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Insurance Law Report: January 2018

January 30, 2018

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 January 2018 issue. To view, click on the titles below for full versions of the article.

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Florida Supreme Court Holds Pre-Suit Construction Defect Notice Can Qualify As a “Suit” Under CGL Policy

The Florida Supreme Court recently held that the pre-suit process for construction defect claims under Florida Statutes Chapter 558 constitutes a “suit” under the standard ISO CGL definition as an “alternative dispute resolution proceeding” that may trigger the duty to defend. Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., 2017 WL 6379535 (Fla. Dec. 14, 2017).

The insured general contractor was served with statutorily required Chapter 558 pre-suit notices, claiming construction defects in a high-rise residential condominium project. The insured notified its insurer and demanded defense and indemnity. The insurer refused to defend on the ground that the notices did not constitute a “suit.” The insured settled the claims without the insurer’s involvement and sought a declaration that the insurer owed a duty to defend and indemnify it. The insured and the insurer cross-moved for summary judgment on whether the insurer’s duty to defend was triggered by the Chapter 558 notices of claim. Under the policy, the term “suit” was defined as “a civil proceeding in which damages because of ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ to which this insurance applies are alleged.” The definition included “an arbitration proceeding” or “any other alternative dispute resolution proceeding” in which covered damages are claimed and to which the insurer consents. The court granted summary judgment in favor of the insurer, concluding that the Chapter 558 process did not satisfy the definition of “civil proceeding” under the policy. The insured appealed, and the Eleventh Circuit certified the question to the Florida Supreme Court.

The Florida Supreme Court found that although the Chapter 558 process does not qualify as a “civil proceeding,” it constitutes a “suit” as an “alternative dispute resolution proceeding” included in the policy’s definition. The Supreme Court noted, however, that an insurer’s consent is required to trigger the insurer’s duty to defend an “alternative dispute resolution proceeding,” and the Supreme Court did not address whether the insurer consented to the insured’s participation in the Chapter 558 process as it was outside the scope of the certified question.
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Oklahoma Supreme Court Rules Oklahoma Savings Statute Applies To Insurer Subrogation Action

The Oklahoma Supreme Court has held that the Oklahoma Savings Statute, 12 O.S. §100, providing a one-year period beyond the statute of limitations for a new action based on a prior timely filed action applies to an insurer’s subrogation claim. State Farm Mutual Automobile Ins. Co. v. Payne, 2017 OK 95, 408 P.3d 204.

An insurer filed a subrogation action against a third-party motorist arising out of an automobile accident which involved the insured. The insurer’s subrogation claim was similar to an action the insured had initially brought, but had voluntarily dismissed after the applicable two-year statute of limitations had expired. The district court dismissed the insurer’s subrogation claim as untimely. The insurer appealed, and the Court of Civil Appeals affirmed. The insurer then sought a writ of certiorari to the Oklahoma Supreme Court.

The Supreme Court of Oklahoma reversed and remanded, ruling that the subrogation action was not time barred based on the Oklahoma Savings Statute, 12 O.S. §100, which provides:

If any action is commenced within due time, and a judgment thereon for the plaintiff is reversed, or if the plaintiff fail in such action otherwise than upon the merits, the plaintiff, or, if he should die, and the cause of action survive, his representatives may commence a new action within one (1) year after the reversal or failure although the time limit for commencing the action shall have expired before the new action is filed.

The Supreme Court referenced earlier jurisprudence which held that Oklahoma’s Savings Statute is “remedial” in nature, and thus “should be liberally construed.” It ruled that the test for whether a subsequent plaintiff qualifies as “the plaintiff” for purposes of 12 O.S. §100 focuses not on whether the subsequent plaintiff is identical to the one before, but on whether the two entities are “substantially the same.” To determine whether the two entities are “substantially the same,” the Court looked to whether the parties were “suing in the same right.” The Supreme Court concluded that because the insurer was “substantially the same, suing in the same right” as its insured for purposes of a subrogation claim, the insurer should be entitled to the same treatment as its insured for purposes of the Savings Statute. Accordingly, it held the insurer’s action timely since it was filed within one year after its insured had voluntarily dismissed the prior lawsuit.
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Fifth Circuit Reassesses Whether Recovery Of Policy Benefits As Damages Under Texas Insurance Code Requires Independent Injury

The U.S. Fifth Circuit Court of Appeals has concluded that its prior holdings requiring an insured seeking policy benefits as actual damages under Chapter 541 of the Texas Insurance Code to establish injury separate and apart from an insurer’s denial of those benefits are not consistent with Texas Supreme Court jurisprudence. Lyda Swinerton Builders, Inc. v. Oklahoma Surety Co., 877 F.3d 600 (5th Cir. 2017).

In a construction defect claim, the district court found (and the Fifth Circuit agreed) that a general contractor was an additional insured under a subcontractor’s insurance policies and was wrongfully denied a defense thereunder. The general contractor sued the insurers and the district court found that the insurers had a duty to defend it in underlying litigation against it. However, based on then existing Fifth Circuit jurisprudence, the district court denied the general contractor recovery of defense costs as actual damages under Chapter 541 of the Texas Insurance Code because the general contractor had not adduced evidence that it suffered injury separate and apart from the denial of a defense. The general contractor cross-appealed on this basis.

The Fifth Circuit concluded that Texas Supreme Court jurisprudence, reaffirmed in USAA Texas Lloyd’s Co. v. Menchaca, 2017 WL 1311 752 (Tex. Apr. 7, 2017) rehearing pending, requires that where an insured establishes a right to benefits it can recover those benefits as damages under Chapter 541. The insurers argued that the general contractor still had to prove independent injury in order to recover policy benefits as damages under Chapter 541, but the Fifth Circuit concluded that this requirement limits recovery of only “other” damages that flow from the denial of policy benefits, and not the benefits themselves. The Fifth Circuit reversed and remanded for further proceedings consistent with its opinion and Menchaca. It also reversed that part of the district court judgment that the 18% penalty under Chapter 541 was imposed until payment thereof, holding that Fifth Circuit jurisprudence is that the penalty stops accruing on the date of the judgment imposing it. The Fifth Circuit noted, however, that if the general contractor were successful in obtaining a judgment for its Chapter 541 claim after remand, the 18% penalty would continue to accrue through the date of that new judgment.
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Eleventh Circuit Enforces “Eight Corners” Rule And Affirms Denial Of Insurer’s Request For Trial On Veracity Of Factual Allegations In Underlying Complaint

The U.S. Eleventh Circuit Court of Appeals, applying Florida law, recently affirmed that an insurer was obligated to defend its insured and not entitled to a jury trial on the veracity of certain factual allegations in the underlying complaint which gave rise to the insurer’s duty to defend. Addison Ins. Co. v. 4000 Island Blvd. Condo. Ass’n, Inc., et al., 2017 WL 6616690 (11th Cir. Dec. 28, 2017).

The insured, a subcontractor, was hired to paint balcony railings for a condominium building. The condominium association sued the insured for breach of express warranty, including allegations that the insured’s defective paint finishes had caused property damage. The insured sought coverage under its CGL policy. The insurer brought an action for declaratory judgment and moved for summary judgment, arguing that it was not obligated to defend because the condominium association had sued the insured for breach of warranty rather than for property damage and that allegations of property damage were unsupported by evidence. The court denied the insurer’s motion for summary judgment. On the insured’s motion for clarification, the district court granted summary judgment on the basis that the underlying complaint clearly alleged facts that brought the claim within coverage under the policy. The insurer appealed.

The Eleventh Circuit affirmed, refusing to recognize the limited exception to the “eight corners rule” in which a court may consider extrinsic facts. The Eleventh Circuit explained that principle was not applicable where there is no manifestly obvious unalleged fact that would place the complaint outside of coverage. Thus, it found that the insurer was required to defend the insured in the underlying lawsuit and was not entitled to a jury trial on the veracity of the factual allegations.
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Eleventh Circuit Finds No Duty To Defend Where Allegations Only Hypothetically Bring Suit Within Coverage

The U.S. Eleventh Circuit Court of Appeals, applying Florida law, recently held that allegations in a complaint that only hypothetically support a negligence claim against an insured, but which did not actually plead negligence against the insured, did not give rise to a duty to defend. Selective Ins. Co. of the Southeast v. William P. White Racing Stables, Inc., 2017 WL 6368843 (11th Cir. Dec. 13, 2017).

A professional jockey sued his employer, the insured, after the jockey was injured in an accident when the horse he was riding collapsed. The jockey asserted claims against the insured under the Florida Workers’ Compensation Statute for failure to cooperate in investigating and prosecuting the jockey’s claims against a third-party tortfeasor and for spoliation of evidence. The jockey alleged negligence against other defendants but did not assert a negligence claim against the insured. The insured sought coverage under its liability policy. The insurer sought a declaration that it owed no duty to defend because the jockey’s claim against the insured did not fall within coverage for damages arising from bodily injury caused by an accident. The court entered a partial declaratory judgment against the insurer, holding that the insurer had a duty to defend because the complaint allegations could support a negligence claim against the insured. The insurer appealed.

The Eleventh Circuit reversed, holding that while the complaint allegations could arguably support a negligence claim, it would not conclude that the insurer was required to defend based on that hypothetical possibility. The Eleventh Circuit also noted that damages sought for breach of duties to preserve evidence are not covered by liability policies that apply to bodily injury caused by an accident. The Eleventh Circuit found that while other allegations in the complaint could potentially support a claim for negligence, the complaint did not seek recovery against the insured for negligence and held that extraneous allegations that could potentially give rise to a later claim for negligence are insufficient to bring the claim within the scope of coverage.
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Eleventh Circuit Holds No Reasonable Jury Could Find That Insurer Acted In Bad Faith Despite Deficient Statutory Insurance Disclosure

The U.S. Eleventh Circuit Court of Appeals, applying Florida law, recently held that no reasonable jury could find that an insurer’s failure to include an insured’s statement about additional insurance in its statutory insurance disclosure pursuant to Fla. Stat. §627.4137 rose to the level of bad faith. Kwiatkowski v. Allstate Ins. Co., 2017 WL 5900553 (11th Cir. Nov. 30, 2017).

A pedestrian was struck by the insured’s automobile. The insured’s insurer unsuccessfully offered policy limits to the claimant. After the claimant retained an attorney, the insurer reiterated its previous offer. Several months later, the claimant’s attorney advised the insurer that the claimant was willing to settle within the policy limits and requested that the insurer provide an insurance disclosure pursuant to Fla. Stat. §627.4137. The insurer timely responded, but the claimant rejected the offer because the insurer’s response was deficient as it did not provide a statement from the insured or its agent regarding additional insurance as required by Fla. Stat. §627.4137. The claimant sued the insured and obtained an excess judgment and then sued the insurer for bad faith, alleging that the insurer failed to settle. The insurer removed the action and moved for summary judgment. The court granted the insurer’s motion for summary judgment, concluding that no reasonable jury could find that the insurer acted in bad faith. The insured appealed.

The Eleventh Circuit affirmed. Although the Eleventh Circuit agreed that the insurer’s insurance disclosure response was deficient in that it did not include a statement by the insured or the insured’s agent—information the insurer had in its possession at the time—it concluded that no reasonable jury could conclude that this omission was anything other than simple negligence that does not rise to the level of bad faith. The Eleventh Circuit reasoned that, as a whole, the insurer’s efforts to settle the claim were prompt, consistent and reasonably diligent.
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Georgia Appellate Court Finds Definition Of “Residence Premises” Ambiguous

A Georgia appellate court recently held that a policy definition of “residence premises” is ambiguous, requiring a construction of the policy in favor of coverage. Lee v. Mercury Ins. Co. of Ga., et al., 808 S.E.2d 116 (Ga. Ct. App. 2017).

The insured made a claim under his insurance policy for damage to insured premises as a result of a fire loss. The insured lived with his wife elsewhere, but owned and paid the mortgage payments for the insured residence. The insurer denied the claim, and the insured filed a breach of contract suit. The insurer moved for summary judgment alleging that the insured failed to reside at the insured residence as required by the policy. The insured cross-moved for summary judgment, asserting he was entitled to judgment in his favor on the issue of coverage under the terms of the policy. The trial court granted the insurer’s motion for summary judgment. The insured appealed.

On appeal, the insured argued that the policy provisions expressly cover the loss at the insured residence and the insured residence qualified for coverage under the policy terms. The appellate court noted that the policy definition of “residence premises” is ambiguous, thereby requiring construction of the policy in favor of coverage and precluding summary judgment in favor of the insurer. The term “residence premises” was defined as “one, two, three or four family dwelling, condominium or rental unit, other than structures and grounds, used principally as a private residence; where you reside and which is shown in the Declarations.” The appellate court held that the placement of the semicolon in the definition of “residence premises,” the policy’s lack of definition of the term “reside,” and the lack of an express condition requiring the insured to reside only at the insured premises creates an ambiguity precluding summary judgment in favor of the insurer. The appellate court reversed.
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Louisiana Appellate Court Affirms Summary Judgment For Insurer Where Damage Manifested After Policy Period

A Louisiana court of appeal affirmed a grant of summary judgment in favor of an insurer where the alleged damage did not manifest during the policy periods. Crosstex Energy Servs., LP v. Texas Brine Co., LLC, 2017-0863 (La. App. 1 Cir. 12/21/17).

The insured, operator of an underground salt dome, had CGL policies for multiple policy periods that provided coverage for property damage, defined as “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….” Years after the last policy expired, a sinkhole appeared near the salt dome. The plaintiffs in the underlying litigation, who own and operate a gas pipeline that traverses the edge of a salt dome, sued the insured alleging that the sinkhole was caused by its operations. The insured filed a declaratory judgment demanding defense and indemnity from various insurers under certain liability policies pre-dating the sinkhole. The insurers moved for summary judgment claiming they had no duty to defend or indemnify because the alleged damage did not occur during the policy periods. The district court granted the motion and the insured appealed, arguing that the policies do not limit coverage to property damage that manifests itself during the policy period and should be interpreted to cover possible hidden property damage that may have resulted from earth movement that may have occurred during the policy periods.

The court of appeal affirmed, finding that the underlying petition did not allege damage prior to the appearance of the sinkhole, and dismissed the insured’s argument that genuine issues of material fact existed as to whether hidden damage occurred before the appearance of the sinkhole due to subsidence and other invisible underground damage in the prior years.
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North Carolina Court Of Appeals Determines Insurer Is Not a Tortfeasor

The North Carolina Court of Appeals held that an auto insurer that paid an underinsured motorist claim after a policyholder was hit by a drunk driver cannot seek contribution from the social hosts who allegedly served the drinks that rendered the driver intoxicated. Nationwide Property & Casualty Insurance Co. v. Smith, 808 S.E.2d 172 (N.C. Ct. App. 2017).

A pedestrian was struck by a car operated by an intoxicated driver. The driver’s auto liability carrier offered the full limit of its coverage. The victim also negotiated a settlement with his UIM carrier, which then sought contribution from the social hosts who provided alcohol to the intoxicated driver. The trial court judge granted the social hosts’ motion to dismiss based on the failure to state a claim. The insurer appealed, but the court of appeals unanimously affirmed, reasoning that a claim for contribution is only available among joint tortfeasors. The court concluded that because neither the victim nor the UIM insurer were tortfeasors, the UIM insurer could not assert a claim for contribution against any tortfeasor.
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Federal District Court In Alabama Finds Business Dispute And “Misuse Of Funds” Is Not An “Occurrence”

A federal court in Alabama denied an insured’s motion to dismiss an insurer’s declaratory judgment complaint where it found that the “misuse of funds” constitutes “deliberate business decisions” and is not an “occurrence.” Acadia Ins. Co. v. SouthernPointe Grp., Inc., 2017 WL 5890350 (N.D. Ala. Nov. 29, 2017).

The insured had a CGL policy providing insurance for “bodily injury or property damage … caused by an occurrence.” The insured had an agreement with a developer to develop restaurants. The developer contributed significant capital, but the relationship quickly soured, and the developer sued the insured asserting claims for breach of contract, fraud and breach of fiduciary duty arising out of the insured’s alleged misuse of funds contributed by the developer. The insurer defended the insured subject to a reservation of rights and sought a declaratory judgment on the grounds that the alleged misuse of funds was not an “occurrence” and that damages due to negligence were economic losses not covered by the policy. The insured filed a motion to dismiss the insurer’s complaint on the basis that the underlying complaint did not include any allegations bearing on its intent to damage the developer’s property, and that the developer “backed out of the parties’ agreement unexpectedly, creating an unforeseen circumstance” meeting the policy’s definition of “occurrence,” which was an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The court disagreed, finding that even if there were no specific evidence of intent, the insurer’s complaint alleged that the insured took specific actions solely for its benefit and that the underlying complaint alleged violations of Alabama commercial laws. Accordingly, the court found that the lawsuit arose from “deliberate business decisions” which do not qualify as “accidental conduct” to meet the policy definition of “occurrence.”
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Florida Appellate Court Finds Unaccrued And Premature Third-Party Bad-Faith Claim Filed In Violation Of Nonjoinder Statute Must Be Dismissed, Not Abated

A Florida appellate court found that an unaccrued and premature third-party bad-faith claim filed before a settlement or verdict against the insured is in direct violation of the nonjoinder statute, Fla. Stat. §627.4136, and must be dismissed rather than merely abated. GEICO Gen. Ins. Co. v. Katherine Martinez, 2018 WL 271823 (Fla. 3d DCA Jan. 3, 2018).

The respondent was injured in an automobile accident involving a vehicle driven by the insured. Shortly after the accident, the respondent sued the insured alleging negligence. The respondent amended her complaint to add the insurer as a defendant and pleaded a bad-faith claim against the insurer. The insurer filed a motion to dismiss, arguing that the bad-faith claim had not yet accrued and was premature pursuant to the nonjoinder statute, Fla. Stat. §627.4136. The trial court abated the action against the insurer pending resolution of the negligence claim against the insured. The insurer petitioned the appellate court for a writ of certiorari.

The appellate court granted the insurer’s petition and quashed the trial court’s order, finding that an unaccrued and premature third-party bad-faith claim filed before a verdict or settlement is obtained against the insured in direct violation of the nonjoinder statute, Fla. Stat. §627.4136, and must be dismissed rather than abated. The appellate court explained that the nonjoinder statute precludes the accrual of any cause of action against an insurer by a third-party until the third-party satisfies the statute’s compulsory condition precedent of obtaining a settlement or verdict against the insured. The appellate court further noted that a third party would have no interest in an insurance policy and, thus, no standing to bring a claim against an insurer until the condition precedent is satisfied.
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North Carolina Court Holds Alleged Statutory Violations Preclude Coverage Under Business Liability Policy

A federal court in North Carolina held that an insurer has no duty to defend or indemnify when the policy’s statutory violation exclusion precludes coverage for the underlying actions. Hartford Casualty Insurance Co. v. Ted A. Greve & Associates, P.A., et al. , 2017 WL 5557669 (W.D. N.C. Nov. 17, 2017), appeal filed (4th Cir. Dec. 11, 2017).

The case arose from two underlying putative class actions asserting a single cause of action against a lawyer for violation of the federal Driver’s Privacy Protection Act (“DPPA”). Plaintiffs in the underlying actions were involved in motor vehicle accidents, and upon receipt of advertisement for legal services, learned that the lawyer had obtained publicly available accident reports and disclosed their personal information in generating the advertisements. Plaintiffs sued the lawyer claiming such disclosure to be an invasion of privacy.

The lawyer’s insurer sought a declaration that it had no duty to defend or indemnify on the basis that the “personal and advertising injury” coverage included in the lawyer’s policy contained an exclusion for statutory violations. The exclusion bars coverage for personal and advertising injuries “arising out of the violation of a person’s right of privacy created by any state or federal act.” However, the exclusion stated that it did not apply to liability that the insured would have in the absence of such state or federal act. The court concluded that the privacy right at issue was “solely a creature of federal law” defeating coverage based on the exclusion and held that the insurer had no duty to defend or indemnify.
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Federal Court In South Carolina Strictly Construes MCS-90 Endorsement

A federal court in South Carolina held that a commercial motor vehicle policy does not cover the insured for an underlying motor vehicle accident where neither the insured nor the insured vehicle were involved in the accident and where the policy’s MCS-90 endorsement was not implicated. Trustgard Insurance Company v. Brown, et al. , 2017 WL 5991866 (D. S.C. Dec. 4, 2017)

An insurer issued a policy to an insured providing coverage for one vehicle and for one driver. A driver rear ended a trailer being towed by another vehicle being operated by another driver. The insured’s only connection to the underlying accident was the display of his Interstate Commerce Commission motor carrier number on the rear-ended vehicle.

The court rejected the argument that the MCS-90 endorsement, which ensures that federally-mandated coverage for regulated motor carriers is in place, applied. The court explained that the MCS-90 endorsement applies even if the vehicle in the accident is not a covered auto, but it is only triggered when no other policy provides sufficient coverage under federally mandated standards. Acknowledging that the endorsement does not apply once the federally-mandated minimums are satisfied, the court considered that another policy actually attached to the vehicle involved in the accident was available to satisfy any possible judgment against Brown. Finding the federally-mandated minimums to be satisfied, the court refused to construe the MCS-90 endorsement as coverage that can be stacked onto sufficient and available liability limits.
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