Reinsurance Law Blog

Reinsurance Law Blog

Habitation or vacancy clause in homeowner’s policy conditions section is an exclusion — Arkansas

Posted in Contractual Liability

In Farm Bureau v. Davenport, 2017 Ark. App. 207, Davenport had 2 houses, one in Michigan and one in Arkansas.  While at the Michigan house, the Arkansas house was broken into and set on fire.  Farm Bureau denied the claim because the house was unoccupied when the house was destroyed. One of the policy conditions, “Vacancy or Unoccupancy” said the policy wouldn’t cover vandalism losses “if you vacate or fail to occupy the dwelling on the residence premises for a period of thirty (30) consecutive days. . .”; and if “you  vacate or fail to occupy the dwelling on the residence premises for a period of sixty (60) consecutive days” the policy wouldn’t cover any property loss. “Unoccupied”was defined as  “being without  human  inhabitants, but containing enough furnishings or other personal property to show an intention to return and occupy the dwelling. . .” “You” and “your” was defined as the named insured, spouse, and dependent resident relatives. When Davenport sued, Farmers admitted the property had been destroyed by vandals, but claimed there was no coverage because the property hadn’t been occupied for 60 days. The jury found for Davenport and the appellate court affirmed.

The insured policyholder has the burden of proof on a condition precedent, but the insurance company has the burden of proof on an exclusion.  Thus an insured policyholder has to prove the loss comes within the policy coverage, and the insurance company has to prove that an exclusion applies.

There is a distinct difference between a condition and an exclusion in an insurance policy. A “condition precedent” in an insurance policy is “a condition to be performed before a right of action dependent upon it will accrue, such as proof of loss[.]” Hill v. Farmers Union Mut. Ins. Co., 15 Ark. App. 222, 225, 691 S.W.2d 196, 198 (1985) (citing Garetson- Greason Lumber Co. v. Home L. & A. Co., 131 Ark. 525, 199 S.W. 547 (1917)). We have held that “the performance of [such condition] should be pleaded in the complaint.” Id. An exclusion, on the other hand, exists when coverage generally exists, but some language in the policy eliminates that coverage. See, e.g., Parker v. S. Farm Bureau Cas. Ins. Co., 104 Ark. App. 301, 304, 292 S.W.3d 311, 314 (2009) (“Once it is determined that coverage exists, it then must be determined whether the exclusionary language within the policy eliminates that coverage.”).

Even though the vacancy clause was under a policy section labeled “Conditions”,  the clause “presupposes that coverage exists but can be eliminated by Farm Bureau based on some action on the part of the insured. Therefore, we conclude that the policy language in this case is an exclusion, despite the caption heading.” Thus, Farm Bureau had the burden of proving vacancy, and the insured did not have to prove occupancy, so the directed verdict was properly denied.

While the meaning of the word “unoccupied” is a question of law, its application is a question of fact.

Ordinarily, however, “the question whether a building is vacant or unoccupied at the time a loss occurs is one of fact for the jury.”

While the Davenports were last at the house in April, 2010, their son stayed there for several days in September, 2010, the same month the house burned down. At the time of the fire, the house was fully furnished, was equipped with fully functioning utilities, and food was stocked in the refrigerator and the freezer. And since there was some evidence of occupancy during September, 2010, the jury had some evidence upon which to base the judgment and the motions for directed verdict and for new trial were properly denied.

Since Farm Bureau had the burden of proof on its occupancy exclusion, the trial court properly instructed the jury on the elements of the claim.  Further, there was no prejudice in failing to instruct the jury on the words inhabit and inhabitant where the plaintiff had read the proposed definitions to the jury, and Farm Bureau got to argue about it in closing argument.

No bad faith for delay in appraisal where there were coverage issues — 10th Cir Oklahoma

Posted in Insurance Bad Faith

This is the second case involving Hayes Family Trust v. State Farm Fire & Casualty.  The first case, involving the appraisal process, is discussed here.  In this case, the policyholder claimed that State Farm acted in bad faith when it delayed the appraisal process because of coverage issues and when it failed to adequately investigate the claim.   Summary judgment to State Farm was affirmed on appeal.

The policyholder argued the appraisal process was mandatory.  But the cited case did not involve a coverage issue.

Further, plaintiffs concede that authority on the topic is sparse, and no reported Oklahoma or Tenth Circuit case holds that an insurer’s denial or delay of an appraisal based on a coverage question constitutes bad faith. Because there was a legitimate dispute as to whether an appraisal was proper, we cannot say that State Farm acted in bad faith. Plaintiffs have not shown that State Farm relied on some reason other than its legitimate dispute for its actions.

As to the failure to investigate the claim, the policyholder offered no evidence that further investigation would have produced additional relevant information or led to different conclusions.

As a result, summary judgment was proper.  The case is not published.

Faulty house inspection did not cause property damage 11th Cir, Florida

Posted in Duty to Defend

In Auto-Owners Insurance Co. v. Ralph Gage Contracting Inc., the Kjellanders sued Gage after he inspected a house they wanted to buy and gave it a positive report.  The Kjellanders claimed the house had mold and a bad HVAC system, and they wouldn’t have bought it if they had known about the problems — which the inspector should have discovered.  But since the inspection did not cause the property damage, Gage’s insurance did not cover the claimed loss.

Under the terms of the Policy, Auto-Owners agreed to pay “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” In pertinent part, the Policy provided coverage for “property damage” only if it was “caused by an ‘occurrence.’” The Policy defines “property damage” this way:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In a case like this one — where the term “accident” is undefined by the Policy — the Florida Supreme Court has said that “accident” means “not only ‘accidental events,’ but also damages or injuries that are neither expected nor intended from the viewpoint of the insured.”

The plain language of the Policy requires unambiguously a causal link between the alleged “property damage” and an “occurrence.” Here, the only asserted “occurrence” is Gage’s alleged negligent inspection. Thus, to show that their claim is within the Policy’s coverage, the Kjellanders must demonstrate that Gage’s negligent inspection caused “property damage” within the meaning of the Policy.

The property was damaged before the inspection, not because of the inspection.  Thus, there was no coverage for the loss. The case is not published.

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.