Archive for October, 2014

No CGL Coverage for Faulty Workmanship Under Pennsylvania Law

Friday, October 24th, 2014

In State Farm Fire & Casualty Co. v. McDermott, 2014 WL 5285335 (E.D. Pa. Oct. 15, 2014), a federal court recently held that an insurer has no duty to defend or indemnify its insured against an underlying construction defect lawsuit containing causes of action sounding in negligence under a commercial general liability (“CGL”) policy affording coverage for property damage caused by an “occurrence.”  Upon considering the substance of the underlying lawsuit, the court concluded that under Pennsylvania law faulty workmanship is not an “occurrence” (defined to mean an accidental or unforeseeable event) that is covered under a CGL policy and, therefore, granted the insurer’s summary judgment motion.

In McDermott, the insured contracted with a homebuilder to provide plaster, stucco and window and door installation services for nearly three hundred homes built in Pennsylvania.  The insured was later named in a negligence and breach of contract lawsuit by the builder, alleging a variety of defective construction practices that purportedly resulted in water intrusion and corresponding home damages.  The insurer agreed to defend the insured subject to a reservation of its rights to disclaim coverage under the terms of the CGL policy prior to commencing a declaratory action challenging coverage.

Relying on Pennsylvania case law, the court determined at the outset that faulty workmanship, and any resulting damages, is not an “accident” (as it is neither unexpected nor unintentional) and therefore not an occurrence under a CGL policy.  Thus, the issue of whether coverage was triggered under the policy hinged on the possibility that liability might rest on the insured’s alleged negligent work performance.  In reaching its decision, the court looked beyond the negligence allegations to conclude that, regardless of how it was framed, the substance of the insured’s potential liability stemmed from its alleged failure to meet contractual expectations.  Because the insured had a contractual duty to perform its tasks in a satisfactory manner, its alleged failure to do so was neither an accident nor an unforeseeable event covered under a CGL policy because the insured was bound to avoid that particular outcome.

Just the Fax: Illinois Appellate Court Concerned That TCPA Settlement Between Insured and Class Action Plaintiffs May Be Collusive

Thursday, October 16th, 2014

An all too familiar scenario: an insurer believes there is no coverage for a claim, but has a duty to defend its insured. In these situations, an insurer often pays for the insured’s independently-selected defense counsel and seeks declaratory judgment regarding coverage. But after the insurer surrenders control of the defense, it may also surrender the right to control a subsequent settlement. What happens if the insured seeks coverage for the settlement, but the insurer considers it unreasonable?

The Illinois Appellate Court recently addressed this scenario in Central Mutual Ins. Co. v. Tracy’s Treasures, Inc., 2014 IL App (1st Dist.) 123339 (September 2014). The Court considered whether coverage existed for the Idlas Telephone Consumer Protection Act (“TCPA”) class action settlement, and if the insurer could challenge the reasonableness of the settlement negotiated by the insured’s independent counsel.

In Idlas, Tracy’s Treasures, Inc. allegedly advertized its business services through unsolicited fax advertisements to a class of plaintiffs in violation of the TCPA. Central Mutual insured Tracy’s Treasures through primary and excess liability policies which contained $14 million in available limits. Central Mutual declined coverage in Idlas but provided the insured a “courtesy” defense. Central Mutual also filed a timely declaratory judgment against the insured seeking a determination of coverage. The insured obtained its own independent counsel in Idlas in light of the conflict with Central Mutual. Central Mutual consented to the substitution of counsel and agreed to pay a reasonable fee for his services.

The insured’s independent counsel did not disclose to Central Mutual that he had started settlement negotiations in Idlas a month before identifying himself to the insurer. Shortly thereafter, the insured filed a motion for preliminary approval of a settlement agreement in Idlas on behalf of the class, and participated in the subsequent fairness hearing. The insured’s counsel did not notify Central Mutual of these events. In the proposed Idlas settlement, the insured agreed to pay $14 million, collectible only against Central Mutual. Although the Idlas complaint defined the putative class to include persons who allegedly received unsolicited faxes from March 5, 2003 through March 5, 2007, the proposed settlement defined the class for the period from September 1, 2002 through July 22, 2003. Although no class members prior to July 22, 2003 came forward, the revised class definition triggered an additional $5 million excess policy issued by Central Mutual. Only 5,561 putative class members – roughly 4% of the total class – received the class settlement notice.

The circuit court approved the $14 million Idlas settlement. Plaintiff’s counsel would receive one-third of the amount collected from Central Mutual, plus costs. Each class member who submitted a claim would receive a pro rata share of the collected amount, not to exceed $500 pursuant to the TCPA. The plaintiff (and only class representative) would receive $9,500, nineteen times more than the potential recovery of every other class member. Unclaimed funds would be given to charitable organizations approved by the Court.

On Central Mutual’s motion for summary judgment in the coverage action, the court held amounts awarded to claimants under the TCPA were punitive in nature and not insurable as a matter of public policy based on the precedent set in Standard Mutual Ins. Co. v. Lay, 2012 IL App (4th) 110527. The insured appealed when Lay was subsequently reversed by the Illinois Supreme Court, which held sums recovered by TCPA claimants were liquidated rather than punitive damages.

Central Mutual raised the following issues on appeal to the Court: (1) although it conceded the applicability of the Illinois Supreme Court’s reversal in Lay, liquidated damages were not covered as a matter of law under its policies; (2) there was no coverage for the Idlas settlement because Central Mutual and the insured had already carved out personal and advertising injury from the relevant policies as part of a settlement for a prior TCPA lawsuit against the insured; and (3) the $14 million settlement was collusive and unreasonable as a matter of law.

The Court ruled in favor of the insured on the first two issues. First, it held the insurer should have included policy language that excluded sums for statutory penalties if it had wanted to avoid coverage for liquidated damages. Next, the Court noted that the confidential carve-out agreement between Central Mutual and the insured was not included as part of the appellate record. Even if available, the Court could not determine as a matter of law that the amount paid by Central Mutual was adequate consideration for the carve-out of personal and advertising injury coverage in its policies. The Court remanded for further consideration.

The primary focus of the Central Mutual decision was the issue of whether the Idlas settlement was collusive and unreasonable. The Court first addressed whether Central Mutual could challenge the settlement. Because Central Mutual “surrendered control of the defense,” the Court determined it also surrendered the right to rely on policy provisions which required its consent to settle. The Court indicated, however, that Central Mutual could still challenge the Idlas settlement because it had filed a declaratory judgment against the insured to preserve its coverage positions and provided a defense by paying reasonable fees for the insured’s independent counsel. Moreover, the Court recognized Central Mutual had been denied the opportunity to be heard on the reasonableness of the Idlas settlement. Although the Court could not hold the settlement collusive and unreasonable as a matter of law, it agreed with the trial court that the facts and circumstances regarding the settlement were “very troubling.” It remanded for further findings on whether the insured’s decision to settle and the settlement amount were both reasonable. The Court also provided guidance on the standard of reasonableness.

To determine if the insured’s decision to settle was reasonable, the trial court must examine the totality of the circumstances and whether the decision conformed to the standards of a prudent uninsured. The Court indicated that the trial court should consider whether a prudent uninsured would have: (1) foregone the opportunity to litigate potential defenses in light of the potential cost and chance of success; (2) sought contribution or indemnification from third-parties; (3) agreed to settle on terms which allowed unclaimed funds to be donated to charity; and (4) considered whether it truly faced “staggering” liability in Idlas from a “practical perspective” in light of the limited number of people notified of the class action and the trial court’s discretion to fashion a class action reward deterring future violations without destroying the insured’s business.

To determine if the amount of the settlement was reasonable, the trial court must examine what a reasonably prudent person in the position of the insured would have settled for on the merits of Idlas’ claim. The Court also stated this test was guided by a “commonsense consideration of the total facts bearing on liability and damage aspects of the plaintiff’s claim.” The Court stated the trial court should consider many of the same factors in its analysis to determine whether the Idlas settlement was reasonable, and further consider: (1) whether the settlement was the product of arm’s length negotiations; (2) what facts were available to the insured’s independent counsel which allowed him, in relatively short time, to value the Idlas claims at over $60 million with only a single class representative; (3) how the parties arrived at a $14 million settlement figure; and (4) any evidence showing there was bad faith, collusion or fraud.

An important takeaway from Central Mutual is to be mindful that the independent counsel’s sole obligation is to the insured. In its arguments, Central Mutual criticized the insured’s independent counsel for misrepresenting plans regarding the defense and settlement of Idlas. Although the Court recognized the insured’s counsel had attempted to “short circuit” Central Mutual’s ability to learn of or challenge the settlement, it also affirmed independent counsel had no duty to the insurer. Accordingly, an insurer should consider retaining monitoring counsel to protect its own interests after providing independent counsel for the insured.

Click here for additional posts on TCPA coverage actions.

New California Law Sets the Stage for Insurance Regulation of Uber, Lyft

Wednesday, October 8th, 2014

By Kara DiBiasio, Sedgwick San Francisco

The emergence and success of ridesharing companies has sparked questions and debates over the gaps in insurance coverage created when private drivers offer commercial driving services.  Ridesharing companies – such as Lyft, Uber, and Sidecar – allow private drivers to login to a mobile app and pick up passengers for a fee.  This innovative structure has changed the driver-for-hire climate in cities across America, including uncertainty about who will pay when one of these drivers gets into an accident.

Most personal automobile liability policies contain exclusions for commercial driving services, so anytime a driver is available for hire or driving a passenger, they likely are not covered by their personal auto policy.  Although a ridesharing company must provide commercial liability coverage, the overlap between the driver’s policy and the commercial coverage is often murky.  Seeking to clarify these potential gaps in coverage, the California Legislature passed AB 2293, which Governor Jerry Brown recently signed into law. 

The law has two primary effects on regulation of ridesharing companies.  First, it imposes disclosure requirements on the company.  Second, it sets minimum insurance coverage requirements for all ridesharing companies operating in California. 

For the disclosure requirements, each ridesharing company is required to disclose in writing to each driver the commercial coverage and limits of liability the company provides while the driver has the app enabled.  Drivers will also have to carry proof of the company’s commercial liability coverage when they have the mobile app enabled. 

The law also sets out insurance coverage requirements for each phase of the driver’s potential liability: when the driver is using the vehicle, but the app is not enabled; when the app is enabled, but the driver is not carrying a passenger; and when the driver is carrying a passenger.  During the first phase, the driver is just an ordinary private driver on the road; the law does not set any requirements for this phase.  During the second phase, the company must provide primary coverage for death and personal injury, as well as property damage.  In addition, the company must provide excess coverage of at least $200,000 to cover any liability of the company or the driver while the app is enabled.  After the driver picks up a passenger, the law requires the company to have primary coverage of at least $1 million for death, personal injury and property damage, as well as an additional $1 million in uninsured and underinsured motorist coverage.

The law also requires the commercial liability insurer to defend and indemnify any liability claim arising out of an accident, either while the app is enabled or while the driver is carrying a passenger.  The driver’s personal auto policy is neither primary nor excess coverage while the app is on or while the driver has a passenger, unless the policy expressly states that it affords such coverage.

Most of the provisions of the new law will take effect July 1, 2015.  Pennsylvania has begun working on similar regulations for ridesharing companies, and other states will likely follow suit in the near future.  Insurers should work with coverage counsel to make sure they are ready with policies that conform to these new regulatory requirements, in advance of the laws taking effect.

Cannonball! CGL Policy Does Not Cover Pool Contractor for Subcontractor’s Negligence

Tuesday, October 7th, 2014

In Standard Contractors, Inc. v. National Trust Ins. Co., Civil Action No.:7:14-cv-66-HL, the U.S. District Court for the Middle District of Georgia recently granted a commercial general liability insurer’s motion to dismiss a contractor’s coverage action on the ground that the policy’s “Contractors Errors and Omissions” coverage applied only to property damage to the contractors’ work arising from the contractor’s own negligence, not that of its subcontractor.

The contractor sought coverage for the costs it incurred to repair damage to a pool facility it was hired to renovate. The contractor alleged that the damage to the pool and surrounding areas arose from the faulty workmanship of its subcontractor, which allegedly deviated from the design plan by failing to include essential parts and installing an improperly sized component.

In relevant part, the subject policy’s Contractors Errors and Omissions coverage applied to “property damage” to the contractor’s work “due to faulty workmanship, material or design….”  However, in order for coverage to apply, the damages must have resulted from the contractor’s negligent act, error or omission while acting in its “business capacity as a contractor or subcontractor.”  The policy specifically exempted from this coverage “[a]ny liability for ‘property damage’ to ‘your work’ if the damaged work or the work of which the damages arises was performed on your behalf by a subcontractor.”

The court ruled that the exemption prohibited the contractor’s claim for coverage, which the court found to arise solely from the negligent work of its subcontractor.  The court rejected the contractor’s argument that an exception to a policy exclusion, which appeared to extend coverage to damages arising out of work performed on the contractor’s behalf by a subcontractor, demonstrated that coverage attached.  The court found that the more specific and limited language of the coverage grant prevailed over the more broadly inclusive language of the exception to the policy exclusion.


Is it a Car or A Street Legal Robot: Insurance Issues for Autonomous Vehicles

Monday, October 6th, 2014

In mid-September, Mercedes-Benz became the latest car company to get a license to test self-driving vehicles in California.  Earlier in the month, GM announced that they will offer a hands-free Cadillac with new cruise control technology to adjust speed, braking and steering.  Since 2005, Google has been test-driving their autonomous vehicles (AVs) on public roads, and last summer unveiled the first test prototype for a vehicle with no steering wheel or brake pedal.     

These autonomous or self-driving vehicles will pose new challenges for the insurance industry, as will the semi-autonomous vehicles that already are entering the market.  Hilary Rowen addressed some of the issues in an article entitled, “Expect tort potholes for self-driving cars,” published in the San Francisco Daily Journal on September 26.  The article can be downloaded here.

Lost Cargo is Dead Weight: Insurer Avoids Coverage Due to Breach of “Deadweight Warranty” in Marine Policy

Friday, October 3rd, 2014

In Hua Tyan Development Ltd v Zurich Insurance Co Ltd [2014] HKCFA 72, the Hong Kong Court of Final Appeal dismissed a marine insurance claim on grounds of breach of warranty by an insured.

The parties entered into an insurance contract with respect to a shipment of a cargo of logs from Malaysia to the People’s Republic of China.  The contract contained a clause warranting the vessels’ deadweight capacity to be no less than 10,000 tons (the “Deadweight Warranty”).

In mid-January 2008, the vessel sank and the cargo was lost. The insurers rejected the insured’s claim in connection with the loss on the basis that the Deadweight Warranty had been breached, as the vessel only had a deadweight capacity of about 8,960 tons.

The court held that insurers are entitled to rely on the Deadweight Warranty, despite the insured’s various arguments based on estoppel, waiver and rectification. The court found no inconsistency in the insurance contract with respect to the identification of the vessel by name and the existence of the Deadweight Warranty.

The judgment provides considerable certainty and clarification to insurers operating in the Hong Kong marine insurance market, to the effect that insurance contracts will be enforced in accordance with their terms. Although a Hong Kong court decision, the judgment should be of interest to London and Bermuda insurers and P&I clubs for a number of reasons:

  1. Hong Kong’s Marine Insurance Ordinance of 1961 largely follows the UK’s Marine Insurance Act 1906, which was in turn a codification of the common law. As in England and Bermuda, breach of a marine insurance warranty discharges an insurer’s liability automatically as of the date of breach.
  2. This is a topical area of law which is the subject of review, and likely statutory reform, in the UK.
  3. The dismissal of the appeal means that the insured’s brokers have been found liable to indemnify the insured with respect to the vessel’s insured value. The precise circumstances giving rise to the broker’s liability were not fully explored in the judgment; however, the case demonstrates the liabilities that brokers face in practice, when cover is successfully denied by insurers.
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