Insurance Developments

Connecticut Court Holds: No Liability for Failure to Settle Claim Within Policy Limits

In Carford v. Empire Fire & Marine Ins. Co., No. CV065001946, 2012 WL 4040337 (Conn. Super. Aug. 21, 2012), the Superior Court of Connecticut held an insurer was not liable for negligent failure to settle a claim, where the insurer did not settle the claim within policy limits prior to judgment at trial. In Carford, the Plaintiffs’ filed suit against its insurer, Empire Fire & Marine Insurance Company (“Empire”), alleging Empire was negligent in failing to settle the Plaintiffs’ insurance claim within the policy limits. Specifically, the Plaintiffs’ contended Empire failed to accept all written offers of settlement, failed to conduct its claim evaluation objectively and impartially, and it failed to pay the excess amount of the underlying judgment. The court disagreed, ruling in favor of the insurer, finding the insurer acted reasonably in investigating the claim and finding under the totality of the circumstances, the facts did not indicate that Empire put its interests above those of the insured. In reaching its decision the court gave weight to two of the insurer’s actions. First, Empire’s letter to its reinsurer in which Empire stated they wished to withhold payment of the policy limits until maximum medical improvement was obtained by the plaintiffs to insure the claim warranted payment of the limits and second, Empire’s suggestion to the Plaintiffs to file suit while the insurer continued to collect information it needed to properly evaluate the claim signified the insurer was balancing its needs with those of the Plaintiffs. The Connecticut Superior Court’s decision to rule in favor of the insurer demonstrates the burden on policy holders in trying to prove such claims and the courts willingness to rule in favor of insurers when there is no showing the insurer placed its own interest above those of the policy holders.

No Duty to Defend Insured Accused of Selling Body Parts

In Evanston Ins. Co v. Legacy of Life Inc, No. 10-50267 (5th Cir. Aug. 24, 2012) the United States Court of Appeals for the Fifth Circuit held an insurer owed no duty to defend its insured in an underlying suit where the insured is accused of selling body-parts for profit.  Prior to issuing a decision, the 5th Circuit certified two questions of law to the Supreme Court of Texas, asking the Texas Court to determine if Evanston Insurance Company (“Evanston”) owed a duty to defend its insured, Legacy of Life Inc. (“Legacy”) under the insured’s professional and general liability policies. 

The plaintiff in the underlying suit contends she consented to Legacy’s harvesting of her mother’s organs and tissues after her mother’s death, because Legacy, a nonprofit organization, represented to her that the organs would be distributed on a nonprofit basis.  The plaintiff alleges Legacy harvested the tissues and organs, but gave the body parts to a for-profit company who sold the parts to hospitals.  Additionally, the complaint alleges that Legacy and the for-profit company it transfers the tissues and organs to are, “closely related entities” that are engaging in unconscionable business practices aimed at profiting from grieving family members.  The plaintiff maintains that as a result of Legacy’s actions, she suffered severe emotional distress.  Legacy sough coverage for the suit under its professional and general liability policies issued by Evanston.  Evanston denied Legacy’s request for defense and filed suit seeking a declaratory judgment, maintaining the conduct alleged in the underlying complaint was outside the scope of both insurance policies.

The district court denied Evanston’s motion finding the insurer had a duty to defend, because the policy’s definition of “personal injury” was broad enough to cover the underlying plaintiff’s claims of extreme mental anguish and emotional distress.  The district court also determined the allegations of “property damage” triggered coverage because a Texas court could find the deceased’s tissues and organs were property.

On appeal to the Fifth Circuit, Evanston argued the district court erred in its decision because the underlying claim did not assert either “personal injury” or “property damage” as required to trigger a duty to defend under the insured’s policies.  The appellate court certified two questions to the Texas Supreme Court, asking the Court to determine: (1) if the insurance policy provision for coverage for personal injury included coverage for mental anguish unrelated to physical damage; and (2) if the policy provision for coverage of property damage included coverage for the plaintiff’s loss of use of her deceased mother’s tissues and organs.  The Texas Supreme Court answered both questions in the negative, finding the claims in the underlying complaint did not constitute personal injury or property damage and thus, Evanston has no duty to defend Legacy in the underlying lawsuit.      

Download Evanston Ins. Co v. Legacy of Life, Inc. (I)

Download Evanston Ins. Co. v. Legacy of Life, Inc. (II)

District Court Holds Bad Faith Actions Must Include Factual Allegations

In a recent ruling on a motion to dismiss, the United States District Court for the Western District of Pennsylvania held an insureds bad faith claim against its insurer was legally insufficient where the complaint merely stated a list of accusations without factual support.  Palmisano v. State Farm Fire and Casualty Co., No. 12-886 (W.D.Pa. Aug. 20, 2012).

The dispute arose after State Farm Fire and Casualty Company (“State Farm”), relying on a report prepared by a structural engineer, denied coverage under the plaintiffs’ homeowner insurance policy.  The report concluded the damage to the plaintiffs’ home resulted from  long-term earth movement and the plaintiffs’ policy excluded coverage for losses resulting from earth movement and water damage. 

Upon denial of the claim, the plaintiffs filed suit alleging breach of contract and bad faith.  On motion to dismiss, the district court decided both claims in favor of State Farm.  Under the breach of contract claim, the court held the one-year contractual limitations period in the policy was reasonable and thus, barred the breach of contract claim. 

In considering the bad faith allegation, the court assessed the claims based on the pleading standards set forth by the United States Supreme Court in Twombly and Iqbal.  See Bell Atlantic Corp v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009).  The court noted under these two cases, to sustain a claim for bad faith, the plaintiff must support his allegations with facts which “describe who, what, where, when, and how the alleged bad faith occurred.”  The court dismissed all of the plaintiffs’ claims and noted that even if the plaintiffs’ claims were legally sufficient, State Farm could defeat the claim because the insurer had a reasonable basis for its actions in that they relied on a report drafted by an expert to deny the plaintiffs’ claim. 

This decision is instructive in that it applies the pleading standard set forth by the United States Supreme Court, which requires that a complaint alleging bad faith must be more than a list of conclusory statements.     

Download Palmisano v. State Farm

Sixth Circuit Holds: No Bad Faith Where Insurer Acted “Reasonably”

In Retail Ventures, Inc., v. National Union Fire Insurance Co. of Pittsburgh, Pa., Nos. 10-4576/4068 (6th Cir. Aug. 23, 2012), the Sixth Circuit Court of Appeals recently affirmed a judgment in favor of the insured in an insurance coverage suit, finding that a commercial crime policy covered losses arising from a data breach.  Although the court ruled in favor of the insured in the coverage suit, the court upheld the lower court’s decision, reaffirming that the insurer did not act in bad faith when denying the claim. 

In deciding the coverage suit, the court found the loss from the data breach “resulted directly from” a hacking scheme, and that the exclusion for loss of confidential information in the policy did not apply to the loss of customer information. 

In affirming the lower court’s ruling on the bad faith claim, the court noted under Ohio state law, an insurer fails to exercise good faith when it refused to pay a claim without reasonable justification.  The insured argued that, under state law, a denial of coverage is permissible only if an insurer had reason to believe that its interpretation of the policy was the “only reasonable one.” The court disagreed noting the insured’s argument would effectively merge breach of contract and breach of the duty of good faith.  The court further stated that the insurer has a reasonable justification for refusal to pay because its interpretation of the exclusion provision was incorrect but not unreasonable. 

The Sixth Circuit’s decision to affirm the lower courts bad faith decision in favor of the insurer demonstrates the burden on policy holders in trying to prove such claims and the courts willingness to rule in favor of insurers when there is a reasonable justification for denying the claim.   

Download Retail Ventures Inc. v. National Union Fire Insurance Co.

Enforceability of Arbitration Agreements in International Insurance Contracts

The Fourth Circuit Court of Appeals in ESAB v. Zurich, No 11-1243 (July 9, 2012) held that a South Carolina law invalidating arbitration agreements in insurance policies did not apply to arbitration agreements between a domestic corporation and foreign insurer. 

ESAB Group (“ESAB”), commenced litigation in South Carolina State Court against Zurich Insurance Company (“Zurich”) seeking coverage in an underlying products liability suit. Zurich removed the case to the United States District Court for the District of South Carolina pursuant to the Federal Arbitration Act (“FFA”) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention”).  Upon removal, ESAB alleged the McCarren-Fergueson Act permitted South Carolina law to govern, and that the court lacked subject matter jurisdiction over the matter because state law invalidates arbitration agreements in insurance contracts.  Conversely, Zurich challenged the district court’s exercise of personal jurisdiction, emphasizing its limited contacts with South Carolina. 

The district court rejected both parties’ arguments, finding the Convention preempted state law and ruling Zurich had sufficient contacts in South Carolina for the court to exercise personal jurisdiction.  Both parties appealed.   

The Court of Appeals affirmed the decision of the district court, rejecting both ESAB and Zurich’s appeals.  The court in affirming subject matter jurisdiction found the McCarren-Fergueson act is limited to domestic affairs, and where a dispute involved a foreign party, the Convention is governing law.  Additionally, the court affirmed the district courts exercise of personal jurisdiction holding that “by agreeing to furnish a defense to its policyholder within a specified policy territory, [Zurich] indicated its willingness to be hauled into court in foreign forums within its territory.”  

The Fourth Circuit’s decision has two significant implications for foreign insurance companies.  First, foreign based insurers can exercise arbitration agreements even though a state law invalidates such agreements.  Second, the court in establishing personal jurisdiction over the insurer, found even though Zurich did not have offices in South Carolina and did not draft the contracts in the state, Zurich consented to personal jurisdiction in South Carolina by agreeing to defend a policy holder located in the state.  

Download ESAB v. Zurich