Archive for the ‘Property Coverage’ Category

The Flying Insurance Adjuster—Implications of Insurers’ Use of Drones

Thursday, May 14th, 2015

By Hilary Rowen, San Francisco

Insurers perform property inspections in connection with underwriting to determine if the property meets their standards for issuing coverage, and to determine the appropriate premium classification. Insurers inspect damaged property to evaluate the extent of the damage, whether the damage resulted from a covered cause of loss and to estimate the cost to repair or replace the insured property.

In the future, inspections of buildings and other insured property by insurers may be done through still photos, videos or data from more sophisticated sensors obtained by an unmanned aircraft. Rather than having inspections done by a person peering up from the ground, on a ladder or walking through a field, the inspections will be done by a person looking at photos taken by a drone or reviewing a computer analysis of data collected through drone-mounted sensors.

Several property-casualty insurers, including State Farm, USAA and AIG, have recently received approval from the Federal Aviation Administration (FAA) to test and use drones in insurance underwriting and claims operations. However, to date, the approvals that the FAA has issued to insurers contain restrictions that effectively limit the insurers to testing drones for use in inspections under limited conditions. Deployment of drones in insurers’ operations will not “take off” until the FAA’s recently issued draft regulation governing commercial use of drones is adopted.

The Regulation of Drones by the FAA: Entering a Period of Rapid Change

After being subject to criticism for its stringent restrictions on commercial use of drones, the FAA announced in March 2015 that it would streamline its process of reviewing “Section 333 exemption” filings for use of drones weighing less than 55 pounds (25 kilograms) in commercial operations. (Section 333 of the FAA Modernization and Reform Act of 2012 authorized the Secretary of Transportation to determine requirements for commercial use of unmanned aircraft systems.) In March the FAA also exempted entities with approved Section 333 exemptions from filing flight plans for each drone use, provided that the drone is flown below 200 feet. The FAA’s move to speed Section 333 approvals and to lift some of the restrictions on commercial drone use is likely to increase insurers’ interest in the use of drones for a wide range of property inspection purposes.

Restrictions in Section 333 Exemption Approval Issued to Insurers

Today, even with the recent changes, the FAA approvals of commercial use of drones have significant restrictions. Although lightweight drones may weigh less than 5 pounds, the operator must have a pilot license (which, under the FAA’s recent relaxation of commercial drone requirements, can be a recreational or sports pilot license). A second observer must be present for all drone flights. The drones can only be operated within line-of-sight of both the pilot and the observer.

Perhaps most significantly for insurers’ use of drones, the FAA’s approvals of insurers’ Section 333 exemption applications contain the following restrictions:

1. A drone cannot be flown within 500 feet of any structure or vehicle without the permission of the owner or person in control of the structure or vehicle; and
2. A drone cannot be operated within 500 feet of a person other than the operator and observer, unless the people within 500 feet are inside a structure that would protect them from debris in the event that the drone crashes.

These limitations impose significant restrictions on testing property inspection drones in real-life situations in urban and suburban areas. The FAA is testing whether to relax some of these restrictions.

On May 6, the FAA announced three drone initiatives: one will allow a drone manufacturer to survey crops in rural areas with drones flying outside of the pilot’s direct line-of-sight; a second initiative will allow a railroad to inspect rail infrastructure beyond line-of-sight in isolated areas; the third initiative will allow CNN to test the use of drones for news-gathering in populated area, under the current line-of-sight restrictions. None of the FAA initiatives involves insurer operations.

The Proposed FAA Regulation

The FAA issued a proposed unmanned aircraft system regulation for comment in February 2015. Under the proposed regulation, a new unmanned aircraft system (“UAS”) airman certificate would be created and the requirement that operators of drones hold traditional pilot licenses would be eliminated. The currently required observer would be optional. The line-of-sight requirement would be modified to provide that either the operator or the observer, if one is present, must maintain eye contact with the drone, rather than the current requirement that both the operator and a mandatory observer maintain a line-of-sight view of the drone.

As perhaps the most significant change with respect to insurers’ use of drones, the proposed regulation eliminates the requirement that drones remain at least 500 feet from structures, vehicles and people, although drones may not be flown directly over people other than the operator and observer. Under the proposed regulation, the operator is responsible for taking measures to mitigate risk to persons and property in the event that the operator loses control of the drone. The Notice of Proposed Rulemaking for the proposed regulation provides an example of a mitigation measure: Where the drone is operating in a residential area, the operator could ask that people in the area of operation remain inside while the drone is flying.

The proposed UAS regulation creates a separate and more relaxed set of requirements for drones weighing less than 4.4 pounds (2 kilograms) that fly at low speeds and at low altitudes. Operators of these very small drones would need to obtain a “microUAS” operator certificate from the FAA. Unlike the larger drones weighing up to 55 pounds, microUAS drones could be operated directly over people.

The proposed regulation requires that any accident involving injury to persons or property (other than the drone itself) be reported to the FAA.

It is unclear when the FAA regulation on the commercial use of small drones will be issued and whether it will be significantly modified based on comments from interested parties. However, the FAA is under pressure to create a regulatory environment more favorable to commercial use of drones, in part because testing and deployment of small drones is moving to other countries with less restrictive requirements.

The Evolution of Insurers’ Use of Drones

It is likely that insurers’ use of drones will move from the testing stage to operational use within the next few years. Possible developments include:

On-Site Inspections Will Be Severed From Data Evaluation

As a general matter, the person performing an insurance underwriting or claims inspection will have the expertise to evaluate the state of the property. The person on-site will usually provide a written assessment of the state of property in underwriting inspections, or the extent of damage, nature of the damage and the likely cause of the damage in claims inspections. These reports typically will include photographs and, sometimes, videos as documentation of the findings. However, the assessment is made by the on-site inspector.

As insurers start utilizing drones in inspections, it is likely that the expertise needed to perform a given underwriting or claims inspection will be split among several individuals. The on-site “inspector” will need to hold an FAA drone operator license and will need to have sufficient insurance training to collect the data relevant to the underwriting or claims evaluation. The drone operator will not need the substantive expertise in building construction and maintenance currently needed for underwriting inspections or the expertise in extent of damage, loss causation and other issues currently needed for claims inspection. Some insurers may outsource the drone inspections to companies that specialize in flying drones, rather than have drone operators on staff. Instead of having experienced claims personnel in the field, insurers will likely perform the analytic portion of the inspection remotely, using personnel who rarely, if ever, go into the field.

Drone Inspections Will Collect Different Data Than Current In-Person Inspections

In contrast to a human on a ladder checking for dry rot with a screwdriver, drones in the near future will not have capabilities to physically probe buildings or take samples. The type of sophisticated instrumentation utilized in space probes will not be practical for drones used for insurance inspections.

While on-site physical inspections will remain an option for insurers, it is likely that as inspection operations change in response to increased use of drones, physical inspections will become a rarity only performed in unusual circumstances where physical sampling is essential.

Current inspections, whether of buildings, crops or other insured property, tend to utilize visible light. The Mark 1 human eyeball, supplemented by photos and, sometimes, videos, is the primary inspection tool. Devices such as infrared detectors generally are only employed where there is some indication of a problem.

It is possible, although by no means certain, that insurance inspection drones will routinely collect data using non-visible light sensors. This could lead to more sophisticated analyses of the condition of buildings and the extent of damage. With a wider range of data, insurers may increasingly utilize computer algorithms to evaluate the inspection data. The use of a range of drone-mounted sensors may prove to be an effective substitute for a diminished reliance on physical probing of buildings.

Impact of the Relaxed FAA MicroUAS Requirements

If the proposed FAA regulation is promulgated with the relaxed requirements for drones weighing less than 4.4 pounds, insurers—and many other commercial users of drones in urban and suburban areas—may favor micro drones. Where it is not practical to get pedestrians, neighbors and other bystanders under cover before launching a lightweight drone, there will be significant incentives to use drones below the 4.4-pound threshold. Absent a set of “safe harbor” guidelines from the FAA regarding what set of precautions, other than moving everyone other than the operator and the observer under cover, is reasonable, commercial users of drones will probably favor microUAS.

It is unclear whether inexpensive microUAS will be able to carry sensors more sophisticated than a camera, given the 4.4-pound weight limit. Many current microUAS use the relatively inexpensive ultralight camera technology in smartphones. However, there is no comparable off-the-shelf source for ultralight, non-visible light sensors. Insurers alone would not be able to generate enough demand for such equipment. In the future, it is possible that there will be enough demand from all commercial uses for microUASs to spur the development of such sensors. Alternatively, the FAA may create an intermediate

category between drones weighing 4.4 pounds and drones weighing 55 pounds that allows less stringent deployment requirements for drones that can carry somewhat heavier payloads than the microUASs.

Drones and Disaster Response by Insurers

Much of the discussion of insurers’ use of drones has focused on handling disaster claims. It has been suggested that use of drones in damage assessments after disasters will allow insurers to handle claims more quickly. This is likely to be true in some disaster scenarios, but not all.

Large-scale disasters, whether hurricanes, earthquakes or Western wildfires, often strain insurers’ claims adjusting resources, even with the reassignment of claims inspection personnel from other regions of the country and the use of independent adjusters. Drones may alleviate at least part of the post-disaster claims resource crunch. As claims inspections increasingly are performed remotely, the need to redeploy claims personnel will diminish and the insurer’s ability to handle a surge in claims in one geographic region will improve. However, a limited supply of drones and qualified drone operators may simply replace a limited supply of claims adjusters as a key post-disaster claims adjusting resource issue.

Potential Issues Relating to Insurers’ Use of Drones

Any change in insurer underwriting or claims handling practices is likely to trigger charges that the insurer is treating policyholders and claimants inappropriately. Potential issues arising from insurer use of drones include:

Failure to Properly Inspect and Investigate a Claim

A shift from in-person inspections to remote inspections based on drone-collected data will inevitably lead to allegations that a claim was improperly denied due to the failure of the drone to collect necessary information or the misinterpretation of the data by a remote claims center. In many ways, these likely future complaints are not materially different from garden-variety challenges to in-person claims inspections. However, it is possible that regulators could impose a requirement that drone inspections be supported by in-person inspections whenever there is a challenge to the drone-collected data, at least where the in-person inspection does not pose a risk to the adjuster. It is unclear whether such a requirement would deter insurers from utilizing drones in adjusting claims; although if challenges became frequent, the cost of duplicate inspections would reduce the use of drones.

Flawed Computer Algorithms for Underwriting and/or Claim Damage Evaluation

If the use of drones is combined with the use of computer algorithms to assess the drone-collected data, there may well be challenges to the accuracy of computer-driven claims review. Challenges to computer models used to estimate replacement costs and other uses of computer programs in claim adjusting have been common in recent years. These lawsuits typically have been brought as class actions. Future litigation over computer algorithms used to assess drone-collected data are also likely to be framed as class actions, increasing insurers’ potential exposure.

Conclusion

Use of drones in insurance inspections will start as a fairly minor supplement to the traditional in-person inspection, primarily used to examine inaccessible portions of structures and other property. As lightweight sensors and the computer software needed to evaluate drone sensor data are developed, drones may trigger a more fundamental reorganization of insurers’ property inspection operations—with the collection and evaluation functions severed from each other.

Whether this more seismic shift occurs will depend both on technological developments and on the legal infrastructure for commercial use of drones. It is a fairly safe bet that the technology will be developed. The only question is whether the legal infrastructure creates an environment in which widespread use of drones makes sense for insurers.

This article was originally published in the Bloomberg BNA’s Daily Report for Executives on May 14, 2015.

Court Confirms Insurer Permitted to Choose Counsel in Discharging Duty to Defend

Friday, February 13th, 2015

By Aaron Mandel, Sedgwick New York

An insurer’s duty to defend and how that duty gets discharged may be one of the most frequently litigated coverage issues.  Although typical policies afford insurers the right to control their insureds’ defense, insureds often prefer to appoint their own counsel and have their insurer reimburse them for their defense costs.  That is especially true where the insurer reserves its rights under its policy.  The latest opinion addressing this issue came out of the U.S. District Court for the Northern District of California in Travelers Property Casualty Co. v. Kaufman & Broad Monterey Bay, et al., No. 5:13-cv-04745-EJD (Feb. 11, 2015).

Sometime before February 2012, the developers (“KB”) of a housing project located in Northern California hired Norcraft to perform cabinet work.  Norcraft was insured under commercial general liability insurance policies issued by Travelers, which extended additional insured coverage to KB for liability arising out of Norcraft’s work.  In February 2012, homeowners sued KB for construction defects including defects in Norcraft’s work (the “underlying lawsuit”).  Travelers agreed to defend KB in that lawsuit after receiving a copy of Norcraft’s subcontract with KB – which Travelers did not receive until almost eight months after the underlying plaintiffs filed their lawsuit against KB – and appointed defense counsel to do so.  KB objected to the law firm Travelers appointed to defend them because they claimed it was “ethically conflicted from representing [KB] since it had represented parties adverse to [KB] in other cases pertaining to similar issues as the [underlying lawsuit].”

Facing KB’s objection to the appointed counsel, Travelers sought a declaration that KB’s objection was a “material breach of [Travelers’] policies and of the implied covenant of good faith and fair dealing.”  KB counterclaimed arguing that Travelers “did not intend to provide [KB] with an immediate, full, complete, and conflict-free defense” because Travelers knew about the appointed law firm’s alleged conflicts.  The parties cross-moved for summary judgment.

First addressing KB’s claim that Travelers did not “immediately” defend them in the underlying lawsuit, the court concluded that Travelers’ duty to defend was not triggered until it received all relevant information to determine the existence of coverage.  In that regard, the court noted that Travelers first received that information when it received a copy of Norcraft’s subcontract with KB and agreed to defend approximately one week later.

The court next addressed KB’s argument that Travelers did not provide it with a “complete” defense.  KB claimed that Travelers’ defense was not “complete” because it extensively reserved its rights to, among other things, withdrawing its defense if it later determined there was no coverage available under its policy.  The court concluded that this argument failed because KB did not explain why Travelers’ reservation of rights violated its duty to defend.

KB also argued that Travelers improperly “entered into a secretly negotiated settlement agreement” with the underlying plaintiffs that resolved their claims arising out of Norcraft’s work.  Rejecting KB’s argument that this violated Travelers’ duty to defend, the court wrote:

Since it is undisputed that [Travelers] had the duty to defend, [Travelers] had the right to control settlement negotiations of the covered claims without [KB’s] participation.  That [Travelers] settled only the claims arising out of the work of Norcraft does not make the settlement improper, nor does it indicate that [Travelers] further its own interests, and [KB] have not shown that it experienced increased defense fees and costs – outside of what it would have otherwise incurred – due to [Travelers’] withdrawal from the [underlying lawsuit].

Ultimately, the court concluded that, because Travelers “fulfilled its contractual duty to defend [KB] against all claims arising out of the work of Norcraft, . . . [Travelers] did provide a complete defense.”  And because it found that Travelers satisfied its duty to provide KB with an “immediate” and “complete” defense, the court found that Travelers was entitled to appoint counsel to defend KB in the underlying lawsuit.

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

Tuesday, October 7th, 2014

By Jeffrey Dillon, Sedgwick New York

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.

 

 

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

Friday, October 3rd, 2014

By Alex J. Potts, Sedgwick Bermuda

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.

British Columbia Supreme Court: Property Policy’s Pollution Exclusion Not Subject to Proximate Cause Analysis

Monday, September 29th, 2014

By Timothy Kevane, Sedgwick New York

An insured’s argument to broadly apply an exception to a pollution exclusion was recently rejected by the British Columbia Supreme Court in Whitworth Holdings Ltd. v. AXA Pacific Insurance Co., 2014 CarswellBC 2648, 2014 BCSC 1696 (Sept. 9, 2014).  There, the court was called on to resolve the application of the exclusion to a sequence of events involving excluded pollution and a non-excluded fire peril.

The insured’s commercial building was damaged in a fire.  As a result of the fire, chemicals escaped from one of the tenants’ fertilizer, herbicide and pesticide wholesale operation, causing pollution damage.  The building was insured by an all-risk property insurance policy.  Among other things, the policy excluded coverage for damage or expense arising from the clean-up due to any release of pollutants, but exempted any loss to the property “caused directly by an insured peril … not otherwise excluded elsewhere in the Policy.”  The insurer argued that the exception ensures coverage exists for fire damage, but not for clean-up of pollutants contaminating property not damaged by fire.  In that case, the cause of the damage was the escape of the pollutants, not the fire.

The insured argued that the exception requires a proximate cause analysis.  According to the insured, the “proximate cause” of the pollution damage was an insured peril, the fire.  That is, but for the fire, the pollutants would not have escaped.  In the insured’s view, any other interpretation would render the exception in the exclusion meaningless, as physical loss caused by fire is already covered regardless of the exception.

The court, however, agreed that the language of the exception – particularly the word “direct” – does not call for a proximate cause analysis.  Relying on the British Columbia Court of Appeal’s reasoning that “direct” describes “an event lead[ing] straight or immediately to its consequence,” the court concluded that the fire and the chemical spill were two distinct events, just as the Court of Appeal found two distinct events in a prior case involving damage to pipes by freezing and damage from the discharge of water.  Neither could be described as a semantic or specious distinction. The court thus adopted the insurer’s interpretation, rejecting the notion that it creates any redundancy in the policy.  To illustrate, the court imagined a reversal of the facts, in which an escape of pollutants subsequently caused fire damage.  The exclusion would bar coverage for the fire damage, thus necessitating the exception to reinstate coverage for the covered fire damage.  Accordingly, the court upheld the application of the exclusion to bar coverage for the pollution damage where it was not directly caused by the fire.

Please click here for a description of Sedgwick’s Canada Insurance practice.  The lawyers in the group are watching coverage decisions and news from Canada for publication on the Insurance Law Blog.

Business Interruption Insurance: Clearing up the Confusion

Tuesday, September 16th, 2014

By Alex J. Potts, Sedgwick Bermuda

In Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm), the English Commercial Court has confirmed the nature of an insurance broker’s duties to its clients when obtaining Business Interruption Insurance (BII) cover.

This case arose out of a broker’s negligence claim, brought by a waste recycling company that had suffered significant losses following a fire. The court dismissed the claim on the basis that the broker had satisfied its duty of care, and it was the company’s own acts or omissions that had resulted in it being under-insured.

The court summarized the broker’s obligations as follows:

  • A broker is not expected to calculate the BII sum insured or choose an indemnity period (which are matters for the commercial client).
  • A broker must, however, explain to the client the method of calculating the sum insured, technical policy terms such as “estimated gross profits” and “maximum indemnity period,” and relevant considerations when choosing a maximum indemnity period.
  • A broker will need to take reasonable steps to ascertain the nature of the client’s business and its insurance needs, but not necessarily by way of detailed investigation. The nature and scope of a broker’s obligation to assess a commercial client’s BII needs will depend upon the circumstances, including the client’s sophistication, and the number of times the broker has met the client in the past.
  • Although BII is for commercial clients, the level of client sophistication will vary enormously. It cannot be assumed that a small or medium-sized enterprise (an SME) will have any understanding of the nature of BII cover.
  • If a client who appears to be well informed about his business provides a broker with information, the broker is not expected to verify that information unless he has reason to believe that it is not accurate.
  • Having satisfied these obligations, a broker must exercise reasonable care to adhere to express instructions as to the BII cover to be obtained.

Although the outcome of the case turned on its own facts, the legal principles are important to the way in which insurance brokers conduct themselves when placing BII risk in the London market, and they should be of interest to brokers’ professional indemnity insurers.

The court made two observations of relevance to the London market collectively. The court noted that, notwithstanding the contract certainty initiative in the London market, there were certain aspects of standard BII policy wordings, such as the definition of gross profit and the calculation of indemnity periods, which still remained unclear for clients, brokers, loss adjusters, and even some insurers. The court also noted that the insurance industry, unlike other parts of the financial services industry, did not yet have standard procedures in place for the identification and recording of sophisticated clients.

It remains to be seen whether the same standard of care is imposed on brokers in the Bermuda insurance and reinsurance market, given certain differences in market practice in London and Bermuda, and the sophisticated nature of many Bermuda (re)insureds.

Sandy in the Courts

Tuesday, July 29th, 2014

Estimates of insured losses from Superstorm Sandy have approached $30 billion. Since late 2013, the courts have been handling numerous insurance cases arising out of the storm.  In this article, Sedgwick’s Michael Topp and Kara DiBiasio review how the federal court in New York (Eastern District) is coordinating the many cases filed in connection with homeowners’ claims.  They also summarize the written opinions that have been issued to date concerning coverage issues raised by Sandy under commercial policies.  The article is available for download here.

The Insurance Law Blog has been updating readers on key Sandy decisions, and we expect many more substantive cov­erage decisions from the courts through­out this year. Concurrent causation, “Named Storm,” and business interrup­tion issues are likely to be heavily con­tested, and Sedgwick and the Insurance Law Blog will continue to monitor the Sandy-related opinions impacting both homeowners and commercial insurers.

Not Feeling It: Court Nixes Claim for Feng Shui Fees and Finds No Bad Faith

Tuesday, June 17th, 2014

By Timothy Kevane, Sedgwick New York

In Patel v. American Economy Ins. Co., — F. Supp. 2d. —, 2014 WL 1862211 (N.D. Cal. May 8, 2014), the U.S. District Court for the Northern District of California granted the insurer’s motion for partial summary judgment, finding no coverage for the fees of a feng shui consultant, rejecting business losses outside the specified period, and concluding there was no bad faith.

The insured dental office suffered smoke damage due to a fire in the basement of premises it occupied.  Among other expenses submitted to its property insurer was a bill for $50,000 from its feng shui consultant who provided advice with respect to crystal replacements, energy balance restoration, furniture placement, and the alignment of Qi forces.  The court held that such expenses did not constitute a “direct physical loss” covered by the policy as they did not involve damage to tangible, material objects.  Furthermore, there was no evidence these expenses were incurred to minimize the suspension of the business and to continue operations (as a covered “extra expense”).  The court held that the extra expense provision was not rendered vague simply because it did not specifically exclude feng shui costs from coverage.

The court also rejected the insured’s supplemental claim for lost business income when it had to shutter its business in 2014 due to additional repairs to the building relating to the original fire, which occurred five years earlier.  The insured argued that the policy covered twelve months’ worth of lost income, and because it initially claimed only one month of lost income immediately after the fire, it remained eligible for another eleven months of coverage.  The court rejected this argument as the business income coverage was limited to the defined “period of restoration,” subject to the requirement that lost income must be sustained within twelve consecutive months from the date of loss.  The court found that it made no difference that restoration work may have resumed outside this limiting period.

Lastly, the court rejected the claim that the insurer disregarded in bad faith the insured’s need to relocate in 2014, citing the absence of any underlying contractual obligation to cover the 2014 lost income.

 

Illinois “Blasts” Non-TCPA Causes of Action Out of Coverage

Tuesday, June 10th, 2014

By Stephanie Sauvé, Sedgwick Chicago

In G.M. Sign, Inc. v. State Farm Fire & Cas. Co., 2014 IL App (2d) 130593 (May 2, 2014), the Illinois appellate court enforced a policy’s Violation of Statutes Exclusion endorsement to preclude coverage for a settlement arising out of an underlying blast-fax lawsuit that alleged various causes of action.

The underlying lawsuit was a class action in which G.M. Sign sued Michael Schane (“Schane”) and Academy Engraving Company for sending unsolicited fax advertisements. G.M. Sign asserted three causes of action in its amended complaint:  violation of the federal Telephone Consumer Privacy Act of 1991 (“TCPA”), conversion, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.  The latter two counts made no express reference to the TCPA, but each count was based on the sending of unsolicited fax advertisements to G.M. Sign and others.  Schane later entered into a settlement agreement in which he stipulated to the entry of judgment against him for $4.9 million, to be satisfied with insurance proceeds.

Schane tendered the suit to his insurer, State Farm.  His insurance policy contained a Violation of Statutes Exclusion endorsement precluding coverage for property damage or advertising injury “arising directly or indirectly” out of any action or omission that violates or is alleged to violate the TCPA or any other statute that prohibits or limits the sending, transmitting, communicating, or distribution of material or information.  Citing this exclusion, the insurer denied coverage because the amended complaint alleged violations of the TCPA.

Thereafter, G.M. Sign filed a declaratory judgment action against State Farm claiming coverage under Schane’s policy.  On cross-motions for summary judgment, the trial court found that the insurer had a duty to defend and indemnify Schane, but the appellate court reversed.  The appellate court determined that the insurer had no duty to defend in connection with the amended complaint because the exclusion applied to all counts in the amended complaint.  The court reasoned that the proper analysis of the “arising out of” language in the Violation of Statutes exclusion is a “but for” analysis — if the alleged injury would not have occurred “but for” a violation of the TCPA, then the exclusion barred coverage for the alternative causes of action which arose from the same conduct underlying the alleged TCPA violation.

Look here for more Sedgwick articles related to insurance coverage for violations of the TCPA.

District Court Seeks to Streamline Hurricane Sandy Insurance Cases Through Dismissals

Friday, June 6th, 2014

By Jeffrey Dillon, Sedgwick New York

Yesterday, in the In re Hurricane Sandy Cases, Civil Action No.: 1:14-mc-00041-CLP-GRB-RER, a committee of magistrates in the Eastern District of New York recommended that the district judges presiding over more than 150 lawsuits against insurance companies arising from Hurricane Sandy dismiss numerous state law causes of action and damages claims. The magistrates, who have been appointed to manage more than 1,000 civil actions arising from the hurricane, based their recommendation on prior rulings in Sandy-related cases that certain state law claims and types of damages are not cognizable under New York law. On February 21, 2014, the magistrates directed plaintiffs to voluntarily dismiss claims or damages not recognized by New York law, or submit letters to the Court explaining the legal basis for continuing to pursue such claims. Those plaintiffs who did not respond to the Court’s directive are now subject to the committee’s June 5th Report and Recommendation.

The committee’s recommendation is aimed at avoiding “wasteful and unnecessary” motion practice before the District Court in each of the individual Sandy-related cases, and to resolve claims that are not cognizable under New York law. Plaintiffs have 14 days from receipt of the Report and Recommendation to file objections with the Court or they will be deemed to have waived their right of appeal.

Among the state law claims to be dismissed are: (i) fraudulent misrepresentation and inducement – on the ground that plaintiffs have failed to allege the necessary elements of a legal duty owed by the insurer separate from its duty to perform under the policy and entitlement to special damages; (ii) breach of the implied covenant of good faith and fair dealing – on the ground that New York courts do not recognize a separate cause of action for breach of the implied covenant when a breach of contract claim is also pled on the same facts; (iii) bad faith denial of insurance coverage – on the ground that plaintiffs have not alleged conduct actionable as a tort, independent of the underlying insurance contract; and (iv) claims under Section 349 and 350 of New York General Business Law­ – on the ground that plaintiffs have not alleged injury independent of loss caused by an alleged breach of contract.

The committee also recommended the dismissal of demands for punitive damages, because plaintiffs have not identified that the insurers’ conduct was actionable as an independent tort, and any claims for attorney’s fees, which are not recoverable in actions against insurers to settle rights under a policy.

 

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