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Illinois Court Addresses Rip-And-Tear Coverage And Existence Of An “Occurrence” In Defective Product Suit

By Brian Bassett

In Lexington Ins. Co. v. Chi. Flameproof & Wood Specialties Corp., 2018 U.S. Dist. LEXIS 135871, 2018 WL 3819109 (N.D. Ill. Aug. 10, 2018), the U.S. District Court for the Northern District of Illinois found that rip-and-tear costs could qualify as covered “property damage,” but the court rejected coverage for claims that the insured intentionally sold a noncompliant product as the suit did not allege an “occurrence.”

Lexington Insurance Company (“Lexington”) issued a CGL policy to Chicago Flameproof & Wood Specialties Corp. (“Flameproof”). During the policy period, a third party ordered fire-retardant-treated lumber from Flameproof for construction in Minnesota. Flameproof instead sent materials that were not tested, certified, or labeled as compliant. The third party installed the materials, discovered the non-compliance, and then removed the materials. Removing the materials allegedly damaged other portions of the building on the project. The third party then sued Flameproof, alleging costs associated with replacing the lumber as well as property damage to the other materials from the removal of the lumber. Flameproof tendered the claim to Lexington seeking a defense. Lexington filed a declaratory action in the Northern District of Illinois.

The court first addressed whether the alleged damage in the underlying lawsuit constituted covered “property damage” as required by the insuring agreement. The court recognized that claims for repair and replacement of Flameproof’s own product did not qualify as “property damage.” However, because the complaint also alleged that other portions of the building were damaged during the removal of those products (sometimes referred to as rip-and-tear costs), the claim did seek recovery for “property damage.”

The court next addressed whether the underlying complaint alleged a covered “occurrence.” An “occurrence” includes an “accident” or “unforeseen occurrence.” The court explained that the proper inquiry is whether the injury was expected or reasonably anticipated by the insured. The underlying complaint alleged that Flameproof knowingly supplied inadequate material and concealing its actions. In sending non-compliant material, Flameproof should have reasonably anticipated that damage could result. The mere fact that the plaintiff included a claim for negligent representation does not, by itself, satisfy the “occurrence” requirement because Flameproof should have expected the property damage. Because the Complaint did not include allegations of an “occurrence”, the court granted Lexington’s motion for summary judgment.

Illinois Appellate Court Holds Proof Of Increased Premiums Alone Not Enough to Rescind Policy

By Brian Bassett

In Direct Auto Ins. Co. v. Koziol, 2018 IL App (1st) 171931, the Illinois Appellate Court held that the fact that an insurer would have charged a greater premium to an insured if the application was accurate was not, in and of itself, sufficient to rescind the policy.

In 2013, Koziol purchased an auto policy from Direct Auto Insurance Company (DAI). Later that year, Koziol filed a claim with DAI for coverage in an accident involving his 2008 Dodge Charger. During its investigation, DAI discovered Koziol had an additional vehicle at his home address – a 2002 Ford Explorer XLS – that was not identified on the application. Determining that the failure to disclose this vehicle was a material misrepresentation, DAI denied coverage asserting that any material misrepresentation in the application voided the policy. Koziol responded that the Ford belonged to his parents, who resided in the same building, and that vehicle was insured under a separate State Farm policy.

After two declaratory actions and a breach of contract action were consolidated, the parties filed summary judgment motions. The trial court denied DAI’s motion, finding a genuine issue of material fact as to whether Koziol had the intent to deceive DAI in omitting the Ford Explorer from the application. However, the court found Koziol’s Beltran argument persuasive. Direct Auto Ins. Co. v. Beltran, 2013 IL App (1st) 121128. Beltran requires (1) a false statement that (2) the insured intended to deceive the insurer or materially affects the risks assumed by the insurer. The trial court found that DAI provided no evidence that Koziol intentionally provided a false statement. Further, the increased premium alone was insufficient to establish a material misrepresentation.

On appeal, the Illinois Appellate Court analyzed Beltran’s two-prong test. The uncontested evidence included: the Ford was not part of Koziol’s application; the Ford was separately insured; and Koziol’s insurance premiums would have increased 35% has the Ford been included in the policy. However, the court found that DAI failed to present evidence of any actual increased risk. Although the premium would have gone up 35% if the Ford had been disclosed on the application, that alone did not prove an increase in the risk insured.

DAI showed no evidence that additional individuals residing with the insured with their own vehicle increased the risk insured by the policy. DAI also provided no evidence that additional individuals drove the vehicle involved in the accident. Finally, DAI offered no evidence that the policy would not have been issued if the additional vehicle had been disclosed. Therefore, under 215 ILCS 5/154, the Illinois Appellate Court held that the omission of an additional vehicle did not constitute a material misrepresentation and denied DAI’s claim for rescission of the policy.

Alabama Court Upholds Late Notice Disclaimer

By Brian Margolies

In its recent decision in Evanston Ins. Co. v. Yeager Painting, LLC, 2018 U.S. Dist. LEXIS 130316 (N.D. Ala. Aug. 3, 2018), the United States District Court for the Northern District of Alabama had occasion to consider an insured’s reporting obligations under a general liability policy.

Evanston’s insured, Yeager, was hired to sandblast water tanks, and in turn, subcontracted out the work to a third party. On May 19, 2012, an employee of the subcontractor was severely injured in connection with a work-site accident. It is not entirely clear when Yeager provided notice of occurrence to Evanston, although Evanston advised by letter dated January 30, 2013 that it would be further investigating the matter subject to a reservation of rights. Evanston subsequently denied coverage by letter dated April 10, 2013, the disclaimer based on a subcontractor exclusion on the policy. Notably, Evanston’s letter advised that Yeager should immediately contact Evanston if any facts changed or if it had any additional information concerning the matter.

Yeager was eventually sued in February 2016 in connection with the incident. Yeager, however, waited until September 2016 to tender its defense to Evanston. Evanston agreed to provide Yeager with a defense, subject to a reservation of rights. Evanston later brought suit and filed for summary judgment on two grounds: Yeager’s failure to have provided timely notice of suit and the application of its policy’s subcontractor endorsement.

In terms of late notice, the Evanston policy required written notice of suit as soon as practicable. The court noted that under Alabama law, the phrase “as soon as practicable” requires notice within a reasonable time in view of the facts and circumstances of the case and that prejudice is not a consideration. Rather, the only two factors to be considered are the length of the delay and the reason for the delay. Applying these factors, the court concluded that even if Yeager’s initial notice of occurrence was timely, Yeager’s notice of suit was not since it was seven months later and since Yeager offered no legitimate excuse for the delay. While Yeager attempted to argue that the April 2013 disclaimer created confusion, the court pointed out that the letter invited the insured to contact the claim handler directly in the event of any change in circumstances, or any additional facts that it believed would require Evanston to reconsider its coverage determination.

The court also concluded that coverage was precluded as a result of an exclusion in the Evanston policy applicable to bodily injury to “any contractor, self-employed contractor, and/or subcontractor, or an “employee”, “leased worker”, “contract worker”, “temporary worker” or “volunteer worker” of same hired by you or on your behalf.” As the claimant was an employee of Yeager’s subcontractor, the court agreed that the exclusion barred coverage for both defense and indemnity purposes.

Illinois Appellate Court Addresses Scope Of Estoppel In Late Reporting Context

By Brian Bassett

In Southwest Disabilities Services & Support v. ProAssurance Specialty Ins. Co., 2018 IL App (1st) 171670, the Illinois Appellate Court held that insurers are not estopped from denying coverage under claims-made and reported policies when the claim was made and reported after the policy expired, even where the insurer fails to file a declaratory judgment action.

ProAssurance issued a claims-made and reported policy to Southwest Disabilities Services & Support (Southwest). The policy stated that the claim reporting period terminated with the expiration of the policy. The policy period was September 26, 2012 through May 26, 2013. In February 2014, Southwest was sued for negligence for an incident that occurred in November 2012. Southwest tendered the claim to ProAssurance in March 2014. ProAssurance denied coverage because the claim was reported after the policy period expired.

In 2016, Southwest filed a declaratory action against ProAssurance alleging that ProAssurance breached its duty to defend the underlying negligence lawsuit and was estopped from asserted coverage defenses because it failed to defend Southwest under a reservation of rights or file a declaratory judgment action. ProAssurance filed a counterclaim and moved for judgment on the pleadings. After a hearing, the trial court found ProAssurance was not obligated to defend or indemnify Southwest.

The appellate court addressed the difference between a “claims-made and reported” policy and an “occurrence” policy. In a “claims-made” policy, the court explained, the claim must be made and reported within the policy period. In an “occurrence” policy, the occurrence must occur within the policy and the claim can be reported even after the policy period expires. Because the claim was not reported within the policy period, as required by the policy, ProAssurance had no duty to defend or indemnify Southwest in the underlying lawsuit.

Southwest challenged that ruling, arguing that ProAssurance was estopped from denying coverage because it failed to file a declaratory judgment action or defend Southwest under a reservation of rights. The court rejected that argument, finding that estoppel only applies where the insurer has breached its duty to defend. As the policy only afforded coverage for claims reported during the policy period, ProAssurance did not have a duty to defend and estoppel could not apply.

The appellate court affirmed the trial court’s holding that ProAssurance was not required to defend or indemnify Southwest for claims reported outside of the policy period of a claims-made and reported policy.

Delaware Supreme Court Addresses When Damages Constitute Uncovered Disgorgement Under New York Law

By Brian Bassett

In In Re: TIAA-CREF Insurance Appeals, 2018 Del. LEXIS 358, 2018 WL 3620873, the Delaware Supreme Court addressed whether investment gains owed by the insured to claimants constituted uncovered disgorgement under New York law.

The insured, TIAA, offered investors the ability to invest in various funds. When an investor desired to sell shares, it submitted a request to a TIAA broker-dealer and identified the date of the requested transaction. Sometimes the sale was not processed timely, and the shares to be sold increased or decreased between the requested transaction date and the sale. The difference in share price during that time period was referred to as the Transactional Fund Expense (TFE), and the gains and losses were netted with operational expenses and passed through to the remaining investors’ accounts.

In four class actions against TIAA, the claimants alleged they were entitled to any gain in value of the shares between the order date and the sale date (TFE gains). Three of the class actions were settled and the fourth is still pending.

TIAA’s primary and excess insurers denied coverage for the suits, asserting that the settlement payments in the class actions constituted disgorgement, an unlawful profit, not covered by the policies. The policies’ definition of “loss” excluded “matters which may be deemed uninsurable under the law pursuant to which” the policy is to be construed. The insurers argued that New York public policy prohibited coverage for such disgorgement. TIAA disagreed with insurers’ categorization that the undistributed gains were ill-gotten gains and maintained that its procedures were lawful. Coverage litigation ensued.

The trial court granted summary judgment in favor of TIAA and the insurers appealed. The Delaware Supreme Court found that New York law prohibits coverage for disgorgement where the payment is conclusively linked to improperly acquired funds in the hands of the insured. The court held that instead of disgorgement, TIAA did not profit at its investor’s expense, but rather shared the gains or losses from shares evenly amongst all investors in a risk-sharing arrangement. Further, the court held that the gains withheld were minimal when considered as a percentage of the investors’ overall interest. Importantly, the court did not find that disgorgement qualifies as covered loss under the policies, but rather distinguished the relief granted to the claimants from the uncovered disgorgement addressed in New York precedent.

The court also discussed whether the insurers could challenge the reasonableness of defense costs incurred by TIAA in defending the class action suits. The insurers argued that TIAA failed to present testimony from anyone that negotiated the subject rates or reviewed the defense bills for reasonableness or necessity. They also contested the rates being charged by TIAA’s defense counsel as being double and triple the normal rates charged where the underlying suits were pending. The court rejected those arguments, finding that TIAA was justified in hiring a specialized practice group from its defense firm at the rates charged, and TIAA offered convincing expert testimony that the bills were reasonable and necessary.

Indiana Court Holds Potential Coverage for RCRA Claim Under General Liability Policies

In its recent decision in Great Am. E & S Ins. Co. v. Coupled Prods., LLC, 2018 U.S. Dist. LEXIS 120662 (N.D. Ind. July 19, 2018), the United States District Court for the Northern District of Indiana had occasion to consider the scope of coverage afforded under a general liability policy for measures imposed on an insured pursuant to the Resource Conservation and Recovery Act (RCRA).

The insured, Coupled, was the owner/lessor of an electroplating facility.  Its tenant ceased operations and abandoned the facility, leaving behind various chemicals and waste materials that became the subject of an NOV issued to Coupled by the Indiana Department of Environmental Management (IDEM) pursuant to RCRA.  Specifically, IDEM alleged that the waste materials were not properly handled, stored and marked.  IDEM also issued a proposed agreed order, requiring Coupled to submit documentation concerning the waste, to ensure that all waste containers would be properly handled, stored and labeled during closure of the site, and to submit a hazardous-waste closure plan for approval with respect to waste at the facility. Coupled sought coverage for these measures under several general liability policies issued to it by Great American.

Because Indiana law governed the policies, the parties agreed that the pollution exclusion was inapplicable.  Great American nevertheless argued that its policies were not triggered for the costs to be incurred by Coupled pursuant to the order because the costs were for not “damages” as a result the “property damage” that already occurred, but instead were “regulatory compliance costs that any hazardous was generator or facility owner faces as a cost of doing business, in order to prevent future harm to the environment.”  In support of this argument, Great American relied on the decision by the Indiana Supreme Court in Cinergy Corp. v. Associated Elec. And Gas Ins. Servs., Ltd, 865 N.E.2d. 571 (Ind. 2007), in which the Court held that a general liability insurer had no coverage applications in connection with the insured’s efforts to bring its facility into compliance with the Clean Air Act. Coupled countered by citing to Indiana case law supporting the position that general liability policies insure governmentally ordered remediation efforts.

The court concluded that Cinergywas not applicable, because the agreed order was not concerned with future regulatory compliance in order to prevent harms to the environment, but instead with remedial measures with respect to an existing hazardous waste situation at Coupled’s facility.  The court went on to note, however, that questions remained as to whether the measures that Coupled would need to implement at its own facility qualified for coverage under a third-party liability policy.  The court, therefore, directed further briefing on issues involving first-party and third-party insurance policies as well as the application of the owned property exclusion.

 

Illinois Appellate Court Finds Insurer Estopped From Denying Coverage Where Declaratory Judgment Suit Filed Too Late

In an unpublished opinion from the Illinois Appellate Court, Country Mutual Insurance Co. v. Badger Mutual Insurance Co., 2018 IL App (1st) 171774-U, the court held that because an insurer breached its duty to defend and failed to file a declaratory judgment action before the underlying lawsuit was resolved, it was estopped from denying coverage for the default judgment entered against its insured in the underlying lawsuit.

The underlying lawsuit concerned a claim that plaintiff’s property allegedly sustained damage when the insured performed work on the plaintiff’s residence. The complaint in the underlying lawsuit did not specifically identify when the property damage occurred. However, the complaint did state that the insurer’s investigator alerted it in 2010 that the property damage was due to the insured’s faulty work during the policy period. The insurer did not defend the insured during the action and a default judgment was entered against the insured.

The insurer filed a declaratory judgment action days after the default judgment was entered. The insurer sought declarations that the property damage occurred outside the policy period, one or more exclusions precluded coverage, and the insurer had no obligation to defend the insured. In their counterclaim, the underlying plaintiffs alleged that the insurer hired a third party to investigate the property damage prior to the underlying lawsuit. The report informed the insurer that the insured’s faulty workmanship during the policy period caused the property damage. Therefore, they argued, the insurer had an obligation to defend the insured and was estopped from denying coverage for the default judgment.

The court acknowledged that estoppel only applies if the insurer breached its duty to defend, and therefore first analyzed the insurer’s duty to defend. The court found that the underlying complaint raised the potential that the underlying plaintiff suffered damage resulting from the insured’s work, as it alleged that the insured’s work caused the underlying plaintiff’s building to sustain “property damages, including water damage.” The court also found that the complaint created the potential that the damage occurred between 2005 and 2010, which overlapped with the insurer’s policy period. As such, the complaint did not foreclose the possibility that the damage occurred during the policy period, and the insurer had breached its duty to defend.

Turning to estoppel considerations, the court reasoned that the insurer breached its duty by waiting until after the default judgment was entered to file a declaratory judgment action. The court criticized the insurer for waiting to bring a declaratory action until eight days after the default judgment was entered. Instead, the court required an insurer to file a declaratory judgment “before the underlying proceeding is resolved.”

The insurer argued that the issue of whether damage occurred during the policy period was not subject to estoppel as it did not constitute a “policy defense.” The court rejected that argument and determined that estoppel precludes the insurer from denying coverage, and does not depend on whether the insurer is raising a “policy defense.” As the insurer was estopped from denying coverage, it was responsible for the full amount of the default judgment.

Wisconsin Court Enforces Breach of Contract Exclusion in E&O Policy

In its recent decision in Crum & Forster Specialty Ins. Co. v. GHD Inc.,2018 U.S. Dist. LEXIS 111827 (E.D. Wisc. July 5, 2018), the United States District Court for the Eastern District of Wisconsin had occasion to consider the application of a breach of contract exclusion in a professional liability policy.

Crum’s insured, DVO, was sued in connection with its contract to construct a biogas converter mechanism.  The underlying suit alleged a sole cause of action; namely, breach of contract based on DVO’s failure to have fulfilled its obligations to design the mechanism to specification.

Crum initially provided DVO with a defense to the lawsuit, but later denied coverage on the basis of an exclusion applicable to any claim:

Based upon or arising out of

1. breach of contract,  whether  express or  oral, nor any “claim” for breach of an implied in law or  an implied  in  fact contracts,  regardless  of whether “bodily  injury”,  “property  damage”, “personal    and   advertising    injury”    or   a “wrongful act” is alleged.

DVO argued that the exclusion effectively rendered the policy’s coverage illusory, since the basis of any errors and omissions claim is the failure to fulfill a contractual obligation.

In considering this question, the court observed that an entity performing professional services has more than contractual obligations – it has duties to exercise reasonable care in performing its work that are owed to the world at large.  These duties, explained the court, are what is insured under a professional liability policy.  The court cited as an example personal injuries or property damage resulting from DVO’s negligent errors or omissions in performing its design work.  Such damages are exactly what is insured under a professional liability policy.  By contrast, the breach of contract exclusion, reasoned the court, manifested Crum’s intent to not be the guarantor of DVO’s work.  As the court noted, “Crum  & Forster agreed  to  insure DVO  against  liability it  incurred  to third parties  for  its negligent  error  or omissions;  it  chose not  to insure  DVO for  liability  it incurred  to  its own  customers  for failing to meet its contractual obligation.”

The court concluded, therefore, that the exclusion was a reasonable restriction of coverage in a professional liability policy and not overly broad as drafted, at least in the context of the underlying suit.

New Jersey Senate Advances Bad Faith Legislation

New Jersey is the latest to join the list of states that have enacted or are considering enacting legislation that would authorize policyholders to file civil suits against first-party insurers for unfair business practices, such as unreasonably delaying or denying benefit payments, engaging in false advertising, or otherwise committing a wide range of unfair or deceptive practices.

On June 7, the New Jersey Senate passed a bill entitled the New Jersey Insurance Fair Conduct Act. The Act would create a new statutory cause of action pursuant to which a first-party insurer would be liable for bad faith based on a single statutory violation, thereby entitling an aggrieved policyholder to collect triple damages and attorneys’ fees. The proposed legislation is now before the state’s General Assembly for further consideration.

Under current New Jersey common law, a policyholder can recover bad faith damages against a first-party insurer only if the policyholder is able to demonstrate that the insurer (i) did not have a reasonable basis for declining coverage, (ii) recklessly disregarded the existence of a reasonable basis for providing coverage, or (iii) unreasonably delayed processing a claim. Pickett v. Lloyd’s, 131 N.J. 457 (1993). Under those scenarios, a prevailing policyholder can recover up to the limits of its policy as well as consequential damages arising from the insurer’s breach of its common law duty. New Jersey law also affords a court discretion to award a prevailing policyholder the amount it incurred in prosecuting its coverage claim. Conversely, there is no authority granting treble damages.

To the extent a policyholder meets its burden of proof under the common law standard, the burden shifts to the insurer. Where the insurer is able to show that insurance coverage is “fairly debatable,” it will defeat the insured’s claim of bad faith. Pursuant to Pickett, “[u]nder the ‘fairly debatable’ standard, a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.”

The proposed Act would greatly reduce a first-party policyholder’s burden of proof by eliminating the need to demonstrate either that the insurer knew that its conduct was unreasonable or that the insurer handled the policyholder’s claim in a way that was indicative of its general business practices. Instead, a policyholder simply would need to demonstrate that the insurer engaged in prohibited conduct, such as (i) misrepresenting and falsely advertising its policy contracts, (ii) promoting false information and advertising generally, (iii) committing defamation, (iv) discriminating against the policyholder, (v) employing unfair claim settlement practices and (vi) failing to maintain complaint handling procedures.

Notwithstanding its specificity as to the types of actions that would be illustrative of an insurer’s bad faith, the Act as it is presently written does not define what constitutes the “unreasonable” delay or denial of a claim for benefits, and it does not include good-faith protections for insurers that exist under the current law.

Traub Lieberman Straus & Shrewsberry will continue to closely monitor the Act as it makes its way through the legislative process and update this blog post, as appropriate, in order to keep our friends and clients apprised of key developments.

Court Holds FLSA Exclusion In E&O Policy Inapplicable to Au Pair Class Action

In its recent decision in Cultural Care, Inc. v. AXA Ins. Co., 2018 U.S. Dist. LEXIS 100679 (D. Col. June 15, 2018), the United States District Court for the District of Colorado, applying Massachusetts law, had occasion to consider the scope of a policy exclusion in a professional liability policy applicable to claims brought under the Fair Labor Standards Act and related wage laws.

AXA’s insured, CCI, is a U.S. State Department designated sponsor of au pairs brought in from foreign countries. It was named as a defendant in a class action lawsuit alleging that it conspired to set the weekly pay rates for the au pairs below market rate in violation of state and federal law, including the FLSA.  The suit set forth several causes of action, including ones based on RICO, restraint of trade, constructive fraud and negligent misrepresentation.

AXA denied coverage under the professional liability policy it issued to CCI primarily on the basis of an exclusion applicable to any “claim or Suit based upon or arising out of any violation of the Fair Labor Standards Act or any similar federal, state or local law pertaining to working conditions, hours, employee benefits or wages.” AXA argued that the gravamen of the underlying suit was alleged violations of the FLSA and comparable state laws, and that the cause of action for negligent misrepresentation flowed from these violations.

In considering the exclusion, the court rejected AXA’s argument that Massachusetts law permits an insurer to look at the “gravamen” or the “essence” of a complaint. Rather, the court observed that Massachusetts law requires examination of each of the causes of action independently.  The court further reasoned that the exclusion did not apply to claims or suits that merely include a cause of action based on a violation of the FLSA or comparable laws, but rather that the exclusion applies only when a claim or suit arises exclusively or entirely from a violation of the FLSA or similar laws.  In other words, as long as one cause of action potentially escapes the exclusion, AXA is required to provide a defense, regardless of whether the suit can be characterized primarily as an FLSA claim.

Based on this reasoning, the court concluded that the claim in the underlying suit for negligent misrepresentation potentially escaped the exclusion because it could be pled independently of the wage-related claims given the specific allegations in the complaint.  As such, the court held that AXA breached its defense obligation by denying coverage for the suit