Florida Court Reconfirms that Insurance Policies May be Voided Based on an Insured’s Innocent Misrepresentations

May 2nd, 2013

By Aaron F. Mandel, Sedgwick New York

Earlier this week, the Florida District Court of Appeal once again concluded that, where an insurance policy does not impose a stricter standard for voiding insurance policies based on misrepresentations than section 627.409 of the Florida Statutes (“Section 627.409”), Section 627.409 permits an insurer to do so based on even innocent misrepresentations if the insurer demonstrates that it would not have issued the policy had it known the truth.

In Universal Property & Casualty Insurance Co. v. Johnson, No. 1D12-0891, 2013 WL 1809639 (Fla. Dist. Ct. App. 1st Dist. Apr. 30, 2013), a fire destroyed the Johnsons’ home.  Universal insured the home, and its policy contained a condition (the “Voidance Condition”) providing that the entire policy would be void if, before or after a “loss,” the insured:  (1) “intentionally concealed or misrepresented any material fact or circumstance”; (2) engaged in fraudulent conduct; or (3) “made false statements.” Universal investigated the claim and denied coverage based on a misrepresentation in the Johnsons’ policy application.  Specifically, the Johnsons answered “no” when asked if either of them had been convicted of a felony in the last 10 years, but Mrs. Johnson had actually been convicted of five felonies in July 1998.  It was later determined that this misrepresentation was innocent in that it was based on a misunderstanding as to the actual date when Mrs. Johnson had been convicted, and that Universal would not have issued the policy had it known the truth about Mrs. Johnson’s criminal history.

The Johnsons sued Universal for coverage and Universal counterclaimed, arguing that it was entitled to void the policy pursuant to Section 627.409.  The Johnsons claimed that Universal could not rely on Section 627.409 to void the policy because the Voidance Condition imposed a more stringent standard than Section 627.409 – i.e., it required that the misstatements be intentional in order to void the policy.  The trial court agreed, and Universal appealed.

The appellate court reversed.  Although it acknowledged that parties to insurance policies are free to contract out of the requirements of state or federal law (provided they don’t violate public policy in the process), the appellate court concluded that the Universal policy did not impose a stricter standard for voiding its policy than Section 627.409.  The court first noted that the Johnsons’ interpretation of the Voidance Condition’s third prong rendered it superfluous of the condition’s other two prongs, in violation of Florida law.  The court also rejected the Johnsons’ argument that the third prong required intent based on the Voidance Condition’s title, “Concealment or Fraud,” even though concealment and fraud require intent.  Specifically, the court reiterated its prior holding that, “headings or subheadings of a document do not dictate the meaning of the entire agreement, especially where the literal language of the heading is contrary to the agreement’s overall scheme.”

Construction Defect Coverage Quarterly

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

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.


Seventh Circuit Confirms Viability of Claims Made Defense in Errors and Omissions Policy Dispute

April 12th, 2013

By Scott M. Bloom and Luke W. Panzar, Sedgwick San Francisco

The Seventh Circuit confirmed that the notice requirements of “claims-made” policies entitle insurers to deny coverage where, before the policy’s inception, the insured knows of circumstances that “might reasonably be expected” to give rise to a claim.  Koransky, Bouwer & Poracky, P.C. v. The Bar Plan Mut. Ins. Co., Case No. 12-1579 (7th Cir.), _____ F. Supp. 3d_______ (“KBP”). 2013 WL 1296724.

An insured law firm, KBP, purchased consecutive malpractice policies from the same insurer for the periods 2006-2007 (“Policy 1”) and 2007-2008 (“Policy 2”).  During Policy 1 it represented a client in a series of transactions.  It misfiled a contract which resulted in the collapse of a deal.  Policy 1 expired about two months after the transaction fell through.

In the renewal application for Policy 2, KBP denied knowledge of any unreported acts or omissions that might give rise to a claim.  Sometime later it learned that its client was considering a malpractice suit in connection with the failed transaction.  It notified the insurer under Policy 2. 

The insurer disclaimed coverage on the basis that KBP had learned of the facts giving rise to the claim before inception of Policy 2.  It also took the position that, because KBP had not given notification before expiration of Policy 1, cover was precluded under that policy also. Litigation ensued.  The district court granted summary judgment in the insurer’s favor.  Its decision was upheld on appeal. 

The court reasoned that timely notice to the insurer was a “condition precedent” to coverage under a claims-made policy.  It was reasonable for KBP to have been aware of the possibility of a malpractice claim once it was known that the transaction had collapsed and the firm’s related mitigation efforts had failed.  The insured should have notified the insurer as soon as it became aware of these circumstances.  KBP did not properly report the claim during Policy 1, and there was no coverage under Policy 2 as KBP was aware of circumstances giving rise to it prior to inception. 
The insurer was not required to show prejudice before denying the claim.  In the court’s view, applying such a requirement would create an expansion of coverage for which no premium was paid.

Click here to view the opinion.

New York Court Rules that Professional Services Exclusion Bars Coverage for Underlying Actions Brought By FINRA and Private Investors

April 11th, 2013

By Eryk Gettell, Sedgwick San Francisco

In David Lerner Associates, Inc. v. Philadelphia Indemnity Insurance Company, 2013 WL 1277882 (E.D.N.Y. Mar. 29, 2013), the United States District Court for the Eastern District of New York affirmed the plain meaning of the words “professional services”. 

Philadelphia Indemnity Insurance Company (“Philadelphia”) – represented by Sedgwick LLP in the coverage action – issued a D&O liability policy to the brokerage firm David Lerner Associates, Inc. (“DLA”).  The policy contained a “professional services” exclusion, however it did not define the words “professional services”.

The Financial Industry Regulatory Authority (“FINRA”) brought a disciplinary proceeding against DLA, alleging that it misrepresented the value of certain real estate investment trust (“REIT”) shares sold to investors, and failed to perform adequate due diligence in marketing those shares.  Shortly thereafter, three related class action lawsuits were brought against DLA.  DLA tendered the FINRA proceeding and the related class actions to Philadelphia for coverage.

Philadelphia denied coverage based on the “professional services” exclusion.  DLA sued for declaratory relief and breach of contract.

The court was asked to consider whether the due diligence carried out by DLA in the course of providing investment advice constituted a “professional service” for purposes of the exclusion, and concluded it did.  In rejecting DLA’s argument that the exclusion was ambiguous merely because the words “professional services” were not defined, the court reasoned that undefined terms “should be read in light of common speech and the reasonable expectations of a business person”.  

The court was not persuaded by DLA’s argument that financial advisors do not perform “professional services” because they are not considered professionals in the malpractice sense, explaining that in the context of liability insurance “professional services” encompassed a broader range of activities. 

The court also rejected the theoretical argument that DLA’s actions were only “ministerial” in nature because “performing a due diligence analysis and marketing financial products requires specialized knowledge and training, and is not a rote activity performed by a professional”. 

Discovery was unnecessary to determine whether the exclusion applied because DLA’s alleged failings fell within the scope of the exclusion on their face. 


Supreme Court of Washington Holds that Insurers Are Not Entitled to Reimbursement of Non-Covered Defense Costs

April 4th, 2013

By Eryk R. Gettell, Sedgwick San Francisco

In a 5-4 decision, the Washington Supreme Court held that an insurer may not recover defense costs incurred under a reservation of rights while the insurer’s duty to defend is undetermined.  National Sur. Corp. v. Immunex Corp., No. 86535-3 (Wash. Mar. 7, 2013).  Although not addressed by the court, the ruling likely only applies to duty to defend policies, as opposed to policies that require the insurer to reimburse defense costs.  The decision is also important because the court confirmed that insureds under duty to defend policies may recover their pre-tender defense costs, unless the insured’s late tender prejudiced the insurer.

National Surety Corporation issued excess and umbrella liability insurance policies to Immunex Corporation for the period from 1998 to 2002.  In August 2001, Immunex notified National Surety that it was under government investigation concerning its wholesale drug pricing.  Beginning in 2001, Immunex was sued in more than twenty actions for claims regarding its alleged price fixing of wholesale drugs.  In October 2006, Immunex tendered its defense of the lawsuits to National Surety.

National Surety issued its reservation of rights letter to Immunex in March 2008.  National Surety advised that, while it did not believe the litigation was covered, it still needed to complete its coverage investigation.  National Surety agreed to defend Immunex until it could obtain a judicial declaration regarding whether the litigation was covered.  National Surety advised that it would reimburse Immunex’s post-tender defense costs, but also reserved the right to recoup any defense costs if it was later determined that there was no coverage, and that National Surety was entitled to reimbursement.

In March 2008, National Surety filed a declaratory judgment action against Immunex in state court.  The trial court ruled that National Surety did not have a duty to defend, but also that National Surety was still responsible for Immunex’s defense costs through the court’s coverage ruling, subject to a set-off if the insured’s late tender was prejudicial.  Both parties appealed, and the Court of Appeals affirmed the trial court’s decision.  National Surety then appealed to the Washington Supreme Court.

The court’s analysis began with a discussion of Washington’s duty to defend principles, as well as the public policy concerns that are implicated by duty to defend policies.  The majority emphasized that, because the duty to defend is broader than the duty to indemnify, an insurer must defend its insured if a reasonable interpretation of the facts or law could result in coverage.  If the insurer is uncertain as to its duty to defend, it may defend under a reservation of rights, and seek a declaratory judgment relieving the insurer of its duty to defend.  The majority stressed that by doing so, the insurer benefits because it avoids breaching its duty to defend, as well as other potential downsides such as a bad faith finding, waiver, and estoppel.

After considering how other jurisdictions have ruled on this issue, the court sided with the minority of jurisdictions, and explained that “[disallowing reimbursement is most consistent with Washington cases regarding the duty to defend, which have squarely placed the defense decision on the insurer’s shoulders.”  The court held that an insurer cannot receive protection from bad faith claims or breach of contract without any responsibility for defense costs if there is a later determination of no duty to defend because, “[t]his ‘all reward, no risk’ proposition renders the defense portion of the reservation of rights defense illusory,” and the insured would “receive no greater benefit than if its insurer had refused to defend out right.”

The court also addressed two related issues: (1) whether National Surety was required to reimburse Immunex’s pre-tender defense costs; and (2) whether Immunex’s late tender prejudiced National Surety, such that it was relieved of any responsibility for defense costs.  With respect to the pre-tender defense costs issue, the court held that an insured under a duty to defend policy is entitled to recover its pre-tender defense costs, except where the late tender has prejudiced the insurer.  However, the court ruled that summary judgment on the issue of prejudice was inappropriate because there were disputed facts as to this issue.

The dissent criticized the majority’s sweeping determination that insurers may never recover defense costs under a reservation of rights.  The dissent argued that the court should follow the approach used by the majority of jurisdictions which looks to whether the insurer’s payment of the insured’s defense costs would unjustly enrich the insured.  The dissent also disagreed with the majority’s view that the unjust enrichment issue was “simply irrelevant,” because National Surety did not receive any “benefit” simply by complying with its duties under the law.

The Immunex decision is a significant departure from the majority of jurisdictions which allow insurers to recoup their defense costs based on equitable considerations when there is a finding of no coverage.  It is important to note, however, that the court’s decision was largely influenced by Washington’s rules concerning duty defend to defend policies.  If the policy at issue had a duty to reimburse defense costs (in which the insured controls its own defense), the court likely would have permitted the insurer to recoup its defense costs incurred under the reservation of rights.

This case is just one of a few recent Washington decisions that the Insurance Law Blog has reported on. Please click here to see posts about other recent Washington decisions impacting insurers.

An American Export: Contingency Fees Adopted in the UK

April 4th, 2013

By Mark Chudleigh, Sedgwick Bermuda

It has taken nearly 20 years for the United Kingdom to move from a time when it was unlawful (or champertous) for a lawyer to share in the fruits of litigation, to the introduction of U.S.-style contingency fee arrangements.  Although the legislators have shied away from using the expression “contingency fee” – instead naming them “Damages-Based Agreements” or “DBAs” – they are in all respects a contingency fee arrangement whereby lawyers can retain a percentage of the damages of up to 25% in personal injury cases, 35% in employment cases, and 50% in most other cases. These arrangements are now lawful in the U.K. with effect from April 1, 2013.

The impact on litigation and on insurers is likely to be significant, as a U.S.-style plaintiff bar develops and seeks to make                U.S.-style returns from litigation.  This will be fueled by the growth of the litigation funding industry, which includes the use of bespoke “after-the-event” insurance solutions to protect plaintiffs from the risk of adverse costs exposure in the event litigation is unsuccessful.

Where the U.K. leads, other countries may follow.  Several countries – Australia, New Zealand, Hong Kong and Bermuda for example – have legal systems based on English law and may look to enact similar legislation.  Insurers and reinsurers with exposure to these countries should watch developments closely, as will we, and will provide updates on any developments.

Prevailing Party Fees are Not Recoverable in Cases Arising Under Admiralty Jurisdiction

March 22nd, 2013

By Charles S. Davant, Sedgwick Fort Lauderdale

Insurers with marine risks in Florida should be wary of an evolving conflict among Florida’s lower appellate courts regarding the applicability of Florida’s Offer of Judgment Statute (ch. 768.79) to claims governed by admiralty law. Compare Nicoll v. Magical Cruise Co., Ltd., No. 5D11-1039, 38 Fla. L. Weekly D624b, 2013 WL 1007679 (Fla. 5th DCA Mar. 15, 2013) with Royal Caribbean Corp. v. Modesto, 614 So. 2d 517 (Fla. 3d DCA 1992).

In Nicoll, plaintiff Fay Nicoll slipped and fell aboard a cruise ship owned by Magical Cruise Company. During the course of litigation, Magical served an Offer of Judgment in accordance with Florida Statute 768.79. The statute allows a party in a civil action to serve an offer of judgment for a specific dollar amount. If rejected or not accepted within 30 days, the serving party is entitled to recover costs and attorney’s fees from the date of service if the serving party beats their offer of judgment by more than 25 percent. For defendants, this means obtaining a judgment of no liability or one that is 25 percent less than its offer; for plaintiffs, this means recovering a judgment for more than 25 percent of its offer.

Nicoll rejected Magical’s offer. Magical subsequently prevailed on a motion for summary judgment and moved for fees according to the statute. The trial court denied Magical’s motion for attorney’s fees and Florida’s Fifth District Court of Appeal affirmed. In so holding, the Court found that entitlement to attorney’s fees under Florida’s statute is a substantive right; thus, the Court must apply federal maritime law to substantive issues arising under admiralty jurisdiction. Under federal admiralty law, a prevailing party is generally not entitled to attorney’s fees, even when a state statute establishes entitlement to such fees. Thus, the Court rejected Magical’s claim for fees.

The opinion recognized a conflict with the Third District Court of Appeal’s decision in Royal Caribbean Corp. v. Modesto, 614 So. 2d 517 (Fla. 3d DCA 1992). The Modesto Court found no conflict between Florida’s rules of law regarding offers of judgment and federal maritime law, stating the rules relating to offers of judgment are an integral part of the state’s management of its courts’ proceedings. The continued validity of Modesto was recently questioned by the Third District Court in Royal Caribbean Corp. v. Cox, No. 3D09-2712, 29 Fla. L. Weekly D2029, 2012 WL 3587008 (Fla. 3d DCA Aug. 22, 2012). However, Modesto remains good law in the Third District Court of Appeal and its conflict with the Fifth District’s decision in Nicoll remains.


Second Circuit Holds That Insurers May Recover Overpayments of Benefits Under ERISA

March 20th, 2013

By Julie Y. Kim, Sedgwick New York

On March 13, the Second Circuit issued a significant opinion interpreting key provisions of the Employee Retirement Income Security Act (“ERISA”).  In Thurber v. Aetna Life Ins. Co., Case No. 12-370-cv, 2013 WL 950704 (2d Cir. Mar. 13, 2013), the court affirmed the order of the District Court for the Western District of New York to the extent it dismissed the plaintiff’s ERISA § 502(a)(1)(B) claim, but reversed the District Court’s denial of Aetna’s counterclaim pursuant to ERISA § 502(a)(3) to recover overpayment of short-term disability (“STD”) benefits.  In reaching its decision, the court held that ERISA plan administrators are not required to provide actual notice to participants and beneficiaries of a plan’s grant of discretionary authority to an insurer or other claim fiduciary, and that Aetna’s counterclaim to recover its overpayment of STD benefits constituted equitable – not legal – relief, and was permissible under ERISA § 502(a)(3).

On appeal, the Second Circuit disagreed with the Seventh Circuit to the extent that its holding in Herzberger v. Standard Ins. Co. interpreted ERISA as requiring actual notice to plan participants of a reservation of discretionary authority, reasoning that “unless ERISA requires the SPD [summary plan description] to contain language setting the standard of review, we see no reason why a plan administrator must actually notify a participant of its reservation of discretion.  ERISA contains no such edict.”  Affirming the district court’s summary judgment in favor of Aetna on its denial of Thurber’s long-term disability benefit claim, the court agreed that Aetna did not act arbitrarily and capriciously and its determination was supported by substantial evidence.

Notably, the Second Circuit reversed the District Court’s dismissal of Aetna’s counterclaim to recover its overpayment of STD benefits based on Thurber’s receipt of other income benefits in the form of no-fault insurance payments.  Discussing Supreme Court decisions analyzing the issue, the Second Circuit held that Aetna’s counterclaim was equitable in nature because the insurer sought specific funds (overpayments resulting from Thurber’s simultaneous receipt of no-fault insurance benefits and STD benefits) in a specific amount (the total overpayment) as authorized by the plan, that had been entrusted to Thurber.  Acknowledging a Circuit split on the issue, the court determined that a different result was not warranted because either (1) Aetna sought to recover a specific portion of benefits rendered overpayments rather than the actual third-party income Thurber received, or (2) the overpayments made had since been dissipated.  The plan clearly provides Aetna the right to recover benefits rendered overpayments, giving Thurber adequate notice that she was holding the money in a constructive trust, and the funds were under her control but belonged to the insurer.

In issuing this precedential opinion, the Second Circuit specifically rejected the Ninth Circuit’s recent decision in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012), which denied insurers the right to pursue recovery of overpayment under ERISA.  It seems likely that there will be significant court activity regarding this issue as courts continue to struggle with interpreting what claims constitute “equitable” relief permissibly sought under ERISA § 502(a)(3).

NJ’s Bad Faith Legislation Stemming From Superstorm Sandy Needs Emergency Relief

March 19th, 2013

By Jeffrey M. Winn and Ryan C. Chapoteau, Sedgwick New York

In the wake of Superstorm Sandy, the New Jersey Legislature is considering the passage of A3710, which will enable policyholders to sue insurers for bad faith based on a single alleged violation of the New Jersey Insurance Trade Practices Act, NJSA § 17:29B-1, et seq.

The proposed legislation is unnecessary and will just promote more litigation, delay the resolution of first-party claims, disturb New Jersey’s current landscape of thoughtful and termperate common law remedies, and result in higher premiums for all policyholders. Although the proposed legislation may be a boon for lawyers, it likely will be a losing proposition for virtually everyone else.

Prior to Superstorm Sandy, the New Jersey Legislature and the courts had carefully crafted a comprehensive framework of rules, causes of action, and damages measures which have adequately protected the public against the bad faith claims settlement practices of insurers.  For example, in Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474, 323 A.2d 495 (1974), the New Jersey Supreme Court prescribed a cause of action that protects policyholders from excess verdicts.  In Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (1993), the Supreme Court conducted a thorough national survey of insurance bad faith decisions before adopting the centrist “fairly debatable” test for New Jersey first-party bad faith claims, thereby rejecting the extreme standards that prevail in some jurisdictions.

While New Jersey already permits policyholders to recover extra-contractual damages against insurers, both the Legislature and courts have adroitly balanced the competing interests.  The Supreme Court in Pickett posited that, when the policyholder has demonstrated that the insurer has engaged in bad faith, the policyholder may recover consequential damages (including attorneys’ fees) and punitive damages.  On liability insurance disputes, prevailing policyholders are generally permitted to recover their costs and fees if they can satisfy the elements of New Jersey Civil Practice Rule 4:42-9(a)(6).  Thus, the remedies are in place and the public is adequately protected.

Policyholder attorneys dislike the Pickett standard because it requires a showing of “gross negligence” by the insurer.  This middle-of-the-road standard eschews the extreme liberal standard of simple negligence advocated by policyholder attorneys, and the extreme conservative standard of “intentional wrongdoing” favored by some insurance industry advocates.  In adopting the Pickett standard, the Supreme Court sent the strong message that bad faith claims should not be a routine add-on to the typical insurance coverage dispute, but should be reserved for sufficiently reckless conduct by the insurer.  The Supreme Court was clear that, to make out an actionable bad faith claim, “simple negligence” is not enough.

The proposed legislation will eviscerate the time-honored Pickett standard.  If enacted, the legislation will unsettle the New Jersey insurance market by equating bad faith with simple negligence, thus making bad faith claims commonplace in most first-party cases.  In the interest of maintaining a stable insurance market in New Jersey, the proposed legislation should not be adopted.

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 >

Subscribe via RSS Feed
Receive email updates: