Insurance Coverage for Wrongful Incarceration Cases in New York

By and on August 10, 2016
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Over a decade has gone by since we first reported on an uptick in post-conviction exonerations due to advances in DNA testing, data preservation and electronic record-keeping that led to the discovery of exculpatory evidence. Today, insurance coverage lawsuits for wrongful incarceration cases are becoming more and more frequent. Typically, such cases involve a scenario in which the underlying claimant is arrested, tried and sentenced for a crime and then subsequently, the underlying claimant is either acquitted or released due to new evidence, lack of evidence or procedural mishaps in the initial trial. While more and more states are instituting statutory remedies for wrongful incarceration, the municipality and its law enforcement and prosecutorial entities are still sued for state tort claims and federal civil rights violations. The insured defendants, in turn, tender the matters to their carriers under general liability policies, errors and omissions policies and law enforcement liability policies.

This series of blog posts with discuss the law in various jurisdictions that have addressed coverage issues related to wrongful incarceration under different types of policies. The first jurisdiction we address is New York.

There are two pertinent New York cases that address coverage issues for claims of false arrest, false imprisonment and malicious prosecution. The first is National Cas. Ins. Co. v. City of Mount Vernon, 128 A.D.2d 332 (1987). In City of Mount Vernon, the underlying claimant was arrested in June 1981 and incarcerated until January 7, 1983. Thereafter, the underlying claimant commenced a lawsuit against the City of Mount Vernon (“City”) and the Mount Vernon Police Department to recover damages for, among other things, false arrest and false imprisonment.

National Casualty issued a policy to the City from January 1, 1983 to January 1, 1984, that provided coverage for all sums that the insured becomes legally obligated to pay as damages because of “wrongful acts” which result in “personal injury” caused by an “occurrence.” The term “occurrence” was defined as an event, including continuous or repeated exposure to conditions, which results in “personal injury” during the policy period. The term “personal injury” was defined to include false arrest, detention or imprisonment, or malicious prosecution. Based on the above definitions, the National Casualty policy would be triggered by false arrest, detention or imprisonment during the policy period.

Upon tender, National Casualty denied coverage because the underlying claimant’s arrest in June 1981 occurred prior to the policy’s inception date of January 1, 1983. The Appellate Division disagreed:

Contrary to National’s contentions, the language of the occurrence clause herein ascribes no temporal relevance to the causative event preceding the covered injury, but rather premises coverage exclusively upon the sustaining of specified injuries during the policy period. Thus, the pertinent policy provision provides coverage for an “occurrence”, and thereafter, states that an occurrence “means an event … which results in PERSONAL INJURY … sustained, during the policy period” (emphasis supplied). Indeed, as one commentator has stated in discussing a similar provision, “[t]he policy will not depend upon the causative event of occurrence but will be based upon injuries or damages which result from such an event and which happened during the policy period. It will not be material whether the causative event happened during or before the policy period.” … Accordingly, the operative event triggering exposure, and thus resulting in coverage under the policy, is the sustaining of a specified injury during the policy period.

Id.at 336-337. The Appellate Division held that damage resulting from false imprisonment represented a category of covered personal injury, and that such damage was allegedly sustained, at least in part, when the policy was in force, i.e. from January 1, 1983 to January 7, 1983. As a result, the City was entitled to coverage under the National Casualty policy.

The second case is Town of Newfane v. General Star National Ins. Co., 14 A.D.3d 72, 784 N.Y.S.2d 787 (2004). Selective Insurance (“Selective”) issued a policy, effective April 26, 2000, that provided coverage for claims for damages because of “personal injury” caused by an offense arising out of the Town of Newfane’s business, but only if the offense was committed during the policy period. The term “personal injury” was defined, in part, as “injury, other than ‘bodily injury’ arising out of one or more of the following offenses: a. [f]alse arrest, detention or imprisonment; [or] b. [m]alicious prosecution.”

The underlying claimant alleged that he was “charged, arrested and jailed under a warrant” on June 7, 1989. He was again jailed for several hours on April 9, 1990. On June 6, 1990, he was convicted of 36 counts of violating Town Law and zoning ordinance. He was sentenced and remanded to jail on July 23, 1990. He was then discharged from custody later that day and the judgment of conviction was reversed on appeal on July 2, 1991, at which time all but one count was dismissed. The criminal prosecution on that one remaining count remained dormant until November 28, 2000, when his motion to dismiss for lack of speedy trial was granted.

The underlying claimant sued the Town of Newfane for malicious prosecution, false arrest, and false imprisonment, among other claims. Initially, the Appellate Division noted that the “offenses” of false imprisonment and false arrest were “committed” outside the Selective policy’s effective date of April 26, 2000. The only issue before the court was whether there was coverage for the malicious prosecution claim “where the criminal prosecution was initiated before the effective date of the policy but terminated in favor of the accused during the policy period.” The Appellate Division concluded, based on the language of the policy, that as a matter of law, there was no coverage for an underlying malicious prosecution cause of action because the date of the commencement of the underlying criminal prosecution was the controlling date for purposes of insurance coverage. The Appellate Division explained that

… the “offense” of malicious prosecution was “committed”, for purposes of determining the issue of insurance coverage, in 1989, more than a decade before the effective date of the Selective policy. That “offense was committed” when the prosecution was instituted, allegedly without probable cause. Such initiation of the criminal prosecution is the essence or gist of the tort of malicious prosecution. Moreover, the legal injury or “offense” incurred by the plaintiff in the underlying action (albeit not necessarily the damages incurred as a result of that “offense”) is the same irrespective of whether the criminal prosecution was known to be baseless when it was initiated or only subsequently demonstrated to be lacking in merit. Therefore, the injury to the accused was contemporaneous with the initiation of the criminal proceeding against him and hence complete long before the inception of coverage and the incidental termination of the criminal prosecution. We thus conclude that, for purposes of determining insurance coverage, malicious prosecution is not a continuing tort. We further conclude that the policy is to be construed as “fixing the point of coverage for malicious prosecution at one readily ascertainable date; the date on which the acts [we]re committed that [might] result in ultimate liability” or “when the alleged tortfeasor t[ook the] action resulting in the application of the [s]tate’s criminal process to the [plaintiff in the underlying action]”.….

Id. at 75-80 (internal citations omitted).

The Appellate Division acknowledged that a malicious prosecution claim may be premised on the initiation or continuation of a criminal proceeding without probable cause, and such claim does not accrue for purposes of the statute of limitations until the ultimate dismissal or favorable termination of the criminal charges. The Appellate Division further recognized that the damages incurred by reason of the continuation of a criminal prosecution might continue. Nevertheless, the court held that none of these considerations were determinative as the policy language focused on when the offense was committed, not when an action could have been brought or damages fully ascertained.

The New York courts emphasize construing and applying the policy language and considering whether false imprisonment, false arrest and malicious prosecution are deemed as “personal injury” or “offense” and whether the injury or the offense is required to happen during the policy period.

The next installment will review the law in California. In the meantime, if there are any questions about another jurisdiction, please contact us and we can address your questions directly.

Filed under General Liability

Contractual Liability Exclusion Not a Basis to Deny Coverage for Consumer Claims Against Genetic Testing Company

By on August 4, 2016
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The Federal District Court in San Jose, California, issued a recent decision interpreting a contractual liability exclusion issued by IronShore to 23andMe, Inc. Ironshore Specialty Ins. Co. v. 23andMe, Inc., 2016 U.S. Dist. LEXIS 96079 (N.D. Cal. July 22, 2016). 23andMe provided a “personal genomic service” to consumers wishing to access and understand their personal genetic information. The consumer purchases a DNA saliva collection kit and then sends the sample back to 23andMe for testing. The FDA objected to the marketing of the product under the Federal Food, Drug and Cosmetic Act. Civil litigation resulted including class actions filed by consumers in federal court, class arbitration complaints under AAA, as well as a Civil Investigative Demand (“CID”) from the State of Washington. The 23andMe customers alleged a variety of legal theories, principally asserting that 23andMe falsely represented the outcome of the personal genome services and that the testing yielded inaccurate and incomplete results.

Although the court agreed with IronShore that under California law a CID does not constitute a claim triggering the duty to defend, the court rejected the principle defense offered by IronShore that it had no duty to defend because of a contractual liability exclusion which provided that “this insurance does not apply…to claims based upon, arising out of, directly or indirectly resulting from or in any way involving:

  1. Contractual Liability

Your assumption of liability or obligations in a contract or agreement.

The court rejected IronShore’s argument that the broad language of the exclusion would include contracts made between 23andMe and its customers. Instead, adopting what the court viewed as the majority rule, the court held that this form of contractual liability does not apply to liabilities or obligations arising from the insured’s own contracts but rather only applies to liabilities and obligations that were originally those of a third party which were subsequently “assumed” by the insured. The court comprehensively reviewed the case law around the country but relied most heavily on a decision from the Michigan Court of Appeals in Peeker which concluded that the phrase “assumption of liability” in the context of a contractual liability exclusion refers to those contracts or agreements in which the insured assumes the liability of another. The court also emphasized that if the court were to adopt in IronShore’s construction of the contractual liability exclusion, virtually all claims relating to 23andMe’s professional services would have been excluded from coverage.

Filed under Breach of Contract, Declaratory Judgment Actions, Exclusion

Connecticut Legislation Requiring Homeowners Policies to Provide Coverage for Collapse and Mitigation Crumbles, But All Is Not Lost for Homeowners

By on July 27, 2016
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*Republished with permission of the Connecticut Law Tribune and The Insurance Coverage Law Bulletin.

A bill requiring homeowners insurance policies in Connecticut to provide coverage for the peril of collapse and mitigation undertaken to prevent all or part of a covered dwelling from falling down or caving in recently failed in the Connecticut Legislature. Following a very narrow 10-9 joint favorable report from the Insurance and Real Estate Committee, the Connecticut Legislature did not act on House Bill No. 5522, An Act Concerning Homeowners Insurance Policies and Coverage For The Peril Of Collapse (“HB 5522”). The demise of HB 5522 is significant for insurers since homeowners policies are not intended to serve as a home warranty or cover non-fortuitous/non-accidental losses, latent defects, improper workmanship/construction and defective materials. More significantly, HB 5522, aside from myriad coverage issues created by the bill’s language, would have likely resulted in premium hikes for Connecticut homeowners to cover what courts have repeatedly found to be uncovered claims.

HB 5522 would have required every insurance company delivering, issuing for delivery, renewing, amending, or endorsing a homeowners policy in Connecticut on or after the effective date (from passage of the legislation) to provide coverage for:

  1. the peril of collapse, including partial or total impairment of a covered dwelling’s structural integrity due to facts such as (a) hidden decay or (b) defective materials or construction methods used in constructing or renovating part or all of the building; and
  2. any mitigation taken to prevent all or part of a covered dwelling from falling down or caving in.

The impetus behind HB5522 is to provide insurance coverage to homeowners for the period of collapse and mitigation following the discovery of crumbling concrete foundations of numerous homes generally located in eastern Connecticut. The cause(s) of the crumbling foundations is unclear at this point, though it appears that the mineral pyrrhotite in stone aggregate used in the production of concrete is a factor in crumbling foundations. It has been alleged that degradation to foundations has happened over a period of years, and appears to impact homes built in the 1980s and 1990s. The crumbling concrete issue has spawned numerous individual and class action lawsuits by impacted property owners seeking coverage under their homeowners policies.

But All Is Not Lost

Despite HB5522’s loss of footing, the Connecticut Legislature overwhelmingly passed House Bill No. 5180/Public Act 16-25, An Act Concerning Concrete Foundations (“PA 16-25”). Governor Dannel P. Malloy signed the legislation on May 25, 2016. PA 16-25, which has various effective dates, establishes requirements concerning residential and concrete foundations, including: (1) establishing additional requirements to obtain a certificate of occupancy for a new residential or commercial building for which a concrete foundation was installed on or after October 1, 2016; (2) requiring municipalities, at the owner’s request, to reevaluate residential properties with foundations made from defective concrete; (3) requiring the Connecticut Department of Consumer Protection, after consulting with the Connecticut Attorney General, to investigate the cause(s) of failing concrete foundations and submit the report to the Legislature’s Planning and Development Committee no later than January 1, 2017; and (4) requiring executive agencies to maintain records concerning faulty or failing concrete foundations in residential buildings as confidential for at least seven years (notably P.A. 16-25 exempts these records from disclosure under the Connecticut Freedom of Information Act).

Additionally, on October 6, 2015, in response to the crumbling concrete issue, the Connecticut Insurance Department issued a formal notice (“Notice”) to all insurers writing homeowners insurance in Connecticut. The Notice informs insurance companies that they cannot cancel or non-renew a homeowner’s policy due to a crumbling foundation. The Notice specifically “directs that no insurer take any action to cancel or non-renew an affected homeowner’s insurance coverage as a result of a foundation found to be crumbling or otherwise deteriorating.” The Notice warned that any non-renewal action taken by an insurer be strictly in accordance with its underwriting guidelines and rules filed with and recorded effective by the Insurance Department.

The State Continues to Investigate

In July 2015, Connecticut Governor Dannel P. Malloy called on the Department of Consumer Protection and the Office of the Attorney General to conduct an investigation into the crumbling foundation issue. The focus of the investigation is to determine if there is a basis to initiate legal action under the Connecticut Unfair Trade Practices Act, based on the manufacture, sale or installation of concrete foundations in eastern Connecticut. As part of that investigation, the state has retained a civil engineer to take core samples from crumbling foundations in eastern Connecticut and test and analyze them to determine the cause of the deterioration and determine the number of impacted homeowners. At this point, the investigation has determined that pyrrhotite is a factor in crumbling foundations, and the investigation continues to search for other conditions that contribute to deteriorating foundations, but that it does not appear that any consumer protection laws were violated. And only a month ago the state reached an agreement with two eastern Connecticut companies taking concrete products off the residential foundation market until June 2017.

To view the CT Law Tribune article, click here.

Filed under Collapse, Construction Defect, First Party Policy

California Supreme Court Holds that Brandt Fees Are Part of Compensatory Damages to be Assessed for Constitutionality of Punitive Damages Awards

By and on June 24, 2016
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On June 9, 2016, in Nickerson v. Stonebridge Life Ins. Co. (2016) 2016 Cal. LEXIS 3757, the California Supreme Court ruled that Brandt fees, either awarded by a jury or a court, must be considered to determine whether and to what extent a punitive damages award exceeds constitutional bounds.

The insured sued his insurer for breach of contract and bad faith for failure to pay benefits under an indemnity benefit policy. The policy promised to pay the insured $350 per day for each day the insured was confined in a hospital for medically necessary care and treatment of a covered injury. The insurer paid only 18 out of 109 days of hospitalization.

The case proceeded to verdict and the jury awarded the insured $31,500 for breach of contract, $35,000 for bad faith, and $19 million in punitive damages. Before trial, the parties had stipulated the trial court could determine the amount of Brandt fees post-verdict.  The trial court awarded the insured $12,500 in Brandt fees.

The insurer moved for a new trial seeking a reduction in the punitive damages award because it was unconstitutionally excessive. The trial court granted the motion for new trial unless the insured accepted a reduction of punitive damages to $350,000. The trial court did not include Brandt fees in that calculation.

The insured appealed the order granting the new trial. The Court of Appeal affirmed, holding the trial court properly reduced the punitive damages award to a 10-to-1 ratio, even without the inclusion of the $12,500 in Brandt fees. The California Supreme Court granted review and reversed.

The California Supreme Court relied on the United States Supreme Court’s three guideposts that reviewing courts must consider to determine whether an award of punitive damages violates due process rights under the Fourteenth Amendment: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. (See BMW of N. America, Inc. v. Gore (1996) 517 U.S. 559, 568.)

Focusing on the second guidepost, the California Supreme Court noted that “few awards exceeding a single-digit ratio between punitive damages and compensatory damages . . . will satisfy due process.” Gore, 517 U.S. at 425. Ratios of punitive damages to compensatory damages that greatly exceed 9 or 10 to 1 are presumed excessive and therefore unconstitutional. (See Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, 1182.)

In reversing the judgment, the California Supreme Court reasoned that disregarding Brandt fees as a necessary component of the insured’s harm “skew[s] the proper calculation of the punitive-compensatory ratio.” The result impairs the reviewing courts’ full consideration of whether the punitive damages award exceeds constitutional limits.

The Court also rejected the insurer’s argument that a trial court’s award of Brandt fees, as opposed to a jury’s verdict, should not be included in the calculation of compensatory damages, overruling Amerigraphics, Inc. v. Mercury Casualty Co. (2010) 182 Cal.App.4th 1538.

Filed under Punitive Damages

California Court of Appeal Rules Parent Company Lacks Standing to Bring Declaratory Relief Action Against Subsidiary’s Insurer

By and on May 11, 2016
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In an opinion filed March 30, 2016, the California Court of Appeal for the First Appellate District held that the trial court properly sustained a demurrer, without leave to amend, as to a parent corporation’s declaratory relief complaint against its subsidiary’s insurer. D. Cummins Corporation v. United States Fidelity and Guaranty Company (2016) 2016 Cal.App.LEXIS 342. The court found that the parent company failed to show that an actual controversy between it and its subsidiary’s insurer existed.

The insured was D. Cummins Corporation (“Subsidiary”), a corporation engaged in the business of installing asbestos containing products. The Subsidiary and its parent, Cummins Holding LLC (“Parent”), brought a state court declaratory relief action against the Subsidiary’s insurer, United States Fidelity and Guaranty Company (“Insurer”). The Subsidiary and Parent sought a declaration relating to insurance coverage for underlying asbestos bodily injury claims.

The Insurer removed the action to federal court on the ground that the Parent, whose inclusion in the lawsuit defeated diversity jurisdiction, was fraudulently joined. The federal court remanded the case and the Insurer demurred to the Parent’s declaratory relief claim on the ground it lacked standing. The trial court sustained the demurrer and the Parent appealed.

The court of appeal cited to California’s declaratory relief statute, Code of Civil Procedure (“CCP”) section 1060, which provides that “[a]ny person interested under a written instrument … may, in cases of actual controversy … bring an original action … for a declaration … including a determination of any question of construction or validity arising under the instrument or contract.” Further, CCP section 1061 provides that the court may refuse to issue a declaratory judgment where the court’s “declaration or determination is not necessary and proper.”

The Parent argued that it had standing because it had a “practical interest in the proper interpretation of [its Subsidiary’s] insurance policies given its relationship to, and its central role in the pursuit of those insurance assets.” The appellate court rejected this argument because the Parent had not shown how this alleged indirect interest translated into “a legally cognizable theory of declaratory relief.”

The Parent next argued that its participation in the litigation was necessary since Subsidiary had no assets of its own. The appellate court rejected this argument because the Subsidiary’s lawsuit was continuing in the trial court notwithstanding the fact Parent’s claims were dismissed. Finally, the Parent cited to a number of decisions for the proposition that in some cases, parties have been permitted to bring declaratory relief actions even though they were not directly affected by the challenged contract, regulation or statute. The appellate court rejected this argument as well, finding that Parent had not alleged any theory showing it had more than an indirect interest in the policies at issue.

The appellate court held that because Parent had no contractual privity with the Insurer and was not otherwise interested in the policy, the trial court acted within its discretion in holding a declaration of Parent’s rights was “not necessary or proper at the time under all the circumstances.”

The practical significance of this case is twofold. First, it highlights that, while California’s declaratory relief statutes are broad, they are not limitless. Second, the constraints on California’s declaratory relief statutes articulated in the decision will make it more difficult for plaintiffs to include parties with no practical interest in declaratory relief actions for the purpose of defeating diversity jurisdiction.

Filed under Declaratory Judgment Actions

Insurance Companies Held Liable As Real Parties In Interest After Unsuccessfully Prosecuting Action Under Assigned Contract With Attorneys’ Fees Provision

By and on May 11, 2016
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In Hearn Pacific Corporation v. Second Generation Roofing, Inc. 2016 Cal. App. LEXIS 354 (May 2, 2016), the California Court of Appeal, First Appellate District, reversed an order denying a subcontractor’s motion to add two insurance companies as judgment debtors in an action after the insurers unsuccessfully prosecuted a contractual indemnity claim based upon an assignment of rights under a contract which included an attorneys’ fees provision.

The Court of Appeal determined that the trial court had abused its discretion in refusing to add North American Specialty Insurance Company (“North American”) and RSUI Group, Inc. (“RSUI”) as judgment debtors in a lawsuit under California Code of Civil Procedure section 368.5. The appellate court held that the insurers’ ability to prosecute the action in the insured transferee’s name under the statute did not insulate them from exposure as real parties in interest. The appellate court similarly found that North American and RSUI should be added as judgment debtors even though they only received a partial assignment of rights from their insured.

The Court of Appeal also rejected the trial court’s finding that Insurance Code section 11580 prevented the subcontractor from suing North American and RSUI. Although Insurance Code section 11580 provided certain litigants with a means to sue third-party insurers for policy benefits, the appellate court found that there was no language in the statute which indicated that it provided an exclusive remedy against insurers who had prosecuted assigned rights under a contract. In so ruling, the Court of Appeal partially rejected the Ninth Circuit’s decision in Fireman’s Fund Ins. Co. v. City of Lodi, California (9th Cir. 2002) 302 F.3d 928 which broadly interpreted the statute.

Filed under Commercial General Liability

Are Insurance Late Notice Provisions Toothless After Arrowood v. King?

By and on May 10, 2016
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*Republished with permission of the Connecticut Law Tribune and The Insurance Coverage Law Bulletin.

Until 2012, an insured seeking coverage after providing late notice of a claim had the burden of proving that its insurer was not prejudiced by the late notice — if the insured could not meet this burden, then the claim would not be covered. See Aetna Cas. & Surety Co. v. Murphy, 206 Conn. 409 (1988); see also Case Notes, infra. In a surprise decision in 2012, Arrowood Indemnity Co. v. King, 304 Conn. 179 (2012), the Supreme Court of Connecticut sua sponte shifted the burden of proof to the insurer, requiring insurers to affirmatively prove that they were prejudiced in order for late notice to negate coverage. Id. (overruling Aetna Casualty & Surety Co. v. Murphy, 206 Conn. 409, 538 A.2d 219 (1988)). Now four years out from King, this article examines subsequent Connecticut case law addressing late-notice provisions in various insurance policies and attempts answer the question: Are late notice provisions now toothless or do they still have some bite?

The claim at issue in King arose from a 2002 accident wherein the insureds’ son towed a friend, who was riding a skateboard, behind an ATV owned by the insureds. The friend on the skateboard (unsurprisingly) suffered significant injury. After the incident, the families socialized and the family of the injured boy never expressed an intent to file suit. As a result, the policyholders never provided notice to their homeowner’s insurance company of a potential claim under their policy until after they were served with a complaint.

The ensuing insurance dispute made its way up to the U.S Court of Appeals for the Second Circuit, where the court certified several questions to the Connecticut Supreme Court, just one of which pertained to late notice. The notice issue was framed as whether the socialization of the families and lack of an indication of intent to file suit excused the delay of notice when the policy required the insured to “give notice as soon as practical.” The court held that the accident was of such a severe nature that any reasonable person would expect a claim could arise. The court noted, however, that there must be prejudice to the insurer before it could be excused from coverage based on the late notice of claim.

Unexpectedly, the court took the opportunity to revisit the burden of proof on the demonstration of prejudice caused by late notice of a claim. Since 1988, Connecticut law allowed insurers to enjoy a presumption of prejudice caused by late notice of a claim; accordingly, it was up to policyholders to disprove prejudice once late notice was established. See Murphy, supra. The King Court concluded that, moving forward, insurance companies would have the burden of proving that they were prejudiced due to late notice of a claim by a preponderance of evidence. See King, supra; see also Arrowood Indem. Co. v. King, 699 F.3d 735 (2d Cir. 2012) (affirming ruling of District Court based on responses to certified questions). The King Court held that this was appropriate because placing the burden on the insured often left the latter with the difficult (if not impossible) task of proving a negative, which difficulty was further exacerbated by the insurer’s potential interest in concealing information regarding whether it actually suffered prejudice. The court reasoned that leaving the burden of proof with the insured would reduce the likelihood of the factfinder obtaining enough information to make the correct determination on the issue of prejudice, creating an unfair result.

With insurers assuming the burden of proving prejudice caused by late notice in the wake of King, outcomes have been mixed. The new burden of proof was first applied in Connecticut with some analysis by the district court in Prizio v. Lincoln National Life Insurance Co., No. 3:11-CV-736 (JBA), 2014 U.S. Dist. LEXIS 43886 (D. Conn. Mar. 31, 2014), in a case that was not particularly close. In Prizio, the insured made a claim for long-term total disability benefits because she fell into a deep depression after her husband’s death. She claimed that her disability began in May of 2006, but she did not make a claim for benefits for over three years, until July of 2009. Her insurer moved for summary judgment, claiming that it was prejudiced by late notice of the claim because it was unable to interview the insured’s co-workers and clients from the pre-May 2006 period, when the plaintiff also purportedly suffered from depression, or to obtain adequate contemporaneous medical information from 2006 to 2009.

Further, the insured did not blame her late notice on her depression, but rather said that she was reluctant to open herself up to a fight with the insurer, and also said that she did not initially know whether her insurance covered mental disabilities. On this record, the court held that the insurer satisfied its burden of proving prejudice, and granted its motion for summary judgment, but not before chastising the insurer for erroneously (and perhaps disingenuously) arguing that the burden of disproving prejudice rested with the insured as it had before King.

About two months after the Prizio decision, the first superior court decision addressing a late notice claim under the post-King framework was issued, though it was not particularly illuminating. Jarrett v. Gov’t Employees Ins. Co., No. CV-13-6036638-S, 2014 Conn. Super. LEXIS 1379 (Conn. Super. Ct. June 4, 2014) (Sommer, J.). The Jarrett plaintiffs suffered a hit-and-run and made an uninsured motorist claim to their insurer 11 months later, even though their policy required notice of hit-and-run accidents within 30 days. The insurer filed a motion to dismiss the plaintiffs’ suit based on their failure to satisfy a condition precedent to coverage, and the court’s consequent lack of subject matter jurisdiction to hear the suit.

The court, in a thoughtful opinion, rejected this argument and denied the motion to dismiss. Although the plaintiffs were undisputedly late in filing their claim and “failed to comply with the relevant cooperation clause,” the court observed that “Supreme and Appellate Court precedent requires the court to make a factual determination on prejudice before it can decide whether the plaintiffs’ failures are a valid enough reason to deny coverage.” Given the court’s remark that the plaintiffs’ lapse might affect the merits of the case, it may have rendered a different decision if the argument had been raised, as it should have been, by a motion for summary judgment. Timely notice is arguably all the more important, and a prejudice defense all the more compelling, in a hit-and-run case, where information can be inherently difficult to gather.

Next, the District of Connecticut addressed the case of State Farm Fire & Casualty Co. v. Yoel, No. 03:13CV101 (AWT), 2014 U.S. Dist. LEXIS 116742, at *11-22 (D. Conn. Aug. 21, 2014). By most accounts, the insured, Mr. Yoel, punched another man several times until his mouth was bloody and he fell onto the ground. However, the accounts began to diverge at that point, as Mr. Yoel testified that the man got right up and seemed okay, whereas his victim stated that he was unconscious and did not regain consciousness until he was brought to the hospital after the fight. Though the altercation occurred in June of 2010, Mr. Yoel did not report his claim to his insurer until January 2012, prompting his insurer to seek summary judgment on the grounds that Mr. Yoel gave late notice of his claim.

The court denied the motion, however, due to an issue of fact as to both prongs of the controlling analysis. First, there was a disputed fact as to whether Mr. Yoel was guilty of “unreasonable delay” in reporting his claims due to conflicting evidence of whether he appreciated the extent of his victim’s injuries. Second, the insurer had not conclusively proven prejudice, because the witness whom the insurer claimed it had lost the ability to interview had provided a statement to the police just after the incident, and the statement was available to the insurer.

The pendulum swung in the insurers’ favor, however, with two Superior Court decisions: Jazlowiecki v. Nationwide Ins. Co. of Am., No. HHD-CV126036618S, 2014 Conn. Super. LEXIS 2004 (Aug. 8, 2014) and Argonaut Insurance Co. v. Town of Berlin, No. CV-12-6017084, 2014 Conn. Super. LEXIS 2929, at *1-11 (Conn. Super. Ct. Dec. 1, 2014) (Swienton, J.).

Jazlowiecki involved a claim for coverage under a homeowner’s insurance policy, after the insured was subject to a counterclaim alleging harassment, retaliation, nuisance, injunctive relief and statutory violations stemming from a dispute between neighbors. Nationwide disclaimed coverage, asserting a late notice defense (among others). The Court (Wahla, J.) granted summary judgment for Nationwide, agreeing that notice was late (it should have been given when the counterclaim was formally served on the insured instead of 10 months later on the eve of trial) and that Nationwide was prejudiced thereby because “discovery had closed, experts had been retained and disclosed, the trial management conference had been completed, and the trial was scheduled to commence within days,” thus robbing Nationwide of its ability to meaningfully participate in the defense.

In Argonaut Insurance, the company pursued a declaratory judgment and moved for summary judgment when it was not notified of a workers compensation claim until 18 months after the incident. The Town apparently did not contest that its delay was unreasonable, instead arguing that the insurer could not establish a good defense to the underlying claim, as the Town argued was necessary to establish prejudice. The insurer argued that it did not need to establish a defense to the underlying claim, since General Statutes Section 31-294(c) created a conclusive presumption that the insurer accepted the claim because it did not contest the claim within 28 days of written notice to the employer, and the deprivation of the insurer’s right to contest the claim constituted prejudice as a matter of law. The court sided with the insurer, granting summary judgment in its favor.

The sixth (and most recent) case to consider this issue did so after trial, holding that the claims notice by the pro se insured, an elderly widow, was not prompt but was nonetheless not unreasonably delayed where she waited until after the spring thaw to present a claim for water damage, and further holding that her homeowners insurer failed to provide any evidence of prejudice. Garre v. Peerless Ins. Co., No. CV-12-6013760S, 2015 Conn. Super. LEXIS 199 (Conn. Super. Ct. Jan. 30, 2015) (Pellegrino, J.T.R.).

Although the evidence showed that the damage stemmed from a storm occurring in late February 2011, with ice damming and significant water seepage occurring after the storm, the plaintiff failed to report the loss until the summer of 2011, in part because she did not know she could. Nonetheless, the court held that the insurer failed to present evidence of prejudice and that, in any event, the insurer was not prompt in its investigation of the claim because it did not send its representative to the plaintiff’s home until months after the claim was made.

At that point, it denied her claim based on “long-term repeated seepage of water, lack of maintenance and visible rot,” a denial which the court held was unsupported by “credible” evidence. Notably, Judge Zemetis had denied a prior motion for summary judgment by Peerless as well, holding that the insurer had failed to substantiate its “mere assertion that ‘the property was not protected in any way from further damage between the date of the alleged loss and the date it was reported to Peerless six months later.’” Garre v. Peerless Ins. Co., No. CV-12-6013760, 2013 Conn. Super. LEXIS 1763, *15, 2013 WL 4504933 (Conn. Super. Ct. Aug. 6, 2013). Accordingly, Peerless failed to prove either prejudice or a breach of the policy’s late notice provision.

As a final note, notwithstanding the above, the type of insurance policy at issue matters. Connecticut law remains clear that proof of prejudice is not required where claims-made policies are at issue, and summary judgment in such cases is routinely granted even without proof of prejudice. See Tucker v. Am. Int’l Group, Inc., No. 3:09-CV-1499 (CSH), 2015 U.S. Dist. LEXIS 9874, *33-34 (D. Conn. Jan. 28, 2015) (Haight Jr., J.) (citing ITC Investments, Inc. v. Employers Reins. Corp., No. CV-98-115128-S, 2000 Conn. Super. LEXIS 3544 (December 11, 2000) (Corradino, J.)); D&M Screw Mach. Prods., LLC v. Tabellione, CV-12-6017117S2014, Conn. Super. LEXIS 417, *11 (Conn. Super. Ct. Feb. 24, 2014) (Gleeson, J.).

Claims-made policies aside, what’s clear from case law in the wake of King is that, while the late notice defense has been dulled by the burden-switching decision, it remains a viable defense and is far from toothless. Care must be taken in the pursuit of such defenses in the case of insurers, and in contesting such defenses in the case of insureds. Policyholders should provide notice as soon as possible lest coverage be foreclosed. Insurers would be wise to document any prejudice they may suffer as a result of late notice, should think twice about denying homeowner’s coverage to sweet old ladies, and should investigate claims promptly in order to boost the chance of success on a late-notice defense.

Filed under Claims Made Policy, Late Notice

Oregon Courts Protect Insurers from Attorney’s Fee Awards in Uninsured/Underinsured Motorist Claims in Trio of Recent Cases

By and on May 9, 2016
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The issue of attorney’s fees in cases involving uninsured/underinsured motorist (“UM” or “UIM”) benefits has been a hot topic in Oregon recently, with the Oregon Court of Appeals issuing a decision on this issue once a month for first three months in 2016. In Oregon, an insurer is entitled to a so-called “safe harbor” from the obligation to pay attorney’s fees in UIM cases if “the only issues are the liability of the uninsured or underinsured motorist and the damages due the insured.” ORS 742.061(3). However, if an insurer raises any issues beyond the scope of ORS 742.061(3), the insured is entitled to attorney’s fees.

In January of 2016, the Oregon Court of Appeals addressed what is meant by the phrase “damages due the insured” in ORS 742.061(3). In Spearman v. Progressive Classic Ins. Co., 276 Or. App. 114 (2016), the insured was involved in an accident with an uninsured motorist and sought recovery from his UIM insurer for only “unreimbursed accident-related medical expenses,” i.e. only those expenses for which the insured had not already been reimbursed under other coverage. In its Answer to the Complaint, the insurer admitted that the insured sustained “some” injury in the collision but disputed the “nature and extent” of the insured’s alleged injuries and disputed the “reasonableness and necessity” of some of the insured’s accident-related medical expenses.

The insured argued that he was entitled to attorney’s fees because the phrase “damages due to the insured” meant “the amount of the benefits due the insured,” and a dispute suggesting that the insurer owes no benefit, or that the insured had no unreimbursed accident-related medical expenses, exceeded the scope of the safe harbor in ORS 742.061(3). In other words, the insurer’s challenge to the “reasonableness and necessity” of medical expenses, and the resulting argument that the insured was otherwise fully compensated for his injuries, would allow the fact finder to determine that the insured was not entitled to any award in the UIM action, thereby raising an issue beyond those permitted by ORS 742.061(3).

However, after examining the purpose of UM/UIM benefits and the statutory context of ORS 742.061, the Court of Appeals rejected the insured’s contention and held that the phrase “damages due the insured” refers to what the insured could recover from the uninsured motorist, not from the insurer. Consequently, even though the insurer’s pleadings put at issue the possibility that plaintiff would recover no benefit in the UIM action, such allegations raised issues only as to the damages that the insured would be entitled to recover from the uninsured motorist, as permitted by ORS 742.061(3). As a result, the insured was not entitled to attorney’s fees.

Then, in February of 2016, the Oregon Court of Appeals again held that where an insurer challenged the existence of an insured’s alleged injuries caused by an underinsured motorist, the safe harbor provision applied. Kelley v. State Farm Mutual Automobile Ins. Co., 276 Or. App. 553 (2016). The court noted that in Spearman, it had concluded “that the issues that are within the scope of ORS 742.061(3) are the issues of liability and damages that an insured would have to establish in an action against the uninsured or underinsured motorist.” Therefore, the insurer’s denial that the insured injured his shoulder in the collision raised only an issue “of liability and damages that an insured would have to establish in an action against the uninsured or underinsured motorist.” The Court concluded that the insured was within the safe harbor scope of ORS 742.061(3) and the insured was not entitled to attorney’s fees.

Finally, in March of 2016, the Oregon Court of Appeals issued yet another decision favorable to insurers on the safe harbor provision. Robinson v. Tri-County Metropolitan Transportation Dist. of Oregon, 277 Or. App. 60 (2016). In Robinson, the plaintiff suffered injuries as passenger in a Tri-County Metropolitan Transportation District (“Tri-Met”) vehicle when it stopped suddenly to avoid a collision with a “phantom vehicle.” In her subsequent lawsuit, the plaintiff argued that she was entitled to attorney’s fees from Tri-Met, a self-insurer, because Tri-Met asserted affirmative defenses that went beyond the scope of ORS 742.061(3). Specifically, Tri-Met allegedly went beyond the safe harbor provision by (1) asserting the possibility of the insured recovering nothing based on offset; (2) alleging the collateral source offset issue; and (3) alleging the insured had failed to state a claim for Tri-Met’s negligence.

The Court of Appeals rejected the first argument based on Spearman, holding that “[i]n the determination of damages, a zero recovery can be a permissible outcome in a UM/UIM claim as a simple matter of fact or evidence, and, as such, it is a permissible outcome within the bounds of the fee exemption in ORS 742.061(3).”

With respect to the second issue, plaintiff argued that Tri-Met’s allegation of collateral source offset automatically disqualified Tri-Met from the fee exemption. However, the affirmative defense was pled as a matter of course, as a contingency, and there was no actual dispute about the existence, enforceability, or applicability of an offset. By looking to the dictionary definition of the term “issue,” the court noted that “[b]ecause the word is used here in the adversarial context of arbitration or litigation, an ‘issue’ is a matter of live controversy, active contest, or actual dispute.” The Court of Appeals concluded that “an insurer’s boilerplate reference to such a matter is a nonissue.” Because nothing in the record showed that the collateral source allegation was actually developed, disputed, or decided, Tri-Met’s reference to a “nonissue” did not disqualify it from the fee exemption.

The Court of Appeals dispensed with the insured’s third argument by stating that UIM claims turn on the fault of the uninsured driver, not Tri-Met. As a result, any response by Tri-Met regarding the negligence of its driver was a “non sequitur” in a UIM claim.

The Court of Appeals attempted to reconcile the Robinson decision with its prior decision in Kiryuta v. Country Preferred Insurance Co., 273 Or. App. 469 (2015), where the court ruled that the affirmative defenses of “Offset” and “Contractual Compliance” destroyed the insurer’s safe harbor protection. The court explained that in Kiryuta, the insurer accepted coverage in the safe harbor letter but then reserved the prospect to deny coverage by asserting that UIM benefits “are subject to all terms and conditions of the policy of insurance.” The Robinson court observed that the Kiryuta decision “did not consider the question here involving an insurer’s reference to a particular provision, one which did not develop into an actual dispute and especially one that was potentially necessary to calculate sums ultimately payable, such as a policy limit or an offset against damages.” The court so held, despite the fact that the insurer argued that the affirmative defenses were not in dispute, i.e. the affirmative defenses were not intended to assert that some term in the policy prevented plaintiff from recovering any damages and only the damages due to the insured was raised and litigated in the arbitration.

The Kiryuta decision has been accepted for review by the Oregon Supreme Court.

Filed under Attorneys’ Fees, Auto

BREAKING: Connecticut Legislation Requiring Homeowners Policies to Provide Coverage for Collapse and Mitigation Crumbles

By on May 6, 2016
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A bill requiring homeowners insurance policies in Connecticut to provide coverage for the peril of collapse and mitigation undertaken to prevent all or part of a covered dwelling from falling down or caving in failed in the Connecticut Legislature. Following a very narrow 10-9 joint favorable report from the Insurance and Real Estate Committee, the Connecticut Legislature did not act on the bill. The demise of House Bill No. 5522, An Act Concerning Homeowners Insurance Policies and Coverage For The Peril Of Collapse (“HB 5522”), is significant for insurers since homeowners policies are not intended to serve as a home warranty or cover non-fortuitous/non-accidental losses, latent defects, improper workmanship/construction and defective materials. More significantly, HB 5522, aside from myriad coverage issues created by the bill’s language, would have likely resulted in premium hikes for Connecticut homeowners to cover what courts have repeatedly found to be uncovered claims.

HB 5522 would have required every insurance company delivering, issuing for delivery, renewing, amending, or endorsing a homeowners policy in Connecticut on or after the effective date (from passage of the legislation) to provide coverage for:

  1. the peril of collapse, including partial or total impairment of a covered dwelling’s structural integrity due to facts such as (a) hidden decay or (b) defective materials or construction methods used in constructing or renovating part or all of the building; and
  2. any mitigation taken to prevent all or part of a covered dwelling from falling down or caving in.

The impetus behind HB5522 is to provide insurance coverage to homeowners for the period of collapse and mitigation following the discovery of crumbling concrete foundations of numerous homes generally located in north-central and northeastern Connecticut. The cause of the crumbling foundations is unclear at this point, and it has been alleged that degradation to foundations has happened over a period of years, and appears to impact homes built in the 1980s. In July 2015, Connecticut Governor Dannel P. Malloy called on the Department of Consumer Protection (“DCP”) and the Office of the Attorney General to conduct an investigation into the crumbling foundation issue. Since that time, other state agencies, including the Insurance Department, Department of Banking, Department of Administrative Services, and Department of Housing, as well as federal, state and municipal officials, have worked with DCP on the issue. During this time, numerous individual and class action lawsuits have been instituted by impacted homeowners seeking coverage under their policies.

Also significant for insurers is that on October 6, 2015, in response to the crumbling concrete issue, the Connecticut Insurance Department issued a formal notice (“Notice”) to all insurers writing homeowners insurance in Connecticut. The Notice informs insurance companies that they cannot cancel or non-renew a homeowner’s policy due to a crumbling foundation. The Notice specifically “directs that no insurer take any action to cancel or non-renew an affected homeowner’s insurance coverage as a result of a foundation found to be crumbling or otherwise deteriorating.” The Notice warned that any non-renewal action taken by an insurer be strictly in accordance with its underwriting guidelines and rules filed with and recorded effective by the Department.

Filed under Collapse, Construction Defect, First Party Policy

Colorado Supreme Court Rejects Notice-Prejudice Rule for “No Voluntary Payments” Provision in CGL Policy

By on April 25, 2016
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In Travelers Property Casualty Co. v. Stresscon Corp., ___ P.3d ___, 2016 CO 22 (Colo. No. 13SC815, April 25, 2016), the Colorado Supreme Court reversed the Colorado Court of Appeals’ decision which held that the notice-prejudice rule—which requires an insurer to show prejudice as a result of a policyholder’s delay in giving notice of a claim in order to deny coverage for the claim—does not apply to the “no voluntary payments” provision in a Comprehensive General Liability (CGL) insurance policy.

In a 4-3 decision, the court held that the notice-prejudice rule, which it first applied to first-party insurance policies in Clementi v. Nationwide Mutual Fire Insurance Co., 16 P.3d 223 (Colo. 2001), and later extended to third-party occurrence-based policies in Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo. 2005), does not apply when the policyholder makes voluntary payments in settlement of a claim in contravention of a policy’s “no voluntary pay­ments” provision. The insured, Stresscon, was a concrete subcontractor that was sued by the general contractor over an accident caused by a crane operator who was Stresscon’s sub­contractor. Stresscon entered into a settlement agreement with the general contractor without having contacted its liability insurer, Travelers. Stresscon settled the accident-related claim, along with other unrelated and concededly uncovered claims against Stresscon, without differentiation as to amount, and then sued Travelers for coverage of the settlement and for bad faith under the common law and Colo. Rev. Stat. § 10-3-1116. Stresscon prevailed at trial and was awarded damage for breach of contract and bad faith.

In the trial court and Colorado Court of Appeals, Travelers argued that Stresscon was not entitled to coverage due to its violation of the policy’s “no voluntary payments” clause by settling with the general contractor without notifying Travelers of the loss or payment, and without seeking Travelers’ permission for or approval of the settlement. Both lower courts rejected Travelers’ argument, with the Court of Appeals holding that the notice-prejudice rule of Friedland applies to “consent to settle” and “no volun­tary payments” clauses and requires the insurer to prove that it suffered prejudice as a result of the insured’s voluntary settlement of a claim without the insurer’s notice or consent. The Court of Appeals concluded that “forfeiting insurance benefits when the insurer has not suffered any prej­udice would be a disproportionate penalty and provide the insurer a windfall based on a technical violation of the policy.” Stresscon Corp. v. Travelers Property Casualty Co., 2013 COA 131, ¶ 45 (Colo. App. Nos. 11CA1239 & 11CA1582, Sept. 12, 2013).

The Colorado Supreme Court disagreed with the Court of Appeals, finding that the justifications for the notice-prejudice rule in Clementi and Friedland did not extend to the “no voluntary payments” provision. First, the court noted that neither Clementi nor Friedland dealt with or addressed a “no voluntary payments” provision, such that there was no precedent for extending the notice-prejudice rule to “no voluntary payments” provisions: “Whatever the state of the law in this jurisdiction may have been with regard to the no-voluntary-payments provision in Friedland, or the one at issue before us today, it was neither addressed nor directly impacted by our decision to extend our notice-prejudice rule in Friedland.”

Next, the court “did not find our justification for adopting a notice-prejudice rule in Clementi and Friedland to apply with the same force to the enforcement of agreements not to incur costs or obligations on behalf of an insurer without the insurer’s consent.” Citing “the freedom to contract,” which the court observed “is especially important in the insurance industry, where the terms of a policy distribute risk and define the very product that is bargained for,” the court determined that the “no voluntary payments” provision “far from amounting to a mere technicality imposed upon an insured in an adhesion contract, was a fundamental term defining the limits or extent of coverage.” This is because the “no voluntary payments” clause “clearly excluded from coverage any payments voluntarily made or obligations voluntarily assumed by the insured without consent, for anything other than first aid. The insurance policy emphatically stated that any such obligations or payments would be made or assumed at the insured’s own cost rather than by the insurer.”

Accordingly, the court concluded, unlike the notice requirements in Clementi and Friedland, which place an affirmative duty on the insured to give timely notice of a claim in order to invoke coverage, “the no-voluntary-payments clause in this case does not purport to impose a duty on the insured to do anything, whether for the purpose of assisting in the insurer’s investigation or defense of a claim, or otherwise.” “Nor does it impose a duty on the insured to refrain from doing something the doing of which would violate the terms of the contract and call for an appropriate remedy,” the court explained, inasmuch as “voluntarily making a payment, assuming an obligation, or incurring an expense necessarily entails affirmative, and voluntary, action on the part of the insured.” Instead, the court held, “the no-voluntary-payments clause of the contract at issue here actually goes to the scope of the policy’s coverage.” As the court explained, the “no voluntary payments” clause means that coverage does not extend to payments made by the policyholder without the insurer’s consent:

Rather than a provision purporting to bar an insured from voluntarily making payments or incurring expense without the consent of the insurer, for the breach of which the insurer would be absolved of compliance with its obligations under the policy, the no-voluntary-payments provision makes clear that coverage under the policy does not extend to indemnification for such payments or expenses in the first place, and instead, the no-voluntary-payments clause merely specifies that as uncovered expenses they will not be borne by the insurer.

Thus, the court concluded, “While there will virtually always be room for debate about the contours of any particular no-voluntary-payments clause, whether the insured acts out of ignorance of the coverage or by design, in an attempt to deprive the insurer of its contractually-granted choice to provide a defense or settle the claim, or for some other reason altogether, the enforcement of such a provision according to its terms can hardly be characterized as ‘reap[ing] a windfall’ by invoking a technicality to deny coverage.”

Because the lower courts erred in applying the notice-prejudice rule to Stresscon’s violation of the “no voluntary payments” provision in Travelers’ policy, the Colorado Supreme Court reversed the denial of Travelers’ directed verdict motion and remanded with directions to vacate the jury verdict (including the verdict on Stresscon’s bad faith claims) and to direct a verdict instead for Travelers.

Filed under Commercial General Liability, Late Notice, Voluntary Payments

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