Mississippi Gulf Coast.  Woodward subcontracted with DCM for the concrete work.  Pass Marianne sold the condominiums to Lemon Drop Properties and, a year after purchasing the condominiums, Lemon Drop brought suit against Pass Marianne and Woodward asserting claims for rescission, breach of contract and gross negligence. Pass Marianne filed a cross-claim against Woodward alleging faulty construction of the condominiums.

The claims were eventually arbitrated and one of the significant issues in the arbitration was the fault of DCM.  After Pass Marianne asserted its cross-claims, Woodward demanded that DCM’s commercial general liability carrier, Acceptance Indemnity Corporation, provide a defense and indemnity.  Acceptance denied the tender.  As a result, Woodward and its insurer filed suit against Acceptance.  The Acceptance policy provided that Woodward was an additional insured, but only with respect to liability arising out of DCM’s ongoing operations performed for Woodward. Additionally, the additional insured endorsement excluded coverage for property damage occurring after all work to be performed by or on behalf of Woodward at the site had been completed.

Woodward and its insurer moved for summary judgment. The district court held that Acceptance had a duty to defend and Acceptance appealed.  On appeal, the 5th Circuit focused on the portion of the additional insured endorsement that excluded coverage for property damage occurring after all work had been completed.  While noting that Mississippi’s highest court had not addressed the issue, the 5th Circuit concluded that, under the terms of the endorsement, claims for liability can be brought after ongoing operations are complete, but the underlying liability cannot be due to the completed operations. The court explained “that liability for construction defects, while created during ongoing operations, legally arises from completed operations.”  Accordingly, the court reasoned that the issue was not whether DCM failed to comply with plans and specifications during ongoing operations, but whether Woodward’s liability arose out of those ongoing operations. “It did not. Woodward’s liability for breach of contract, if any, flows from defects in the completed construction project.”

Accordingly, the court held that, even if it accepted the district court’s factual finding that damage had occurred during ongoing operations, the liability for such damages arose out of completed operations for which Woodward was not an additional insured under the policy.  As a result, Acceptance had no duty to defend Woodward.


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