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Insurance Law Report: May 2016

May 26, 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 May 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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Georgia Supreme Court Holds Coverage For Injuries From Lead-Based Paint Excluded By Policy’s Absolute Pollution Exclusion
The Georgia Supreme Court has held that an absolute pollution exclusion in a CGL policy bars coverage for injuries due to lead-based paint ingestion. Georgia Farm Bureau Mut. Ins. Co. v. Smith, 784 S.E.2d 422 (Ga. 2016).

A tenant sued her landlord for injuries she sustained as a result of ingesting lead from lead-based paint in a rental house. The landlord sought coverage under his CGL policy, and the insurer sought a declaratory judgment that it had no duty to defend or indemnify because coverage for the underlying claim was excluded by an absolute pollution exclusion in the policy. The exclusion provided that the policy did not cover bodily injury “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” The term “pollutants” was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

The trial court granted summary judgment to the insurer, finding that lead-based paint unambiguously falls within the policy’s definition of “pollutant” as a contaminant. The insured and underlying plaintiff appealed. The appellate court reversed, noting a split among courts in other jurisdictions that have dealt with this issue and agreeing with those courts that have enforced similar pollution exclusions only in instances of so-called “industrial pollution.” The insurer appealed.

The Georgia Supreme Court reversed. It found that Georgia courts had repeatedly applied similar pollution exclusions in circumstances other than traditional industrial pollution and had not required insurers to explicitly name every pollutant for the exclusion to be enforceable. The Supreme Court held that lead-based paint unambiguously qualifies as a “pollutant” such that the absolute pollution exclusion bars coverage for injuries caused by lead-based paint.
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Kentucky Supreme Court Holds Two-Year Limitation Provision Within Which To Make Claim Under Policy Not Unreasonable
The Kentucky Supreme Court recently reversed a court of appeal’s holding that a policy provision limiting the time to make an underinsured motorist claim was void because it was unreasonable. State Farm Mut. Auto. Ins. Co. v. Riggs, 2016 WL 1068192 (Ky. Mar. 17, 2016).

An insured asserted a claim against his auto insurer three years after the date of a car accident. The insurer moved for summary judgment arguing that the claim was untimely under its policy. The policy limited the time to make a UIM claim to two years from the date of an accident or the date of the last basic reparation benefit payment, whichever occurred later. The trial court granted summary judgment in favor of the insurer, and the court of appeal reversed, finding the time limitation unreasonable because it may require an insured to sue an insurer before knowing whether the tortfeasor is uninsured.

The Kentucky Supreme Court indicated that the insurer linked its UIM coverage to the tort claim time limitation found in KMVRA, KRS 304.39-230 (6), and stated that it is unable to find the limitation unreasonable because “it encourages the prompt presentation of all the potential insurance claims relating to a single accident and forces them to progress through the court system in a more cohesive way....” and is thus not contrary to public policy. The Supreme Court found the trial court did not err when it concluded the time limitation provision to be enforceable and that the insured’s claim was untimely.
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Arkansas Supreme Court Reaffirms That CGL Policy Does Not Cover Breach Of Contract
The Arkansas Supreme Court recently found two certified questions from a federal court regarding faulty workmanship moot and reaffirmed that a CGL policy does not extend coverage for breach of contract. Columbia Ins. Grp., Inc. v. Cenark Project Mgmt. Servs., Inc., 2016 Ark. 185, 2016 WL 1732833 (April 28, 2016).

Homeowners contracted with the insured to construct building pads on lots in a subdivision. The contract required the insured to perform the work in accordance with plans, specifications and drawings developed by an engineering firm. The homeowners sued the insured, alleging it failed to construct the building pads in accordance with the engineering plans.

The insured’s CGL insurer sought a declaration of no coverage in federal court and filed a motion for summary judgment that the policy did not provide coverage for the claims. The insured filed a motion for summary judgment that the insurer breached its duty to defend. The court ruled the insurer had a duty to defend, but certified the following questions to the Arkansas Supreme Court:

  1. Whether faulty workmanship resulting in property damage to the work or work product of a third party (as opposed to the work or work product of the insured) constitutes an “occurrence?”
  2. If such faulty workmanship constitutes an “occurrence,” and an action is brought in contract for property damage to the work or work product of a third person, does any exclusion in the policy bar coverage for this property damage?

In considering the first certified question, the Arkansas Supreme Court concluded that the question rests on the premise that the underlying claim involves defective workmanship by the insured. However, the Supreme Court concluded that the homeowners’ claim was one for breach of contract, and that the coverage issue is controlled by Unigard Sec. Ins. Co. v. Murphy Oil USA, Inc., 331 Ark. 211, 962 S.W.2d 735 (1998). The Court reasoned that the claim was that the insured breached the contract by not adhering to the engineering firm’s plans, specifications, and drawings and sought economic losses from that breach and that although the underlying litigation touched on property damage, it did not alter the nature of the lawsuit as one for breach of contract. Therefore, the Court found no coverage owed. In light of that conclusion, the Supreme Court found the certified questions moot and declined to respond to them.
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Fifth Circuit Refused To Extend CGL Coverage For Additional Insured’s Contractual Liability
The U.S. Fifth Circuit Court of Appeals recently upheld a district court’s finding that an additional insured is not entitled to coverage under a CGL policy for liability of another that it contractually assumes. Int'l Offshore Servs., L.L.C. v. Linear Controls Operating, Inc., 2016 WL 1658100 (5th Cir. Apr. 26, 2016).

A subcontractor’s employee was injured on a boat chartered by the contractor. The charter between the boat owner and the contractor required the contractor to defend and indemnify the boat owner for the injury or death of its employees and of those of its subcontractors. The boat owner filed a declaratory judgment action against the contractor and the subcontractor for defense and indemnity for the subcontractor’s employee’s injury.

The Master Service Agreement (MSA) between the contractor and the subcontractor required the subcontractor to maintain insurance for the contractor as an additional insured “for obligations undertaken and liabilities assumed by [the subcontractor] under” the MSA, including “Contractual Liability, insuring the indemnity agreements contained in this contract.” The subcontractor secured coverage for “indemnities as required by [the] Contract,” and the contractor paid the premium. The subcontractor’s policy listed the contractor as an additional insured but excluded coverage for contractual liability except liability assumed in an “insured contract.” The term “insured contract” was defined as “[t]hat part of any other contract or agreement pertaining to your business … under which you assume the tort liability of another party to pay for ‘bodily injury’ … to a third person.” The policy provided that the terms “you” or “your” “refer[red] to the Named Insured shown in the Declarations, and any other person or organization qualifying as a Named Insured under [the] policy.” The district court concluded the charter was not an “insured contract” because the policy defined the terms “you” and “your” to include only Named Insureds and not additional insureds such as the contractor.

The Fifth Circuit affirmed, finding the contractor entitled to coverage for its contractual liability only if it were a Named Insured under the subcontractor’s policy, and it was not. The Fifth Circuit held that the contractor did not have coverage for its contractual liability under the charter with the boat owner.

The insurer was represented by Phelps Dunbar attorneys. Please contact Marty McLeod or David Saltaformaggio in our New Orleans office for further details about this opinion.
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Fourth Circuit Affirms Coverage For Publication Of Private Medical Information
The U.S. Fourth Circuit Court of Appeals held that an insurer had a duty to defend a class-action lawsuit alleging that it made the plaintiffs’ private medical records accessible on the internet. Travelers Indem. Co. of Am. v. Portal Healthcare Solutions, L.L.C., 2016 WL 1399517 (4th Cir. Apr. 11, 2016).

A class-action complaint alleged that the insured “engaged in conduct that resulted in plaintiffs’ private medical records being on the internet for more than four months.” Its insurer sought a declaratory judgment that it had no duty to defend the insured under a policy covering certain “publications” of information, arguing that the complaint failed to allege a covered publication by the insured.

Following Virginia’s “eight corners” rule, the Fourth Circuit ruled that the class-action complaint did, in fact, give rise to a duty to defend. The complaint arguably alleged a “publication” qualifying as covered conduct under the policies, because the allegations, if proven, gave “unreasonable publicity to, and disclosed information about, patients’ private lives.” The court noted that “any member of the public with an internet connection could have viewed the plaintiffs’ private medical records during the time the records were available online” via an internet search, rendering untenable the insurer’s claim that there was no covered “publication” of information.
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Florida Appellate Court Finds Coverage For Pre-Recorded Telephone Messages Not Barred By "Expected Or Intended Injury" Exclusion
A Florida appellate court recently held that coverage for damages arising from pre-recorded telephone solicitations by the insured is not barred by the "expected or intended injury" exclusion where there is no intent to cause harm to the recipients of the solicitation. Old Dominion Ins. Co. v. Stellar Concepts & Design, Inc., 2016 WL 1445957 (Fla. 4th DCA Apr. 13, 2016).

After a judgment against an insured for damages from pre-recorded telephone solicitations, its insurer sought a declaratory judgment that it had no duty to indemnify or defend. The parties cross-moved for summary judgment. The trial court determined that coverage existed under the policy, and the insurer appealed.

On appeal, the insurer contended that the trial court erred in determining that the policy covered damages arising from automated solicitation calls placed by the insured because there was no “occurrence.” Alternatively, the insurer argued that the "expected or intended injury" exclusion applied because the calls were placed intentionally, not accidentally, and the insured knew the calls would necessarily result in loss of use of the phone lines. The appellate court agreed that the calls constituted an “occurrence” because the undisputed evidence showed that the insured lacked the specific intent to cause harm to a third party. The court also determined that the trial court correctly found that the "expected or intended injury" exclusion did not apply because, while the calls were intentionally placed, the damages were not intentionally caused. The appellate court affirmed the grant of summary judgment.
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Governmental Entity’s Failure To Come Forward With Exculpatory Evidence In Years Subsequent To Wrongful Conviction And Incarceration Did Not Constitute “Wrongful Acts” Under Law Enforcement Liability Policies
A federal district court in Mississippi granted motions on the pleadings in favor of insurers in response to underlying civil rights suit defendants’ and plaintiffs’ declaratory judgment action finding that no coverage existed under law enforcement policies requiring “wrongful acts” during the policy period where the alleged “wrongful act” was the failure to come forward with evidence that would have required earlier convictions to be reviewed. Travelers Indemnity Company v. Forrest County, 2016 WL 626549 (S.D. Miss. Feb. 16, 2016).

Insurers had issued liability law enforcement policies to a county whose officials were sued for civil rights violations and imprisonment of innocent individuals based on racial animus. The policies were in force years after the arrests, convictions and incarcerations and all required “wrongful acts” during the policy periods. The insurers argued that the underlying plaintiffs did not alleged specific, plausible conduct during the policy periods, but, instead, claimed only that the insureds violated a continuing duty to come forward with the truth and rectify past misconduct, which they claimed constituted “wrongful acts” during the policy periods. The court found, consistent with opinions elsewhere, that an official’s failure to come forward to rectify civil rights violations which occurred prior to the policy period does not trigger coverage under policies issued years after the wrongful arrests and convictions absent a new and independent “wrongful act” during the later policy periods.

Insurers in the case are represented by Phelps Dunbar attorneys. Please contact Bart Hall in our New Orleans office or Scott Ellzey in our Gulfport, Mississippi office for further details about this opinion.
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South Carolina Court Of Appeals Adopts Broad Interpretation Of Pollution Exclusion
The South Carolina Court of Appeals held that coverage for foul but otherwise harmless odors from a sewerage system was precluded by a pollution exclusion in a policy issued by the South Carolina Insurance Reserve Fund (the “Fund”). S.C. Ins. Reserve Fund v. E. Richland Cnty. Pub. Serv. District, 2016 WL 1125810 (S.C. Ct. App. Mar. 23, 2016).

A resident sued a county, alleging that the county’s sewerage valves constantly emitted offensive odors onto his property. The county tendered the complaint to the Fund, which disclaimed coverage on the basis of the policy’s pollution exclusion. Litigation ensued, and the Fund obtained a summary judgment. The county appealed.

The Court of Appeals affirmed, adopting a broad reading of the pollution exclusion and affirmed entry of declaratory judgment in favor of the Fund. The court was not persuaded by the contention that “odors must be harmful in some way to be considered pollutants,” holding that foul odors fell within the ordinary meaning of the terms “fumes” and “gases” included in the definition of “pollutants” in the exclusion. Moreover, the court held that the “sudden and accidental” exception to the exclusion did not apply because release of the fumes was part of the county’s “routine business operations and was not unexpected.” The Court of Appeals also rejected the county’s argument that the pollution exclusion was void because the South Carolina Tort Claims Act requires the Fund to “provide coverage for all risks for which immunity has been waived under the Act,” instead following the terms of the policy.
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Federal Court In Texas Holds Single Crew Sublimit In P&I Policy Applies To All Crew Members Collectively
A federal court in Texas granted summary judgment on insureds’ claims against their insurer seeking the full limits of a protection and indemnity (“P&I”) coverage, holding that only a smaller crew sublimit was available for the claims of four crewmen. United Specialty Ins. Co. v. Porto Castelo Inc., et al., 2016 WL 2595072 (S.D. Tex. May 5, 2016).

An explosion and fire occurred onboard a covered vessel injuring the four crewmen onboard. The insurer reserved rights, indicating there was coverage under the P&I portion of the policy, but that the crew sublimit for the claims was eroded by defense costs. The insured contended that the crew sublimit should be applied per crew member as there was nothing in the policy explaining how to reconcile the crew sublimit with the total P&I limit. The insureds also argued that the policy did not define the word “crew.” Applying Texas law, the district court held that the clear and unambiguous language of the crew sublimit limited coverage for the claims of the crewmen to the crew sublimit. The court reasoned that the claims by all of the crewmen arose out of a single occurrence, and that the word “crew” referred to the entire crew as a whole, rather than to a single crew member.
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Federal Court In Georgia Holds Professional Services Exclusion Does Not Preclude Coverage For Claims Not Involving The Insured’s Specialized Knowledge
A federal court in Georgia held that a professional services exclusion in a directors and officers liability policy did not preclude coverage for claims involving improper fee charges associated with the business of the insured as that did not involve the insured’s “specialized knowledge.” Philadelphia Indem. Ins. Co. v. First Multiple Listing Servs., Inc., 2016 WL 1109171 (N.D. Ga. Mar. 22, 2016).

A class-action lawsuit was filed against the insured, a real estate listing service, relating to the insured’s practice of providing alleged improper kickback fees. The insured sought coverage under its directors and officers liability policy. The insurer denied coverage based on the policy’s professional services exclusion, among other reasons, and sought a declaration that the policy did not cover the class-action lawsuit. The policy’s professional services exclusion barred coverage for any loss “involving the Insured’s performance of or failure to perform professional services for others.” The insured argued that the class-action lawsuit involved its business, not its professional services, and that the term “professional services” is ambiguous.

The court granted the insured’s motion for summary judgment, holding that the professional services exclusion did not bar coverage. To constitute a “professional service” under Georgia law, “the task must arise out of the acts specific to the individual’s specialized knowledge or training.” The court concluded that the class-action lawsuit did not include allegations regarding the insured’s maintenance of its real estate listing database, and thus did not involve the insured’s “specialized knowledge.” The court held that the professional services exclusion did not apply to the claims involving improper fee charges. It also noted that if the plain meaning had not resulted in such a finding, it would have found the undefined term “professional service” to be ambiguous and construed coverage in favor of the insured.
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Federal Court In Arkansas Finds Putative Insurer’s Recreational Use Of Farm Machinery Not Used “In Any Of The Named Insured’s Operations”
A federal court in Arkansas recently entered a declaratory judgment in favor of an insurer, finding that the estate of a putative insured had not met its burden of establishing that the use of an all-terrain vehicle was “in any of the named insured’s operations” as required by the insureds' general liability policy. Southern Farm Bureau Casualty Insurance Company v. Hammond, et al., 2016 WL 1600855 (W.D. Ark. Apr. 21, 2016).

The insureds operated a farm. Their son was driving an all-terrain vehicle and had an accident on the farm, resulting in the deaths of their son and another individual. A wrongful death action was filed against the insureds and their son’s estate. The insurer filed a declaratory judgment action seeking a declaration that the insureds' son was not an insured. The policy provided that in addition to named insureds, “[e]ach of the following is also an insured:… (c) any other person while operating farm tractors, self-propelled farm machinery … in any of the name insured’s operations covered by this policy.”

In an earlier decision, the court found the vehicle was “self-propelled farm machinery,” and now considered whether the insureds' son operated the vehicle “in any of the named insured’s operations” at the time of the accident. The court found that purely recreation use of farm machinery did not entitle the insureds' son to insured status. Based on the stipulated facts agreed to by the parties, the court stated it could only speculate as to why the insureds' son and the other individual were riding the vehicle, but that speculation is not enough to carry the burden of proof. The court concluded that the son’s estate did not meet its burden to show the use of the vehicle at the time of the accident was more likely than not “in any of the named insured’s operations.”
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Federal Court In Arkansas Finds Arkansas Workers’ Compensation Commission Does Not Have Exclusive Jurisdiction Over Declaratory Judgment Action Related To Employee’s Personal Injury Lawsuit
A federal court in Arkansas recently denied an insured’s motion to dismiss a complaint for declaratory judgment action where the insured argued the Arkansas Workers’ Compensation Commission had exclusive jurisdiction over an injured worker’s claim. Atl. Cas. Ins. Co. v. CM Sellers, LLC, 2016 WL 1735574 (W.D. Ark. Apr. 5, 2016), report and recommendation adopted sub nom., Atl. Cas. Ins. Co. v. CM Sellers, 2016 WL 1717223 (W.D. Ark. Apr. 28, 2016).

A worker sued the insured, claiming he was injured on a worksite after his employer dispatched him to work at the insured's worksite. Thereafter, the insured’s CGL insurer sought a declaration that it owed no coverage under its policy. The insured filed a motion to dismiss, arguing the court is without subject matter jurisdiction to consider the case because the primary issue is whether the worker was an employee of the insured at the time of the accident for which the Workers’ Compensation Commission has exclusive jurisdiction.

The court found that the Workers’ Compensation Commission did not have exclusive jurisdiction. The court reasoned that the relevant provisions of the policy are not limited to a determination of the worker’s employment status, noting that none of the provisions relied on by the insurer required a determination of the worker’s employment status. The court stated that the issue was whether there was an employer-employee relationship between two of the defendants, and thus a determination by the Workers’ Compensation Commission is “instructive” but not controlling.
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Florida Appellate Court Finds Improper Denial Of Coverage Does Not Forfeit Insurer’s Right To Withhold Payment In Absence Of Contract For Repairs
A Florida appellate court recently held that the improper denial of coverage in a sinkhole claim does not result in a waiver of the right to withhold payment in the absence of a contract for subsurface repairs. Citizens Prop. Ins. Corp. v. Amat, 2016 WL 670189 (Fla. 2d DCA Feb. 19, 2016).

The insureds sustained damage to their residence as a result of a suspected sinkhole. The insureds sued their insurer for breach of contract, alleging that the insurer wrongfully denied coverage for the claim. The trial court entered judgment in favor of the insureds and against the insurer for money damages. The insurer appealed the award for money damages because the policy required the insureds to enter into a contract for the performance of subsurface repairs before the insurer was required to pay for damages in a sinkhole claim.

On appeal, the insurer argued that the trial court erred in entering a money judgment requiring it to pay for subsurface repairs without requiring the insureds to enter into a contract for those repairs. The insureds argued that the insurer waived its right to insist on their compliance with the disputed provisions of the policy because the breach of contract allowed the insureds to treat the policy as “put to an end.” The appellate court disagreed and held that the trial court erred in ordering the insurer to pay for subsurface repairs before the insureds entered into a contract for those repairs. The appellate court considered the fact that the case involved a dispute about coverage, not rescission, and that given the jury’s finding of coverage, the appellate court held that the trial court was obligated to enforce the contract, including the policy’s restrictions on the insurer’s obligation to pay for the cost of the repair for subsurface damages.

The appellate court reversed and amended the judgment to the extent that it awarded money damages payable to the insureds without recognizing the insurer’s right to withhold payment for the cost of the subsurface repairs until the insureds entered into a contract for those repairs.
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