Pennsylvania Supreme Court Holds that Statutory Insurance Bad Faith Claims Are Assignable

By on December 17, 2014
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Deciding a certified question from the United States Court of Appeals for the Third Circuit, Pennsylvania’s Supreme Court ruled on December 15, 2014 that insurance bad faith claims arising under 42 Pa. C. S. § 8371 (1990) are freely assignable.

In Allstate Property and Cas. Ins. Co. v. Wolfe, No. 39 MAP 2014, Allstate was alleged to have acted in bad faith when an insured motorist suffered a $50,000 punitive damages award after Allstate failed to settle the claim within policy limits. After Allstate refused to pay the punitive damages award, the insured assigned its putative insurance bad faith claim to the tort victim/judgment creditor in exchange for a covenant not to execute against the insured motorist. Allstate argued that statutory bad faith claims are unliquidated personal tort claims that are unassignable under Pennsylvania law as a matter of public policy. The district court disagreed, relying on a line of state Superior Court and federal district court cases holding that such claims were assignable. On appeal, the Third Circuit certified the question to the Pennsylvania Supreme Court.

While the Court recited the competing public policy arguments advanced by the parties and their amici, the Court ultimately treated the case as involving an issue of statutory interpretation. The Court noted that, prior to the enactment of Section 8371, Pennsylvania’s courts had viewed claims of insurance “bad faith” through the lens of contractual claims, which historically were freely assignable. From that, the Court concluded that in enacting the statute, which provided additional remedies of punitive damages, attorneys’ fee-shifting, and presumptively-enhanced prejudgment interest, the legislature intended to supplement the pre-existing contract-based claims, not transform them into non-assignable tort claims.

Centrally, we simply do not believe the General Assembly contemplated that the supplementation of the redress available for bad faith on the part of insurance carriers in relation to their insureds would result either in a curtailment of assignments of pre-existing causes of action in connection with settlements or the splitting of actions. . . . Our fundamental conclusion here is, simply, that we discern no legislative intent to preclude assignability of damages claims under Section 8371 to the degree these have been reposited into a pre-existing liability scheme which permits assignments.

Chief Justice Castille dissented without opinion from the Court’s 5-1 decision.

Filed under Bad Faith

Unraveling Plain Meaning, Extrinsic Evidence And the Doctrine of Contra Proferentem

By and on December 15, 2014
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Gordon & Rees insurance attorneys Regen O’Malley and Greil Roberts published an article in the Insurance Coverage Law Bulletin discussing the slow but steady trend of judges willing to consider extrinsic evidence to assist in the interpretation of insurance policies.  This is a positive development for insurers, who frequently come up against the courts’ strict application of the contra proferentem rule whenever policy language is determined to be ambiguous.

To read the full article, click here.

Filed under Uncategorized

Replacement Cost Value and the Insured’s Duty to Repair

By on December 9, 2014
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Commercial property policies provide two methods for recovery.  The first method, actual cash value, permits an insured to immediately recover the value of the damaged property less the amount of depreciation.  This amount is often insufficient to provide the insured with enough money to repair or replace the damaged property.  Therefore, the insured can elect to repair the damage and make a claim for the difference between the actual cash value and the amount it cost to replace the property assuming that the insured advises the insurer in a timely manner.  The second method is known as replacement cost, under which the insured can recover the cost to repair or replace the property with property of comparable quality.  Additionally, the repairs must be made as soon as reasonably possible.  However, in a recent decision from the California Court of Appeal, the court held that the failure to repair or replace the property “as soon as reasonably possible” did not preclude reimbursement for replacement cost where the insurer never accepted coverage for the loss.

CON BLOG_home buildIn Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co. (November 24, 2014) 2014 Cal. App. LEXIS 1073, the Court of Appeal concluded that the trial court should have entered a conditional judgment for the insured in the amount of the replacement cost even though repairs had not been performed.  In so holding, the court reasoned that after the insurer denied coverage, the insured no longer had an obligation to immediately repair the property in order to recover replacement cost because the insurer’s decision materially hindered the insured from repairing the damage.

Stephens & Stephens XII, LLC (Stephens) the owner of a distribution center, purchased a commercial property policy from Fireman’s Fund Insurance Company (Fireman’s Fund).  Almost immediately following the inception date of the policy, Stephens made a claim seeking coverage in connection with a burglary during which all conductive material was stripped and removed from the building, the walls were damaged, fire protection equipment was rendered inoperable and all electrical components were taken.  Fireman’s Fund was concerned that the burglary was too extensive to have occurred in the three days following the inception of the policy and when the claim was made.  Over the course of the next three years, Fireman’s Fund and Stephens entered into various discussions regarding reimbursement for the damages.  Stephens sought replacement cost even though it had taken no steps to make the repairs.  At no time, did Stephens seek actual cash value.  Fireman’s Fund never accepted coverage for the loss and five years after the incident, Fireman’s Fund denied coverage on the grounds that Stephens had concealed and misrepresented material information during the insurance investigation.  Stephens brought suit against Fireman’s Fund for bad faith and breach of contract.

At trial, Stephens sought only the replacement cost and expressly disclaimed any intent to seek recovery for actual cash value.  The jury found that Fireman’s Fund failed to make payments required by the policy thereby preventing Stephens from repairing the damage to the property.  Despite not having repaired the property, the jury found that Stephens performed its duties under the policy and awarded damages for replacement cost at $2,100,293.  The court, however, entered judgment notwithstanding the verdict on behalf of Fireman’s Fund, holding that Stephens was required to complete the repairs before it was entitled to receive replacement cost.

The Court of Appeal reversed, holding that Stephens was excused from complying with the repair requirement because the insurer’s refusal to accept coverage prevented Stephens from repairing the damage.  In so holding, the court reasoned that when an insurer’s decision to decline coverage materially hinders an insured from repairing damaged property, procedural obstacles to obtaining the replacement-cost value should be excused.  Therefore, the policy’s requirement that damage be repaired as soon as possible was excused.  Thus, Stephens was entitled to a judgment for replacement costs consistent with the repair requirement if it completed the repair as soon as reasonably possible after the judgment became final.

Image courtesy of Flickr by Great Valley Center

Filed under Replacement Cost Value

Seventh Circuit Court Applies “Continuous” Trigger Theory To A First Party Property Claim

By on December 1, 2014
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In Strauss v. Chubb Indem. Ins. Co., the Seventh Circuit U.S. Court of Appeals (applying Wisconsin law) declined to adopt the “manifestation” trigger theory in all first-party property insurance claims, and instead found that the policy terms unambiguously required application of a “continuous” trigger theory.

The insureds constructed a home in 1994.  They purchased insurance for the residence from a number of insurers from October 1994 to October 2005 (collectively, “the Chubb Defendants”).  Water infiltrated and damaged the home as the result of construction defects, but the damage was not discovered until 2010.  The Chubb Defendants denied the insureds’ request for coverage because the damage first manifested in 2010, well after the last of the Chubb Defendants’ one-year policies expired.  The Chubb Defendants’ maintained that a “manifestation trigger” applied to first-party property insurance, meaning that the insureds should seek coverage under the policy it had in place at the time it discovered the damage.  The Chubb Defendants also asserted that the claim was time barred under Wisconsin statutory law and a suit limitation clause.

The insureds filed suit within one year of their discovery of the damage caused by the water intrusion.  In cross-motions for summary judgment, the Chubb Defendants argued that public policy and case law from across the country supported application of a “manifestation” trigger.  The insurers also argued that the insureds filed suit too late, past either a statutory deadline or a time limit imposed by the policies.  The district court disagreed and concluded that the “continuous” trigger theory applied to the “occurrence-based” policies at issue.  Since the “continuous” trigger theory applied, the district court also found that the insureds’ claim was not time-barred.

The Seventh Circuit affirmed.   While acknowledging that jurisdictions across the country utilize the manifestation trigger in first-party claims, the court explained that no Wisconsin court had so held.  Rather, the court noted that in Miller v. Safeco Ins. Co of Am., 683 F.3d 805, 810-11 (7th Cir. 2012), the court had declined to adopt a bright-line rule requiring use of the manifestation trigger theory in all first-party property insurance coverage disputes.  Instead, the court looked to the policy language and its definition of “occurrence,” as “a loss or accident to which this insurance applies occurring within the policy period. Continuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence.”  This language unambiguously contemplated a long-lasting occurrence that could give rise to a loss over an extended period of time.  The court dismissed public policy concerns raised by the Chubb Defendants that by not adopting a bright-line manifestation trigger, it created uncertainty for insurers because it allowed liability arising on stale policies.  Finally, because the loss was ongoing and occurred with each rainfall, the loss was continuous from the date of faulty construction until the damage manifested in October 2010 for purposes of the statute of limitations.

Arguably, the occurrence definition was designed to apply to the liability coverage part of the policy.  However, the first-party portion of the policy also referenced the word “occurrence,” so the court found it applicable in the first party context as well.

Filed under Trigger of Coverage

Gordon & Rees Partner Matt Foy Appointed Vice Chair of DRI Insurance Law Committee

By on November 13, 2014

DRI – The Voice of the Defense Bar, the leading organization of defense attorneys and in-house counsel, has appointed Gordon & Rees San Francisco partner Matthew S. Foy as vice chair of DRI’s Insurance Law Committee.

In a Sept. 11 letter to Foy announcing his vice chair appointment, DRI president-elect John Parker Sweeney noted the appointment is for a one-year term, effective at the conclusion of DRI’s Oct. 22-26 Annual Meeting, held at the San Francisco Marriott Marquis.  The appointment paves the way for Foy’s selection as chair of the Insurance Law Committee in 2016.  In addition to the Insurance Law Committee, Foy is a member of DRI’s Commercial Litigation, Intellectual Property Litigation and Steering Committees.

Foy is the co-national practice group leader for the firm’s property and casualty insurance practice as well as the practice group leader of the San Francisco insurance group. He has more than 15 years of experience representing national insurers at the claims stage, in trial and on appeal. Foy’s practice focuses on insurance coverage and bad-faith litigation and advice involving primary and excess liability policies with an emphasis on complex personal and advertising injury, cyber-liability, environmental, asbestos, other mass torts, and construction defect matters. He also handles all aspects of insurance cases involving professional liability insurance, inland marine, first-party property, and life, health, and disability matters. He assists clients with drafting policy language and claims manuals and provides in-house client seminars on coverage and claims handling issues, as well as litigation planning. In addition to his insurance practice, Foy represents corporate clients in connection with contract negotiation, dispute resolute, and related litigation.

Foy is a frequent speaker on issues confronting the insurance industry and he recently contributed a chapter in DRI’s 2014 “Coverage B: Personal and Advertising Injury Compendium.”

Filed under Uncategorized

Florida District Court Finds That Settlement Can Trigger Bad-Faith Claim

By and on November 11, 2014
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Florida’s Fourth District Court of Appeal recently ruled that an insured need only establish an insurer’s coverage obligation and the extent of damages, and not the insurer’s liability for breach of contract, to be permitted to proceed with a bad-faith claim under Section 624.155(1)(b)1 of the Florida Statutes.

INS BLOG_hurricaneIn Cammarata v. State Farm Florida Insurance Co., 2014 Fla. App. Lexis 13672 (September 3, 2014), the insureds (homeowners) were two of many South Florida residents who sustained damages as a result of Hurricane Wilma, which hit the coast on October 24, 2005.  Nearly two years later, the insureds filed a claim with their homeowners’ insurer.  The insurer inspected the home and, having estimated the amount of damages to be lower than the policy deductible, advised that the policy had not been triggered.  The parties then participated in an appraisal process, with the insureds’ appraiser submitting an estimate higher than the policy deductible and the insurer’s appraiser submitting an estimate lower than the policy deductible. Pursuant to the policy, the insureds filed a petition requesting that the circuit court appoint a neutral umpire.  The umpire issued an estimate higher than the policy deductible (although lower than the insureds’ appraiser’s estimate), and the insurer paid the amount, minus the deductible.  The insureds then filed a bad-faith action against the insurer under Section 624.155(1)(b)1 of the Florida Statutes.

The parties filed cross-motions for summary judgment.  In its motion, the insurer argued that because its liability for breach of contract had not been determined the insureds’ bad-faith action was not ripe.  In response, the insureds argued that only an insurer’s liability for coverage and the extent of the damages covered must be determined for a bad-faith claim to mature.  The trial court granted the insurer’s motion.

The Fourth District Court of Appeal reversed, holding that the determination of the existence of liability and the extent of an insured’s damages are the conditions precedent to a bad-faith action, and that those conditions may be established by a settlement paid by the insurer.  In so holding, the Fourth District receded from its prior decision in Lime Bay Condominium, Inc. v. State Farm Florida Insurance Co., 94 So.3d 698 (Fla. 4th DCA 2012), relied upon by the insurer, in which the Fourth District held that an insurer’s liability for breach of contract must be determined before a bad-faith action becomes ripe, harmonizing that decision with its decision in Trafalgar at Greenacres, Ltd. v. Zurich American Insurance Co., 100 So.3d 1155 (Fla. 4th DCA 2012), in which the Fourth District ruled that an appraisal award issued after an insured filed a breach of contact claim satisfied the necessary prerequisite of obtaining a “favorable resolution” prior to filing a bad-faith claim.

In Cammarata, the Fourth District relied upon the Florida Supreme Court’s decisions in: 1) Blanchard v. State Farm Mutual Automobile Insurance Co., 575 So.2d 1289 (Fla. 1991), addressing an insurer’s claim that an insured must bring a bad-faith claim together with an underlying breach of contract claim, in which the court held that “[a]bsent a determination of the existence of liability . . . and the extent of the [insured’s] damages, a cause of action cannot exist for bad faith”; and 2) Vest v. Travelers Insurance Co., 753 So.2d 1270 (Fla. 2000), addressing a claim for bad faith based upon an insurer’s payment of policy limits after the filing of a bad-faith action, in which the court held that the existence of liability and the extent of an insured’s damages can be established based “upon a settlement,” thereby ripening a bad-faith claim.

The Fourth District Court of Appeal reversed and remanded for reinstatement of the insureds’ bad-faith action, noting that it was not taking any position on whether that action has any merit.

Image courtesy of Flickr by NASA Goddard Space Flight Center.

Filed under Appraisal, Bad Faith

Property Damage in a Digital Age: Florida District Court Confirms That Coverage for “Property Damage” Excludes Electronic Data

By and on October 31, 2014
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In Carolina Casualty Insurance Co. v. Red Coats, Inc. d/b/a Admiral Security Services, Inc., the U.S. District Court for the Northern District of Florida ruled that the cost to provide free credit protection services to individuals whose confidential medical information was contained on stolen laptop computers did not constitute “property damage” under two commercial general liability insurance policies.

The insured (Red Coats, Inc.), a full-service contract management company that provides security, janitorial and alarm services, entered into a contract with AvMed, Inc., a provider of health coverage plans to members and subscribers throughout Florida, to provide security services at AvMed’s Gainesville, Florida, facility.  Shortly thereafter, two of AvMed’s laptop computers were stolen from its Gainesville facility.  As HIPAA-protected information was contained on at least one of the stolen laptops, AvMed notified the affected subscribers/members and provided each of them with two years of free credit protection services.

AvMed thereafter filed suit against Red Coats, alleging that one of Red Coats’ security guards committed the subject theft (alleging claims against Red Coats for breach of contract, fraud, negligent hiring, retention and supervision, and vicarious liability).  Red Coats then made claims against each of its five insurers (including two commercial general liability carriers, an employment practices liability carrier, and two crime carriers), all of which denied coverage.  After Red Coats and AvMed settled their dispute, Red Coats’ employment practices liability carrier filed a declaratory judgment action, seeking a decree of no coverage.  In response, Red Coats counterclaimed against each of its insurers.  The parties filed cross-motions for summary judgment, which were decided by the court on April 22, 2014 (the crime carriers resolved prior to the disposition of summary judgment).

The commercial general liability policies defined “property damage,” in pertinent part, as “loss of use of tangible property that is not physically injured.” Notably, those policies specifically excluded from the definition of tangible property “electronic data,” defined as “information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment.”

The U.S. District Court for the Northern District of Florida ruled that, with regard to Red Coats’ commercial general liability policies, “the loss of use of the laptops was not the problem – AvMed has a lot of other laptops – the problem was that others could access the HIPAA data.  At best, the only coverage would be [the] cost of getting new laptops; there would be no coverage for the HIPAA information and any other data or programs on them, since they would represent electronic data, which is expressly excluded from coverage.  Simply put, this is not property damage in any ‘man on the street’ definition of the term. . . . [I]t is an economic loss claim which is not covered by the [commercial general liability policies].”  The court also rejected Red Coats’ argument that coverage existed under its employment practices liability policy.

Red Coats has appealed the Northern District’s decision to the Eleventh U.S. Circuit Court of Appeals (with briefing to be completed by November 14, 2014).

Filed under Electronic Data, HIPAA-Protected Information, Loss of Use, Property Damage

Under Illinois Law, Nontrivial Possibility of Excess Judgment Creates Conflict Requiring Independent Defense Counsel

By and on October 10, 2014
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In Perma-Pipe, Inc. v. Liberty Surplus Insurance Corp., No. 13-2989, 2014 U.S. Dist. LEXIS 54867 (N.D. Ill. April 21, 2014), the Northern District of Illinois held an insurer breached its duty to defend when it refused to pay for the insured’s independent defense counsel. Although the insurer had waived all coverage defenses, there was a “nontrivial” exposure over the policy limit, which created a conflict of interest under Illinois law.

The insured, Perma-Pipe, was a pipe manufacturer sued for alleged “catastrophic” pipe failures with damages alleged over $40 million.   Liberty issued a commercial general liability (CGL) policy with $1 million per occurrence and $2 million aggregate limits.  Liberty agreed to defend, but reserved rights and allowed Perma-Pipe to select independent defense counsel.  Liberty later withdrew its reservations and retained its own defense counsel. Perma-Pipe sued.

The federal district court, applying Illinois law, found a conflict of interest requiring independent defense counsel.  Because Perma-Pipe was sued for more than $40 million, far above the policy limits, there was “a nontrivial probability” of an excess judgment. While Liberty argued Perma-Pipe had excess coverage, there was no evidence of this in the record.  In any event, the possible existence of excess coverage would not negate the conflict.

While the “nontrivial” excess exposure test may be difficult to apply, that is apparently not the case where the exposure alleged dwarfs the available coverage limits.

Filed under Duty to Defend, Independent Counsel

ERP Exclusion Bars Coverage For Alleged False Imprisonment And Invasive Inspections Of Employees

By and on October 2, 2014
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In Jon Davler, Inc. v. Arch Insurance Company, Case No. B252830 (2014 Cal. App. LEXIS 837), the California Court of Appeal, Second Appellate District, affirmed dismissal of the insured’s coverage action, holding that an Employment-Related Practices (ERP) exclusion in a CGL policy barred coverage for employees’ claims against their employer that a supervisor falsely imprisoned them in a workplace bathroom for invasive inspection purposes under threat of termination.

The complaint alleged that three female employees were forced to enter a workplace restroom and have their undergarments inspected to determine whether they had left a sanitary napkin next to the women’s toilet.  They sued their employer John Davler, Inc. (JDI) and the involved supervisor for false imprisonment and other causes of action.

INSBlog_prisonbarsJDI’s insurer, Arch, declined to defend under a CGL policy which included an ERP exclusion.  The exclusion listed a number of “employment-related” practices, but it did not mention false imprisonment.  JDI filed suit against Arch based on the coverage denial.  The trial court sustained a demurrer by Arch without leave to amend, and this appeal followed.

The Court of Appeal rejected JDI’s arguments that the phrases “such as” and “arising out of” in the ERP exclusion are ambiguous.  “Such as” is not exhaustive, and the court concluded the allegations clearly “arose out of” employment.  The employees allegedly were detained because they were employees, they were following their supervisor’s directive at their place of employment, and she threatened loss of their jobs if they did not comply.

The court also rejected JDI’s argument that there was a structural ambiguity because the policy’s insuring agreement specifically provided coverage for false imprisonment while the ERP exclusion did not explicitly exclude such claims.  The Court of Appeal based its decision on Frank and Freedus v. Allstate Ins. Co. (1996) 45 Cal.App.4th 461 which held a similar exclusion was unambiguous and applied to defamation even though “employment-related practices” were not defined and the insuring agreement explicitly provided coverage for defamation claims.

The Court of Appeal declined to follow Zurich Ins. Co. v. Smart & Final, Inc. (C.D. Cal. 1998) 996 F.Supp. 979, in which the court held a reference to false imprisonment in the insuring agreement but not in the ERP exclusion did create an ambiguity.  The court also concluded Zurich v. Smart & Final is factually distinguishable as the conduct alleged there (interrogation and false imprisonment as a loss prevention tactic) was not clearly employment related.

Filed under Employment-Related Practices Exclusion

Delinquent Claims Are Timely Claims: Eighth Circuit Declares Notice Provision Ambiguous

By and on September 18, 2014
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In George K. Baum & Co. v. Twin City Fire Insurance Co., No. 12-3982 (8th Cir. July 16, 2014), the Eighth U.S. Circuit Court of Appeals ruled that the “as soon as practicable” notice language in a claims made professional services policy was ambiguous, rejecting the insurer’s late notice defense.

The insured, a municipal bonds dealer, secured professional services insurance from Twin City for a policy period from 2003 to 2004.  In 2003, the Internal Revenue Service opened an investigation based on the insured’s faulty representation that interest on the municipal bonds was tax exempt.  The insured notified its insurer of actual claims by the IRS and future potential claims by the insured’s municipal clients.  The insurer treated the IRS investigation as a claim under the policy and the insured ultimately settled with the IRS for $7.7 million without admitting misconduct.  In 2008, two years after settling with the IRS, various municipalities filed derivative suits against the insured, which were consolidated into an MDL in Southern District of New York.  The insured did not notify Twin City of the litigation until 2010, another two years later.

The insurer initially denied coverage on the basis that the derivatives claims were not claims made during the 2003-2004 policy period, but it later withdrew its position because the claims related back to the timely-reported IRS investigation.  The insurer also denied coverage based on late notice, arguing that under New York law, it did not have to prove prejudice.

The U.S. District Court for the Western District of Missouri ruled that Missouri law applied and that the insurer could not prove the prejudice required to deny coverage based on late notice.  The Eighth Circuit Court of Appeals affirmed rejection of the late notice defense, but on different grounds.   The court first ruled that New York law applied because the policy was issued to the insured’s office in New York specifically to avoid paying Missouri’s surplus lines tax.  Although the insurer was correct that it was not required to prove prejudice under New York law, the court found that the policy’s notice requirement was ambiguous.

The policy’s insuring agreement required notice “as soon as practicable, but in no event later than sixty (60) days after the POLICY EXPIRATION DATE” in 2004.  The policy also provided that “all claims based upon, or arising out of, the same wrongful act or interrelated wrongful acts shall be considered a single claim for all purposes…which shall be deemed first made at the time the earliest of all such claims was first made.” Thus, the court concluded that the subsequent multi-district litigation “constitute[d] ‘a single claim for all purposes,’ including notice” that was provided in 2003.  The court also found that the “as soon as practicable requirement” was ambiguous when considered in conjunction with the 60-day time limitation and the relation back language.  Finally, the court rejected the insurer’s alternative argument that the insured’s interpretation would allow it “to wait weeks, months or even years” before providing notice. The court was unpersuaded by “the complaints of a poor draftsman” and it warned that it would not “rescue an insurer from its own drafting decisions.”

Baum reminds us that courts continue to construe notice provisions generously in the insured’s favor and encourages a vigilant approach both to drafting and to litigation strategy regarding how that drafting might be later perceived by a court.

Filed under Claims Made Policy, Late Notice, Professional Liability

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