An Insured’s Failure To Timely Repair or Replace Property May Limit Recovery Under Policy

In Brown, et al. v. Everett Cash Mutual Insurance Company, et al., the insureds property was completely destroyed by a fire.  Everett made various payments to the insureds under the policy, including payment for damage to the residence itself at actual cash value.  The insureds contended, they were entitled to full replacement value for the property.

In determining whether the insureds were entitled to replacement cost value for the residence, the Pennsylvania Superior Court looked to the policy language, which stated the insureds were entitled to recover the actual value of the property at the time of loss, without deduction for deterioration a/k/a replacement cost value.  However, the policy also included language that stated the insurer did not have to pay for “more than the actual cash value of the loss until repair or replacement [was] completed”.

On appeal, the insurer argued it was only required to pay full replacement value if the insureds repaired or replaced the residence.  Since the insureds failed to timely repair the residence, the insurer took the position, the insureds were not entitled to full replacement cost of the residence.  Conversely, the insureds argued they were unable to rebuild the residence without the full replacement cost proceeds from the policy, thus, this should not prohibit them from recovering the full replacement value.  In reaching its holding, the court reasoned other courts had analyzed similar policy provisions which stated that the policy would pay no more than actual cash value for the loss or damage until actual repair or replacement was completed and had found this language to by clear and unambiguous.  Consequently, the court concluded the insurer had not breached the policy by only paying the actual cost value, as opposed to the replacement value for the residence, because the insureds had failed to comply with a condition precedent.

This case offers support for an insurer that pays out policy proceeds on an actual cash value, as opposed to replacement cost value, due to an insured’s failure to comply with the policy’s requirements.  However, we note, that in order for an insurer to take such action, based on this case, the policy needs to clearly state that an insurer need not pay replacement cost value until the insured has undertaken the repair or replacement work.

Thanks to Colleen Hayes for her contribution to this post.

 

 

New York High Court Settles “Issued or Delivered” Debate

The New York Court of Appeals settled a longstanding debate over the scope of Insurance Law section 3420 by ruling it “encompasses situations where both insureds and risks are located in this state.”  The debate raged under the old 3420, which applied to policies “issued for delivery” in New York, and was reinvigorated following the revision of 3420 as applicable to policies “issued or delivered” in New York.

In the action underlying the coverage dispute of Carlson v. Amer. Int’l Group, Inc., Claudia Carlson was killed in a car accident by a truck with a DHL Worldwide Express, Inc. logo.  DHL hired MVP Delivery and Logistics, Inc. to supply delivery services in Western New York, where the accident occurred.  The Estate obtained a $7.3 million verdict in their wrongful death suit.  MVP’s insurer contributed $1.1 million toward the verdict, and the Carlson Estate obtained the right to pursue further amounts from DHL’s insurer, in this case National Union Fire Insurance Co. (“National Union”) and American Alternative Insurance Co. (“AAIC”).  Although American International Group, Inc., and AIG Domestic Claims, Inc. (collectively “AIG”), did not issue any pertinent policy to DHL, both were named as defendants.

AAIC issued a policy providing “hired auto” coverage to Airborne Inc. (headquartered in Washington State), DHL’s predecessor.   DHL issued a similar policy providing “hired auto” coverage to DHL (headquartered in Florida), and a second policy providing umbrella coverage. The Carlson Estate sued AIG and DHL seeking satisfaction of the outstanding judgment pursuant to Section 3420, and alleging a host of causes of actions alleging unfair business practices, including bad faith.  National Union and AAIC argued the first cause of action, seeking contribution to settlement, should be dismissed in part because the pertinent policies were not “issued or delivered” in New York as required Section 3420.  Reversing the trial court, the Fourth Department held the  policies were not issued or delivered in New York, holding instead they were issued in New Jersey (from AAIC’s offices), and delivered in Washington and then Florida.

On appeal, the Court of Appeals reversed the Fourth Department on this issue, and held the policies were “issued or delivered” in New York.  Based on a previously issued General Counsel Opinion underlying Section 3420, the Court noted, “[T]he proper interpretation of the term ‘issued or delivered in this state’ refers both to a policy issued for delivery in New York, and a policy issued for delivery outside of New York.”  The Court recognized that the location of the risk and the location of the insured, rather than the location of the physical insurance policy, controlled.  As a matter of public policy, the Court reasoned the outcome was consistent with the legislative intent behind Section 3420, which “created this statutory cause of action to remedy the inequity of the common law rule that an injured person had no cause of action against the insurer of a tortfeasor and to protect the tort victims of New York.”  The Court further recognized DHL purchased insurance coverage for its package delivery services, a substantial portion of which occurred within New York State.

The Court of Appeals’ decision amounts to a common sense recognition of business reality:  not all businesses regularly operating within New York are domiciled or headquartered there.  It would be presumptively unfair to afford the business the economic benefits of providing services within the state, while not holding the same business accountable under New York law.  That said, the decision was decided on a 4-3 split, and featured a strongly worded dissent that perceived the majority ruling as unduly expansive.  The dissent predicts this decision will open the proverbial can of worms.  Ultimately, if an insurer seeks to limit risk to geographic locations, care should be taken in the underwriting process, and the policy should be issued with specific endorsements to that effect.

Thanks to Chris Soverow for his contribution to this post.

 

http://www.nycourts.gov/reporter/3dseries/2017/2017_08163.htm

Superior Court of Pennsylvania Finds Coverage for Gunfight

The Superior Court of Pennsylvania recently reversed summary judgment entered in favor of Erie Insurance Exchange in Erie’s action for a declaration that it was not obligated to defend or indemnify the Estate of Harold Eugene McCutcheon, Jr. in a personal injury action filed by Richard Carly.

In Erie Insurance Exchange v. Tracy L Moore and Harold E. McCutcheon, III, individually and as Administrators of the Estate of Hard Eugene McCutcheon, Jr. and Richard Carly, on September 26, 2013, Harold McCutcheon went to the home of his former wife, Terry L. McCutcheon, killed her, and then committed suicide.  Before McCutcheon killed himself, Richard Carly arrived unexpectedly at the home, struggled with McCutcheon, and was seriously injured by shots fired from McCutcheon’s gun.  Erie contended that the homeowners’ policies it issued to McCutcheon did not cover Carly’s injuries because McCutcheon inflicted them intentionally.  Carly contended that, as alleged in his complaint against McCutcheon’s Estate, the discharge of the gun and resulting injuries were unintentional, and Erie therefore was required to provide a defense and indemnity.

The Superior Court assessed how the policies’ terms applied to infliction of a gunshot wound during an altercation between two participants.  Despite agreeing with Erie that the repeated descriptions of McCutcheon’s conduct in Carly’s complaint as “negligent” and “careless” were merely “artful pleading” and not determinative, the Superior Court decided to reverse the Trial Court because the facts as alleged set forth a claim that McCutcheon accidentally shot Carly while he waived around his gun during their struggle.  Specifically, the facts alleged a chaotic brawl in which McCutcheon fired his gun wildly while trying to fight Carly off.

In reaching its conclusion that the alleged events fit the policies’ definitions of a covered “occurrence,” rather than conduct deliberately intended to inflict harm, the Superior Court distinguished this case from the willful assault cases, noting that no one knows what McCutcheon was thinking that night and that facts.

The Superior Court’s holding in this matter provides important insight regarding the waning applicability of the intended harm exclusion in personal injury cases.  It appears that courts are analyzing complaints with increasing scrutiny in an effort to find coverage.

Thanks to Hillary Ladov for her contribution to this post.

 

 

Insurer Has Heavy Burden of Proving Applicability of Independent Contractor Exclusion

In a recent New York appellate decision, the court considered whether an insurer could rely on several policy exclusions concerning independent contractors to disclaim coverage.

In Century Sur. Co. v. All In One Roofing, LLC, the Appellate Division, 10 Leonard Street, LLC hired McAlpine Construction to perform work on its building.  McAlpine hired All In One Roofing to install the roof.  All In One hired Vasyl Berezhanskyy to perform the work, Berezhanskyy hired Zdeno Jadron.  Jadron was injured during the course of the work and sued 10 Leonard, McAlpine and All In One.  All In One’s carrier, Century Surety disclaimed coverage based two independent contractor exclusions that disclaimed coverage for any injury to an employee of an independent contractor.  Surety asserted that Berezhanskyy was an independent contractor and that his acts, omissions and negligence caused the injuries to Jadron.  At trial, the jury returned a special verdict finding that Berezhanskyy was not an independent contractor of All In One, and the Supreme Court declared that Surety owed coverage to All In One in connection with Jadron’s action.

On appeal, the court found that based on the evidence, there was a valid line of reasoning and permissible inferences which could have led a rational jury to conclude that Berezhanskyy was not an independent contractor. Berezhanskyy and Edmond Warchick, the principal of All In One, appeared to agree that there were aspects of the job that were not under Berezhanskyy’s control, including the type of roof to be installed, the number of screws and plates used in the installation of certain aspects of the roof, the date the work was supposed to start, and, finally, when a second roof was discovered by Berezhanskyy after he commenced work under the contract, what to do with the second roof. As such, the jury could have reasonably concluded that Berezhanskyy was not solely responsible for the methods and means of the job and that he was not “free from the control and direction of the person for whom the services are being performed.”

This case serves as a reminder that an insurer’s burden of demonstrating that exclusions apply to negate coverage remains high, and that aspects of the interpretation of the exclusions may be left to the jury.

Thanks to Rebecca Rose for her contribution to this post.

 

 

 

 

 

 

Auto Insurer Can’t Put the Brakes on Bad-Faith Case

In Newhouse v. Geico Casualty Company, the court denied an insurer’s motion to sever and stay the bad faith portion of a claim filed by its insured for uninsured motorist benefits.

In March 2015, plaintiff was driving a rental car when he was struck from behind while stopped at a stop sign . As a result of the accident, plaintiff suffered a variety of injuries, some of which required medical treatment.  Following payment of the tortfeasor’s policy limits, plaintiff sought UIM benefits from his auto insurer.  Plaintiff claimed he was owed the full amount of the UIM coverage offered by the policy, $100,000. The insurer evaluated the claim and offered $10,000.  Newhouse believed his injuries exceeded the offer, and filed suit alleging breach of contract regarding the offer, bad faith in relation to making such an offer, and loss of consortium on behalf of plaintiff’s wife.

In denying the insurer’s motion to sever and stay the litigation the court examined four factors: (1) whether the issues are significantly different from each other; (2) whether they require separate witnesses and documents; (3) whether the nonmoving party would be prejudiced by bifurcation; and (4) whether the moving party would be prejudiced if bifurcation is not granted. While the insurer argued the issues were distinct, and the evidence in the UIM claim differed from the bad-faith claim, the court disagreed.  The court also rejected the insurer’s argument that it would be prejudiced by a lack of bifurcation because, relative to the bad faith action, the carrier would have to present information on how it valued a claim before the jury assessed liability and damages in the UIM portion of the claim.

Bifurcation is a common strategy for defending allegations of bad faith arising out of UIM claims handling. The court’s decision signals a turn away from severing cases in favor of judicial economy and is something that should be monitored.

Thanks for Hillary Ladov for her contribution to this post.

 

Failure to Answer Questions at Examination Under Oath May Preclude Coverage

In Country-Wide Ins Co v Gotham Medical PC, the New York Appellate Division held that the insurer had no coverage obligations to its insured based on its principal’s failure to answer questions at an examination under oath.

Gotham Medical submitted no fault benefit claims for 31 individuals to Country-Wide Insurance for patients that had sought medical treatment following auto accidents.  Country-Wide noted that the claims were generally suspicious: many were identical, and potential and systematic  “upcoding” of claims was noted because the level of care often exceeded that which would be necessary for the injury reported.  Country-Wide launched an investigation that revealed Gotham Medical’s principal, Dr. Scheer, had been the subject of a disciplinary hearing by the Office of Professional Medical Conduct (OPMC).

At his EUO, Dr. Scheer’s counsel repeatedly instructed him not to answer questions regarding the OPMC hearing and resulting consent order, stating that the issues were not relevant.  Based on this refusal, Country-Wide denied all coverage and sought a declaratory judgment.  The Court agreed, stating that compliance with the EUO is a condition precedent to coverage under the policy.

While Defendants argued that the OPMC disciplinary hearing was confidential, the Court refused to split hairs, stating that the effect and outcome of the hearing were not confidential, and that “Dr. Scheer’s refusal to answer all relevant questions at the EUO, as required by the provisions of the applicable insurance policies, constitutes a material breach of contract, and precludes recovery by defendant.”

This decision provides additional support for any insurer in New York disclaiming coverage based upon its insured’s refusal to answer pertinent questions during EUOs, and as reminder to insureds that simply submitting to an EUO in no way constitutes compliance with the policy requirements.

Thanks to Vivian Turetsky for her contribution to this post.

Zipline Included in the Premises and Covered Under the Policy

The tension between the scope of coverage for an additional insured and the terms of an underlying contract reared its head when a youth group sought coverage as an additional insured in a zip-line accident case.

In Great American Alliance Ins. Co. v. Windermere Baptist Conference Center, Inc.., the Searcy Baptist Church youth group leased camp grounds from Windmere Baptist Conference Center.  The camp grounds included a ropes course, dubbed “the Edge.”  The lease agreement memorialized numerous benefits, including lodging and recreational activities.  Under typical circumstances, a guest camper would have to pay an additional premium for activities at the Edge.  No such additional premium appeared in the lease agreement between the Church and Windmere.  While leasing the property, one of the Church’s youth group members was injured while zip-lining at the Edge.

The Windmere policy provided coverage to the Church as a lessee under a blanket additional insured endorsement, but only for “liability arising out of the ownership, maintenance or use of that portion of the premises leased to [the Church]” by Windermere. Great American argued the Edge was not listed in the agreement and, therefore, coverage was not triggered.  The Church argued the lease included any and all recreational activities on the grounds.

The Western District of Missouri ruled in favor of the Church, finding ambiguity first in the insurance policy, and then in the underlying contract.  With respect to the policy, the court held the additional insured endorsement’s use of “lease premises” conflicted with a layman’s understanding, and resolved the ambiguity in favor of the insured seeking coverage.  As for the contract, the court referred to parole evidence showing the Edge was offered as part of the included services.

Great American made the correct call based on the information provided.  Having been set off from the standard camp grounds and recreational activities, the Edge arguably was not part of the premises leased.  Further investigation into the negotiations, though, may have led to a different interpretation at the outset.  Insurers are often at the mercy of the information the insured can think to provide.  As a result, in-depth investigation by a third-party can uncover critical facts relevant to a coverage determination, saving time and litigation costs down the road.

Thanks to Chris Soverow for his contribution to this post.

 

 

Pennsylvania Statutory Bad Faith Claims Cannot Be Maintained Against Insurance Agent

A Pennsylvania Court recently ruled that a plaintiff-insured could not maintain a claim for statutory bad faith against an insurance agent, since Pennsylvania’s bad faith statute only governed the conduct of insurers.

In Fertig v. Kelly, plaintiff was involved in a motor vehicle accident and sued the driver of the other vehicle, the plaintiff’s insurance carrier, and the plaintiff’s insurance agent.  Plaintiff alleged his insurer and agent acted in bad faith in investigating and evaluating his claim.  In determining whether the plaintiff could sustain his claim for bad faith against his insurance agent, the court first determined the allegations asserted against the agent did not meet the standard required to constitute bad faith under the Pennsylvania statute.  Moreover, the court concluded that even if the plaintiff’s allegations were sufficient to meet the bad faith standard, Section 8371 only applied to bad faith conduct of an insurer, as that term was defined by the statute.

If you are defending a bad faith claim on behalf of an insurance agent, this case can serve as the basis to dismiss the complaint early on in the litigation process.

Thanks to Colleen Hayes for her contribution to this post.

 

Insurer Has Heavy Burden Proving Insured’s Noncooperation

In a recent New York appellate decision, the court considered whether letters from attorneys representing an insured in an underlying lawsuit and investigation reports regarding statements made by an insured’s president can be considered on a motion for summary judgment following an insurer’s disclaimer on the grounds of noncooperation.

In DeLuca v. RLI Insurance Company, plaintiff sued RLI’s insured, ML Specialty Construction, Inc., alleging property damage caused by ML’s construction work on a neighboring property.  After ML Construction notified RLI of the plaintiff’s claim, RLI retained counsel to defend ML Construction.  RLI then disclaimed coverage after ML Construction allegedly stopped cooperating with counsel after five years of cooperating with the defense.  ML Construction then defaulted in the underlying action. After the plaintiff obtained a judgment against ML Construction, she commenced a declaratory judgment action against RLI seeking a declaration that RLI was obligated to pay her damages in connection with the judgment obtained against ML Construction.  RLI cross-moved for summary judgment.

The Second Department held that an insurer who seeks to disclaim coverage on the basis of a policy’s noncooperation clause faces a heavy burden.  The insurer must demonstrate that “(1) it acted diligently in seeking to bring about the insured’s cooperation, (2) its efforts were reasonably calculated to obtain the insured’s cooperation, and (3) the attitude of the insured, after its cooperation was sought, was one of willful and avowed obstruction.”  The court held that in this case, RLI failed to meet its burden, namely by failing to submit proof of its efforts and ML Construction’s refusal to cooperate in an admissible form.  The proof RLI submitted as evidence of ML Construction’s noncooperation were letters from ML Construction’s counsel and investigation reports and emails from an investigation services company.  The letters, emails, and reports purportedly contained statements from ML Construction’s president supporting RLI’s contention of ML Construction’s noncooperation, which the court held were offered for their truth and were therefore were hearsay, and not admissible.  Furthermore, an affidavit from the president of the investigation company containing a conclusory assertion that efforts to obtain ML Construction’s cooperation were not successful did not sufficiently meet the insurer’s heavy burden of proving noncooperation.  Accordingly, the denial of RLI’s cross-motion for summary judgment was affirmed.

This case serves as a reminder that an insurer’s burden of demonstrating an insured’s alleged noncooperation in connection with a disclaimer of coverage remains high.

Thanks to Rebecca Rose for her contribution to this post.

 

 

 

Second Circuit Reaffirms Privity Requirement In Additional Insured Endorsement (NY)

It is easy for claims professionals, contractors, and others to look no further than an underlying contract when determining whether a tendering party qualifies as an additional insured.  After all, when the promise to procure additional insured coverage is memorialized in a written contract, parties may expect the coverage to follow.

Of course, the experienced professional knows that insurance policy language determines additional insured status, not an underlying contract.  But it is important to carefully parse policy language as well, because even judges are capable of struggling with the application of clear policy language.  One additional endorsement that often causes confusion in the construction, legal, and insurance industries is the additional insured endorsement requiring contractual privity.

The Second Circuit recently addressed that issue in Cincinnati Insurance Company v. Harleysville Insurance Company.   There, the injured claimant was the employee of a sub-subcontractor on a construction project who was injured while performing his job duties.  After suit was filed, the general contractor’s insurer claimed its insured was an additional insured under the sub-subcontractors policy because the sub-subcontractor’s contract required it to name the general contractor as an additional insured.

Like many policies, the sub-subcontractor’s policy contained a blanket additional insured endorsement.  However, that endorsement conferred additional insured status on a third party “when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.”  When the issue was presented to the trial court, it ruled that the general contractor was an additional insured because the underlying contract required that party to be named as an additional insured, but the Second Circuit reversed.

Relying on relatively recent New York precedent, the Second Circuit reasoned that when interpreting the intention of parties to an insurance contract, courts are confined to the four corners of the policy, not extrinsic evidence such as underlying contracts.  Because the policy required privity between the insured and purported additional insured, the general contractor was not an additional insured.

Cincinnati should serve as a reminder to always start with policy language when analyzing rights and obligations under a policy.  Even then, words are to be afforded their actual meaning. We expect this decision to widely cited going forward, to support the privity requirement in assessing AI status.  Thank you to Michael Gauvin for his contribution to this post.  Please email Brian Gibbons with any questions.