Archive for April, 2014

So A Man Walks Out of a Bar . . . Applying the Liquor Liability Exclusion to a Drunken Pedestrian

Wednesday, April 30th, 2014

By Jason Chorley, Sedgwick San Francisco

In State Automobile Mutual Ins. Co. v. Lucchesi, ___ Fed. Appx. ___, 2014 WL 1395690 (3d Cir. Apr. 11, 2014), the U.S. Court of Appeals for the Third Circuit upheld summary judgment for State Auto and concluded that a liquor liability exclusion in a general liability policy precluded coverage for bodily injuries sustained by a bar patron hit by a taxi after leaving the bar.

State Auto issued a commercial general liability policy to the owners of Champs Sports Bar & Grill, located in State College, Pennsylvania.  The policy contained a liquor liability exclusion precluding coverage for “damages” an insured became obligated to pay because of “bodily injury” for which the insured was held liable because of “causing or contributing to the intoxication of any person,” “furnishing of alcoholic beverages to a person … under the influence of alcohol,” or violating a “statute … relating to the sale, gift, distribution, or use of alcoholic beverages.”

One night, Clinton Bonson was drinking at Champs and left the bar on foot.  While crossing a major thoroughfare, he was hit by a speeding taxi and seriously injured.  Bonson sued Champs, its owner, and two former bartenders, alleging that Champs was liable for his injuries because it:  (1) failed to cut Bonson off, which enhanced his degree of intoxication; and (2) allowed Bonson to leave the bar intoxicated.  Although State Auto initially provided a defense subject to a reservation of rights, it filed a declaratory relief action in Pennsylvania federal court and sought summary judgment based on the liquor liability exclusion.  Champs conceded that the liquor liability exclusion applied to the bar’s furnishing of alcohol to Bonson in excess, but argued that it did not apply to Bonson’s claim that Champs let Bonson leave the bar while intoxicated.  The district court granted summary judgment in favor of State Auto, noting that the claims were inextricably intertwined, and that the sole basis for the claims was the service of alcohol.

On appeal, the Third Circuit noted that every claim in Bonson’s complaint sought damages for the bodily injury he suffered when he was hit by the taxi.  Rejecting the same argument Champs made before the district court (i.e., that the exclusion did not apply to Bonson’s claim that he was allowed to leave the bar while intoxicated), the court stated that “if coverage of the former claim is excluded, so is coverage of the latter, as both claims see ‘damages because of’ the exact same ‘bodily injury.’”

New York Federal Court Dismisses Superstorm Sandy Bad-Faith Claim as Redundant

Tuesday, April 29th, 2014

By Gilbert Lee, Sedgwick New York

In 433 Main Street Realty, LLC v. Darwin National Assurance Co., 2014 WL 1622103 (E.D.N.Y. Apr. 22, 2014), the United States District Court for the Eastern District of New York dismissed the insureds’ cause of action against their insurer for alleged breach of the covenant of good faith and fair dealing in connection with a property damage claim related to Superstorm Sandy. The court concluded that the bad-faith claim was redundant and duplicative of the insureds’ cause of action for breach of contract.

The insureds owned and were developing a residential property in Port Washington, New York when the construction site sustained wind and water damage related to Superstorm Sandy. The insureds sought coverage under a commercial inland marine policy issued by Darwin National Assurance Company which was subject to a $10,000 deductible, except for loss caused by flood, which was subject to a $250,000 deductible. Although Darwin agreed that the claim was covered under the policy, the parties disagreed as to whether the property damage was caused by flood and, therefore, subject to the $250,000 deductible. The insureds later commenced a declaratory judgment action asserting, among other things, causes of action for breach of contract and breach of the insurer’s good faith obligations premised upon Darwin’s alleged mishandling of the claim and its insistence that the higher deductible applied.

The district court acknowledged that New York implies a duty of good faith and fair dealing into every express contract, but further recognized that a breach of that duty is merely a breach of the underlying contract. In that regard, the court concluded that New York authorities do not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim based upon the same facts also is pled. Under those circumstances, the cause of action for breach of the implied covenant of good faith and fair dealing should be dismissed as redundant.

In reviewing the insureds’ allegations, the district court held that the core of the dispute was that the insurer had not paid what the insureds believed was due under the insurance policy. Accordingly, because the insureds failed to allege facts showing bad faith differing from the facts supporting the alleged breach of contract, the district court dismissed the bad faith claim as redundant. Notably, however, the court acknowledged in a footnote that dismissal of the bad faith claim does not preclude the insureds from claiming consequential damages beyond the policy limits on their breach of contract claim based on allegations of bad faith.

Please click here to see our earlier coverage of Superstorm Sandy and related regulations and property coverage disputes.

England and Wales Court of Appeal: Do Not Disclose At Your Peril

Friday, April 25th, 2014

By Andrew Milne, Sedgwick London

The Court of Appeal in England and Wales recently affirmed the High Court’s decision in Alan Bate v Aviva Insurance UK Ltd [2014] EWCA Civ 334, which held that Aviva was entitled to rescind or avoid a domestic property insurance policy taken out by Alan Bate.

Mr. Bate took out a policy covering a substantial property he owned called the Long House, which he was converting into five separate dwellings. The Long House was damaged in a 2001 fire, and a claim was made with Mr. Bate’s previous insurers. At the time Mr. Bate sought coverage from Aviva, he represented in his application that the 2001 fire had occurred at a “previous address,” and failed to disclose the renovation being done to his property and that the company performing the work was based at the property.

In June 2006, the Long House was largely destroyed by a second, accidental fire following which Mr. Bate submitted a claim to Aviva. Aviva did not accept the claim, and informed Mr. Bate it had decided to rescind and/or avoid the policy on the grounds of misrepresentation and non-disclosure. Mr. Bate commenced proceedings against Aviva, and the High Court ruled in Aviva’s favor.

The judgment is interesting because it concerns a claim that arose before the Consumer Insurance (Disclosure and Representations) Act 2012 came into force. The Act replaced a consumer’s duty to voluntarily disclose material facts with a duty to take reasonable care not to make a misrepresentation during pre-contractual negotiations. Although a similar decision probably would have been reached in this case even if the Act had been in effect when Mr. Bate filed his claim with Aviva given the misrepresentation he made about the 2001 fire, it is unlikely to be long before we see reported cases where insurers are prevented from rescinding or avoiding consumer insurance policies in circumstances where they would have been able to do so before the Act took effect.

“Related Acts” Reduce Insurer’s Exposure by Half

Tuesday, April 22nd, 2014

By John Na, Sedgwick Los Angeles

The Eighth Circuit Court of Appeals recently held that, under Minnesota law, multiple wrongful acts by a financial advisor to four plaintiffs are “interrelated” and “logically connected” within the meaning of the policy’s “Interrelated Wrongful Acts” limitation.  In Crystal D. Kilcher v. Continental Casualty Co., 2014 WL 1317296 (8th Cir. April 3, 2014), the Eighth Circuit reversed the district court’s ruling that the policy’s $1 million coverage limit for a single claim did not apply, instead finding that the insured’s wrongful acts in selling life insurance policies and unsuitable investment products to the plaintiffs constituted a single claim, reducing Continental’s exposure.

The four plaintiffs in Kilcher were clients of financial advisor Helen Dale of Transamerica Financial Advisors, Inc.  Continental insured Transamerica and Dale under a claims made, professional liability policy providing $1 million in coverage per claim up to an aggregate amount of $2 million.

Starting in 1999, Dale advised each plaintiff to purchase whole life insurance policies.  In addition, she instructed plaintiffs to invest in various annuities, some with surrender charges for early withdrawals.  In 2007, plaintiffs learned their investments and portfolios were not suitable for their age, background, and investment goals.  Plaintiffs ultimately consolidated their claims and filed a single suit against Dale and Transamerica alleging breach of fiduciary duty, negligent misrepresentation, fraudulent misrepresentation, fraud, unsuitability, and violation of state securities laws. In January 2012, the parties entered into a settlement wherein Continental agreed to pay $1 million to settle plaintiffs’ claims against Dale, and submit to the district court for a ruling on whether plaintiffs’ claims constituted a single claim or multiple claims.

The policy provides that multiple claims “involving the same Wrongful Act of Interrelated Wrongful Acts shall be considered as one Claim.”  The policy defines “Interrelated Wrongful Acts” as “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.”  The district court did not find Dale’s wrongful acts logically or causally connected to one another, holding that plaintiffs submitted at least two different claims because Dale’s wrongful acts included not only selling life insurance policies but also unsuitable annuities as well.  Continental appealed the district court’s ruling.

The Eighth Circuit reversed the district court’s ruling, holding that plaintiffs’ claims are interrelated as they are logically connected to a common set of “fact, circumstance, situation, transaction or event.”  The court noted that, although Dale may have made different misstatements, omissions, or promises to each plaintiff on different dates, the analysis does not stop there.  The court stated that a logical connection exists between all of Dale’s wrongful acts, such as her desire to earn commissions by advising plaintiffs to purchase life insurance policies and investments not suitable for them.  In addition, the court found that the plaintiffs are all young, unsophisticated investors who presented the same opportunity to Dale: an investor who trusted in Dale to act in his or her best interest.  The court refused to engage in “micro-distinguishing” between the different acts involved in selling different types of life insurance policies and annuities, instead finding that they are all logically connected by Dale’s  instructions that plaintiffs make inappropriate purchases and unsuitable investments.

California Court: Commercial Crime Policy Rescinded Due To Insured’s Material Misrepresentation Concerning Handling of Funds

Friday, April 18th, 2014

Kurtz v. Liberty Mutual Insurance Co., et al., Case No. 2:11-cv-7010 (C.D.Cal. April 14, 2014), was an insurance coverage dispute arising out of the downfall of Los Angeles businessman Ezri Namvar who has also been referred to as the “Bernie Madoff of Beverly Hills.” The Chapter 7 Bankruptcy Trustee for one of Namvar’s companies, Namco Financial Exchange Corp. (NFE), sued its primary and excess insurers seeking to recover over $35 million in client funds misappropriated from NFE.

The Commercial Crime Policy’s application asked, “Are proceeds from 1031 transactions held in bank accounts segregated from those of your operating funds?” NFE answered “Yes,” to this question, representing that it did in fact segregate its client funds from operating funds. In their motion for summary judgment, the insurers asserted that they were entitled to rescind their respective policies on the ground that NFE’s response to the segregation question constituted a material misrepresentation that the insurers relied upon in issuing the policies.

The insurers’ joint motion cited testimony from NFE’s own employees, as well as NFE’s broker and the underwriters, concerning the segregation requirement. The evidence demonstrated that, instead of segregating client funds, NFE maintained both client funds and operating funds in one comingled bank account. NFE argued that, because it accounted for each client’s funds separately in its internal ledgers, it answered the segregation question honestly. The court disagreed. It rejected the insured’s argument that differences between the policy provisions and the application questions created an ambiguity, and held that the question on the application was unambiguous and subject to only one reasonable construction – i.e. whether NFE maintained client funds and operating funds in segregated bank accounts. Because NFE misrepresented that it segregated operating funds from client funds on the application, and the evidence also established that this misrepresentation was material, the court held that rescission was proper.

The court rejected two additional arguments from the NFE Trustee. First, the court rejected the Trustee’s argument that the insurers were estopped from denying coverage for failure to comply with insurance regulations concerning timely responses to claims. The court held that even if the insurers did violate the regulations (which the insurers denied), estoppel did not apply because the Trustee had failed to present evidence of any reliance on the insurers’ conduct, and the Trustee could not demonstrate any harm as the policy was void ab initio due to the material misrepresentation on the application. Second, the court rejected the Trustee’s claim that the insurers could not raise rescission as a defense for failure to allege it as an affirmative defense or first tender the premiums earlier. The court held that the insurers had properly raised rescission as a defense in their answers, and that under California law an insurer may properly allege rescission as a defense to a suit filed by the insured without first tendering the premiums.

Accordingly the court granted judgment for the insurers. Sedgwick’s Michael R. Davisson, Susan Koehler Sullivan and Ira Steinberg represented one of the defendant insurers.

Offshore Professional Risk in 2014

Wednesday, April 16th, 2014

By Mark Chudleigh, Chen FoleyNick Miles, and Alex J. Potts, Sedgwick Bermuda

From the Cayman Islands to Hong Kong, there’s a lot going on in the world of offshore litigation and law reform. In this report, Sedgwick’s Offshore Professional Risks practice offers a global perspective on professional risk, with unique expertise and solutions valuable to providers and users of offshore services and insurance carriers operating in offshore jurisdictions, including Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, and the Isle of Man.

Learn more about new laws changing the future of this business, collective investment schemes, issues relating to cybercrime and cyberliability, and the dangers of being an offshore lawyer.

 Read the full news report here.

Eleventh Circuit Recognizes Important Exception to the Eight Corners Rule

Tuesday, April 15th, 2014

By Eryk Gettell, Sedgwick San Francisco

Florida courts generally adhere to the Eight Corners Rule when determining whether an insurer has a duty to defend its insured.  Under this rule, the duty to defend determination is made by looking only at the terms within the four corners the insurance policy and the allegations within the four corners of the complaint.  Extrinsic evidence may not be considered.  Recently, however, in Composite Structures, Inc. v. Continental Insurance Co., 2014 WL 1069253 (11th Cir. March 20, 2014) (unpublished), the United States Court of Appeals for the Eleventh Circuit (applying Florida state law) recognized an important exception to the Eight Corners Rule – when an insurer’s coverage denial is based on factual issues that ordinarily would not be alleged in the complaint, the insurer may consider extrinsic evidence outside of the complaint.

The underlying lawsuit was brought by two seamen who sustained carbon monoxide poisoning while aboard a boat.  The seamen sued the insured boat manufacturer for negligence and strict liability, and the insured tendered its defense to Continental Insurance Co.  Continental disclaimed coverage for the underlying suit because the insured first discovered the occurrence more than 72 hours after its commencement.  As a result, the insured had not satisfied the conditions of the pollution buyback endorsement that created exceptions to the pollution exclusion in the two general liability policies at issue. 

In the declaratory judgment action brought by the insured, Continental successfully argued in the district court that the conditions in the pollution buyback endorsement were not satisfied because the insured did not first discover the occurrence within 72 hours after its commencement, and because the occurrence was not timely reported to Continental.  On appeal from the district court’s summary judgment ruling, the insured argued that the district court erred in considering evidence outside of the underlying complaint in determining Continental’s coverage obligations.

The Eleventh Circuit affirmed the district court’s decision.  The appellate court recognized that Florida courts generally follow the Eight Corners Rule.  However, the court also noted that the Florida Supreme Court has recognized certain exceptions to this rule, including that insurers may look to facts outside of the underlying complaint when the basis for the insurer’s declination involves facts that normally would not be alleged in the complaint.  Here, the court observed that the underlying complaint involved negligence and strict liability claims, neither of which required the plaintiffs to allege the date of when the insured notified its insurer of the occurrence.  Thus, the Eleventh Circuit held that, “[u]nder Florida law, Continental was permitted to consider the uncontroverted date of written notice when determining its duty to defend because the date of written notice to the insurance company is not a fact that would normally be alleged in the complaint.” 

On April 7, 2014, Continental filed a motion for publication with the Eleventh Circuit and urged the court to publish its decision.  The insured has not opposed Continental’s motion at this time.  Interested readers should stand by, as a published opinion would have a significant impact on lower courts in the Eleventh Circuit.

In January 2014, we looked at the Eight Corners Rule as it applies in Texas.  Click here to read more.

Florida High Court Liberally Construes Self-Insured Retention Endorsement

Thursday, April 10th, 2014

By Robert C. Weill, Sedgwick Fort Lauderdale

The Florida Supreme Court has taken a liberal view of self-insured retentions (SIRs), recently holding that an insured can apply indemnification payments from a third party to satisfy its SIR under a general liability policy. See Intervest Constr. of Jax, Inc. v. Gen. Fid. Ins. Co., 39 Fla. L. Weekly S75, 2014 WL 463309 (Fla. Feb. 6, 2014) (to read the slip opinion click here). The Court decided the case on two certified questions from the Eleventh Circuit Court of Appeals.

General Fidelity issued a general liability insurance policy to a homebuilder with a SIR of $1 million. The SIR endorsement indicated that General Fidelity would provide coverage only after the insured had exhausted the $1 million SIR. The homebuilder contracted with a third-party to, among other things, install attic stairs in a house under construction. The contract between the homebuilder and the subcontractor contained an indemnification provision requiring the subcontractor to indemnify the homebuilder for any damages resulting from the subcontractor’s negligence.

After the house was built, the homeowner fell while using the attic stairs and sued only the homebuilder for her injuries. The homebuilder sought indemnification from the subcontractor. Following mediation the parties and their insurers agreed to settle the homeowner’s claim for $1.6 million with the subcontractor’s insurer paying the homebuilder $1 million to settle the homebuilder’s indemnification claim against the subcontractor; the homebuilder would then pay the $1 million to the homeowner. A dispute then arose as to whether the homebuilder or its insurer was responsible for paying the $600,000 settlement balance.

The homebuilder argued that the $1 million contribution from the subcontractor’s insurer satisfied its SIR obligation, and General Fidelity was required to pay the remaining $600,000. General Fidelity, on the other hand, argued that the $1 million payment to settle the indemnity claim did not reduce the SIR because the payment originated from the subcontractor, not its insured. Thus, General Fidelity maintained that the terms of the policy required its insured—the homebuilder—to pay the additional $600,000 to settle the homeowner’s claim.

The Court adopted the position advanced by General Fidelity. Although the SIR endorsement required the payment to be “made by the insured,” the court looked to other policies’ SIR provisions that contained more restrictive language. These other policies specify that the SIR must be paid from the insured’s “own account” or make clear that payments from additional insureds or insurers could not satisfy the SIR. Because the General Fidelity policy did not employ this more restrictive language, the court took a more expansive view of General Fidelity’s SIR endorsement.

The second prong of the dispute centered around whether the transfer of rights provision in the General Fidelity policy gave General Fidelity priority over its insured to the $1 million that the subcontractor’s insurer paid. If it did, then the homebuilder could not claim the $1 million as satisfying the SIR. The majority found that the provision did not give General Fidelity priority over its insured. The majority rested it conclusion on the fact that the provision “does not address the priority of reimbursement nor does the clause provide that it abrogates the ‘made whole doctrine.’”

Justices Polston and Canady dissented. They believed the majority had “rewritten” the SIR provision “to allow satisfaction of the self-insured retention limit in a manner other than the manner specifically provided for in the policy.” They also characterized the majority’s reasoning as creating a “legal fiction” that “effectively reads the phrase ‘by you’ out of [the SIR endorsement].”

 

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