Bermuda Monetary Authority Announces Principles Underpinning Use of New Powers

January 23rd, 2013

By Nick Miles

The Bermuda Monetary Authority (the BMA) has published a new statement of practice (SoP).  It sets out factors to which it will have regard and procedures to be followed in deciding whether and in what manner to exercise powers granted under the following four statutes that regulate financial sectors in Bermuda:

• The Insurance Act 1978
• The Banks and Deposit Companies Act 1999
• The Investment Business Act 2003
• The Trusts (Regulation of Trust Business) Act 2001

A full analysis of the SoP and the BMA’s powers can be found in our Insurance News Flash published today.

Disability Policy’s Mental Illness Limitation Upheld by Ninth Circuit in Fibromyalgia Case

January 22nd, 2013

By John T. Seybert and Julie Kim

In Maurer v. Reliance Standard Life Insurance Co., No. 11-16044, 2012 WL 6101903 (9th Cir. Dec. 10, 2012), the Ninth Circuit interpreted a policy provision favorably for insurers, holding that a policy’s mental nervous limitation may permissibly limit long-term disability (“LTD”) benefits where the beneficiary would otherwise be capable of working, but for the mental or nervous disorder.

Sara Maurer (“Maurer”) ceased working as an attorney and filed a claim for disability benefits based on chronic neck and back pain, and fibromyalgia.  Maurer’s insurer, Reliance Standard Life Insurance Company (“RSL”), determined that Maurer was disabled by fibromyalgia “with a significant psych component to chronic pain” and paid twenty-four months of benefits.  In connection with its concurrent review of Maurer’s benefit claim, RSL received updated treatment records indicating that Maurer suffered from depression, anxiety and “bi-polar diathesis,” indicating Maurer’s predisposition to the condition when stressed.  After paying LTD benefits for three years, RSL performed another review and concluded that without the contribution of mental nervous illness, Maurer’s medical records indicated that she was capable of performing full time sedentary work. RSL therefore notified Maurer that it was terminating her benefits.

On administrative appeal, Maurer argued that she was completely disabled by psoriatic arthritis.  RSL obtained an independent medical evaluation by a board-certified rheumatologist, who could not confirm that diagnosis and opined that Maurer’s alleged symptoms were primarily related to chronic pain and psychiatric dysfunction rather than inflammatory disease.  RSL’s administrative appeals process resulted in the conclusion that the prior termination of benefits was appropriate.  The U.S. District Court granted summary judgment to RSL, finding that RSL’s coverage determination was not an abuse of discretion.

On appeal, the Ninth Circuit considered whether Maurer’s claim for LTD benefits was limited to the twenty-four month period applicable to mental nervous disorders.  The employee welfare benefit plan provided benefits for policyholders who become “totally disabled.” The policy also included a “Mental/Nervous Limitation,” which provided that benefits for total disability “caused or contributed to by mental nervous disorders . . . will not be payable beyond an aggregate lifetime maximum duration of twenty-four (24) months. . . .”  Maurer argued that the mental nervous limitation should not apply unless RSL could demonstrate that the mental nervous condition was the sole cause of the disability.  The Ninth Circuit rejected Maurer’s argument and ruled that the insurer “permissibly interpreted the ‘mental/nervous’ limitation to preclude coverage when, in the absence of a mental or nervous disorder, a beneficiary would be physically capable of working.”

While this decision may result in other courts following the Ninth Circuit’s lead, insurers should carefully consider whether to apply a mental illness limitation in cases involving both physical and mental conditions – under Maurer, insurers must be able to show that, but for the mental illness, the claimant would be capable of working.

If it Floats, it May Not be a Boat – the U.S. Supreme Court Clarifies the Definition of a Vessel

January 16th, 2013

Our readers in the marine insurance industry are sure to be paying attention to Lozman v. City of Riviera Beach, Florida, an opinion issued by the U.S. Supreme Court on Tuesday.   Charles Davant, an associate in our Fort Lauderdale office who advises marine insurers and litigates cases involving various maritime and admiralty issues, has provided an analysis of the case below.

The U.S. Supreme Court settled an important conflict between the Fifth and Eleventh Circuits this week, holding a floating home, incapable of propelling itself, was not a “vessel” within the meaning of the Rules of Construction Act, 1 U.S.C. § 3.  Lozman v. City of Riviera Beach, Florida, Case No. 11-626, 23 Fla. L. Weekly Fed. S556a.  We expect this decision will have an impact, not only on individuals and their floating homes, but also on businesses that use special purpose structures in construction and other industries.  We will keep you updated as lower courts begin to digest and interpret this important decision.

In 2002, Fane Lozman bought a floating home, which “contained a sitting room, bedroom, closet bathroom and kitchen, along with a stairway leading to a second level with office space.”  Id.  “An empty bilge space underneath the main floor kept it afloat.”  Id.  Mr. Lozman moved his vessel four times in seven years, ending up at a marina owned by the City of Riviera Beach, Fla.  Id.  After failing to pay dockage fees and damages for trespass, the city invoked admiralty jurisdiction and sought a maritime lien on the vessel pursuant to the Federal Maritime Lien Act, 46 U.S.C. § 31342.  The lower courts allowed the city to maintain the maritime lien finding the home was “capable” of movement over water and the owner’s intent was to remain moored at the city’s marina indefinitely.  Id.  The U.S. Supreme Court reversed.

In reaching its decision the Court considered the definition of a vessel within the Rules of Construction Act, to wit, that a vessel is “every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water.”  Id.  The Court focused on the phrase “capable of being used…as a means of transportation on water.”  Id.  It found it must apply the definition in a practical, as opposed to theoretical, way.  Id.  Disagreeing with the Eleventh Circuit’s broad interpretation of the definition, the Court found that not every floating structure is a vessel.  Id.

In the Court’s view, a structure such as Mr. Lozman’s does not fall within the statutory definition of a vessel (thereby invoking admiralty jurisdiction) “unless a reasonable observer, looking into the home’s physical characteristics and activities, would consider it designed to a practical degree for carrying people or things over water.”  Id.  The Court’s observations of the particulars of Mr. Lozman’s floating home illustrate its general criterion: it has no rudder or other steering mechanism, it’s hull was unraked, it had a rectangular bottom just 10 inches below the water, had no capacity to generate or store electricity, its rooms looked like nonmaritime living quarters, it was equipped with French doors and ordinary windows, and was not self-propelled.  Id.  Thus, in the Court’s opinion, the characteristics of the home could not “lead a reasonable observer to consider it designed to a practical degree for transportation on water.”

Mr. Lozman may now seek a return of the $25,000 bond the city posted when it arrested the vessel.

The opinion, authored by Justice Breyer, can be found here.

By Charles S. Davant

Was That Really an “Accident”?: Northern District of California Reiterates What Constitutes an “Accident” Under a Commercial General Liability Policy

January 14th, 2013

By Benjamin E. Shiftan

In Alco Iron & Metal Co. v. American International Specialty Lines Insurance Co., No. 11-5181 CW, 2012 WL 5878391 (N.D. Cal. Nov. 21, 2012), the U.S. District Court for the Northern District of California granted summary judgment for an insurer by holding, in part, that an insured’s intentional act does not constitute an “accident” within a policy’s definition of “occurrence” even when the insured acted under the mistaken belief that it had the right to take such action.

In Alco, Caicos Investments, Inc. sued Alco Iron & Metal Company, alleging that Alco wrongfully entered Caicos’ property, removed rail spurs, and sold the rail spurs to a third party as scrap metal (the “Caicos action”).  Alco alleged that Caicos’ tenant at the time told Alco that it was authorized to do so.  Alco tendered its defense of the Caicos action to its commercial general liability insurer, American International Specialty Lines Insurance Company (now known as Chartis Specialty Insurance Company (Chartis Specialty)).  Chartis Specialty rejected Alco’s tender because, among other reasons, the Caicos action did not allege an “occurrence,” which was defined in Chartis Specialty’s policy as an “accident.”  Alco subsequently filed an insurance coverage action against Chartis Specialty, and the parties filed cross-motions for summary judgment.

In its cross-motion, Alco argued that its actions in entering the Caicos property and taking the rail spurs constituted an “accident” because the Caicos’ tenant had specifically authorized Alco to do so.  Specifically, Alco alleged that the tenant’s false representations constituted “an independent and unforeseen happening” that rendered Alco’s actions accidental in nature.  Chartis Specialty responded to this argument by noting that “Alco intended to take each step that lead [sic] to the harm,” and by pointing out that Alco’s “mistaken, but sincere, belief that it had permission to remove the rail did not make those purposeful acts accidental, even if Alco never intended to cause Caicos any harm.”

The court granted Chartis Specialty’s cross-motion for summary judgment and denied Alco’s cross-motion for summary judgment.  Siding with Chartis Specialty’s line of reasoning, the court noted that an “accident” signifies “an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause.”  The court further stated that, under California law, the term “accident” refers to the insured’s intent to commit the “act” giving rise to liability as opposed to the insured’s intent to cause the “consequences” of that act.  The court emphasized that California courts had rejected Alco’s argument that an act constitutes an “accident” whenever an insured mistakenly believes that it has the permission to act in a particular way.  Additionally, the court noted that the tenant’s false representations did not constitute an “additional, unexpected, independent and unforeseen happening” that rendered Alco’s actions accidental, because the tenant made these representations prior to Alco’s volitional acts.  In short, the court concluded that Alco was not entitled to coverage for the Caicos action because there was nothing “accidental” about its entering Caicos’ property and taking its rail spurs.

The Electronic Age: Liability and Insurance Coverage

January 14th, 2013
We thought our readers would be interested in this article from Law360 by Carol Gerner and Fred Smith in which they discuss the ongoning concern over  health care electronic data breaches, civil liability and coverage issues, and steps that the insurer can take when underwriting cybersecurity policies.

Click here to read the article.


English Court of Appeal Decision on Multiple Causes and Mitigation of Loss

January 9th, 2013

By Chen Foley

In Ace European Group & Ors v Standard Life Assurance Limited, [2012] EWCA Civ 1713, the English Court of Appeal reaffirmed the principle that where a loss has multiple causes, the insured’s entitlement to an indemnity in respect of an insured cause is unaffected by the fact that there also exist equally effective uninsured causes.  Liability insurers are therefore not entitled to an apportionment by reference to the insured and uninsured causes of the loss.

A copy of the judgment/opinion can be found here.

Standard Life marketed a fund as a temporary and secure home for short-term investments.   In fact, investors’ money was placed in risky asset-backed securities.

Standard Life revalued the fund resulting in an immediate, one-off fall in the fund’s value.  It was obvious to Standard Life that this would give rise to claims against it.  To preempt these, and in an attempt to avoid further reputational damage, it made a lump sum payment into the fund and compensated a number of investors directly at a cost of UK£101,862,048.

Standard Life sought to recover the sum under its professional liability policy arguing it was a “Mitigation Cost”.  Insurers denied the claim, arguing the sum (i) was paid with the dominant purpose of avoiding reputational damage and (ii) was not required to avoid or reduce prospective third party claims.  Both arguments were rejected at first instance.

On appeal, although the insurers did not challenge the finding of coverage for Mitigation Costs, they argued that they were entitled to an apportionment of the Mitigation Costs between that portion which was insured (i.e. used to preempt third party claims) and that portion which was uninsured (i.e. intended to protect Standard Life’s reputation).

The appeal was dismissed.  The court reasoned that concepts such as averaging and underinsurance, which insurers had sought to rely upon, were of no application to liability insurance.  Accordingly, the rationale underlying the principle of apportionment was irrelevant and inapplicable in the liability context.

It was suggested at first instance that the insurers could have limited the recoverable Mitigation Costs by requiring them to relate “solely” or “exclusively” to a specific purpose.  The Court of Appeal did not address this point specifically although it noted that apportionment in the liability context could produce significant uncertainty because the very nature of the liabilities that insurers will seek to carve out are often impossible to quantify.  If insurers do wish to cover mitigation costs, they might also seek to control their exposure through the imposition of a sub-limit or strict provisions requiring insurer consent to any settlements.

Impact of the PPACA Insurance Exchanges on the Marketplace for Health Coverage

January 7th, 2013

The new year will surely bring more news and developments stemming from Pres. Obama’s signing of the Patient Protect and Affordable Care Act (“PPACA”). The mandated state insurance exchanges must begin operation by an October 1, 2013 open enrollment period for health cover­age with a January 1, 2014 effective date.  So, we thought our readers would be interested in this recent article by San Francisco partner Hilary Rowen discussing the Act’s insurance exchange provisions and deadlines, the impact of the exchanges on the marketplace, and the impact on employer-based health coverage. The article originally appeared in the December 2012 issue of the ABA Health eSource.

Click here to read the article.

Insured’s Attempt to Negate Water Exclusion All Wet

January 3rd, 2013

By Kelly Nugent

In Cardio Diagnostic Imaging, Inc. v. Farmers Insurance Exchange, Case No. B239145 (Dec. 18, 2012; certified for publication), the Second Division of the California Court of Appeal affirmed the lower court’s ruling that an exclusion in a first-party property insurance policy precluding coverage for damages caused directly or indirectly by “water that backs up or overflows from a sewer, drain or sump” was unambiguous and barred coverage for flood damage to the insured’s property caused by a malfunctioning toilet that overflowed due to a blockage in a connecting sewer line.

On appeal, the insured (“Cardio”) made three arguments as to why the exclusion should not preclude coverage for the damage to its property.  First, Cardio argued that the phrase “backs up or overflows from” meant that water must come out of the sewer or drain and does not include water unable to proceed down an interior drain.  Second, Cardio argued that the exclusion should be limited to water damage from large-scale disasters because it was listed among other exclusions precluding coverage for damage caused by such disasters.  Third, Cardio argued that the exclusion did not apply because the damage was caused by water overflowing out of a toilet as opposed to water overflowing out of a drain.

The Appellate Court disagreed, finding the inclusion of the word “or ” in the exclusion critical to the interpretation of the exclusion.  Applying the fundamental principle that policy language must be construed so as to give effect to every term, the Appellate Court concluded that the exclusion unambiguously applied both to water which “backs up,” and to water that “overflows from” a sewer or drain.  Additionally, the Court rejected Cardio’s argument that the exclusion’s placement among other exclusions related to large-scale disasters warranted limiting its application to those types of events because the wording of the exclusion was not so limited.  Finally, the Court rejected Cardio’s attempt to negate the exclusion because the overflow resulted from a toilet and not a “drain,” finding the distinction immaterial given that the toilet was connected to a drain.

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

December 20th, 2012

By Greg Lahr

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

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

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

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

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

Cases to Watch in 2013

December 20th, 2012

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

Survey can be found here.

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


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