Insurance Law Report focuses on developments in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.
Below are the articles for the December issue. To view, click on the appropriate title and you will be brought to the full version of the article below.
Florida Supreme Court Holds Bad Faith Denial of Insurance Benefits not Required for Recovery of Attorneys’ Fees
The Florida Supreme Court recently held that an insured could recover attorneys’ fees under section 627.428, Florida Statutes, without having to prove the insurer denied her claim in bad faith. Johnson v. Omega Ins. Co., 200 So. 3d 1207 (Fla. 2016).
The insured submitted a claim to her homeowner’s insurer for damage caused by sinkhole activity. The insurer investigated the claim and initially determined that the damage was not caused by a sinkhole, and thus, was not covered under the policy. The insured filed suit against the insurer. The insurer continued to investigate the claim and subsequently determined that the insured’s damage was caused by sinkhole activity. The insurer filed an answer in the lawsuit admitting that the insured was entitled to benefits under the policy. Based on the insurer’s admissions, the insured moved for confession of judgment and attorneys’ fees under section 627.428. The insurer argued that a finding of bad faith on the part of the insurer was required to award attorneys’ fees under section 627.428. The trial court granted the insured’s motion. The appellate court reversed, holding that a finding of bad faith was a prerequisite for entitlement to attorneys’ fees. The insured appealed.
The Florida Supreme Court reversed, finding that the insured could recover her attorneys’ fees under section 627.428 without being required to prove the insurer denied her claim in bad faith. It explained that merely an incorrect denial, and not a “bad faith” denial, of benefits is all that is required to recover attorneys’ fees. The case was remanded to the trial court to determine the amount of the attorneys’ fee award.
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Texas Supreme Court Overrules Discovery Order and Sanctions Entered in Multidistrict Hail/Windstorm Litigation
The Texas Supreme Court held that a discovery order requiring an insurer to produce “all emails, reports attached to emails, and any follow-up correspondence and information” is overbroad and reversed sanctions for refusing to produce that information. In re Nat’l Lloyds Ins. Co., No. 15-0452 (Tex. Oct. 28, 2016).
Plaintiffs sought to compel the insurer’s system-generated management reports referenced in emails in an attempt to obtain historical claims data for hail storms in prior years. The insurer argued that the reports sought did not concern historical claims, the reports did not contain information relevant to the multidistrict litigation and that all relevant reports had been produced in a keyword search of its network drives. Plaintiffs filed a motion to compel, which the trial court granted, ordering the insurer to produce “all emails, reports attached to emails, and any follow-up correspondence and information.” The insurer was also sanctioned for attorneys’ fees.
After denial of the insurer’s motion for reconsideration, it filed a mandamus proceeding with the Texas Supreme Court, which held that the compelled discovery is impermissibly overbroad. It relied on its prior opinion in In re National Lloyds, 449 S.W.3d 486, 489–90 (Tex. 2014), which similarly found that discovery of “all claim files” involving certain adjusters and adjusting firms is not reasonably calculated to lead to the discovery of admissible evidence and, therefore, the trial court’s order compelling discovery of such information is overbroad.
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Florida Supreme Court Finds FIGA’s Obligations Arise Under Applicable Statute at Time Insurer Declared Insolvent and Insured is Held to Have a Covered Claim
The Florida Supreme Court recently held that Florida Insurance Guaranty Association’s (“FIGA”) duties to an insured arise under the statute in force at the time an insurer is declared insolvent and the insured is determined to have a “covered claim.” De La Fuente v. Fla. Ins. Guaranty Ass’n, 2016 WL 6137341 (Fla. Oct. 20, 2016).
The insureds submitted a claim to their homeowner’s insurer for loss because of a sinkhole. The insurer denied the claim, and the insureds sued the insurer for breach of contract. After answering the complaint, the insurer became insolvent and FIGA entered the case. The trial court adjudicated the insurer to be insolvent and FIGA was activated to handle the “covered claims” of the insolvent insurer in accordance with sections 631.50 through 631.70, Florida Statutes. However, the statute in effect when the policy was issued differed from the statute in effect at the time the insurer was adjudicated insolvent. The trial court entered an amended final judgment confirming the appraisal award and entering judgment in favor of the insureds against FIGA. The appellate court reversed, holding that, under the statutory definition of “covered claim” and the policy provisions that authorize appraisal and require payment of the appraisal award directly to the insured within 60 days of the filing of the award are inapplicable to a sinkhole loss once FIGA is activated. The appellate court certified questions to the Florida Supreme Court concerning the applicability of the statutory definition of “covered claim” to determine an amount of loss and the scope of FIGA’s obligations regarding “covered claims.”
The Florida Supreme Court affirmed, finding that FIGA’s duty arises under the statute in force at the time an insurer is declared insolvent and the insured is determined to have a “covered claim.” It concluded that, because the definition of “covered claim” in effect when the insurer became insolvent applied to the claim, FIGA could not directly pay the insureds a lump sum, but could only pay for actual repairs. The Supreme Court further noted that the limitation on FIGA’s monetary obligation to payment for actual repairs of a sinkhole loss precludes an insured from obtaining an appraisal award under a policy to which FIGA is not a party as FIGA’s responsibilities are statutory and not contained within the policy.
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Fifth Circuit Holds No Defense or Indemnity for Creditors’ Suit Against Insured Based on Bankruptcy and Creditors Exclusion in D&O Policy
The U.S. Fifth Circuit Court of Appeals recently upheld summary judgment dismissing all claims against an insurer based on a bankruptcy and creditors exclusion in the insured’s directors and officers (“D&O”) policy. Markel Am. Ins. Co. v. Huibert Verbeek, No. 1:15-51099 (5th Cir. Sept. 27, 2016).
The insureds, owners of a wholesale distributor of flowers, refinanced their debt with lenders by entering into credit facility agreements. The insureds later defaulted, and their creditors sued alleging the insureds participated in a scheme to fraudulently induce them into signing the loan agreements by misrepresenting the company’s financial position. The insureds tendered the defense of the creditors’ lawsuit to their D&O insurer. The insurer denied the tender based on a bankruptcy and creditors exclusion that excluded coverage for any claim brought by a creditor of the company whether or not a bankruptcy or insolvency proceeding had been commenced. The insurer filed a declaratory judgment action and filed a motion for summary judgment based on the exclusion, which was granted by the trial court. The insureds appealed.
The Fifth Circuit held that the credit transaction formed the basis of the claims and damages sought in the underlying lawsuit and that the exclusion applies because all of the damages plead in the underlying complaints arise out of the allegedly fraudulently induced loan and because the plaintiffs in the underlying lawsuit were suing in their capacity as creditors. The Fifth Circuit rejected the insured’s position that the exclusion is triggered only when the action involves the creditor trying to recover debt owed by the company. It also upheld the trial court’s sua sponte granting of summary judgment on the insurer’s duty to defend because there cannot be a duty to indemnify where there is no duty to defend.
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Fifth Circuit Overturns Summary Judgment for Insured Based on Computer Fraud Provision in Crime-Protection Policy
The U.S. Fifth Circuit Court of Appeals recently overturned a summary judgment finding coverage for the insured under the insured’s crime-protection policy after falling victim to a fraud perpetrated, in part, through email. Apache Corp. v. Great Am. Ins. Co., 2016 WL 6090901 (5th Cir. Oct. 18, 2016).
The insured was defrauded by changing bank account information for a known vendor following an unauthorized request from criminals. The criminals emailed the insured from a similar, but false, email account confirming the change, and the insured confirmed the change by calling a telephone number provided in the falsified request. The insured then began making authorized payments of legitimate invoices from the vendor to the criminals’ bank account instead of to its vendor’s account.
The insured sought coverage under the “Computer Fraud” provision, which states, “[w]e will pay for loss of … money … resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the premises to a person (other than a messenger) outside those premises….” The insurer denied the claim because it argued the loss did not result “directly” from the use of a computer, as the insured confirmed the change via telephone, and because the use of a computer did not cause the transfer of funds as the invoices were approved and paid through the insured’s normal accounting procedures. The insured argued that the confirming telephone call and approval of the bank account change “[did] not rise to the level of negating the e-mail as being a ‘substantial factor.’” The insured sued, and the trial court granted the insured’s motion for summary judgment finding coverage under the policy.
On appeal, the Fifth Circuit made an Erie-guess as to the interpretation of the computer-fraud provision and reversed, concluding that the email was merely incidental to the authorized transfer of money and that the transfers were not made because of fraudulent information, but because the insured elected to pay legitimate invoices, albeit to the wrong account. Ultimately, the Fifth Circuit held that the computer fraud provision could not be interpreted as reaching any fraudulent scheme in which an email communication was part of the process.
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Fifth Circuit Holds Claim Must Allege Specific Act or Omission, not Merely a Cause of Action, to Trigger Professional Liability Insurer’s Duty to Defend
Legal representation, without more, does not constitute an “act or omission in the rendering of legal services” for purposes of determining a professional liability insurer’s duty to defend an attorney accused of unjust enrichment when his client made an allegedly false claim, according to the U.S. Fifth Circuit Court of Appeals. Edwards v. Cont'l Cas. Co., 2016 WL 6500668 (5th Cir. Nov. 2, 2016).
A lawyer represented a client in a personal injury suit against his employer for a work-related injury. The parties entered into a settlement as a part of which the employer paid attorneys’ fees to the lawyer through an annuity contract. The employer later sued the lawyer and his client, alleging that they had exaggerated or fabricated the extent of the client’s injuries and claimed that it was fraudulently induced to settle. It sought reimbursement of its settlement payment and the cost of funding the annuity contract. The lawyer notified his professional liability insurer, but the insurer denied defense and indemnity. The lawyer filed a declaratory judgment against his insurer, and the district court granted partial summary judgment in his favor, holding that the insurer had a duty to defend. The insurer appealed.
The policy provided that the insurer owed a duty to defend against a “claim,” defined as “one arising out of an act or omission, including personal injury, in the rendering or failure to render legal services.” The Fifth Circuit held that because the employer did not allege a professional act or omission that gave rise to the claim, the lawsuit did not satisfy the requirement that the claim arise out of an act or omission. It rejected the argument that “arising out of” required nothing more than a “but-for” causation and should be interpreted broadly and held that the representation, without more, could not be an act or omission in the rendering of legal services. The Fifth Circuit reversed the summary judgment.
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Tenth Circuit Holds Insurer’s Burden of Proof When Arguing Policy is Void Because of Insured Fraud and is Preponderance of Evidence Standard
The U.S. Tenth Circuit Court of Appeals upheld the preponderance of evidence burden applied by a trial court in an insurer’s declaratory judgment action to determine rights and obligations under a policy. The insurer alleged that the insured had committed fraud in submission of several claims and sought repayment and payment for investigation costs on the basis that the policy was void under a “fraud and false swearing” provision. Century Surety Company v. Shayona Investment, LLC, 2016 WL 6440369 (10th Cir. Nov. 1, 2016).
An insurer issued a commercial lines policy and filed a declaratory judgment action after paying several claims and becoming suspicious and finding that the insured committed fraud in at least some of its submissions. The policy included a provision that expressly voided coverage “in any case of fraud” by the insured, including intentional concealment or misrepresentation of any material fact relating to the covered property or claim for coverage. The insurer prevailed at trial, receiving an award for repayment and for the cost of investigating the insured’s claims. The insured appealed, arguing that a clear and convincing evidence standard applied to the fraud claims.
The Tenth Circuit broke down three possible reasons that a clear and convincing standard could apply: (1) when an insurer seeks restitution of money paid; (2) where a party seeks costs not directly covered by the contract, i.e., investigation expenses; and (3) the combination of (1) and (2) transforms the entire claim into one governed by the higher evidentiary standard. The Tenth Circuit held that (1) setting aside the issue of extra-contractual damages, the higher standard is applied only in civil cases involving allegations of fraud or some other quasi-criminal wrongdoing because the interests at stake involve more than the mere loss of money and the insured stood only to lose money; (2) the insured waived the argument that the insurer could not recover extra-contractual expenses caused by the insured’s fraud by not objecting to the jury instruction on damages; and (3) the insured’s argument that the inclusion of investigatory expenses supports viewing an entire claim as one for fraud is unavailing because the declaratory action was brought to determine the insurer’s rights under the contract because of the insured’s fraudulent conduct, and inclusion of additional damages did not convert the action.
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Texas Court of Appeals Holds Insured Unharmed by Insurer’s Denial of Defense When Defense Costs Paid by Another Insurer
A Texas court of appeals affirmed summary judgment in favor of an insurer dismissing the insured’s breach of contract and bad faith claims based on a denial of the insured’s tender of defense of an underlying lawsuit. Coreslab Structures (Texas), Inc. v. Scottsdale Insurance Company, 496 S.W.3d 884 (Houston—[14th Dist.] 2016).
After denial of the insured’s defense tender, the insured’s defense costs were paid by another insurer. The insured sued the insurer that denied coverage for refusing to defend it, and the trial court granted the insured’s motion for summary judgment on the duty to defend. However, the trial court dismissed the insured’s insurance code and prompt payment claims based on the denial. The insurer then paid its share of defense costs, but the insured appealed the trial court’s ruling on its other claims, arguing that it was entitled to recover costs, statutory interest and damages.
The court of appeals affirmed summary judgment in favor of the insurer dismissing the insured’s insurance code and prompt payment claims. The court reasoned that the insured failed to cite any case holding that an insured’s choice to seek a full defense on only one of two available policies allows the insured to recover defense costs against the chosen insurer after the other pays some or all of the defense costs. Because the insured received a full defense from another insurer, it was not harmed and cannot show damages caused by the insurer’s initial denial.
Phelps Dunbar represented the insurer in this case. For additional information regarding this decision, please contact Peri Alkas at email@example.com.
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Kentucky Court of Appeals Finds “Occurrence” May Be Fortuitous Loss from Unintended “Chance Event”
The Kentucky Court of Appeals held that an “occurrence” may either be a fortuitous loss from an unintended “chance event” or a prolonged unintended action. The court concluded that the fortuitous loss is dependent upon the good faith of the actor and not the duration of the “occurrence.” Am. Mining Ins. Co., Inc. v. Peters Farms, LLC, 2016 WL 6543625 (Ky. Ct. App. Nov. 4, 2016).
The insured sued a mining company for extracting coal from its property without consent or written agreement. The mining company filed for bankruptcy and sought indemnity from its insurer. The court held that the extraction of coal was an “occurrence” that triggered coverage as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court found that the mining company mistakenly extracted the coal from the insured’s property even though it had maps and did not have an extraction agreement with the insured. The court concluded that since the extraction was an “occurrence,” its insurer covered the claim.
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Florida Appellate Court Finds Lease to be “Entrustment” of Property Within Policy’s Entrustment Exclusion
A Florida appellate court recently held that a lease was a manifestation of “entrustment” of commercial property within the plain meaning of an entrustment exclusion of a policy. Grover Commercial Enters., Inc. v. Aspen Ins. UK, Ltd., 2016 WL 4651115 (Fla. 3d DCA Sept. 7, 2016).
A landlord had a commercial property policy that insured against damage to real and business personal property but contained an exclusion that excluded loss or damage resulting from any “dishonest or criminal act by you … or anyone to whom you entrust the property for any purpose.” The landlord leased real property and certain business personal property to the tenant, who had complete and exclusive possession of all leased property and, upon commencement of the lease term, was obligated to return the real and business personal property to the landlord. The tenant removed certain business personal property and damaged the real property during the lease term. The landlord made a claim under the policy seeking coverage for “theft” of certain business personal property and “vandalism” damage to the real property. The insurer denied coverage for the claim pursuant to the entrustment exclusion, and the landlord sued the insurer. The trial court entered summary judgment in favor of the insurer, finding that the policy’s entrustment exclusion excluded coverage for the loss. The landlord appealed.
On appeal, the landlord argued that the trial court erred in entering summary judgment as the entrustment exclusion is ambiguous as to whether “leasing” property to a tenant was distinct from “entrusting” the property. The landlord alleged that the policy’s use of the term “entrustment” did not encompass a landlord-tenant relationship as the term “tenant” was not specifically included in the entrustment exclusion. The insurer argued that the lease was a manifestation of the “entrustment” of commercial property from a landlord to a tenant and, as such, removal of business personal property and damage to real property were criminal acts not covered under the policy. The appellate court found that the term “entrust” is not ambiguous and that, under the plain meaning of the term “entrust,” the landlord entrusted its property to the tenant. The appellate court affirmed the trial court’s order granting summary judgment in favor of the insurer.
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Appellate Court in Georgia Holds “Occasional Rental” Exception to Rental Exclusion Does Not Apply When Insured Does Not Intend to Use Property Following Lease
An appellate court in Georgia recently held that the “occasional rental” exception to a rental exclusion does not apply when the insured has no intention of using the property as a residence following the termination of a lease to tenants. Corbin v. State Farm Fire & Cas. Co., 388 Ga. App. 684, 790 S.E.2d 831 (2016).
The insured entered into a month-to-month lease of a house with tenants while she considered selling the property. Six days after executing the lease, one of the tenants slipped and fell at the property and sued the insured. The insured sought coverage under her homeowner’s policy with the insurer. The insurer sought a declaration that it did not cover the lawsuit based on the policy’s rental exclusion. The insured and tenants argued that the exception to the rental exclusion for occasional rentals applied, and therefore the policy provided coverage. The “occasional rentals” exception, however, states that the rental exclusion does not apply to rentals “on an occasional basis for the exclusive use as a residence.” The trial court granted partial summary judgment in favor of the insured and tenants, finding that the lake house was an insured location but noting a “factual” dispute concerning whether the “occasional rental” exception applied. The insurer appealed.
The appellate court reversed and granted summary judgment in favor of the insurer, finding that the rental exclusion applied. The appellate court found that the “occasional rental” exception to the rental exclusion did not apply because the insured did not intend to continue to use the property as a residence following the termination of the lease.
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Federal Court in Texas Finds Primary Insurer Does Not Have Standing to Sue Under Texas Insurance Code
A federal court in Texas dismissed an insurer’s claim based on the Texas Insurance Code in a lawsuit seeking settlement contribution from a non-participating excess insurer. Starnet Ins. Co. v. Fed. Ins. Co., 2016 WL 5957620 (W.D. Tex. Oct. 12, 2016).
The underlying claim involved the blowout of a well drilled by the insured, resulting in surface pollution to surrounding property owned by a third party. The clean-up expenses were allocated to the insured’s working interest in the well, which was arguably covered by the insured’s policies. The excess insurer, however, refused to pay the claim because it alleged that its policy was not excess to the insurer’s primary policy. The primary insurer paid the excess insurer’s portion of the claim in exchange for a release and subrogation agreement. The paying insurer then sued the excess insurer for violating Chapters 541 and 542 of the Texas Insurance Code.
The excess insurer filed a motion to dismiss based on the primary insurer’s lack of standing under the Insurance Code. The court acknowledged that claims under Chapter 541 cannot be assigned from an insured to an insurer. The court also held that the insurer could not bring suit under Chapter 542 because the Texas Legislature explicitly restricted the Chapter’s scope to first-party claims. Because the insurer was seeking to recover money paid to indemnify a third party, it was not a first-party claim. Therefore, the insurer was not making a claim as defined by Chapter 542 and lacked subject matter jurisdiction to bring suit against the excess insurer.
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Federal Court in Oklahoma Holds No Action Clause Does Not Bar Insured’s Declaratory Judgment Action
A federal court in Oklahoma denied an insurer’s motion to dismiss, finding that it could not rely on the policy’s “no action” clause to dismiss an insured’s declaratory judgment action seeking judgment on the insurer’s duty to defend and indemnify. Wilbanks Securities, Inc. v. Scottsdale Ins. Co., 2016 WL 6109312 (W.D. Okla. Oct. 19, 2016).
The insured had a financial services professional liability errors and omissions policy and sued its insurer for breach of contract and bad faith for failing to defend an arbitration. The insurer moved to dismiss, contending the insured failed to satisfy a condition precedent of the policy as the underlying arbitration was ongoing:
Suits Against Us. No suit or other action may be brought against us unless, as a condition precedent thereto, there has been full compliance with all terms and conditions of this policy and the obligation of the insured to pay “damages” has been finally determined either by judgment against the insured, after trial or arbitration or by written agreement signed by the insured, the claimant and us. Anyone who has obtained such a judgment or written agreement will be entitled to recover under this policy to the extent of the insurance then available to the insured under this policy. No one has the right to make us a party to a suit to determine the liability of an insured; nor shall we be impleaded by an insured or his/her/its legal representative(s).
The court found that the “no action” clause was enforceable under Oklahoma law. However, it held that the effect of the “no action” clause proposed by the insurer would eliminate any obligation by an insurer to fulfill its duty to defend until such time as an insured had failed to prevail in the underlying action and that the no action clause is not a condition precedent. Rather, the court held, it is a provision that applies to third parties, not the insured, where the issue is the duty to defend, and “no action” clauses do not bar an insured’s claims for declaratory relief against an insurer, at least where coverage is denied by the insurer.
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Federal Court in Alabama Finds Insurer is not Liable for Property Damage Resulting from Insured’s Cyber-Network Breach
A federal court in Alabama granted summary judgment in favor of an insurer in a lawsuit brought by credit unions following a cyberbreach of the insured’s network, finding the insurer did not have to defend or indemnify. Camp’s Grocery, Inc. v. State Farm Fire & Cas. Co., 2016 WL 6217161 (N.D. Ala. Oct. 25, 2016).
Credit unions that operated in the insured’s store sued the insured alleging that a cyberhack of the insured’s network compromised customers’ confidential information and credit and debit card data. The credit unions alleged they suffered losses as they were forced to reissue and reinstate customer’s cards and that the hacking compromised their customer’s confidential data that resulted in the loss of cardholder’s accounts, reissuance of cards, reimbursement of their customers losses and the loss of current and potential customers. The insured had a liability policy for which coverage was limited to harm to “tangible property,” which did not include “electronic data.” The policy also excluded coverage for “damages arising out of the loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data.” However, the policy included an endorsement which covered “accidental direct physical loss” to computer equipment and removable data storage media used in the insured’s business.
The insured sought a declaratory judgment on the insurer’s duty to defend and indemnify, and both parties moved for summary judgment. The insurer argued that coverage was not available because the policy covered damages for only “tangible property” loss, which did not include electronic data. The court granted the insurer’s motion for summary judgment, holding that coverage was not available under the policy because the underlying lawsuit only alleged claims of purely economic loss. The court additionally found that the credit unions’ claims for “property loss” were based on breached electronic data contained on the cards, which was intangible, and thus not covered. It also held that the endorsement covering “accidental direct physical loss,” which afforded first-party coverage, did not impose a duty to defend or indemnify against claims for harm allegedly suffered by the credit unions.
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Federal Court in South Carolina Allows Bad Faith Claims for Improper Reassignment of Claim and Failure to Participate in Mediation
A federal court in South Carolina recently found that an insured had stated a claim for bad faith where the complaint alleged that the insurer improperly reassigned a pending claim to a new law firm in the middle of litigation and failed to send a representative with settlement authority to participate in mediation. Agape Senior Primary Care, Inc. v. Evanston Ins. Co., 2016 WL 4804066 (D. S.C. Sept. 14, 2016).
The insured’s first claim was that the insurer unjustifiably reassigned counsel in the middle of litigation, resulting in the new law firm spending unnecessary time and money getting up to speed on the case and thus eroding the coverage available under the policy. The insurer countered that it had the right to choose defense counsel, and thus it could not have acted in bad faith by reassigning pending claims to new counsel. The court, however, found that allegations that the original attorneys were doing their job, the new counsel was located further away, significant and unnecessary attorneys’ fees were incurred “retracing the steps” of the prior attorneys, and the switch eroded available policy benefits were sufficient to state a claim for bad faith.
The court also held that the insured had stated a claim for bad faith by alleging that the insurer violated the South Carolina Alternative Dispute Resolution Rules (“SCADR”) by failing to send a representative with authority to settle to a scheduled mediation, resulting in delay and unnecessary expense. Moreover, the court found the insured did not violate the confidentiality of a settlement conference by making such allegations, because the SCADR protects the confidentiality of “communications during a mediation settlement conference,” but does not necessarily prohibit “disclosure of those present or not present at the mediation.”
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Federal Court in North Carolina Finds “Employee Theft” Insuring Clause Ambiguous
A federal court in North Carolina recently found the employee theft coverage in a crime coverage policy to be ambiguous and thus construed the coverage broadly in favor of the insured. Colony Tire Corp. v. Fed. Ins. Co., 2016 WL 6683590 (E.D. N.C. Nov. 14, 2016).
The insured, an automotive parts retailer, filed a claim with its insurer after the principals of a company the insured hired to handle the insured’s payroll and taxes embezzled money from the insured. The policy’s employee theft insuring clause provided coverage for loss of money sustained by the insured “resulting from theft or forgery committed by an employee,” which was defined to include “any contractual independent contractor.” The term “contractual independent contractor” was defined to require a written contract between the insured and either a natural person who undertakes to perform the services or “an entity acting on behalf of such a natural person independent contractor.” Since the contract for payroll and tax services was with the corporation, and not the principals, the question was whether the corporation was “acting on behalf of” the principals when it contracted with the insured such that the corporation qualified as a “contractual independent contractor.”
Central to the court’s analysis was the construction of the undefined term “acting on behalf of.” The court opined that the phrase could reasonably indicate either of two meanings — acting “within the scope of a formal agency relationship” or acting “for the benefit” of another. It concluded that the phrase was thus ambiguous and construed it broadly in favor of the insured to include either meaning. The court concluded that because the purpose of the corporation’s existence was to facilitate the principals’ embezzlement and enable their lavish lifestyles, the corporation was “acting on behalf of” the principals when it contracted with the insured. Thus, the court concluded, the principals were “contractual independent contractors” and the monetary loss was covered under the policy’s employee theft coverage.
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Federal Court in Texas Dismisses Hail Claim Because Insured Failed to Allocate Damage Caused by Covered and Non-Covered Perils
A federal court in Texas held that a property owner’s affidavit and an estimate of the cost of repairs to the property are insufficient to show a covered loss in granting insurer’s motion for summary judgment. One Way Investments Inc. v. Century Surety Company, et al., No. 3:14-cv-2839-D (N.D. Tex. Sept. 21, 2016).
The insured claimed that a hail storm caused damage to the roof and appurtenances and the interior of its property. After inspection of the property, the insurer’s adjuster estimated the cost of damage was less than the amount of the insured’s deductible. The insurer filed summary judgment arguing that the policy did not cover wear-and-tear damage and that the insured had not shown evidence from which a jury could allocate covered loss (because of wind and hail) from non-covered loss (because of wear and tear). The insured pointed to the fact that the roof leaked after, but not before, the storm and provided an estimate of the cost of repairs.
The court granted summary judgment and reasoned that the insured failed to produce evidence that would enable a reasonable jury to estimate the amount of damage or the proportionate part of damage caused by a covered cause, i.e., hail and wind. The evidence provided was silent as to whether and what damage was from wear and tear, poor construction or any other causes. The court further reasoned that summary judgment was proper because the insured did not present any evidence that would enable a reasonable jury to find that the damages it sought for repairs were reasonable and necessary. The insured’s extra-contractual claims were also dismissed because there was no evidence enabling a reasonable jury to find that the insurer did not have a reasonable basis for denying its claim. The only evidence introduced as to causation was from the insurer’s expert who opined that “the poor condition of the roof was not caused by hail or any storm event but by the age of the roofing materials and normal wear and tear.”
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Federal Court in Arkansas Holds Weapon Must be Used to Intimidate or Cause Injury to Another to Satisfy Assault and/or Battery Exclusion
A federal court in Arkansas held where a liability policy’s assault and/or battery exclusion defines “assault and/or battery” as “use” of a firearm, the injury must be caused by a person using a weapon for the purpose of intimidating another or causing injury to another for the exclusion to apply. Atl. Cas. Ins. Co. v. Paradise Club, 2016 WL 6573978 (W.D. Ark. Nov. 4, 2016).
A club patron was watching her boyfriend participate in an amateur boxing match when an altercation took place and gunshots were fired, striking and injuring her. She sued the club alleging the club’s negligence caused her injuries. The club’s insurer filed for declaratory judgment and asserted that the policy’s assault and/or battery exclusion precluded coverage. The exclusion defined “assault and/or battery” as “intended to include, but not limited to, any injury of any kind resulting from the use, or threated use, of a gun, firearm, knife or weapon of any kind.” The insurer moved for summary judgment, and the club patron argued that the term “use” was ambiguous and that whether the gun which fired the rounds that struck her was in “use” at the time was a genuine issue of material fact. The insurer took the position that the term “use” is broad enough to apply to any discharge of a firearm, whether intentional or accidental and that other interpretations were unreasonable.
The court disagreed with both parties. It found the term “use” is not ambiguous, but interpreted the inclusion of the word “use” as implying a “user” which requires some volitional act on the part of the party who causes the injury. Further, taking into account the assault and battery context in which the word is used (in conjunction with descriptions of a physical weapon), the court held that the injury must not only be caused by a volitional act, but that “the user must be utilizing the gun as one would any weapon: as a means of intimidation or causing injury.” The court denied the motion for summary judgment, finding a genuine issue of material fact as to whether the bullet came from a gun that was being used as a means of causing intimidation or injury when it was discharged.
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