Archive for June, 2015

Insurer’s Reasonable Handling of Competing Claims on Policy Limits Sinks Bad Faith Claim

Monday, June 29th, 2015

By Timothy Kevane, Sedgwick New York

In Purscell v. TICO Insurance Co., the U.S. Court of Appeals for the Eighth Circuit held that an insurer’s unsuccessful attempt to resolve multiple personal injury claims exceeding the policy limits did not constitute bad faith.  2015 WL 3855253 (8th Cir. June 22, 2015).

The case arises out of an automobile collision.  The insured’s passenger – distraught, inebriated and suicidal due to a recent drunk driving incident that killed a friend of hers – commandeered the insured’s vehicle by slamming her foot on the accelerator.  The car entered an intersection at 75 m.p.h when it collided into another vehicle, injuring its two occupants.  The insured’s passenger died as a result of the crash.  The insured’s liability policy afforded limits of $25,000 per person and $50,000 per accident for bodily injury.  The insurer, Infinity, immediately put the full $50,000 per accident policy limits on reserve, designating $25,000 for the fatality and $25,000 for the other vehicle’s occupants (the Carrs).

Shortly after the accident, Infinity received a policy limits demand from the Carrs.  Although aware that Mr. Carr’s medical expenses were substantial, Infinity advised it needed to complete its investigation of the claim, including with respect to coverage issues, and kept its insured apprised of the investigation.  In response, the Carrs withdrew their offer.  Infinity responded by assuring that liability was not being denied, but in view of the potential fatality claim, the policy limits would have to be allocated.  After the fatality claim became certain, the Carrs filed their own lawsuit.

Infinity requested updates from the attorneys for the Carrs and the fatality claimants about how to split the policy proceeds.  The insured demanded that Infinity settle the Carrs’ claim within limits, but made no mention of the fatality claimants, who later made their own policy-limits settlement demand.  Infinity later clarified to the insured that the parents of the deceased passenger were also making a claim, and that all claimants were negotiating how to divide the policy limits.  The insured did not respond.  Infinity eventually filed an interpleader action, after having tried unsuccessfully to obtain input from the insured as to a viable settlement approach.  A jury subsequently awarded Mr. Carr $830,000 and Mrs. Carr $75,000 in damages.  The fatality claim was settled for about $7,000.

The insured sued Infinity for bad faith, claiming that it failed to focus on the one claim (by one of the Carrs) with the highest exposure.  To prove that claim, he had to show that Infinity: (1) reserved the exclusive right to contest or settle any claims; (2) prohibited him from settling claims without its consent; and (3) refused in bad faith to settle a claim within policy limits.  The evidence had to show the insurer intentionally disregarded the insured’s best interests when it had a reasonable opportunity to settle within policy limits.

The Court found no bad faith by Infinity in trying to settle all three claims globally, given that it never denied responsibility to pay the full limits.  When a global settlement became unattainable, the insurer appropriately filed the interpleader action.  Furthermore, the insurer never had a reasonable opportunity to settle the Carrs’ claim because it was unexpectedly withdrawn shortly after being made.  The Court also took note of the insured’s disregard of the insurer’s inquiry about the fatality claim, when he asked it to settle the Carrs’ claim only.  The Court concluded that “no reasonable jury” could find that Infinity acted in bad faith in seeking a global settlement of all three claims.

Significant Structural Decision — Washington Supreme Court Adopts a Broad Interpretation of “Collapse”

Tuesday, June 23rd, 2015

In an En Banc decision published yesterday, the Washington Supreme Court in Queen Anne Park Homeowners Ass’n v. State Farm Fire and Cas. Co., Case No. 90651-3 (June 18, 2015), broadly interpreted the term “collapse” to mean “substantial impairment of structural integrity.”  The decision was made in response to the following certified question from the Ninth Circuit Court of Appeals:

What does “collapse” mean under Washington law in an insurance policy that insures “accidental direct physical loss involving collapse,” subject to the policy’s terms, conditions, exclusions, and other provisions, but does not define “collapse,” except to state that “collapse does not include settling, cracking, shrinking, bulging or expansion?

State Farm Fire and Casualty Company (“State Farm”) issued a property liability policy to plaintiff Queen Anne Park Homeowners Association (“the HOA”).  The HOA sued State Farm after the insurer denied HOA’s claim that its two-building condominium had collapsed.  The HOA supported its claim with an engineer report that found hidden decay in the condominium’s walls which had substantially impaired the walls’ ability to resist loads.  State Farm, on the other hand, asserted that the building had not collapsed.

Prior to this decision, Washington courts were split as to the meaning of the term “collapse.”  Some lower courts strictly defined “collapse” to require an actual collapse (i.e. the structure has to break down or come apart in order to collapse).  Other courts interpreted “collapse” to include structures exhibiting imminent collapse and/or substantial structural impairment.  The Washington Supreme Court itself declined to address the issue in Sprague v. Safeco Ins. Co. of American, 276 P.3d 1270 (Wash. 2012).  There, in a 5-4 split decision, two justices filed a concurring opinion applying the following dictionary definition of “collapse”: “to break down completely: fall apart in confused disorganization: crumble into insignificance or nothingness…fall into a jumbled or flattened mass.”  Four dissenting justices felt that the Washington Supreme Court should adopt the more liberal “substantial impairment of structural integrity” standard.

Citing the division of the Washington Supreme Court and courts across the country, the court in Queen Anne Park HOA determined that the undefined term “collapse” was ambiguous because it was susceptible to more than one reasonable interpretation.  Thus, the court agreed that “collapse” should mean “substantial impairment of structural integrity” because it was reasonable and most favorable to the insured.  “Substantial impairment of structural integrity,” the court explained, “means the substantial impairment of the structural integrity of all or part of a building that renders all or part of the building unfit for its function or unsafe….”  However, under the restrictions in the State Farm policy, the court cautioned that “collapse” must mean more than mere settling, cracking, shrinkage, bulging, or expansion.

Until the term “collapse” is defined, insurers should expect more claims in Washington under policies affording coverage for losses to property involving collapse.

Special Licenses Would Stall the Ascent of Self-Driving Cars

Monday, June 22nd, 2015

By Hilary Rowen, Sedgwick San Francisco

I will be a guinea pig. Shortly, I will be sitting in a simulator at the Stanford University Center for Design Research generating data on how ordinary drivers respond when required to take control of a self-driving car.

Most of us are fairly good at keeping our attention on the road while we are actively driving. (Although when our attention strays, the chance of being in an accident increases.) As cars increasingly drive themselves, drivers will be able to take their eyes off the road, but will need to retake control of the vehicle on occasion. Most of us are likely to find these rare occasions somewhat challenging.

As self-driving cars move closer to “deployment” – i.e., sales to the general public – the question has arisen whether a special license, by analogy to separate license requirements for motorcycles or trucks, should be required for the operator of a self-driving car.

Classifying Self-Driving Cars

First, we need to take a short detour into the classification of self-driving cars. Two systems for classifying the level of autonomous driving functions are in current use. In 2013, the National Highway Transportation and Safety Administration issued a four-level classification system; in the same year, SAE International, a professional organization of automotive and aerospace engineers, issued a five-level system.

The NHTSA and SAE classification systems are quite similar. Level 1 in both the NHTSA and SAE classifications refers to stand-alone driver assistance features, such as automatic braking. Both the NHTSA and SAE systems also include a Level Zero, where there is no automation. Level 2 in both systems refers to partial automation. The vehicle performs significant vehicle control functions, such as distance maintenance and lane maintenance. Level 2 cars can be operated in “hands free” and “foot free” mode, at least in some driving environments, but require that the driver remain alert and actively monitor the driving environment. A wide range of cars that qualify as Level 2 will be on the market in the couple of years.

Under both the NHTSA and SAE classifications, Level 3 cars delegate all driving functions to the vehicle. Level 3 car retain steering wheels and brake pedals, and will signal the driver when driving conditions require the driver to retake control. An alert could sound because of a change in driving conditions – such as heavy rain – that reduced the quality of the sensor data below the level required for autonomous operation or because the vehicle entered a geographic area where autonomous operation was not authorized.

A number of manufacturers and technology company – most notably Google – are testing prototypes of Level 3 cars. There are various estimates regarding when Level 3 cars will be on the market; it is likely that a number of auto manufacturers will offer Level 3 cars within a decade.

NHTSA has a single classification, Level 4, for vehicles that dispense with operator controls for steering and braking. SAE bifurcates this category into two subsets: SAE Level 4 vehicles cannot operate in all conditions and all geographic locations. Prototype SAE Level 4 cars are currently being tested. It is quite possible that some Level 4 autonomous vehicles will be deployed on a limited basis within the next five years. Such deployment will likely involve low maximum speeds (in the range of 25 to 35 miles an hour) and very limited geographic travel zones. Due to these limitations, the initial deployment of Level 4 cars is likely to be as people-mover fleet vehicles.

SAE Level 5 can operate anywhere, any time; including driving situations that would be challenging to a human driver. SAE Level 5 vehicles are still in the speculative vision stage. The sheer versatility of a human driver is hard to match, even though the current technology can easily exceed our reaction time and does not have blind spots and other deficiencies of human drivers.

Special Licenses for Level 3?

Level 3 vehicles offered for sale to the public will have a lower incidence of accidents – and quite likely will produce less severe bodily injuries in the event of an accident – compared with conventional cars. The relative incidence of accidents in Level 2 and Level 3 cars is more difficult to predict, but it is likely that less competent drivers will pose a lower aggregate risk in Level 3 cars.

Nevertheless, Level 3 vehicles pose particular challenges to drivers in the event of a transition from autonomous to driver-controlled operation. Under the NHTSA definition, Level 3 cars will be required to provide the driver “with an appropriate amount of transition time to safely regain manual control.” Even with alerts, some drivers will fail to take control timely and cause accidents. With Level 3 cars, there will be some high risk miles, even though Level 3 cars on average will generate fewer accidents per mile traveled.

The ability to respond quickly when the mind is engaged in an activity unrelated to driving – texting, reading, talking on the phone, watching a movie – will affect a given driver’s chance of being involved in an accident when signaled to re-take control of a Level 3 car. The existence of high risk miles and the varying ability of drivers to respond has led to suggestions that operators of Level 3 cars be required to hold a separate driver’s license.

This would be a bad idea. As a matter of public policy, higher risk drivers should not be deterred from purchasing and operating autonomous vehicles. The people who are likely to have the poorest response times (and worst judgment) when faced with the sudden need to take control of a Level 3 car are also likely to pose the highest risk when behind the wheel of a conventional car. From a public safety perspective, we want teenagers, the very elderly, and people who simply are not very competent drivers – but hold driver licenses – to be in Level 3 vehicles.

Imposing special drivers’ license requirements for Level 3 cars – similar to the separate license required to operate a motorcycle – will inhibit the introduction of Level 3 cars. Less competent drivers might not pass a separate autonomous vehicle test; but would continue to drive. Many drivers who could easily pass an autonomous vehicle driving test would be deterred from buying a Level 3 car by the need to get a new license. As a result, the potential for accident reduction offered by Level 3 cars would not materialize.

The hypothetical autonomous vehicle driving test might be very similar to sitting in the simulator at Stanford. Hopefully, this experience will not become a prerequisite for Level 3 car purchasers.

This article was originally published in the Daily Journal on July 19, 2015.

United Kingdom Budget 2015 – Pension Reform Implications for Financial Advisers and Their Insurers

Friday, June 19th, 2015

By Richard Booth, Sedgwick London

Insurers providing professional liability coverage should be aware of certain changes in the way individuals in the UK may use their defined contribution pension savings, as new claims activity may result.

The March 2015 Budget announcement revealed the Chancellor’s intention to take pension reforms even further in 2016, including allowing pensioners who already have taken out annuities to sell the income they receive. Previous reforms announced in 2014 mean that, as of April 2015, individuals reaching 55 are now given the options of:

  1. Taking a number of smaller lump sums, and in each case 25% of the sum will be tax free.
  2. “Cashing-in” all of their pension savings for one lump sum.

As the Liberal Democrats’ pensions minister warned last year, the reforms raise the spectre of pensioners blowing their hard earned pension contributions on Lamborghinis, rather than making more prudent investment decisions.

The reforms (those implemented in April 2015 and proposed for 2016) have been welcomed by many commentators for giving individuals more choice in terms of how they spend their savings. The Government has recognized, however, that there are accompanying risks, and the Citizens Advice Bureau will provide individuals with guidance via the “Pension Wise” service. Because the service will not provide advice, many people will consult an Independent Financial Advisor (IFA).

Some IFAs will be expecting new work as a result of the reforms. With a wide variety of investment options available to individuals, and “low risk” products still offering disappointing returns, IFAs will be presenting pensioners with products that offer the potential for higher income and growth, but with higher levels of risk attached. This inevitably will bring further claims activity to the sector relating to the quality of advice provided. It will be a matter of when, rather than if, the first complaints to the Financial Ombudsman Service and claims in the civil courts start to emerge.

The decisions that individuals will need to make in relation to pension contributions will potentially have huge consequences for their retired life. A correspondingly high level of importance will attach to the advice IFAs provide. They must, therefore, ensure that:

  1. They fully understand the reforms including the potential tax implications for their clients’ specific circumstances.
  2. They adequately “fact find” their clients; for example, finding out if they require income from their investment or whether their circumstances merit prioritising capital growth.
  3. They advise on the impact receiving a lump sum payment will have on any entitlements they may need to state benefits.
  4. They record their recommendations, and rationale for them, in sufficient detail so that complaints and claims can be responded to with contemporaneous evidence.

Professional indemnity insurers should consider whether Proposal Form documentation should include specific questions in relation to what pension advice IFA’s are providing, what percentage of an insured firm’s business is related to pension advice, and what risk management processes and procedures are in place to ensure sound advice and to limit claims.

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