Florida High Court Narrows Application of Economic Loss Rule to Product Liability Actions

March 12th, 2013

By Robert C. Weill, Sedgwick Ft. Lauderdale

In a dramatic reversal of established precedent, the Florida Supreme Court on March 7, 2013 held in a 5-2 decision that the economic loss rule only applies to product liability actions.  Tiara Condo. Ass’n v. Marsh & McLennan Cos., No. SC10-1022, 2013 WL 828003 (Fla. Mar. 7, 2013).  The case was before the Court on a question certified by the Eleventh Circuit Court of Appeals, which asked whether the economic loss rule exception for professionals applies to insurance brokers.  Rather than answer the issue framed by the Eleventh Circuit, the Court restated the certified question to broaden the issue before it as follows:  “Does The Economic Loss Rule Bar An Insured’s Suit Against An Insurance Broker Where The Parties Are In Contractual Privity With One Another And The Damages Sought Are Solely For Economic Losses?” Slip op. at 2 (all caps omitted). The Court answered the rephrased certified question in the negative, holding that the application of the economic loss rule is limited to products liability cases.

The majority of the Court reasoned that the Court “will depart from precedent as it does here when such departure is necessary to vindicate other principles of law or to remedy continued injustice.” Slip op. at 18 (internal citations omitted). Additionally, the Court noted “[s]tare decisis will also yield when an established rule has proven unacceptable or unworkable in practice.” Id. The Court believed that the repeated creation of exceptions to the rule over time, “now demonstrates that expansion of the rule beyond its origins was unwise and unworkable in practice.”  Slip op. at 18.  The Court’s decision, therefore, “return[ed] the economic loss rule to its origin in products liability.”  Id.  Interestingly, the concurring opinion noted that the majority of the Court did not view its decision as a “departure from precedent,” but instead viewed its decision as “the culmination of the Court’s measured articulation of the economic loss rule’s original intent.”  Slip op. at 19 (Pariente, J., concurring).

Chief Justice Polston and Justice Canady dissented with opinions.  Judge Polston noted that as a result of the decision “there are tort claims and remedies available to contracting parties in addition to the contractual remedies, which, because of the economic loss rule, were previously the only remedies available.”  Slip op. at 26 (Polston, C.J., dissenting).  To state it more simply, every breach of contract claim now will be accompanied by a tort claim or claims.  See Slip op. at 35 (Canady, J., dissenting).

 

Washington Supreme Court Presumes that First-Party Insurers May Not Assert Attorney-Client Privilege or Work Product Protection in Bad Faith Actions

March 5th, 2013

By Robert A. Meyers, Sedgwick Seattle

In Cedell v. Farmers Ins. Co. of Washington, No. 85366-5 (Wash. February 21, 2013), a 5-4 majority of the Washington Supreme Court established a new framework for evaluating attorney-client privilege and work-product issues in bad-faith lawsuits against first-party insurers. The framework does not apply to bad-faith lawsuits involving underinsured motorist (“UIM”) coverage.

First, the Court declared that it will presume that a first-party insurer may not assert the attorney-client privilege or work-product protection in a bad faith lawsuit.

Second, the Court held that an insurer may seek to rebut that presumption by demonstrating that the insurer’s attorney “was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.” If the insurer can satisfy that burden, it should be entitled to an in camera review of the disputed information and the redaction of privileged and protected information.

Third, the Court held that, even if the insurer successfully rebuts the presumption, the insured may seek to pierce the attorney-client privilege by demonstrating that “a reasonable person would have a reasonable belief that an act of bad faith has occurred.” In that event, the trial court would conduct an in camera review of the privileged materials, and if the trial court determines that “there is a foundation to permit a claim of bad faith to proceed,” it will declare that the insurer has waived its attorney-client privilege.

Following the Court’s ruling, in future bad-faith lawsuits relating to first-party insurance claims one can reasonably anticipate some confusion and disagreement about whether the insurer’s attorney’s conduct constituted “counsel as to [the first-party insurer’s] liability” which would be subject to the attorney-client privilege, or a “quasi-fiduciary task” that would not be subject to the privilege. Moreover, a first-party insurer should be keenly aware that if its attorney undertakes tasks that could be construed to be quasi-fiduciary tasks such as investigating, evaluating, or processing the first-party claim, [1] the insurer’s communications with its attorney relating to those tasks might not be privileged and [2] the attorney’s work product relating to those tasks might not be protected. Because of that, if a first-party insurer’s attorney undertakes such quasi-fiduciary tasks, it might behoove the insurer and its attorney to establish separate files that relate to those tasks.

Opinion:
http://www.courts.wa.gov/opinions/?fa=opinions.disp&filename=853665MAJ

Dissent:
http://www.courts.wa.gov/opinions/?fa=opinions.disp&filename=853665Di1

 

Pendergrass: The 78 Year Reign has Ended

March 4th, 2013

By David M. Ajalat, Sedgwick San Francisco

After decades of criticism, the California Supreme Court recently overturned Bank of America etc. Assn. v. Pendergrass, 4 Cal.2d 258 (1935) (Pendergrass) which narrowed the fraud exception to the parol evidence rule.  Traditionally, the fraud exception allowed a party to present extrinsic evidence (evidence outside of the terms of a contract) to show that an integrated agreement was tainted by fraud.  Pendergrass, however, held that evidence of fraud could only be used to “establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing.”  Pendergrass, 4 Cal.2d 258, 263.

The California Supreme Court reconsidered Pendergrass in Riverisland Cold Storage Inc., et al. v. Fresno-Madera Production Credit Ass’n, S190581 (Riverisland).  There, Plaintiffs Lance and Pamela Workman sought a forbearance agreement from a credit association.  The forbearance agreement initially contemplated a three-month term.  However, the credit association promised to lengthen the term to two years if the Workmans pledged further collateral.  The Workmans pledged two additional parcels of land, but the agreement they signed only reflected three months of forbearance.  After three months, the credit association recorded a notice of default.  The Workmans sued for fraud.

The trial court granted the credit association’s motion for summary judgment.  Following  Pendergrass, it reasoned the parol evidence rule barred the Workmans from relying on evidence of fraud.  The Court of Appeal reversed the trial court’s decision, concluding Pendergrass only barred evidence of promissory fraud.  The California Supreme Court went further by overruling Pendergrass and its progeny, concluding that the parol evidence rule should never be used as a shield to protect misconduct.

Riverisland should increase the volume of insurers’ substantive fraud litigation.  Accordingly, insurers should familiarize themselves with the elements of fraud.  In particular, they should pay attention to the reliance element, which requires the plaintiff to establish its justifiable reliance on the defendant’s misrepresentation.  A party cannot justifiably rely on a misrepresentation if it had a “reasonable opportunity to know of the character or essential terms of the proposed contract.”  Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th 394, 419.  Accordingly, insurers should provide prospective insureds with ample time to learn the essential terms of insurance agreements.

A Win is a Win, Even When it’s Not

March 4th, 2013

By Luke Panzar, Sedgwick San Francisco

In National Union Fire Ins. Co. of Pittsburgh v. Seagate Technology, Inc., Case No. C 04-01593, the District Court for the Northern District of California ruled that an insurer was not in violation of its duty to defend where it stopped defending its insured following a trial court’s ruling absolving it of its duty to do so, even though the victory was later overturned on appeal.  In what was an issue of first impression, the District Court’s decision gives insurers the right to halt defense payments in reliance on a final judgment while an appeal is pending, without fear of claims alleging breach of contract or bad faith.

In 2000, a lawsuit was filed against Seagate which triggered National Union’s duty to defend.  In 2004, National Union filed a declaratory action in the Northern District of California seeking a judgment that it had no obligation to defend the action brought against Seagate.  After another six years of litigation in both the underlying action and the coverage suit, the District Court held that while the insurers’ duty to defend began on November 1, 2000, it ended on July 18, 2007.  Thereafter National Union stopped paying Seagate’s defense costs.

On appeal it was held that National Union’s duty to defend did not in fact terminate in 2007.  Seagate then argued that by relying on the trial court’s ruling National Union was in breach of its contractual duty to defend it.  Seagate sought fees and prejudgment interest in excess of $20 million.

The District Court noted that the duty to defend typically terminates upon a judicial determination that the insured does not have a potentially-covered claim.  The court then acknowledged that a favorable summary judgment order is just such a determination.  While acknowledging that the losing party has a right to appeal, the court, citing Maness v. Meyers, 419 U.S. 449, 458 (1975), reasoned that, absent a stay, the losing party must comply with the order pending appeal.  Because Seagate did not seek a stay, National Union did not act wrongfully in relying on the District Court’s final judgment.  To hold National Union in breach of contract for relying on a Rule 54(b) final judgment would serve to convert that judgment into one that is merely provisional.

Business Pursuits Exclusion of a Professional Liability Policy Found To Preclude Coverage for the Insured Law Firm and Its Attorney

February 22nd, 2013

By Ekaterina Levy, Sedgwick San Francisco

An Illinois appellate court held that a lawyers professional liability policy’s business pursuits exclusion barred coverage for an underlying civil conspiracy action against a law firm and one of its attorneys.  American Zurich Ins. Co. v. Wilcox & Christopoulos, LLC, 2013 Ill. App. LEXIS 23 (Jan. 17, 2013).  The underlying suit alleged that the attorney, through the services of his own company, prepared fraudulent documents in order to obtain a liquor license for a restaurant.  The court found that the exclusion was not rendered ambiguous solely because the attorney acted “for” two companies (his own and the restaurant) in procuring the liquor license.

An investor filed a civil conspiracy lawsuit against the Wilcox law firm, attorney Wilcox, and other defendants, alleging that the defendants were involved in a conspiracy to open and operate a restaurant by illegal means.  The company that was to operate the restaurant, Panacea Partners, allegedly retained attorney Wilcox and his company, Liquor License Solutions, to obtain the liquor license.  The complaint alleged that Liquor License Solutions was involved in the fraudulent scheme, Wilcox prepared false corporate documents, and Wilcox acted both individually and in the scope of his employment with Liquor License Solutions.

The Wilcox firm requested coverage for the lawsuit from American Zurich pursuant to a lawyers professional responsibility claims-made policy.  At issue before the appellate court was whether a “business pursuits” exclusion operated to preclude coverage.  Specifically, the exclusion provided that the policy did not afford coverage for “any claim based upon or arising out of in whole or in part, from the alleged acts or omissions by any Insured, with or without compensation, for any business enterprise, whether for profit or not-for-profit, in which any Insured has a controlling interest.”

The court rejected the insured’s argument that the exclusion applies only when an insured attorney does work for an entity in which any insured has a controlling interest, whereas the underlying complaint alleged that Wilcox’s work was done for Panacea Partners and not for Liquor License Solutions.  Relying on the dictionary definition, the court found that the term “for” is unambiguous, and in the context of the entirety of the exclusion the term meant “for the benefit of.”  Because Wilcox, an insured, acted for the benefit of his company, Liquor License Solutions, while working to obtain a liquor license for Panacea Partners, the court held that the business pursuits exclusion was triggered, and American Zurich had no duty to defend attorney Wilcox or the Wilcox law firm.

Under this decision, the business pursuits exclusion will bar coverage as long as an insured’s work benefitted its own company, even if the insured simultaneously performed legal work for a third party.

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

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.

 

Fracking Decision in New York Delayed Once Again

February 19th, 2013

By Dirk Haarhoff, Sedgwick New York

In late December 2012, we reported that the New York Department of Environmental Conservation (DEC) was in the process of preparing an environmental impact statement (EIS) regarding well permits for extracting oil and natural gas through horizontal drilling and high-volume hydraulic fracturing – i.e., “fracking.”  The final draft of the EIS was due last Wednesday.  However, the DEC allowed that deadline to pass without issuing its final draft, meaning that the four-year moratorium on shale gas drilling in New York could extend into 2014 or even longer.

According to the DEC, the decision to delay finalizing the report was made in order to allow the state’s health commissioner more time to study fracking’s potential health effects.  The moratorium has been in place because of concerns that fracking may contaminate water supplies.  The Joint Landowners Coalition, a pro-fracking group, plans to sue the DEC as a result of the missed deadline on the ground that delaying the drilling is a “de facto taking of property rights.”  Meanwhile, anti-fracking groups are planning to litigate if regulations are drafted and drilling is allowed to proceed.  As such, whether fracking is permitted in New York ultimately may be decided by the courts.

We are also continuing to watch developments in fracking-related litigation in California and elsewhere.  The current edition of Sedgwick’s Hydraulic Fracturing Digest discusses pending litigation filed in CA by several environmental groups.  Please click here to read this issue.

Twin Towers: Two Events, Two Occurrences under English law

February 15th, 2013

By Alex J. Potts, Sedgwick Bermuda

In the recent case of Aioi Nissay Dowa Insurance Company Ltd v Heraldglen Ltd & Advent Capital (No 3) Ltd [2013] EWHC 154 (Comm), 8 February 2013, the English Commercial Court upheld an arbitration tribunal’s award that the 9/11 terrorist attacks on the Twin Towers of the World Trade Center were properly described as two separate occurrences arising out of two separate events, for the purposes of an aggregation clause under a retrocession excess of loss reinsurance programme governed by English law.

Applying the ‘unities’ doctrine to the facts of the case, the arbitration tribunal (made up of Mr Ian Hunter QC as Chairman, Mr David Peachey and Mr Richard Outhwaite) concluded that the losses arising on the 10 inward reinsurances were caused by two separate occurrences arising out of separate events. The Commercial Court agreed with the tribunal’s reasoning and its conclusions on the agreed primary facts, which had been taken from the Final Report of the National Commission on Terrorist Attacks upon the United States.

The ‘unities’ doctrine is an English law test that derives from Mr Michael Kerr QC’s award in the Dawson’s Field Arbitration in 1972. It has been applied and developed by Rix J in Kuwait Airways Corporation v Kuwait Insurance Co SAK [1996] 1 Lloyd’s Rep 664, and subsequently affirmed by the English Court of Appeal in Mann v Lexington Insurance Co [2001] 1 Lloyd’s Rep 1 and Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] Lloyd’s Rep IR 696. The ‘unities’ test of aggregation has been stated to depend on the position and viewpoint of an informed observer (placed in the position of the insured), and it involves consideration of the degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible. The ‘unities’ test must be assessed by finding and considering all the relevant facts carefully, and then conducting an exercise of judgment and analysis. The exercise should be performed on the basis of the true facts (even if they are only discovered subsequently), and not simply on the basis of the facts as they may have appeared at the time.

Although specifically dealing with reinsurance contracts subject to LSW (London Standard Wording) 351, this judgment of the Commercial Court, and the underlying arbitration award, provide some welcome certainty to the reinsurance market generally on the issue of aggregation under English and Bermuda law.

A copy of the judgment can be found here: http://www.bailii.org/ew/cases/EWHC/Comm/2013/154.html

S.B. 112 – Proposed Property Insurance Reform Bill in Texas

February 11th, 2013

By Lisa M. Henderson, Sedgwick Dallas

A Texas State Senator has introduced legislation that would require residential property insurance carriers to include on the declarations page a dollar amount and explanation for every deductible.  The Senator, Eddie Lucio Jr., believes the bill is necessary to eliminate the confusion caused by deductibles that are listed as percentages, as opposed to a certain dollar amount.  Mr. Lucio believes that policyholders often assume that the deductible is a percentage of their loss when, in fact, the deductible is a percentage of the insured value of the residence.  The bill would require that declarations pages: (1) list and explain each type of deductible under the residential insurance policy; and (2) list the exact dollar amount of each deductible under the residential property insurance policy.  The bill was approved by the Business & Commerce Committee on February 6, 2013.  If enacted, the bill will apply to all residential property insurance policies issued in Texas on or after January 1, 2014. 

We will continue to track S.B. 112 and post any developments.

Introducing Construction Defect Coverage Quarterly, and an Analysis of “Occurrence” in Defect Coverage Actions

February 7th, 2013

We are pleased to introduce the inaugural issue of Sedgwick’s Construction Defect Coverage Quarterly.  In our first issue, we discuss the definition of an “occurrence” in the construction defect action context, and analyze a recent Colorado case which applied the “business risk exclusion” to preclude coverage.

As we note in the newsletter, one of the largest issues litigated in today’s construction defect coverage actions is whether defective construction constitutes an “occurrence” (and, therefore, may be covered) under liability insurance policies.  In addition to the analysis in the newsletter, we thought our readers would be interested in this case from the Ohio Supreme Court which held that faulty construction work does not qualify as an “occurrence” within the meaning of a general liability policy.

*******************

Through its recent opinion in Westfield Ins. Co. v. Custom Agri Systems, Inc., 2012 WL 4944305 (Ohio Oct. 16, 2012) (“Westfield”), the Ohio Supreme Court joined the majority of states in holding that faulty construction work does not qualify as an “occurrence” within the meaning of a general liability policy.  

In Westfield, Younglove Construction (“Younglove”) contracted with PSD Development (“PSD”) to construct a feed manufacturing plant.  After PSD withheld payment, Younglove sued PSD for breach of contract in Ohio federal court.  In its answer, PSD alleged that one of Younglove’s subcontractors, Custom Agri Systems, Inc. (“Custom”), defectively constructed a steel grain bin, but did not allege that Custom’s defective construction work damaged PSD’s other property.  Younglove then sued Custom for contribution and indemnity, and Custom sought a defense and indemnity from its general liability insurer, Westfield Insurance Company (“Westfield”).  Westfield intervened in the action, seeking a declaration it was not obligated to provide coverage to Custom because Younglove’s claim against Custom did not seek damages arising out of “property damage” caused by an “occurrence.”  Westfield and Custom cross-moved for summary judgment on the issue.

In deciding the motions, the court acknowledged that Ohio law did not address whether defective construction work qualifies as an “occurrence” within the meaning of a liability policy.  Rather than decide the issue, however, the court found that a contractual liability exclusion in Westfield’s policy precluded coverage and granted summary judgment to Westfield.  Custom appealed to the Sixth Circuit, and Westfield filed an unopposed motion to certify two questions of state law to the Ohio Supreme Court:  whether a property owner’s claims of defective construction allege “property damage” caused by an “occurrence” under a commercial general liability policy, and, if so, whether contractual liability exclusions nevertheless preclude coverage for such claims.  The Sixth Circuit granted Westfield’s motion, and the Ohio Supreme Court accepted certification.

Addressing only the first question because the court believed it was dispositive, the Ohio Supreme Court held that defective construction does not constitute an occurrence.  The court reasoned that general liability policies are “not intended to protect business owners against every risk of operating a business,” nor are they “intended to insure the risks of an insured causing damage to the insured’s own work.”  The court also looked at court decisions in other jurisdiction, and found the majority view is that claims of defective construction are not claims for “property damage” caused by an “occurrence” within the meaning of general liability policies.  The court then analyzed whether Custom’s defective construction of the grain bin was an “occurrence,” noting the policy defined “occurrence” as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.”  Although the policy did not define “accident,” the court noted that the term has an inherent “fortuity principle” under which losses must be “unexpected, as well as unintended,” and concluded that Custom’s defective work on the steel grain bin was not an “occurrence.”

by Aaron F. Mandel and Stevi A. Raab

Sedgwick Speaks
Sedgwick’s insurance attorneys regularly present to clients and other industry professionals on a wide range of topics. Click here to see a list of upcoming Sedgwick events and scheduled speaking engagements of our attorneys and here to see prior speaking engagements of our attorneys.

Our Firm
Sedgwick provides trial, appellate, litigation management, counseling, risk management and transactional legal services to the world’s leading companies. With more than 370 attorneys in offices throughout North America and Europe, Sedgwick's collective experience spans the globe and virtually every industry. more >

Search
Subscribe
Subscribe via RSS Feed
Receive email updates: