Archive for the ‘Uncategorized’ Category

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].”


Washington Insurance Law: 2013 Year in Review

Tuesday, January 21st, 2014

2013 was a particularly eventful year in Washington insurance law. This paper, authored by Sedgwick Seattle’s Robert Meyers, summarizes the holdings of several notable Washington insurance decisions that were filed in 2013.  Download a copy of the paper here. 

In June 2013, Bob gave a webinar on The State of Bad Faith in Washington.   The WA program, and the others in our bad faith series, are are available for on demand viewing.  Please click here to request a link.

Straight Talking in Texas: The Contractual Liability Exclusion Means What It Says and Says What It Means

Friday, January 17th, 2014

By Kim Steele and Neil Rambin, Sedgwick Dallas

According to prominent insurance commentator, Randy Maniloff, Ewing Construction Co., Inc. v. Amerisure Insurance Co. was “probably the most closely watched coverage case in the country” in 2013.  This is no longer, as the Texas Supreme Court issued its opinion today, reversing the Southern District of Texas’ 2011 decision and holding that the contractual liability exclusion found within the standard CGL policy does not apply to a general contractor’s contractual promise to perform its work in a good and workmanlike manner. Ewing Const. Co., Inc. v. Amerisure Ins. Co., — S.W.3d —- (Tex. Jan 17, 2014) (NO. 12-0661).

Ewing was the general contractor hired by the Tuloso-Midway Independent School District to renovate and build additions to a school in Corpus Christi, Texas, including the construction of tennis courts at the school.  Shortly after Ewing’s completion of the tennis courts, the District complained that the courts were flaking crumbling and cracking.  It eventually sued Ewing for faulty construction, asserting claims for breach of contract and negligence, among others. Ewing tendered the lawsuit to its CGL carrier, Amerisure, seeking a defense and indemnity. Amerisure denied any duty to defend arguing, in part, that coverage was precluded by the “contractual liability” exclusion in its policy because Ewing had agreed in its contract with the District to build the tennis courts in a good and workmanlike manner, and failed to do so.  As a result, Ewing filed suit against Amerisure seeking a declaration that it had an obligation to defend Ewing, and in failing to do so Amerisure breached its duty to defend and violated Texas’ Prompt Payment of Claims Act. Amerisure counterclaimed, seeking a declaration that it had no duty to defend or indemnify Ewing.

Judge Janis Graham Jack of the Southern District of Texas broadly construed the Texas Supreme Court’s decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), and held that the contractual liability exclusion applied to preclude coverage for the claims against Ewing because “Ewing assumed liability with respect to its own work on the subject matter of the contract, the tennis courts, such that it would be liable for failure to perform under the contract if that work was deficient.” Ewing appealed that decision to the Fifth Circuit Court of Appeals which initially affirmed, but then on rehearing changed course, and withdrew its opinion and certified two questions to the Supreme Court of Texas:

1. Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion.

2. If the answer to question one is “Yes” and the contractual liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract.”

The Supreme Court answered “no” to the first question, thereby mooting the second.

The contractual liability exclusion in the Amerisure policy excluded claims for damage premised upon an insured’s contractual assumption of liability except when: (1) the insured’s liability would exist absent the contract, and (2) the contract is an “insured contract.”  Ewing maintained that its agreement to construct the tennis courts in a good and workmanlike manner did not add anything to its general obligation to comply with the contract’s terms and exercise ordinary care in doing so.  As a result, it argued that its express agreement to perform the construction in a good and workmanlike manner was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion.  The Supreme Court agreed, concluding that the allegations that Ewing failed to perform in a good and workmanlike manner were substantively the same as its claims that it negligently performed under the contract. The court ultimately held that “[a] general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not ‘assume liability’ for damages arising out of its defective work so as to trigger the contractual liability exclusion.”

The Supreme Court’s message in the Ewing decision is clear: the contractual liability exclusion will not apply to exclude coverage for a contractor’s violation of duties generally owed to its clients, irrespective of its contract.  Rather, it will only apply in cases where the contractor assumed atypical liabilities more akin to the contractual duties at issue in Gilbert.

West Virginia Reverses Course, Concludes that Faulty Workmanship is Covered Under a CGL Policy

Thursday, June 27th, 2013

By Aaron F. Mandel, Sedgwick New York

Last week, the Supreme Court of Appeals of West Virginia issued an opinion holding that faulty construction work qualifies as an “occurrence” under a CGL policy if it causes “bodily injury” or “property damage.” Cherrington v. Erie Insurance Property & Casualty Co., — S.E.2d —, 2013 WL 3156003 (W. Va. June 18, 2013). Cherrington reverses approximately 14-years’ worth of precedent concluding that CGL policies did not cover faulty workmanship.

For a full analysis of Cherrington and other recent case law addressing the “occurrence” issue in the context of faulty construction work, be sure to check out Sedgwick’s Construction Defect Coverage Quarterly when it drops next month.

Prior issues of the Construction Defect Coverage Quarterly can be found here.


First Circuit Permits Insurer to Retain Policy Premiums Despite Rescission

Wednesday, May 15th, 2013

By Aaron F. Mandel, Sedgwick New York

Courts often require insurers to return premiums (or at least offer to return them) when rescinding an insurance policy.  Some states may even require it under statute.  The reason is that rescission is an equitable remedy intended to place the parties in the same position they were before the policy was issued, and the insurer obviously does not receive any premiums until the policy is issued.  On Monday, the U.S. Court of Appeals for the First Circuit rejected this general rule and determined that an insurer was entitled to retain premiums as special damages when it seeks to rescind an insurance policy based on rampant fraud.

In PHL Variable Insurance Co. v. P. Bowie 2008 Irrevocable Trust, No. 12-2243, 2013 WL 1943820 (1st Cir. May 13, 2013), an insurance broker (“Rainone”) and an attorney acting on behalf of a trust (“Baldi”) submitted an application on behalf of Peter Bowie seeking a $5 million life insurance policy naming the trust as the beneficiary.  The application stated that Bowie had an annual salary of $250,000, and a personal net worth of approximately $7.5 million.  Rainone and Baldi represented that the policy premiums would not be paid by any third-party, the policy was not being purchased as part of any program to transfer the policy to a third-party within the first five years, and neither Bowie nor the trust had any agreement for any other party to take legal or equitable title to the policy.  Bowie confirmed this information to a third-party inspector working for PHL, and PHL issued the policy. 

The representations made by Rainone, Baldi, and Bowie were false.  Bowie turned out to be a retired city worker, used car salesman, and blackjack dealer who did not have a personal net worth anywhere near the $7.5 million he, Rainone, and Baldi claimed.  Bowie also could not personally afford the policy’s premium.  The premium was actually being paid by a company (“Imperial”) “whose business model consists of lending money to pay for life insurance policy premiums and, when borrowers default on those loans, taking possession of the policies as collateral”; indeed, Imperial’s loan terms made its loans virtually impossible to pay back.  A subsequent amendment to the trust documents provided that the policy would be assigned to Imperial if its loan was defaulted on and, if PHL rescinded the policy, any premiums refunded to the trust would be delivered to Imperial.

PHL eventually discovered the scheme and filed an action against the trust in the U.S. District Court for the District of Rhode Island seeking to rescind the policy.  PHL also sought to obtain the premiums paid in order to offset the damages it suffered in connection with issuing the policy.  These included costs to underwrite and issue the policy, payment of commissions and fees in connection with issuing and servicing the policy, costs incurred to investigate the scheme, and costs to initiate its rescission action.  Alternatively, PHL advised that it was ready, willing, and able to refund the premiums if the court required it to do so, and tendered the premium into the court’s registry.

Resolving cross-motions for summary judgment filed by PHL and the trust, the court determined that the sole issue was whether PHL was required by law to return the premiums, or if the court’s equity powers enabled it to permit PHL to retain the premiums as special damages.  The court determined that it could permit PHL to retain the premiums, and the trust appealed.  The First Circuit affirmed. 

Initially, the court rejected the trust’s argument that Rhode Island case law required an insurer to return premiums when seeking to rescind an insurance policy.  The court instead determined that the case law “do[es] not stand for such a broad and inflexible proposition,” and focused on equity principles that Rhode Island law permits courts to consider in attempting to make whole a party defrauded into entering a contract.  Those principles include: (1) rescission seeks to create a situation the same as if no contract ever existed; (2) parties should gain no advantage from their own fraud; and (3) a court in equity can grant all relief necessary to make the aggrieved party whole so long as it is permitted by the pleadings.  Because it concluded that PHL was deceived into issuing the policy as the result of a conspiracy, the First Circuit determined that:

these equitable principles provide ample support for the district court’s decision to make PHL whole by allowing it to retain the premium.  PHL paid a commission to Rainone of $172,365 that it would not have paid but for the misrepresentations that led it to issue the Policy.  Mere rescission of the contract would not have compensated PHL for this expense.  While PHL apparently did not provide a precise accounting of the other costs in incurred with respect to the Policy, it was reasonable for the district court to conclude that the costs alleged in PHL’s complaint — including underwriting, administration, and servicing of the Policy, as well as investigation into the misrepresentations in the application — justified awarding PHL the remaining $19,635 from the premium, particularly in light of the Trust’s fraud.

Although insurers generally are permitted to rescind policies only when there is no other adequate remedy at law, PHL Variable acknowledges that even permitting an insurer to rescind may not make it whole.  Rescission by itself does not compensate the insurer for all of the costs necessary to issue a policy, and even qualifying those costs as “overhead” does not acknowledge the insurer’s lost opportunity costs.  Accordingly, unless a statute or case law absolutely requires an insurer to return premiums in order to rescind its policy, insurers should consider their right to retain premiums as special damages.

Construction Defect Coverage Quarterly

Monday, April 29th, 2013

In honor of Earth Day, which recently celebrated its 43rd birthday, the lead article in the current issue of our Construction Defect Coverage Quarterly addresses potential coverage issues implicated by green construction. We also continue the analysis of how various states define “occurrence” under liability policies, and highlight a recent opinion from a Washington federal court enforcing a broad EIFS exclusion.

Please click here to read the CDCQ and let us know if you are intrested in being placed on the mailing list for this quarterly newsletter.

Washington Federal Judge Presumes that Liability Insurer May Not Assert Attorney-Client Privilege or Work Product Protection in Bad-Faith Suit

Friday, April 19th, 2013

On April 12, 2013, Judge Richard Jones of the U.S. District Court for the Western District of Washington ruled that in a bad-faith lawsuit against a liability insurer, the judge would presume that the insurer has no attorney-client privilege or work-product protection. Judge Jones’ ruling thereby materially extended the holding of the Washington Supreme Court’s recent decision in Cedell v. Farmers Insurance, in which a 5-4 majority presumed that a first-party insurer may not assert the attorney-client privilege or work-product protection in a bad-faith lawsuit. 

Click here for the Insurance Law Blog’s previous coverage of Cedell.


Texas Court – Appraisal Award Insufficient to Defeat Insured’s Breach of Contract Claim

Wednesday, February 20th, 2013

By Kimberly L. Steele, Sedgwick Dallas

A recent federal opinion from Judge Sam Lindsay of the Northern District of Texas, Dallas Division, found that an insurer’s payment of an appraisal award was insufficient to defeat the insured’s breach of contract claim, and that the insured’s statutory and common-law bad faith claims remained viable as well. In the case of Church On The Rock North d/b/a North Church v. Church Mutual Ins. Co., No. 3:10-CV-0975-L (N.D. Tex. Feb. 11, 2013), North Church sued Church Mutual over its handling of a claim for damages arising out of an April 2010 thunderstorm. The parties agreed on the cost of a number of repairs, but differed on others, including the amount to be paid for replacement of North Church’s roof. Church Mutual invoked the appraisal process, and while appraisal was ongoing, North Church sued.

Church Mutual removed the lawsuit to federal court, and the case was administratively closed (subject to a potential future motion to re-open) so that appraisal could be completed. Upon receipt of the appraisal award, Church Mutual issued two checks, one for the remaining unpaid balance of the loss owed, and a second for the withheld depreciation. Church Mutual later moved to re-open the lawsuit and for summary judgment on North Church’s claims for breach of contract, common law bad faith, and violations of the Texas Insurance Code and the Deceptive Trade Practices Act. According to Judge Lindsay’s order, “[b]oiled down to its essence, [Church Mutual’s] contention is that without a viable contract claim, North Church’s other claims necessarily fail, and North Church cannot succeed on its contract claim because it is estopped by the alleged binding appraisal award and [Church Mutual’s] timely payment of that award from pursuing a contract claim[.]”

Judge Lindsay rejected Church Mutual’s position in all respects. Specifically, he concluded that Church Mutual had failed to establish as a matter of law that the appraisal award was binding and enforceable, but only assumed that it was true. Moreover, Church Mutual did not present sufficient evidence to prove that North Church intended to be bound by the award, failed to prove that its payments were timely, and did not establish as a matter of law that its calculations of deductible, depreciation, and prior payments were correct. Thus, Church Mutual’s motion for summary judgment on the contract claims was denied.

Judge Lindsay likewise denied Church Mutual’s summary judgment in relation to the insured’s extra-contractual claims. He did so not only because their contract claims remained viable and because mere payment of an appraisal award, without more, did not preclude an award for pre-appraisal violations of the Insurance Code. He also noted that North Church’s statutory claims were based on timing of payment and purported misrepresentations, not allegedly wrongful underpayment or denial of policy benefits, so the statutory claims would not stand or fall with the common-law bad faith claim. In closing, Judge Lindsay expressly stated that he was not commenting on the strength or weakness of North Church’s case, but only that Church Mutual had not met its summary judgment burden.

The Insurance Law Blog has looked at appraisal awards in Texas in earlier posts.  Please click here for a post from December regarding appraisal clauses and the disputes in Texas over the appraisal process.


Hydraulic Fracking – Recent Developments in CA, NY, NJ and PA

Thursday, December 20th, 2012

By Greg Lahr

For our readers who are keeping tabs on developments in the hydraulic fracturing (“fracking”) industry, we thought you would be interested in Sedgwick’s latest Hydraulic Fracturing News Flash regarding a recent proposal in California to regulate fracking, which can be viewed here.

Here are some recent developments that we are following in other states:

In New York, the Department of Environmental Conservation (“DEC”) has prepared a Revised Draft Supplemental Generic Environmental Impact Statement (“SGEIS”) on the Oil, Gas and Solution Mining Regulatory Program. The SGEIS pertains to issuing well permits for horizontal drilling and high-volume hydraulic fracturing for extracting oil and natural gas from the Marcellus Shale and other low-permeability gas reservoirs. Since making the SGEIS available for public review in September 2011, the DEC has drafted proposed regulations, which are available for comments from December 12, 2012 to January 11, 2013. At least until the regulations are finalized, it appears that the DEC’s moratorium on issuing well permits for horizontal drilling and fracking will continue.

In Pennsylvania, appellate review of the constitutionality of Act 13 of 2012 (“Act 13”), 58 Pa. C.S. §§ 2301 et seq. (signed into law on February 14, 2012), continues with the filing of appellate briefs to the Pennsylvania Supreme Court in September 2012. According to the General Assembly, Act 13 broadly reformed the laws that govern the development of oil and gas resources in Pennsylvania by establishing uniformity and promoting growth in the industry though the pre-emption of local ordinances that impose conditions or limitations on oil and gas operations. The General Assembly intended to allow oil and gas development as a permitted use in any zoning district, and mandate that restrictions placed on oil and gas development by municipalities be no greater than those placed on other industrial uses. A number of municipalities sought a declaratory judgment that Act 13 is unconstitutional, and requested that the Act be permanently enjoined. After the Pennsylvania Attorney General filed preliminary objections based primarily on standing and justiciability grounds, the municipalities filed a motion for summary judgment. On July 12, 2012, the Commonwealth Court issued a decision that granted in part and denied in part the summary judgment motion, and in part sustained the Attorney General’s objections. Significantly, the court declared a section of Act 13, which provides for uniformity of local ordinances, to be unconstitutional. Cross-appeals were filed by the municipalities and the Attorney General.

In New Jersey, a one-year moratorium on fracking signed by Governor Christie is set to expire in January 2013. However, a New Jersey assemblyman is currently sponsoring legislation that would extend the ban on fracking until the state Department of Environmental Protection reviews the federal Environmental Protection Agency’s study on the effects of fracking, which may not be out in final form until 2014.

Cases to Watch in 2013

Thursday, December 20th, 2012

The onset of the new year brings lists of all types: holiday gift lists, the best movies of 2012, New Year’s resolutions. The Sedgwick Insurance Law Blog has made a list of the insurance cases to watch in 2013. Some are just getting off the ground and we will be watching to see how they move through the courts, while others are ongoing and we are watching for decisions from the appellate courts. Our list crosses various lines of insurance coverage and issues, but we know it is far from complete. Please vote for your pick(s) and/or tell us what case you are watching.

Survey can be found here.

Please look out for the post in early January with the results.


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