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

The Seventh Circuit Holds That the “In Care of” and “Business” Exclusions Preclude Coverage Under a Homeowner’s Policy

February 6th, 2013

By Christina Ahn, Sedgwick San Franciasco

In Nationwide Insurance Co. v. Central Laborers’ Pension Fund, No. 12-1784 (7th Cir. Jan. 11, 2013), the United States Court of Appeals for the Seventh Circuit affirmed that a homeowner’s insurer was entitled to deny coverage on grounds that the “in care of” and “business” exclusions applied.

Jeanne Hentz worked as an accountant with Kevin W. Bragee, CPA, LLC.  Among the firm’s clients were a group of investment funds (the Funds).  Hentz placed a CD containing confidential information relating to participants and beneficiaries of the Funds into her laptop.  The laptop was stolen from her car and the CD was lost. 

The Funds brought a state action in Illinois against Hentz, alleging that she had negligently breached her duty to safeguard the information contained on the CD.  Hentz tendered the defense of the action to her homeowner’s insurance carrier, Nationwide.

Nationwide brought a federal diversity action seeking a declaration that it did not have a duty to defend or indemnify Hentz.  It argued that Hentz’s claim was not covered because of an “in care of” exclusion, which precluded coverage for damage to property “in care of the insured.” Nationwide also argued that the policy’s “business” exclusion applied, which precluded coverage for property damage arising out of, or in connection with, a business.  Nationwide filed a motion for summary judgment. 

The district court granted Nationwide’s motion, concluding that the policy’s “in care of” exclusion applied, but it did not address Nationwide’s argument regarding the “business” exclusion.  The Funds appealed.

The Seventh Circuit affirmed the district court’s judgment in relation to the “in care of” exclusion.  Under Illinois law, an “in care of” exclusion applies if the following two conditions are met: the property lost or stolen was both (1) within the exclusive possessory control of the insured at the time of the loss, and (2) a necessary element of the work performed by the insured. 

Regarding the first element, the court reasoned that Hentz’s possession of the CD and her duty to safeguard it amounted to the “exercise [of] some type of possessory control over the” CD, which became exclusive when Hentz placed the CD in her car.  Regarding the second element, the court concluded that the CD was necessary to her ordinary employment activities because the handling and care of confidential information was vital to her work as an accountant.

The Seventh Circuit went on to find that the “business” exclusion applied because Hentz’s failure to safeguard the CD was an omission amounting to a breach of duty arising in connection with her employment with the audit firm.

State of Washington v. James River Insurance Company – What Impact on Bermuda Insurers?

February 1st, 2013

By Richard J. Geddes, Sedgwick Chicago

The short answer is – none.

State of Washington, Dept. of Transportation v. James River Insurance Company, – P.3d –, 2013 WL 258877 (Wash. January 24, 2013), a January 2013 decision of the Washington State Supreme Court, upheld a Washington statute prohibiting insurance contracts from depriving Washington policyholders from access to state courts, due to the insurer’s contract provisions calling for arbitration to resolve contract disputes. [The Insurance Law Blog reported on the decision shortly after the court ruled on January 17th.]

James River represents a purely U.S.-domestic dispute. All parties to the dispute were U.S. residents, such that the NY Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the NY Convention”), which is the source of enforcement of international arbitration agreements, did not apply. The NY Convention applies to arbitration agreements between parties of different nations, each of which is signatory to the NY Convention, and requires those nations to enforce the arbitration agreements between those parties.

The law in the U.S. dealing with conflicts between international arbitration agreements and state insurance law is not uniform, but if a trend is apparent, it is to recognize the primacy of these international contractual agreements via the NY Convention over contrary state law. The question: whether the McCarron Ferguson Act, granting the states the right to regulate insurance except in cases where Congress has expressed a contrary intent, would be trumped by Federal law recognizing the enforceability of international arbitration agreements. The issues controlling these decisions are complex, and require consideration beyond the space available here. However, of the three Circuit Courts that have considered this question, two,¹ and importantly, the most recent two, have found in favor of enforcing the arbitration agreement, while only one,² the earliest, has not.

The lesson here is that U.S. state court decisions about purely domestic disputes say nothing about the enforceability of international arbitration agreements as are typically included in Bermuda form policies. The U.S. federal courts have generally favored the enforcement of these agreements. Equally important to Bermuda insurers is the fact that Bermuda and U.K. courts have routinely been receptive to applications to issue anti-suit injunctions to bar lawsuits filed in contravention of arbitration agreements. In short, Bermuda insurers may continue to rely on the enforceability of their chosen Bermuda- or London-based arbitration selection. 

 


¹ Safety National Casualty Corp. v. Certain Underwriters at Lloyds, 587 F.3d 714 (5th Cir. 2009); ESAB Group v. Zurich Insurance PLC, 685 F.3d 376 (4th Cir. 2012).

² Stephens v. American International Ins. Co., 66 F.3d 41 (2d. Cir. 1995).

 

Boom or Bust: Third Party Rights Against Liability Insurers of Bankrupt Entities in Bermuda and the U.K.

February 1st, 2013

By Alex J. Potts, Sedgwick Bermuda

In the recent case of Re Kingate Management Limited (in Provisional Liquidation) [2012] SC (Bda) 52 Com, the Supreme Court of Bermuda considered the statutory rights of third party claimants to assert direct claims against liability insurers of insolvent and bankrupt insureds in Bermuda.

This is the first occasion that the Court has considered and applied Bermuda’s Third Parties (Rights Against Insurers) Act 1963, a piece of legislation modeled on the U.K.’s Third Parties (Rights Against Insurers) Act 1930.  The Court confirmed that the effect of Bermuda’s legislation is that the benefit of insurance policies taken out by an insolvent company (or bankrupt individual) with respect to third party liabilities are directly transferred to any third party to whom the company is liable, by operation of law.  The transfer of rights takes place when a winding-up order is made or a liquidator is appointed.

The Court also confirmed that the Act imposes discovery obligations on an insolvent insured and its liquidator, receiver or trustee in bankruptcy, as well as its insurer.  A third party who asserts a disputed claim against an insolvent company which is insured against the relevant liability is entitled to obtain from the insolvent insured, and its insurer, such documents and information as may reasonably be required for the purpose of ascertaining and enforcing such rights, if any.

Importantly, the Bermuda Court followed and applied the English Court of Appeal’s decision in Re OT Computers Ltd (in administration) [2004] 3 WLR 886, which made clear that, under English law, a third party claimant did not need to have conclusively established liability before it was entitled to documents and information relating to the insurance position.

It should be noted that the U.K. Act is due to be significantly reformed by the Third Parties (Rights Against Insurers) Act 2010. However, the implementation date for the U.K. reforms has been delayed, and the new legislation is not currently expected to come into force until later this year.

Court Gives Insured Roofer the Bird – Late Notice is Sufficient to Deny a Claim

January 29th, 2013

By Todd D. McCormick, Sedgwick New York

In Atlantic Casualty Insurance Company v. Value Waterproofing, Inc., 2013 WL 152854 (S.D.N.Y., 2013), the Southern District Court of New York held that a commercial general liability insurer had no duty to defend or indemnify its insured where the insured had failed to provide timely notification of a claim.  This appears to be the first decision to address New York Insurance Law § 3420(a)(5), which provides that an insurer cannot deny coverage on late notice grounds unless it demonstrates direct prejudice.

Atlantic Casualty Insurance Company issued a commercial general liability policy to Value Waterproofing, Inc.  In early February 2010, Value was hired by Kansas Fried Chicken (KFC) to repair its roof.  Later that month, a major snow storm hit New York, leaving approximately 20 inches of snow on KFC’s roof.  KFC’s roof collapsed.

KFC immediately informed Value and its own insurance carrier, Greenwich Insurance Company,  of the collapse.  Value, however, failed to notify Atlantic.

Atlantic was first made aware of the loss some six months later by letter from Greenwich, which was seeking to subrogate against Value on behalf of KFC.  Atlantic sent a claims investigator to the property who observed that the damaged portion of the building already had been demolished.  Atlantic requested information relating to the damage and repair work from Greenwich, but its request was ignored. Upon revisiting the property, Atlantic discovered that the entire roof had been replaced.

Atlantic denied coverage for the loss, and filed suit seeking a declaration that it had no duty to defend or indemnify Value in connection with the subrogation action because it was unable to investigate the underlying loss due to late notice.

Atlantic prevailed.  The court emphasized the significance of notification provisions in allowing insurers to both investigate losses and maintain adequate loss reserves.  By delaying notification for over six months, the insured had “materially impaired” Atlantic’s ability to “ascertain potential causes of the collapse, information which would be highly relevant to an investigation and defense of [Value’s] claim.”

It was prudent for Atlantic to investigate the underlying loss as soon as it was placed on notice, even though the delay had caused it prejudice. An insurer that receives late notification of a claim should not automatically assume it will be entitled to rely upon the insured’s dilatory notice as a ground for a denial. It is advisable that an insurer seeks to protect its position by undertaking inquiries as best it can, pending determination of its coverage obligation.

The Privilege is in the Policy: Tripartite Attorney-Client Relationship Arises Where Insurer Retains Counsel Pursuant to Policy Terms—to Prosecute or Defend

January 28th, 2013

By Katherine E. Mast, Sedgwick Los Angeles

In Bank of America v. Superior Court, ___Cal.Rptr.3d ___, 2013 WL 151153 (Cal. Ct. App. Jan. 15, 2013) the California Court of Appeal for the Fourth Appellate District held that a tripartite attorney-client relationship arises, accompanied by the associated attorney-client privilege and work product protections, when an insurance carrier hires a law firm to prosecute an action on behalf of its insured pursuant to the policy terms.

Bank of America, N.A. (B of A) was the insured under a lender’s title policy issued by Fidelity National Title Insurance Company (Fidelity) to insure a deed of trust on certain real property.  Pacific City Bank (PCB) had recorded a deed of trust on the same property and, after recording a notice of default, noticed a trustee sale.  B of A tendered the claim to Fidelity, which hired counsel to institute an action on behalf of B of A to protect its interests.

In the litigation initiated by B of A, PCB served subpoenas seeking communications between B of A’s counsel and Fidelity.  B of A moved to quash the subpoenas on the grounds that they sought documents that were protected by the attorney-client privilege and constituted attorney work product.  The trial court held that, because the law firm was retained to prosecute, rather than defend, the underlying action, Fidelity did not have a “favored position” or “sacred role” in the litigation and thus there was no attorney-client relationship between Fidelity and counsel representing B of A.

The Court of Appeal reversed, holding that the trial court erred as a matter of law in making an artificial distinction based on whether the retention of counsel by the carrier was for the purpose of defending or prosecuting an action.  Rather, the court focused on whether the retention was within the scope of Fidelity’s contractual duties to B of A.  In the context of title insurance, a title insurer owes “kindred duties” to defend and initiate lawsuits to protect the integrity of the insured’s title. For this reason, the court found that there were no distinguishing factors between the prosecution and defense of an action, and it rejected the argument that a tripartite relationship is created only when counsel is retained by the carrier to defend its policyholder.  Accordingly, the court held  that a tripartite relationship was created between B of A, Fidelity, and retained counsel when Fidelity retained counsel to prosecute litigation on behalf of B of A pursuant to the terms of the insurance contract.  The court also found that the tripartite relationship existed regardless of whether there was a formal retainer agreement between the carrier and the law firm.  Further, the tripartite relationship existed even though the carrier retained counsel under a reservation of rights, because the reservation of rights did not trigger the insured’s right to independent counsel. Finally, the court rejected arguments that Fidelity or B of A had waived their rights to assert the attorney-client privilege or attorney work product doctrine.

Washington Supreme Court Articulates New Analysis of EUO Conditions

January 24th, 2013

By Robert A. Meyers, Sedgwick Seattle

In an effort to protect insurers against fraudulent claims, many insurance policies include a condition that requires a policyholder to submit to an examination under oath (“EUO”) at the insurer’s request. In Staples v. Allstate Ins. Co., No. 86413 (Wash. January 24, 2013), an 8-1 majority of the Washington Supreme Court articulated a new analysis of insurers’ and policyholders’ respective rights and obligations under EUO conditions.

First, the Court held that an insurer may only demand an EUO if the EUO is “material to the investigation or handling of a claim.”  By so ruling, the Court expressly disapproved of the Washington Court of Appeals’ decision in Downie v. State Farm Fire & Cas. Co., 84 Wn. App. 577, 582-83, 929 P.2d 484 (1997), in which the Court of Appeals had declared that insurers have an “absolute right to at least one EUO.”

Second, the Court held that an EUO condition is a form of “cooperation clause.” As such, the Court held that a policyholder need only “substantially comply” with an EUO condition, and an insurer must demonstrate that it was actually prejudiced by any breach of an EUO condition. By so ruling, the Court again disapproved of the Washington Court of Appeals’ ruling in Downie, in which the Court of Appeals had declared that an insurer need not demonstrate that it was prejudiced by a breach of an EUO condition.

Turning to the facts of the case, the Court then reversed an order granting summary judgment in favor of Allstate under Allstate’s EUO condition. Although Allstate’s policyholder had failed to submit to an EUO after repeated requests spanning four months, the Court held that there were genuine issues of material fact with respect to whether (1) an EUO was material to Allstate’s investigation, (2) the policyholder substantially complied with Allstate’s requests for an EUO, and (3) Allstate was prejudiced by any breach of the policy’s EUO condition. Therefore, the Court held that a jury must resolve the issues.

In view of the Court’s ruling, it likely will be more difficult for an insurer to obtain relief via summary judgment because of a Washington policyholder’s breach of an EUO condition.  Indeed, in Staples, the dissenting justice even gloomily opined, “Today’s decision invites insureds to put minimal effort into complying with the terms of their insurance policies, expecting the company to pay.”

The Court’s majority and dissenting opinions can be found here and here, respectively.

Unity of Accident and Occurrence: Illinois Appellate Court Holds That One Accident Causally Produced Only One Occurrence

January 24th, 2013

By Bryan Chapman, David Dolendi and Ji Suh Faloon, Sedgwick Chicago

In Ware v. First Specialty Ins. Corp., No. 1-11-3340, 2012 IL App (1st) 113340, 2013 WL 145017 (Jan. 11, 2013), the Illinois Appellate Court affirmed the trial court’s grant of summary judgment in favor of an insurer, holding that the injuries and deaths of some 40 individuals caused by an apartment porch collapse comprised only one occurrence. The court based its holding on the relevant policy definitions, and a causation analysis pursuant to case precedent.  In the underlying litigation, all parties had stipulated that the collapse was not interrupted by intervening human acts or by preceding or subsequent events, such that no intervening acts or circumstances were considered a cause or contributing factor to the deaths or injuries of plaintiffs. Id. at 16.

The defendant insurer was First Specialty during the relevant policy period. The trial court, in granting summary judgment to the insurer, had held that there was only one occurrence – there was “simply one source” of all plaintiffs’ injuries and resulting deaths, which was the porch collapse. As a result, the policy’s general aggregate limit of $2 million was not implicated, only its $1 million limit per occurrence. Id. at 15. On appeal, the appellate court considered the sole issue to be whether the collapse and resulting injuries and deaths comprised one occurrence. Id. at 18.

The plaintiffs contended that, because several plaintiffs’ injuries and deaths did not occur until sometime after the collapse, the collapse and resulting injuries and deaths were all separate occurrences. Id. at 17. Plaintiffs relied on the “time and space test” applied in Addison Ins. Co. v. Fay, 905 N.E.2d 747 (Ill. 2009).  The insurer, by contrast, maintained that the collapse and resulting injuries and deaths were only one occurrence, relying on the policy’s occurrence definition and Illinois precedent. Id. at 17.

The trial court examined the policy’s definitions of “occurrence” and “bodily injury,” and noted that the bodily injury definition’s reference to resulting death “at any time” critically undermined the plaintiffs’ emphasis on the injuries and deaths occurring sometime after the collapse. Id. at 21. Because of the policy language, which effectively defined an occurrence as “encompassing any injuries or deaths at any time,” the court found this lapse of time to be “immaterial.” Id.

The trial court then assessed the plaintiffs’ arguments under what it called the “cause theory,” which determined the number of occurrences by “referring to the cause or causes of the damages.” Id. at 23. Under the cause theory, the only relevant factor in determining the number of occurrences is how many separate events or conditions led to a party’s injuries. This makes the time at which the injuries manifested themselves irrelevant. Id. at 24. The “inescapable conclusion” under this theory, then, was that there was only one cause of all injuries and deaths: the porch collapse. This was the court’s understanding and the understanding to which all parties were bound by their previous stipulation. Id. at 25.

The appellate court held that the above analysis pursuant to both the cause theory and the policy definitions were sufficient to affirm summary judgment, and concluded that the porch collapse comprised a single occurrence because the collapse alone caused the underlying injuries. 

 

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: