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Insurance Law Report: July 2016

August 02, 2016

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 July issue. To view, click on the appropriate title and you will be brought to the full version of the article below.

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Alabama Supreme Court Affirms Reformation of Commercial Property Policy on Basis of Mutual Mistake
The Alabama Supreme Court affirmed a trial court’s judgment to reform a commercial property policy on the basis of mutual mistake. Har-Mar Collisions, Inc. v. Scottsdale Ins. Co., 2016 WL 3136189 (Ala. June 3, 2016).

An auto shop operator obtained commercial property coverage which incorrectly identified the name in which it was incorporated. After a fire destroyed the auto shop, the insurer made an initial payment but later claimed it was unclear what, if any, insurable interest the named insured had in the auto shop. The auto shop’s sole shareholder asserted he had never incorporated a business under the name identified as the named insured and that it must have been “a typo or abbreviation.” The auto shop sued the insurer seeking a judgment that the corporation was a named insured under the policy and asserting claims for breach of contract and bad faith failure to pay claims. At trial, the trial court found there was a mutual mistake and that reformation was appropriate.

The Alabama Supreme Court affirmed the trial court’s judgment to reform the policy to reflect the corporation as the named insured. The court considered the Ohio Court of Appeals decision Gooslin v. B-Affordable Tress Serv., (N. S-10-045, Aug. 12, 2011) 2011-Ohio-4048, and found that, similar to that case, the issue is whether the contract provision in question is clearly and convincingly contrary to the parties’ understanding. The court found that it was, reasoning that the undisputed evidence showed that the parties intended for the policy to insure the auto shop, regardless of under what name it is incorporated, and that the policy did not reflect that intent because it lists a corporation that does not exist and never existed.
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Oklahoma Supreme Court Holds Choice of Law Provision in Policy Dispositive of UM Stacking Question
The Oklahoma Supreme Court reversed and remanded a case in which the trial court granted summary judgment in favor of an insurer regarding an insured’s ability to stack UM coverage.

The Supreme Court held that a Kansas insured was not bound by Kansas’ prohibition on stacking of UM limits but that Oklahoma law applied under the terms of the policy because the accident occurred in Oklahoma. Oklahoma law allows stacking at the time of the accident giving rise to the claim and the policy provided “[s]ubject to the law of the state of occurrence, we will pay no more than these maximums regardless of the number of vehicles insured, insured persons, claims, claimants, policies, or vehicles involved in the occurrence.” The Supreme Court found that the lower courts improperly engaged in a choice of law analysis, and held that the policy limits stacking only if the law of the state of where the occurrence took place limits stacking. Leritz v. Farmers Insurance Company, Inc., 2016 WL 35886902 (Okla. June 28, 2016).
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Texas Farm Bureau Seeks Approval of Arbitration Endorsement to Homeowners’ Policies
Texas Farm Bureau has asked the Texas Department of Insurance to allow it to write arbitration clauses into its homeowners’ policies in exchange for a reduction in premiums. Presently, the Texas Insurance Code only allows the Texas Windstorm Insurance Association to issue such endorsements under sec. 2210.554. The insurer argues that it needs to do this to stay profitable in Texas and increase consistency, but consumer advocacy groups claim it will undermine policyholders’ rights. An additional concern is that filings and rulings in arbitrations are not a matter of public record, so they lack the precedential value of case law. It is unclear whether the Commissioner of Insurance will issue an administrative order that affects access to the open courts without legislation being passed first to do this.
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Tenth Circuit Enforces Insurer Option to Unilaterally Cancel Policy Within 60 Days
The U.S. Tenth Circuit Court of Appeals upheld a grant of summary judgment in favor of an insurer regarding the cancellation of a policy based on policy provisions and the date of mailing of notice of cancellation. Self v. Travelers Indemnity Company, 2016 WL 3397698 (10th Cir. June 14, 2016).

The insured purchased a vehicle for her stepson and obtained insurance for a six-month period. The insurer generally contacted its insureds after issuance of a policy to conduct a welcome interview and to verify certain policy information for underwriting purposes. The insured did not respond to such a request, and the insurer sent a notice of cancellation to the insured, citing the insured’s failure to respond to inquiries for an initial customer interview as the basis. The notice identified an effective date of cancellation.

The policy set forth procedures for cancellation by the insurer: “We may cancel by mailing to the named insured shown in the Declarations at the address shown in this policy: a) At least 10 [days’] notice: (1) if cancellation is for nonpayment of premium; or (2) if notice is mailed during the first 60 days this policy is in effect…; or b) At least 20 [days’] notice in all other cases.” The same provision also stated: “3. After this policy is in effect for 60 days … we will cancel only: a. For nonpayment of premium; or b. If your driver’s license or that of [certain other related drivers] has been suspended or revoked … c. For fraud, misrepresentation or concealment….”

After the effective cancellation date, the insured’s stepson was involved in an accident. A claim was submitted and the insurer denied the claim based on the cancellation and lack of reinstatement. The insured filed suit alleging that the insurer’s cancellation was ineffective because the date of cancellation was the 66th day of the policy term and the policy was not cancelled for any of the allowable reasons for a policy in effect 60 days. The court found the cancellation provision unambiguous and held that the provisions allow the insurer to cancel “by mailing to the named insured…at least 10 [days’] notice … if notice is mailed during the first 60 days this policy is in effect,” which the court found had occurred.
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Fifth Circuit Finds No Damages From Insurer’s Late Initial Payment Made Promptly After Appraisal Award
The U.S. Fifth Circuit Court of Appeals considered that an insurer might be liable for a delay in initial payment on a claim despite its prompt payment of an appraisal award but did not reverse an underlying judgment against it because the insurer initially overpaid the claim. Quibodeaux, et al., v. Nautilus Ins. Co., 2016 WL 3644641 (5th Cir. July 7, 2016).

An insured made a claim for property damage. It was undisputed that the insurer was late in accepting or rejecting the claim and then in making the initial payment. However, the insurer paid on a replacement cost value basis, which was more than it was required to pay, which was an actual cash value basis. The insured filed suit; an appraisal was later compelled and the insurer promptly paid the award. The insured still claimed breach of contract and violations of the prompt payment provisions of the Insurance Code for the initial payment.

The Fifth Circuit found that the insured had not preserved on appeal the issue of timely acceptance or rejection of the claim, only payment. As to the payment, the court found that the insured’s rights had not been substantially affected by summary judgment for the insurer because the amount of overpayment by the insurer exceeded any 18 percent statutory penalty on the amount.
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Louisiana Appellate Court Finds Auto Exclusion in CGL Policy Applies to Bodily Injury Caused While Delivery Truck Stopped for Inspection
A Louisiana appellate court affirmed a trial court’s judgment in favor of an insurer on the basis of an auto exclusion in a CGL policy, finding the alleged bodily injury arose out of the “use” of a delivery truck even though it was stopped for an inspection. Morrow v. State Farm Mut. Auto. Ins. Co., 2015-0578, 2016 WL 3561709 (La. App. 4 Cir. June 29, 2016).

A security guard was injured when the driver of a delivery truck owned by a food sales and service business closed the truck door as the guard inspected the cargo compartment of the truck. The guard sued for damages, and, in a direct action proceeding, added the insurer of the food sales and service business. The insurer moved for summary judgment on the basis of an auto exclusion in its CGL policy. The trial court granted the insurer’s motion and dismissed the guard’s claims against the insurer.

On appeal, the court considered the issue of whether “the auto exclusion applies to bodily injuries allegedly caused while a delivery truck is briefly stopped for the purpose of allowing an inspection of its contents.” The guard argued that the truck was not in “use” because the truck was not in motion or in the process of being operated, loaded or unloaded. The court held that the truck was being used solely for transportation and locomotion at the time of injury and noted that the engine was running and the driver stopped briefly only so the guard could inspect the truck’s contents. The court reasoned that the guard’s injuries did not arise out of the insured’s food sales and service business but out of the ordinary use of an auto as set forth in the policy’s exclusion. The court affirmed the trial court judgment.

The insurer was represented by Phelps Dunbar attorneys. Please contact Katie Myers at katie.whitman@phelps.com for further information regarding the case.
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North Carolina Court of Appeals Finds No Coverage in Tort Suit Against Public College
The North Carolina Court of Appeals ruled that a public community college did not waive its sovereign immunity with respect to a tort suit because no coverage was available. Edwards v. Bd. of Trs. of Haywood Cmty. Coll., 2016 WL 3584362 (N.C. Ct. App. July 5, 2016).

The claim arose from the college’s auction of the contents of an old sawmill, at which the claimant purchased various items. Several weeks after the auction, but before the claimant had retrieved all of the purchased items, a fire destroyed the sawmill and its contents. The claimant sued the college seeking damages for the destroyed property and based his claims on the fact that he was permitted to retrieve his purchased property from the campus only during the college’s normal business hours.

Critical to the court’s disposition was the question of whether coverage was available for the claims under either of two policies issued to the college because the college, as a government entity, waived sovereign immunity for tort claims only to the extent of insurance coverage. Under the first policy, the court found no “occurrence” because the claims were based not on an “accident” but on the college’s “intentional tortious act of restricting the hours when [claimant] could retrieve his purchases from the campus.” Likewise, the second policy’s requirement that a “covered cause of loss” be a “risk of direct physical loss” was not satisfied because the claimant did not argue that the college’s business hours created such a “risk of direct physical loss.” Accordingly, the court concluded that neither policy provided coverage and that the college’s sovereign immunity was not waived.
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Federal Court in Louisiana Holds Inter-related Wrongful Acts Occurred Prior to Policy Period
A federal court in Louisiana granted summary judgment in favor of an insurer where the court found the insured’s failure to pay overtime to its employees was a series of inter-related wrongful acts which first occurred prior to the insurer’s policy period. Treo Staffing, LLC v. Axis Surplus Ins. Co., 2016 WL 3876433 (M.D. La. July 15, 2016).

The insured, a business which supplied employees to its clients, improperly calculated and failed to pay overtime to its employees under the Fair Labor Standards Act. The Department of Labor demanded payment of, and the insured agreed to pay, the overtime wages, and the insured sought coverage from its insurer. The policy required a “wrongful act” to occur during the policy period and stated that “all related Wrongful Acts or series of interrelated Wrongful Acts shall be deemed to be one Wrongful Act and shall be deemed to have occurred when the first of such Wrongful Acts occurred.” In a motion for summary judgment, the insurer argued the insured’s wrongful act was not covered because it did not first occur within the policy period.

The court found that the failure to properly pay overtime was a series of interrelated wrongful acts, and the policy clearly and unambiguously deemed that failure to be one wrongful act. The court stated that the policy period began nearly two years after the insured commenced its series of inter-related wrongful acts, and therefore coverage was precluded under the policy. The court also rejected the insured’s argument that a policy exclusion of coverage for wrongful acts occurring prior to the effective date “if on or before the policy effective date, you knew or could have reasonably foreseen that such Wrongful Act … could give rise to a Claim” created enough ambiguity to preclude summary judgment.
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Federal Court in Virginia Narrowly Construes Course of Insured’s Business Operations
In matter of first impression for Virginia state and federal courts, a federal court in Virginia held that delivery of medication to a home care agency client by an agency employee that was a “personal favor” for the client was not done in the agency’s business operations and that there is no coverage under the agency’s auto liability coverage. Russell Lloyd Potter, Alverta Davis, et al. v. American Alternative Insurance Corporation et al., No. 2:15-cv-266, 2016 WL 3766309 (E.D. Va. July 8, 2016).

The dispute arose out of an auto accident where an employee of a home care agency collided with another auto. The employee claimed that at the time of the accident she had clocked out of work and was running errands, including delivering medication to a client which she characterized as personal a personal favor for the client. The driver of the other auto filed a declaratory judgment action against the agency’s CGL insurer, whose policy included an endorsement providing coverage for bodily injury, “arising out of the use of a ‘non-owned auto’, by you or your ‘employees’ or ‘volunteer workers’ in the course of your business operations.” The court examined (1) the extent to which the vehicle at issue was used in the course and scope of the agency’s business, (2) the extent over which the agency held or exerted a right of control over the vehicle and its driver, and (3) the scope of Davis’s employment. The court noted that “[c]ourts should take an employee’s admission that he or she acted outside the scope of his or her employment seriously.” The court placed particular emphasis on the employee’s statement that she was running personal errands at the time of the accident and therefore concluded that she was acting outside the scope of her employment at the time of the accident.
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Federal Court in Florida Finds Duty to Defend and Indemnify Additional Insured for Injuries Arising Out of Lessor’s Use of Leased Premises
A federal court in Florida recently found that the phrase “arising out of” in an additional insured endorsement did not apply only to an additional insured’s vicarious liability for an insured’s negligent acts and that a lessee’s insurer had a duty to defend and indemnify a lessor of leased premises as an additional insured against a claim that arose out of the lessor’s use of the leased premises. Diocese of St. Petersburg, Inc. v. Arch Ins. Co., 2016 WL 2991226 (M.D. Fla. May 24, 2016).

A lease required the lessee to acquire general liability insurance and to name the lessor as an additional insured under the policy. Both the lessor and lessee were sued as a result of an injury sustained on the leased premises as a result of water emanating from a sewer system. The lessor filed a declaratory judgment action against the lessee’s insurer seeking a declaration that the lessee’s insurer had a duty to defend and indemnify it as an additional insured. The lessor moved for summary judgment, arguing that it was an additional insured as the underlying lawsuit was for a “liability arising out of the ownership, maintenance, or use of” the leased premises.

The district court granted the lessor’s motion for summary judgment, finding that the damage arose out of the lessor’s use of the leased premises and the lessor therefore qualified as an additional insured under the policy. The district court rejected the argument that the additional insured endorsement was intended to cover only the lessor’s vicarious liability. The district court entered judgment in favor of the lessor declaring that the lessee’s insurer had a duty to defend and indemnify.
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Alleged Representation of Coverage by Insurance Agent Does Not Create Coverage Under Theories of Estoppel and Vicarious Liability Under Mississippi Law
A federal court in Mississippi found that an insurance agent’s statement that water damage found in the insured’s home would be “covered” does not create coverage. Martin v. Shelter Mutual Insurance Company, 2016 WL 3648288 (S.D. Miss. July 1, 2016).

An insured made a claim with her insurer when a contractor she hired to renovate her kitchen discovered extensive water damage to the floor. The insured called her insurance agent who allegedly stated that the damage was covered. The next day the insurer’s adjuster observed long-term water damage and determined that the leaks were present and continuously leaking and that damage was caused by rot, mold, deterioration and the lack of a moisture barrier, all of which is excluded under the homeowners’ policy. The adjuster immediately told the insured that the claim would not be covered and sent a denial letter five days later.

The insured sued the insurer and the agent. The claims against the agent were voluntarily dismissed and the insurer moved for summary judgment on the insured’s claims of estoppel and vicarious liability. The insured argued that the insurer waived its policy defenses because of its agent’s statement that the claim was covered so that the insurer was estopped from asserting otherwise. The court held that cases cited by the insured regarding waiver of defenses were inapplicable because none involved an effort to invoke waiver to bypass an exclusion. Further, the court found that no reliance was pled by the insured and distinguished a case relied on by the insured that was limited to “statements or representations made by the insurer’s agents before or contemporaneous with entering into the insurance contract may, if relied upon by the insured, become binding.”

The vicarious liability claim was based on the agent’s alleged representation that the claim was covered, for which the insurer was allegedly responsible. The court found that the alleged representation was not a misrepresentation or omission of fact, but opinion. The court again found no detrimental reliance shown by the insured and that reasonable reliance could not be shown where the agent’s statement was contradicted by the adjuster’s subsequent statement that damage was not covered.
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Federal Court in Florida Holds Compounding Veterinary Supplements Constitutes Professional Health Care Services
A federal court in Florida recently held that insureds’ compounding of veterinary supplements constitutes the rendering professional health care services as a pharmacist, and that coverage for claims resulting therefrom is excluded by policies’ professional services exclusion. Cincinnati Ins. Co. v. Quorum Mgmt. Corp., 2016 WL 2937461 (M.D. Fla. May 13, 2016).

Following the deaths of polo horses owned by the underlying plaintiffs, the underlying plaintiffs sued the insureds who had compounded and manufactured a nutritional supplement given to the horses immediately prior to their deaths. The underlying plaintiffs alleged that the insureds were in the business of “designing, formulating, compounding, manufacturing, selling, and distributing veterinary medications and nutritional supplements.” The insureds sought coverage under their CGL and umbrella policies. The insurer refused to defend the insureds and filed a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify the insureds per a professional services exclusions in the policies. It provided that the insurance did not apply to “‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ arising out of the rendering or failure to render professional health care services as a pharmacist.” The policies did not define “pharmacist” or “professional health care service.” The parties filed cross-motions for summary judgment. The insureds and underlying plaintiffs argued that the terms “pharmacist” and “professional health care service” are ambiguous and that the underlying allegations did not fall within the exclusion.

The district court referred to Florida’s pharmacy statutory scheme and dictionary definitions and determined that the plain meaning of “pharmacist” under Florida law clearly includes “compounding.” The district court noted the insureds were not mass producing or manufacturing the alleged lethal drugs so as to fall outside the scope of “pharmacy,” but were compounding a specific supplement for one-time use. The district court also determined that the plain meaning of “professional health care services” could refer to animals and not just to humans because courts must look at the nature of the service and who is performing it, not the end user or patient. Accordingly, the district court found that the professional services exclusion clearly and unambiguously excluded coverage.
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Federal Court in Texas Finds No Coverage Under Commercial Crime Policy for funds Lost in Ponzi Scheme
A federal court in Texas recently granted summary judgment in favor of an insurer because its insured did not “own” funds it lost within the meaning of a commercial crime policy after unknowingly investing in a Ponzi scheme. Cooper Industries Ltd. et al. v. National Union Fire Ins. Co. of Pittsburgh, PA., No. 2016 WL 3405295 (June 21, 2016).

The insured invested pension plan funds with a registered investment advisor, but unbeknownst to it, the advisor was part of a Ponzi scheme orchestrated by its principals who misappropriated funds and used the advisor’s funds as their personal bank accounts. Part of the funds “invested” was by way of a loan in exchange for a promissory note. The insured sought recovery under its crime policy. The insurer denied the claim and argued that there was no compensable loss because the policy only covers money that the insured “owned.” The policy provided that “[t]he property covered under this policy is limited to property … [t]hat you own or lease….” The insurer argued that the insured no longer “owned” the funds within the meaning of the policy because it had loaned money to an unregulated investment entity via promissory note, who in turn invested that money.

The court found that the insured structured its investments with the advisor such that it held, at the most, a limited partnership interest in the investment advisor’s entities. Under Delaware law, a partner has no interest in specific limited partnership property. Accordingly, the court reasoned that because the insured chose to lend funds in exchange for promissory notes and because a partnership interest did not confer “ownership” in any underlying property, it did not “own” its lost earnings within the meaning of the policy.
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Federal Court in Virginia Applies Broad Reading to “Arising Out Of” Language in Professional Liability Policy
A federal court in Virginia broadly applied the phrase “arising out of” to conclude that claim arose before a policy retroactive date and was thus subject to a sub-limit of coverage. Minnesota Lawyers Mutual, Insurance Co. v. Protostorm, LLC, et al., 2016 WL 3447892 (E.D. Va. June 22, 2016).

A law firm’s client sued the firm for legal malpractice for alleged errors in the firm’s preparation of various patent applications. After a jury trial, the client was awarded damages. The firm’s professional liability insurer conceded that its policy covered the judgment, but filed a declaratory judgment action to determine whether its indemnity obligation was capped at the sub-limit for claims “arising out of” acts, errors or omissions that occurred prior to a retroactive date in the policy.

The court relied on a recent decision of the Virginia Supreme Court that concluded that the phrase “arising out of” had a very broad meaning and required only a causal connection between a particular fact and the elements of a cause of action, citing Doctors Co. v. Women’s Healthcare Associates, Inc., 740 S.E. 2d 523, 527 (Va. 2013). It identified the elements of the underlying malpractice claim and then looked to determine whether any post-retroactive date act, error or omission was necessary to establish those elements. Based on the facts available to the jury, the court concluded that all of the elements necessary for the accrual of the malpractice action were present beforehand. The court granted summary judgment in favor of the insurer enforcing the sub-limit.
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