Florida High Court Precludes Use of Extrinsic Evidence to Construe Ambiguous Policy Language

July 23rd, 2013

In what may be described as a controversial 4-3 decision, the Florida Supreme Court in Washington National Insurance Corp. v. Ruderman, No. SC12-323, 2013 WL 3333059 (Fla. July 3, 2013), held that ambiguous language in an insurance policy “must be construed against the insurer and in favor of coverage without resort to consideration of extrinsic evidence.” (Emphasis added). Although the first part of the court’s holding, which is embodied in the Latin phrase contra proferentem, was nothing new, the second part of its holding—excluding the use of extrinsic evidence—appears to be a significant departure from well-established Florida jurisprudence. The court limited its analysis on this issue to a 34-year old decision, Excelsior Ins. Co. v. Pomona Park Bar & Pkg. Store, 369 So. 2d 938 (Fla. 1979), and found that the court never “expressly” held that “extrinsic evidence must be considered in determining if an ambiguity exists.”

The Dissent

The dissent, authored by Chief Justice Polston, disagreed that the policy was ambiguous and charges that the “majority improperly rewrites the parties’ contract to provide coverage for which the parties did not bargain and the insureds did not pay.” Even if the policy was ambiguous, the dissent contends that the majority “improper recedes from [its own] precedent” because “it is well-settled Florida law that parties may attempt to resolve an ambiguity through available extrinsic evidence before applying the last-resort principle of construction against the drafter.” To support its position, the dissent cites to decisions from the Florida Supreme Court (one dating back over 100 years) and the district courts. The sheer volume of authority referenced by the dissent with selected quotations appears to render the majority’s analysis facially incomplete.

Impact

The court’s decision will probably have a tremendous impact on coverage disputes in the State of Florida. The holding effectively precludes insurers from introducing any evidence to oppose a claim that a policy provision is ambiguous. Consequently, insurers will have to focus their legal energy on convincing the court that the policy is clear and unambiguous. On the other hand, given that ambiguity is an extremely subjective determination (as evidenced by this decision), if an insurer offers what the trial court believes to be a reasonable (and favorable) construction of the policy, the courts will have to side with the insured.

Although it remains to be seen, the decision also could obviate the need for experts and streamline cases. The decision also leaves unanswered whether the holding applies in a dispute between two insurers, and whether the sophisticated insured defense—an exception to the doctrine of contra proferentem—is viable. Similarly, while insurers can try to insulate themselves from the effect of the decision by allowing insureds to actively negotiate insurance policies, this would only be realistic for large, sophisticated commercial policyholders. Finally, litigants may try to use the decision in run-of-the-mill contract disputes where the contract was drafted by one party without negotiation or input by the other party.

 

The Sixth Circuit Reminds Claim Administrators of the Dangers of a Breach of Fiduciary Duty When Handling Plan Assets

July 23rd, 2013

The Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001, et seq., was passed with the goal of protecting plan assets so that those assets would be available for plan participants and beneficiaries.  See Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 510-11 (1981).   Under ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), any person who “exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets” is a fiduciary under ERISA.  It is a breach of ERISA fiduciary duty to use plan assets for the fiduciary’s own purposes.  ERISA § 504(a)(1), 29 U.S.C. § 1104(a)(1); and ERISA § 506(b)(1), 29 U.S.C. § 1106(b)(1).

In Pipefitters Local 636 Ins. Fund v. Blue Cross and Blue Shield of Mich., __ F.3d __, 2013 WL 3746217 (6th Cir. July18, 2013), the Sixth Circuit ruled that Blue Cross and Blue Shield of Michigan (“BCBSM”) breached its ERISA fiduciary duty because it paid certain state fees from the self-funded plan assets without being authorized to do so by the plan.  Since 1996, BCBSM has been required by the State of Michigan to pay one percent of its revenues as a “Medigap” fee for defraying senior citizen medical care costs.  BCBSM entered into an administrative services agreement with the plaintiff to administer claims and allow access to its network, which would allow for payment of medical services at the discounted negotiated rates.  The agreement did not address the payment of the Medigap fee.  BCBSM, however, added the Medigap fee to the discounted fee owed to providers and collected the fee from the plan assets, and passed that Medigap fee on to the state.  As a result, the Medigap fee was being collected from the plaintiff’s ERISA plan assets.  The district court granted summary judgment and awarded plaintiff $284,970.84 after it found that BCBSM collected the Medigap fee between June 2002 and January 2004, which was a breach of its fiduciary duty.

On appeal, the Sixth Circuit affirmed the district court ruling, finding that the act of applying the Medigap fee to the payments was a discretionary act, and BCBSM was not authorized under the administrative services agreement to charge those fees.  The Sixth Circuit ruled “[w]here a fiduciary uses a plan’s funds for its own purposes, as is the case here with Defendant using the [Medigap] fees it discretionarily charged to satisfy the Medigap obligation it owed to the state of Michigan, such a fiduciary is liable under § 1104(a)(1) and § 1106(b)(1).”  2013 WL 3746217, at * 7.

The Sixth Circuit’s ruling demonstrates the dangers of handling plan assets and the importance of having the administrative services agreement set forth the parties’ obligations.  If BCBSM had reached an agreement that the Medigap fees were part of the administrative fee charged by BCBSM, then plaintiff could not allege breach of fiduciary duty because the fees would not have been plan assets.  If the administrative services agreement stated that BCBSM could add the Medigap fees to the discounted payments for covered services, then plaintiff similarly could not allege a breach of fiduciary duty because BCBSM would have been administering the plan in accord with the plan terms.

Timely Reporting Crucial in Claims-Made-and-Reported Policies

July 17th, 2013

In GS2 Engineering & Environmental Consultants, Inc. v. Zurich American Insurance Company, 2013 WL 3457098 (D.S.C. July 9, 2013), the U.S. District Court for the District of South Carolina, Columbia Division, found that renewal of a claims-made-and-reported policy does not modify the policy requirement that claims be reported in the same policy period in which they are received.

GS2 was insured under a series of one-year claims-made-and-reported insurance policies issued by Steadfast Insurance Company. The first policy covered the policy period August 7, 2005 to August 7, 2006. The policy was renewed annually until the last policy period of August 7, 2010 to August 7, 2011. At issue were the policies in effect from August 7, 2009 to August 7, 2010 (“the 2009 policy”) and August 7, 2010 to August 7, 2011 (“the 2010 policy”). The policies required that a claim first be made against GS2 within the “policy period” and reported, in writing, to Steadfast during the “policy period.”  GS2 was served with a lawsuit filed by Richland School District on April 14, 2010, but Steadfast did not receive notice of the claim until September 23, 2010.  Steadfast denied coverage because GS2 did not both receive and report the claim during the same August 7, 2009 to August 7, 2010 policy period.

In GS2’s ensuing coverage action, the court granted summary judgment for Steadfast.  The court found that GS2 waited too long to notify Steadfast of the lawsuit, and it rejected GS2’s argument that all of the Steadfast policies should be treated as a single continuous policy.  The court also rejected GS2’s alternative argument that the reporting period for the 2009 policy should be extended into the 2010 policy. Instead, the court held that the policies require both that claims be made against GS2, and reported to Steadfast during the same policy period.  Also, the claim came too late to come within the 2009 policy’s extended reporting period.

Seventh Circuit Demonstrates The Dangers Of Not Having Sufficient Written Procedures In Place To Confirm Coverage – Money Damages Are Available For a Breach of ERISA Fiduciary Duty

July 16th, 2013

In Kenseth v. Dean Health Plan, Inc., __ F.3d __, 2013 WL 29991466 (7th Cir. 2013), the U.S. Court of Appeals for the Seventh Circuit changed course in the wake of the U.S. Supreme Court decision in CIGNA v. Amara, __ U.S. __, 131 S.Ct. 1866 (2011), finding that monetary damages may be available as “other appropriate equitable relief” under the Employee Retirement Income Security Act of 1974 (“ERISA”) § 502(a)(3), 29 U.S.C. § 1132(a)(3).  The Seventh Circuit’s opinion follows other recent Circuit Courts’ opinions interpreting AmaraSee Gearlds v. Entergy Servs., Inc., 709 F.3d 448 (5th Cir. 2013); McCravy v. Metropolitan Life Ins. Co., 690 F.3d 176 (4th Cir. 2012).  But the Seventh Circuit went further under ERISA § 502(a)(3) and charted a new tack for future claimants to obtain monetary damages as “make-whole relief” – which is in the amount equivalent to the benefits otherwise not available under the plan – because of poorly worded plan language.

Ordinarily, a claim under ERISA § 502(a)(3) seeking the equivalent of benefits is ineffectual for several reasons.  The ERISA plan language controls whether a claimant is entitled to benefits and thus, if claimants cannot prove their entitlement to benefits under the plan, they will not prevail under section 502(a)(3).  See ERISA § 402, 29 U.S.C. § 1102; Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 83 (1995). Also, claimants previously faced the unyielding hurdle that the relief sought could not be money damages.  See Mertens v. Hewitt Assocs., 508 U.S. 248 (1993).  But in Kenseth, the Seventh Circuit ruled that an oral communication in connection with claims administration could provide a basis to award “make-whole relief” in the form of money damages.

In Kenseth, Deborah Kenseth (“Kenseth”) was enrolled in an employee welfare group health benefit plan governed by ERISA.   The ERISA plan provided in-network coverage subject to certain limitations and exclusions, including an exclusion for medical services related to the treatment of morbid obesity and any medical services to treat a non-covered service.  On its face, the plan did not provide coverage for Kenseth’s gastric bypass and surgery to treat severe acid reflux associated with a previous gastric banding surgery that she received years ago.  But the ERISA plan invited plan members to call the claim administrator to find out if services were covered.  Kenseth, without reviewing the plan, called the claims administrator, who purportedly misinformed Kenseth that the services would be covered.  In the initial appeal, the Seventh Circuit found that an ambiguity existed in the plan regarding whether treatment for complications associated with Kenseth’s original gastric banding surgery was covered, and whether there was an authoritative process for confirming whether a particular service was included in the plan.  See Kenseth v. Dean Health Plan, Inc., 610 F.3d 452 (7th Cir. 2010).  Nevertheless, the Seventh Circuit presaged the futility of Kenseth’s claim, stating “[t]he relief that Kenseth truly seems to seek is relief that is legal rather than equitable in nature,” and “this is the sort of make-whole relief that is not typically equitable in nature and is thus beyond the scope of relief that a court may award pursuant to section 1132(a)(3).”  Id. at 481.

But after Amara, on the second appeal, the Seventh Circuit ruled that: “We can now comfortably say that if Kenseth is able to demonstrate a breach of fiduciary duty as we set forth in our first opinion, and if she can show that the breach caused her damages, she may seek appropriate equitable relief including make-whole relief in the form of money damages.”  Kenseth, 2013 WL 2991466, at *14.

The ruling in Kenseth should serve as a warning to all ERISA plan administrators to review their plan language regarding who has the final authority to advise whether a particular service is covered.  Equivocal or ambiguous plan language may open the door to a potential breach of ERISA fiduciary duty claim designed at getting the equivalent of benefits that are not covered under the plan.  The best practice to protect against these claims is to make sure the plan expressly provides that oral communications are not sufficient to confirm coverage for a particular service.

Injured Party Free to Pursue Medical Payments Under Tortfeasor’s Policy After Settlement of Liability Claim

July 8th, 2013

By Beth E. Yoffie, Sedgwick Los Angeles

In a case of first impression, Barnes v. Western Heritage Ins. Co., ___ Cal.App.4th ___, 2013 Cal.App.LEXIS 480 (June 20, 2013), the California Court of Appeal, Third Appellate District, held the collateral source rules allow an injured plaintiff to pursue benefits under the medical payments provision of a commercial general liability (“CGL”) policy even after the tortfeasor’s liability insurer settles the injured party’s claims under the liability portion of the insurance contract. 

Plaintiff Justin Barnes was injured when a table fell on his back during a recreation program co-sponsored by the Shingletown Activities Council (“Council”).   More than a year later, after consulting a medical specialist, he requested payment from the Council’s CGL insurer, Western Heritage Insurance Company (“Western Heritage”).  Western Heritage denied the claim on grounds that Barnes failed to report the claim within a year of the accident as the policy required. 

Barnes sued the Council for negligence and premises liability, seeking recovery of medical expenses and general damages.  Western Heritage settled the action on the Council’s behalf.  Barnes subsequently filed suit against Western Heritage for breach of contract and bad faith based on its failure to pay his medical expenses claim. 

The trial court entered summary judgment in favor of Western Heritage on the ground, among others, that collateral estoppel barred the action because Barnes’ settlement of the personal injury action resolved the medical payments issue under the insurance contract. The court also ruled that permitting Barnes to recover under the medical payment provision would result in an impermissible double recovery.

The appellate court reversed, finding the insurance policy’s medical payments coverage was separate and distinct from the liability coverage.  The court found that the medical expenses part created a direct obligation from Western Heritage to Barnes instead of providing coverage for the Council’s tort liability; accordingly, it held the medical expenses coverage was a collateral source from which Barnes could recover directly from the insurer.   

The case is significant because it found for the first time that an injured plaintiff may pursue a claim against a defendant’s insurer for bad faith and breach of contract under a medical payments provision after settling the underlying lawsuit against the insured.  The decision means that a liability insurer whose policy includes a medical payments provision may be on the hook for both the injured party’s medical expenses and the insured’s liability to the injured party which, in turn, can also encompass the injured party’s medical expenses.

Absolute Pollution Exclusion Applies Indoors

July 5th, 2013

By Timothy D. Kevane, Sedgwick New York

In Midwest Family Mutual Insurance Co. v. Wolters, et al., — N.W.2d –, 2013 WL 2363239 (Minn. May 31, 2013), the Minnesota Supreme Court joined the minority view in holding that the absolute pollution exclusion applies to pollution that may occur indoors.

What Happened: the insured, a general contractor, was hired to build a home, including the installation of a gas boiler and carbon monoxide detectors.  The homeowners suffered serious injuries as a result of carbon monoxide poisoning and sued for negligence, claiming an incorrect boiler was installed and the detectors malfunctioned.  The contractor’s general liability policy contained an absolute pollution exclusion precluding coverage for bodily injury arising out of the release of pollutants.

What the Court Said:  applying a plain-meaning approach to the interpretation of the policy, the court held that carbon monoxide is both a pollutant and irritant.  And, because the exclusion avoids the use of language descriptive of the natural environment (e.g., “atmosphere”), the exclusion applies to a release that occurs indoors.  The court thus rejected the majority rule that the exclusion is limited to hazards traditionally associated with environmental pollution.

For What It’s Worth:  while the authorities remain split on the issue, Wolters demonstrates that the absolute pollution exclusion can be reasonably construed to apply to non-environmental claims.  Here, the court’s analysis was guided by the revision to the “qualified” pollution exclusion (deleting the reference to pollution of the “atmosphere”).  The Court’s “plain-meaning” approach is noteworthy in prevailing over other rules of construction that exclusions are narrowly interpreted and ambiguities construed against the insurer.  For followers of Judge Posner (fans, detractors and those in the middle), the dissent cited his recent Seventh Circuit opinion in Scottsdale Indemnity, noting the exclusion was never intended to apply to non-environmental accidents in which pollutants have caused “everyday activities” to have gone “slightly, but not surprisingly, awry.”

Aerospace Insurance Update

July 2nd, 2013

Our Aerospace practice group’s June newsletter discusses the introduction of drones into domestic airspace and the privacy concerns it raises.  The newsletter also features an article importance of forum selection clause for insurers by examining a case between a German manufacturing company and Virginia residents.

Click here to read the full issue.

Hydraulic Fracturing Digest

June 28th, 2013

Our Hydraulic Fracturing Practice Group recently issued its June newsletter. This issue discusses the Bureau of Land Management call for the expansion of fracking on 36 million acres of Federal and Indian land and the response from the Obama administration with its own revised rules regarding Hydraulic Fracturing. These revised rules have been met with criticism from both sides of the issue.

Click here to read the full issue.

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

June 27th, 2013

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.

  

New York Assembly Presents Insurance Reform Overhaul in Wake of Superstorm Sandy

June 25th, 2013

We previously reported on the New Jersey Legislature’s attempts to enact a bill that would allow policyholders to sue an insurer for bad faith in the wake of Superstorm Sandy.  New Jersey Assembly Bill A3710  is still pending.  On the other hand, New York’s Assembly has been very active after Superstorm Sandy and resoundingly passed 12 new bills on June 4, 2013, which would affect changes to the Insurance Law.  The State Senate is now holding debates for these bills, which provides insurers an opportunity to request the legislature to reject these proposed laws.

The American Insurance Association has attacked the new legislation, stating that it is “misguided, if well-intentioned” because the bills “would simply open the floodgates for even greater litigation after a catastrophe.”  Although policyholders already have considerable privileges under current law, the New York Assembly is attempting to rewrite insurance policies by rejecting basic contractual principles that allow parties to form the terms of their own agreements.  If passed, the insurance market may raise premiums to ensure they can pay the newly-mandated covered claims, and handle an increase in litigation costs.

The New York insurance reform legislative package includes the following bills:

• Investigation and Settlement Standards (Bill No. A01092, passed 121-23).  The Assembly is attempting to require insurers to investigate a claim and advise the claimant in writing within 15 days (with a potential additional 15 day extension) on whether the insurer has accepted or rejected the claim.  The insurer then must pay the claim within 3 days from the settlement date.

• Creating a Task-Force for Disasters (Bill No. A01093, passed 144-0).  This bill creates an 18-member task force, including officials from federal and state agencies, insurers and independent representatives who will examine and report on whether policyholders and communities have adequate insurance coverage for disasters.

• Discounts on Fire and Homeowner’s Insurance Upon Completing Residential Home Safety and Loss Prevention Course (Bill No. A01475, passed 141-3).  The Assembly is attempting to force insurers to provide discounts to homeowners for a three-year period upon completing a state-certified course that would teach insureds how to prevent losses triggered by weather-related events.  The bill does not comment on the amount of the discount, but requires the discount to be based on sound actuarial practices.

• A Homeowner’s Bill of Rights (Bill No. A02287, passed 118-26).  Legislators are attempting to educate homeowners who purchase property and casualty coverage by obligating insurers to provide them with a consumer guide written “in plain language in a clear and understandable format.”  This disclosure must provide information, such as how coverage is affected by different types of weather conditions and natural disasters as well as whether the property is located in a flood zone.  Additionally, the Department of Financial Services will be required to establish a “Consumer’s Guide on Insuring Against Catastrophic Loss” brochure.

• A Uniform Windstorm Deductible (Bill No. A02729, passed 144-0).  The Superintendent of Insurance will have the duty to institute a uniform and reasonable standard for hurricane windstorm deductibles.  Proponents of the bill claim it will help promote a better understanding of the applicability and amount of hurricane windstorm deductibles.

• Expediting State Disaster Emergency Insurance Claims (Bill No. A05570, passed 117-26).  This bill establishes an expedited procedure for claimants to advance any lawsuit against insurers that deny claims related to property damage sustained in counties where a State Disaster Emergency is declared by the Governor.

• Private Right of Action for Unfair Claim Settlement Practices (Bill No. A05780, passed 108-34).  The bill creates a private right of action for unfair claim settlement practices for claims relating to a loss or injury in an area under a declared disaster emergency.  If enacted, insurers will be liable for punitive damages if their claims practices are deemed willful.

• Limiting Insurers from Deciding Not to Renew Homeowners Policies (Bill No. A06913, passed 120-24).  The Assembly is trying to restrict insurers’ reduction of coverage by regulating notices of intention to not renew homeowner’s insurance policies.  If passed, insurance companies must file a plan with the Superintendent of Insurance if they intend to reduce by 20% the net number of these policies in New York, or if they plan to reduce the number of these policies by 500 within five years, whichever is greater.  Additionally, insurers must file a plan if they intend to not renew 4% or more of their total number of covered policies within New York.

• Coverage for Business Interruption Claims Arising From Excluded Perils (Bill No. A07452, passed 113-30).  This bill would force insurers to cover business interruption claims even if the loss directly or indirectly arose from or was caused by an excluded or uninsured peril.

• A Standard Set of Definitions (Bill No. A07453, passed 115-29).  This bill would force all New York insurance policies to adopt a standard set of definitions, as promulgated by the Superintendent of Insurance, for all commonly used terms and phrases.  The proposed legislation does not include a list of the terms and phrases it considers to be common, but provides that an insurer may use alternative definitions as long as they are not any less favorable to the policyholder.

• Providing a Copy of a Policy Prior to it Being Purchased (Bill No. A07454, passed 119-24).  The bill would require insurers to provide potential customers of personal and commercial lines of insurance a copy of the policy prior to the policy being purchased.  Legislators want customers to have sufficient time to review a policy before agreeing to buy it.

• Outlawing Anti-Concurrent Clauses (Bill No. A07455, passed 119-24).  The law would forbid insurers from denying a claim when a loss occurred from several causes, and one cause is covered while another cause is precluded from coverage.  If enacted, New York would be joining California,[1] North Dakota,[2] West Virginia,[3] and Washington[4] in eliminating anti-concurrent causation clauses.

The Assembly also passed Bill No. A07456 on June 10, 2013, by a vote of 125-14, which would require the Superintendent of Financial Services to prepare a report card on insurers’ responses to emergencies and disasters.  Insurers would be graded on: (1) the number of claims the insurer received and the status of those claims; (2) the number of independent adjusters the insurer has working in the field; (3) the number of policyholders who have hired public adjusters; (4) the average amount of time, in days, for the insurer to investigate a claim, make a payment, and close a claim; (5) the number of complaints the insurer has received from its insureds and the number of complaints the Department has received on each insurer; and (6) any other information the Superintendent deems necessary.  This report card must be published within 20 days of the declaration of a disaster or emergency and updated every week for at least 6 months or until the Superintendent determines that the report card is no longer necessary.

 

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Sedgwick’s insurance attorneys regularly present to clients and other industry professionals on a wide range of topics. For a complete list of our attorneys, click here.
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