Reinsurance Law Blog

Reinsurance Law Blog

Insurer equitably estopped from denying coverage based on change of position on interrelated acts — 10th Circuit — NY law

Posted in Contractual Liability, Duty to Defend

In Brecek & Young Advisors v. Lloyds London, BYA told Lloyds about some claims (Wahl Arbitration) that fell within the 2006-2007 policy issued by Lloyds to BYA.  Lloyds first claimed that the Wahl Arbitration was related to another claim under a previous policy issued by Fireman’s Fund. Under the policy,“Interrelated Wrongful Acts” are “considered a single Claim.” Lloyds said it wasn’t responsible for indemnifying or defending BYA for claims made during the policy period which are interrelated with claims made prior to the policy period. Lloyds also claimed that 26 claims in the Wahl arbitration were not interrelated, and thus each claim was subject to a separate $50,000 retention. Lloyds and BYA ultimately paid approximately $385,000 and $932,000, respectively, to defend and settle the Wahl Arbitration. BYA reserved its right to contest the separate retentions. When BYA sued Lloyds on this issue, each party sought summary judgment.  In a footnote in its motion, Lloyds said that if the Wahl claims were interrelated, then the Wahl claims were also interrelated to the previous claim, so it had no coverage at all. Summary judgment was granted to BYA, and Lloyds appealed.

In the first appeal, Lloyds abandoned the separate retention claim, and argued solely that the Wahl arbitration was interrelated to other previous claims so there was no coverage at all. The Tenth Circuit agreed the claims were all interrelated, but found that BYA should be allowed to present its estoppel defense, as it had shown prejudice. On remand, it was determined that Lloyds was estopped from denying full coverage to BYA.  Thus, Lloyds owed BYA  $931,859.59, plus prejudgment interest, and Lloyds appealed again. The trial court’s ruling was affirmed.

BYA’s reliance on Lloyds representations regarding coverage of the Wahl Arbitration was reasonable and that BYA demonstrated prejudice. Lloyds told BYA that it determined the previous claim and the Wahl claims were not interrelated.  And, before the Wahl arbitration settled, both insurers agreed as to which of the two insurance companies were on the hook for the claims, so BYA had no claim against Fireman’s Fund — until Lloyd’s changed its position, and then it was too late.   Lloyds’ control of the defense of Wahl and its contribution to the settlement “was more than adequate to show prejudice under New York law, at least with respect to the $385,000 already paid by Lloyds as part of the Wahl Settlement.”

Because BYA had back-to-back claims-made policies, either the Lloyds Policy or the [Fireman’s Fund policy] would provide coverage for the Wahl Arbitration, but not both. [Ms.] Haag testified that it would have been to BYA’s advantage if Wahl had been covered under the [Fireman’s Fund policy], because that would have saved BYA from paying the $50,000 each claim deductible. Once Lloyds settled the Wahl Arbitration, however, BYA was prejudiced because it could not reverse the character and strategy of the defense to allow Fireman’s Fund to defend it and participate in the Settlement.

The settlement of the Wahl Arbitration created coverage defenses that otherwise would not have existed under the Fireman’s Fund policy, specifically, voluntary payments and failure to obtain consent to settlement provisions under the policy, as well as laches, statute of limitations, and other defenses related to the delay in pursuing the coverage claim. Prejudice can be demonstrated based on a lost opportunity under New York law. Since BYA demonstrated reasonable reliance and prejudice, Lloyds was estopped from changing its position, and the judgment to BYA was affirmed.

 

Notice / Prejudice rule applied to claims made policy where notice was given within the date certain requirement — Federal Court, Colorado

Posted in Contractual Liability

In Childrens Hospital v. Lexington, Childrens (CHC) was sued for professional negligence.  It failed to provide notice to its insurer, Lexington, “as soon as practicable”, but gave notice within the “date certain” notice requirement of the claims-made policy.  As a result, the court determined it could use the notice prejudice rule to determine if the notice was timely.

Professional liability policies are often claims made policies, which have different requirements for giving the insurance company notice of claims than the more common occurrence liability policies.  Generally, claims made policies require a policyholder to provide notice of a claim as soon as practicable, but in any event within the policy period.  In this case, Childrens gave notice of the claim within the policy period, but 9 months after suit was filed. Thus, Childrens did not provide notice to Lexington “as soon as practicable.”  But, Lexington’s own failures to promptly follow up on the notice when it did receive it, failure to request specific information or request that settlement be explored meant that Lexington’s failures, not Childrens, was the cause of any prejudice to the insurer, Lexington.  As a result, Lexington had to cover the judgment.

. . . Lexington failed to make any inquiry about the case, exhibit any desire to learn about, comment on, or participate in preparation and trial, or otherwise exercise any claimed right under the Policy to monitor or work with CHC’s attorney in settlement negotiations, investigation, or trial. This failure completely undermines Lexington’s speculative and unsupported position that it was prejudiced because with earlier notice it would have been able to avoid or mitigate the liability it now faces by resolving the [underlying] lawsuit for less than the ultimate judgment entered against CHC.

Case 1:15-cv-01904, United States District Court, Colorado, 04/13/17

8th Circuit nixes RICO claim against insurer, cites McCarran-Ferguson Act

Posted in New Case

In Ludwick v. Harbinger Group, Inc. and Fidelity & Guaranty Insurance Company, the Eighth Circuit affirmed dismissal of a RICO claim against Fidelity and Guaranty (F&D) and its affiliates.  Ludwick claimed that as a result of certain accounting practices where assets and liabilities were moved around F&D and its affiliates, the annuity Ludwick purchased from F&D was not worth as much as it should be worth.  But the Eighth Circuit noted the McCarran-Ferguson Act prohibits Congress from passing laws “regulating the business of insurance” unless “such Act specifically relates to the
business of insurance.” 15 U.S.C. § 1012(b).  RICO doesn’t relate specifically to insurance, and the states involved regulate insurance.

Ludwick insists her suit threatens no conflict, frustration, or interference because it is just about F&G’s bookkeeping, not the underlying propriety of the transactions or state regulators’ approval of them. . . .[But] The precise claims asserted in this case arise out of F&G, in Ludwick’s words, “misrepresent[ing] the true financial condition of [the company] in its public reports and marketing materials, artificially inflating its purported assets and surplus.” Ruling on those claims would necessarily involve deciding whether the supposed sham transactions left F&G in the healthy financial position it reported, or whether Ludwick is correct that a proper accounting would have shown liabilities substantially exceeding F&G’s assets (as Ludwick says, “a negative statutory surplus”).
Questions about insurance companies’ solvency are, no surprise, squarely within the regulatory oversight by state insurance departments.

Thus, the claim was properly dismissed.

10th Circuit affirms dismissal of proposed class action against ACORD insurers

Posted in New Case

In Snyder v. Acord Corporation, 17 named Plaintiffs attempted to bring a class action against their insurers as well as numerous other insurers, holding companies, trade associations and consulting firms. Their theory is that the Defendants are involved in a massive conspiracy to underinsure and underpay homeowners’ claims in no small part because of insurance industry standards developed by Defendant ACORD and others.  The district court dismissed with prejudice the 260-page, 1,363 paragraph third amended complaint, and the Tenth Circuit affirmed.

The district court did not abuse its discretion in dismissing the third amended complaint for want of a simple, concise statement of the claims, one that would provide fair notice of the claims asserted against each defendant, rather than leave it to the court or each defendant to construct cognizable claims. The district court correctly applied the plausibility standard in dismissing the complaint with prejudice for failure to state a claim.

The 10 page opinion included 7 pages of parties to the action.

UM and Choice of law; law where the policy was issued applies — 8th Circuit North Dakota

Posted in Contractual Liability

In American Fire and Casualty Co. v. Hegel, Hegel’s decedent, Fetzer, was killed while delivering pizzas in an accident where Fetzer was not at fault.  The trial court found that North Dakota law applied (place of the accident) and that American Fire (Pizza company’s insurance company) owed UM.  The Eighth Circuit reversed.  North Dakota choice of law principles applied.  Under North Dakota law, “when insurance coverage is at issue, the location of the accident has “less significance” when the policy covers risks that are scattered throughout two or more states.” (citing Plante v. Columbia Paints, 494 N.W.2d 140, 143 (N.D. 1992))

The policy at issue was sold to a Kentucky company, by a Kentucky agent to cover autos all over the country.

[A]pplying Kentucky law to the Policy creates the most predictable result.

The Eighth Circuit found the trial court erred in focusing on the fact that the accident occurred in North Dakota, and the deceased lived in North Dakota and was employed there.  That North Dakota required UM coverage while Kentucky did not was apparently immaterial, because minimum limits had been paid by the tortfeasor.

Criminal Acts exclusion did not apply to negligent conduct even if the conduct leads to a criminal conviction — Missouri

Posted in Contractual Liability, Insurance Bad Faith

In Pitt v. Leonberger, the Missouri Court of Appeals ruled that the criminal conduct exclusion did not apply. Leonberger, a school bus driver, struck and killed Pitts’ son.  The insurer, Missouri United School Insurance Council (MUSIC), accepted liability and even hired an attorney to represent Leonberger when a criminal charge of negligent homicide was filed against Leonberger.  The attorney told Leonberger to plead guilty, and he did.  MUSIC stated it thought it was prudent to exercise control over the criminal matter since the outcome could impact the claim. And, MUSIC thought the death was a tragic accident, not a criminal matter.  Before pleading guilty, Leonberger requested MUSIC settle all claims against him within the
policy limits if the opportunity arose. At no time before the plea did MUSIC tell Leonberger that pleading guilty to the criminal charges would affect his coverage. After the civil suit was filed against Leonberger, MUSIC’s reinsurer, UE, said there wasn’t any coverage because of the criminal act exclusion.  There was some evidence that the claim of no coverage was intended to force the plaintiffs to accept the statutory cap on damages or go to mediation.  A reservation of rights letter was prepared, but not sent, and a policy limits demand was made by the plaintiffs.  When MUSIC eventually sent the reservation of rights letter, Leonberger settled with the Pittses to the extent of coverage, per Missouri law, and Pitts went forward with the coverage claims, after a court found Leonberger liable for negligence in the death of Pitts’ child.

The finding of coverage was affirmed, and the insurer was liable for the full amount of the judgment, regardless of limits.

The general liability and automobile liability insurance policy covered any “accident,” which included acts of negligence, and negligence has no degrees in a civil action, so any finding of negligence rendered insurers liable for coverage. Policy excluded criminal acts, but listed that exclusion with other acts that are all intentional, so the criminal acts exclusion must also refer to intentional acts. So, when the same events produce guilty verdicts in both civil and criminal actions, the criminal charge “did not change the nature of the act from negligent to intentional [.]” Otherwise, criminal procedure would determine the insurance contract’s coverage. The overlap created, at best, an ambiguity construed against the insurer. Also, the insurer initially assumed the defense of its insured without reservation of rights, and even retained criminal counsel for the insured, who advised the insured to plead guilty. Those facts preclude denial of coverage. Having had the opportunity to control the litigation, the insurer is liable for any judgment against its insured without regard to policy limits, but only if the insurer made its refusal to defend in bad faith. Statute applies post-interest judgment pending appeal, while circuit court applied contractual interest separately and cumulatively, from which garnishee insurer cannot appeal.

Mid-Continent off the hook on claim against bankrupt policyholder — 5th Circuit

Posted in Contractual Liability, Duty to Defend

In Kipp Flores Architects v. Mid-Continent Casualty Co.,  Hallmark (Mid-Continent’s policyholder) had a license to build one home per KFA blueprints, but ended up building hundreds, and not paying KFA for its plans.  After KFA sued for copyright infringement, 2 Hallmark entities filed for Chapter 7 bankruptcy, stating there would be no money to distribute to unsecured creditors.  KFA filed a claim for $63 million on one entity and eventually got a judgment against another Hallmark entity for $3 million, which Mid-Continent paid.

But KFA wanted Mid-Continent to pay the “final judgment” it got by filing its proof of claim in the Hallmark bankruptcy, up to the policy limits of $6M.  When Mid-Continent refused to pay, KFA sued Mid-Continent for breach of contract as a judgment creditor of Mid-Continent’s policyholder, Hallmark,  and as third-party beneficiary under Mid-Continent’s policies. On cross motions for summary judgment, the trial court found for Mid-Continent, and the Fifth Circuit affirmed.

KFA claimed that since no party objected to KFA’s proof of claim, the claim was “deemed allowed,” became a final judgment against Hallmark and under principles of res judicata, suffices to trigger Mid-Continent’s duty to indemnify its insured, Hallmark.  Mid-Continent said the claim was not a judgment and didn’t mean anything in a no asset case. While a claim with no objection is deemed allowed under 11 U.S.C § 502(a), in a no asset case, claims are discouraged, since they can’t be paid.

The Bankruptcy Rules plainly contemplate pretermitting claims allowance and objection procedures when there are no distributable assets.

* * * *

Section 502 would be significantly transformed if, under KFA’s reading, certain “parties in interest” in no asset cases would be required to monitor, object to, and litigate proofs of claim that need not even be filed.

The court concluded:  “There cannot be a “deemed allowed” claim where there were no distributable assets, no other bankruptcy-related purpose for claims “allowance,” and parties in interest were not on notice of the obligation to file objections to claims.”

We hold that KFA did not have a “deemed allowed” claim that constitutes res judicata against Mid-Continent because in this no asset bankruptcy case, nothing in the court proceedings required claims allowance, no notice was provided to parties in interest to object to claims, and no bankruptcy purpose would have been served by the bankruptcy court’s adjudicating KFA’s claim. The district court’s judgment in favor of Mid- Continent is AFFIRMED.

No coverage for theft by a person who was both an employee and not an employee — 7th Circuit, Indiana

Posted in Contractual Liability

In Telamon v. Charter Oak, the Seventh Circuit ruled against coverage for employee theft.

Underlying this insurance dispute is a regrettably common tale of greed and dishonesty. Telamon, an Indiana telecommunications firm, engaged Juanita Berry to work for it from 2005 to 2011 as its Vice President of Major Accounts. Berry used that position to steal over $5 million from the firm. Upon discovering this loss, Telamon then turned to two insurance policies in an effort to recover its money: a crime insurance policy with Travelers Casualty & Surety (Travelers), and a commercial property policy with Charter Oak Fire Insurance (Charter Oak). At that point, Telamon crashed into a brick wall. Travelers denied coverage because Berry was not, legally speaking, an employee. And Charter Oak refused to pay because, in practice, she was.

Telemon sued the insurance companies, and lost. The Seventh Circuit affirmed. The Traveler’s policy covered thefts by employees, including a person “leased to the Insured under a written agreement between the Insured and a labor leasing firm, while that person is subject to the Insured’s direction and control and performing services for the Insured.” But Berry was working for Telemon through consulting agreements between Telemon and Berry’s company, J. Starr. J. Starr was not a labor leasing firm – its only client was Berry. Thus Berry was not an employee under the Travelers policy.

The Charter Oak policy excluded dishonest acts by employees, authorized representatives, or anyone to whom [the insured] entrust[s] the property for any purpose. The court said an “authorized representative” is “a person or company empowered to act on an entity’s behalf.” This described Berry, a Vice President of Telemon, so the exclusion applied and there was no coverage under the Charter Oak policy either.

Note:  Most commercial general liability policies do not cover theft by employees.  That is why one buys crime insurance policies.  The crime insurance policy would likely have covered at least part of the loss if this had been a normal employer/employee situation.

Fireworks explosion was one occurrence, affirming summary judgment — 4th Circuit, Pennsylvania law

Posted in Contractual Liability

Liability policy limits are usually based on occurrences, with a new limit applied to each occurrence and an annual limit on top of that.  (This may not apply in claims made policies  which are usually issued to professionals) As a result, insurance companies are often litigating whether an incident is one or multiple occurrences.  For example if a car goes out of control and hits one car, then another, are there two occurrences or just one?  Usually, these multiple impact cases are treated as one occurrence.

In Hollis v. Lexington, (unpublished), Hollis claimed numerous acts of negligence by the fireworks company and its employees which resulted in injuries to Hollis and her sons when a misfired firework exploded near them.  The insurance policy had limits of 1 million per occurrence and $2 million in the aggregate. But since the cause of the injury was one thing — the exploding firework — there was only one occurrence, and thus, only one limit of insurance applied.

Summary judgment in malicious prosecution case affirmed, Oklahoma Court of Civil Appeals

Posted in New Case

In Fox v. Fox, Tim Fox had evidence that his personal email account had been accessed without permission by Big Giant, his former employer and his family’s business.  Tim Fox sued various parties for invasion of privacy, and then, dismissed the case.  Tom Fox then sued Tim Fox for malicious prosecution.  The trial court found probable cause and granted Tim Fox summary judgment.  The Court of Civil Appeals affirmed.

That there may have been other evidence showing Tom did not access Tim’s email account didn’t matter.  There was sufficient evidence to show that Tim’s email account was accessed by someone at Big Giant, and Tom and one other were the two people at Big Giant who knew most about computers.  The evidence presented by Tim was undisputed, and supported a finding of probable cause.  Thus, summary judgment was proper.

Lexblog