Insurance Developments

Proposed NY Law Would Require Warnings on Skateboards and Inline Skates

Bronx Democratic Senator, Ruben Diaz, introduced legislation (S794-2013) in response to the large number of injuries related to the use of skateboards and roller skates among children.  The proposed bill would require New York retailers to post conspicuous warning labels informing buyers of skateboards and inline skates to use protective gear   

The bill, which is presently sitting in the New York State Senate’s Committee on Consumer Protection, would require retailers to post labels or tags on their products reading “Warning! Reduce the risk of serious injury and only use [this product] while wearing full protective gear – helmets, wrist guards, elbow pads and knee pads.”  If passed, the law would also require retailers to include a warning instruction within the user’s guide or buyer’s instruction manual. 

The proposed legislation gives the attorney general authority to seek a court order enjoining a retailer’s continued violation of the law, and permits the court to impose a fine of up to five hundred dollars for each violation.

Similar legislation has been proposed in the New York State Assembly. Syracuse Democrat William B. Magnarelli sponsored a bill (A00473) that would amend the state’s vehicle and traffic law to require protective headgear for operators of bicycles, skateboards, in-line skates and scooters who are under age eighteen.  The current law only requires protective headgear for children under fourteen. 

 

Contractor's Principal's Failure to Supervise Construction Does Not Justify Piercing Corporate Veil

In an unpublished decision issued January 3, 2013, the New Jersey Appellate Division held that the alleged breach of a promise made by the principals of a general contractor to personally supervise a residential construction project was not a violation of the New Jersey Consumer Fraud Act, and did not justify piercing the corporate veil to find the principals personally liable. Wiater Building & Design, Inc. v. Gutierrez, 2013 WL 28090 (N.J. App. Div., Jan. 3, 2013). A copy of the decision is available here.

This case started as so many similar cases do – with allegations that an extensive home renovation took too long and cost too much. Years later, the general contractor sued the homeowners for a small unpaid balance. The homeowners counterclaimed, and then filed a third-party complaint against the general contractor’s principals. Notably, the homeowners sought relief under the New Jersey Consumer Fraud Act, which provides for treble damages in the event the contractor engages in certain proscribed business practices, and allows for the corporate veil to be pierced in the case of an affirmative act or knowing omission by an individual. The homeowners alleged that the general contractor’s principals (with whom the homeowner had a longstanding professional relationship) had promised to personally oversee the construction, and alleged that the work was substandard and left incomplete due to the general contractor’s principals’ failure to so supervise the work. This obligation, however, was not contained in the construction contract.

All claims between the homeowners and the general contractor were eventually settled, except for the homeowners’ claim against the general contractor’s principals. The principals moved for summary judgment, which the trial court granted. On appeal, the Appellate Division held that there was no violation of the Consumer Fraud Act which would justify piercing the corporate veil and holding the general contractor’s principals personally liable. The court noted that the homeowners’ claims sounded “basically in contract,” and that the mere promise to personally supervise construction (especially when such promise was not contained in the contract itself) was insufficient to hold the principals personally liable.

While not especially groundbreaking, this case nicely illustrates the importance (not just to contractors, but for anyone wishing to avoid litigation) of ensuring that all obligations of anyone involved in construction are clearly stated in the construction contract, as an extrinsic promise not made part of the contract will likely be quickly forgotten, and given no effect by a court.

California Court Dumps Class Action Against Toilet Manufacturer

On January 4, 2013, the United States District Court for the Central District of California partially dismissed a class action suit against Flushmate and a number of other defendants. United Desert Charities v. Flushmate, et al., 2:12-cv-06878 (C.D.Ca., Jan. 4, 2013). A copy of the decision may be obtained here.

Flushmate manufactured the “Series 503 Flushmate III Pressure-Assist Flushing System,” which was integrated into several different models of toilets sold by many well-known retailers. The Flushmate system was subject to a 2012 recall by the CPSC after numerous failures were alleged. According to Flushmate’s own advisories issued in 2000 and 2003, joints within the system were occasionally known to separate, leading to the “rapid release of the pressurized water contained in the vessel.” This defect allegedly resulted in several instances of property damage and personal injury.

Plaintiffs, all owners of toilets equipped with the Flushmate system, filed a class action complaint alleging several claims against Flushmate, as well as several toilet manufacturers that purchased and integrated the Flushmate system into their toilets. The purported class alleged claims of fraud, violation of California unfair competition law, breach of express and implied warranties, and violation of the California Consumer Remedies Act.

Last week, the court substantially trimmed the scope of the proposed class action by dismissing several claims. The court dismissed plaintiffs’ fraud claim, as their fraud claims had not been pled with sufficient specificity, and because plaintiffs’ failed to alleged that they actually relied on the defendants’ misrepresentations. The court also dismissed the plaintiffs’ California Consumer Remedies Act claim, and several of the plaintiffs’ express and implied warranty claims. However, the court left intact plaintiffs’ unfair competition claim. Not surprisingly, the court’s dismissal of several of the plaintiffs’ claims was without prejudice, thus leaving the door open for plaintiffs to file an amended class action complaint.

The court’s decision is relatively similar to yesterday’s post on this blog in the Borger v. Trex class action, available here. Notably, the California court in this case held that the plaintiffs’ fraud claims were not barred by the economic loss doctrine. As discussed on this blog yesterday, the economic loss doctrine bars recovery under tort for damages that solely consist of economic losses. Many courts apply the economic loss doctrine so as to bar fraud claims similar to the claims alleged here. Relying on California law, however, the court held that the plaintiffs’ fraud claims were not barred by the economic loss doctrine, because the fraud alleged induced the plaintiffs to purchase and use the defective product, and thus the defendants’ misrepresentations were separate from the issue of providing allegedly defective products. This is a critical distinction, and illustrates the necessity for products manufacturers operating on a nationwide scale to be aware of the differences in the law applied across their markets.

District of New Jersey Trims Class Action Against Decking Manufacturer

On January 4, 2013, the District of New Jersey partially granted a building product’s manufacturer’s motion to dismiss, eliminating some of the claims within purported class action lawsuit against it. Borger v. Trex Company, Inc., Civ. Action No. 12-CV-2584 (D.N.J., Jan. 4, 2013). A copy of the Court’s opinion is available here.

The plaintiff purchased Trex decking products in April of 2010. Trex’s product carried a twenty-five year warranty, and Trex stated that its decking (which was a composite made from recycled plastic and wood fibers) would not rot or deteriorate. According to the plaintiff, within three months her deck began flaking and showing signs of mold and mildew. The plaintiff complained to Trex, which denied her warranty claim. Plaintiff then filed her class action complaint.

On Friday, the Court dismissed the plaintiff’s claim under the New Jersey Consumer Fraud Act, as well as her fraudulent concealment and fraudulent misrepresentation claims, noting that such claims were barred by the economic loss rule (a doctrine which bars recovery under tort for damages that solely consist of economic losses). The Court also noted that the plaintiff had failed to plead her fraud claims in detail.  

The Court left intact the plaintiff’s claims for breach of warranty and contract claims, as well as the plaintiff’s claim under the New Jersey Consumer Fraud Act, and the case will move forward on these grounds. The Court granted the plaintiff leave to amend her complaint, which will allow her to re-plead her fraud claims, if she chooses. While including more details in her complaint might meet the heightened pleading for fraud claims, the economic loss doctrine will remain a major roadblock to these claims. Even in the event the plaintiff can show non-economic losses, fraud claims often lack the typicality and commonality necessary for class certification.

Even though the plaintiff’s contract claims will move forward, this case is by no means over. In a class action, individual damages (like repair costs associated with the many individual class members) is difficult to quantify on a class-wide basis, and the plaintiff may face an uphill battle on class certification.

The Allocation Saga: Which Team is Your State On?

Over the past thirty years courts have been called upon to determine the best way to allocate available insurance coverage for long latency (i.e., long tail) personal injury claims spanning multiple policies.  As a result, two allocation methods have evolved and been used throughout the country: pro rata and all sums.   

Generally, under the pro rata approach, insurers that cover the loss are responsible for their respective portion of the loss.  Often based on an insurer’s “time-on-the-risk,” the pro rata approach allocates costs across applicable policies based on the time that insurance policies covered the risk.  

Under the all sums approach (a.k.a., joint and several allocation), each insurer who issued a policy which covers a loss may bear full responsibility for the loss up to the monetary limit of each policy.  Depending on policy limitations and the nature of the injury or injuries, the policyholder may recover the totality of its loss from one insurer whose policy was in effect at the time of, and covered, the loss.  The insurer may then seek contribution from the other insurers who also covered the loss.  

In Security Inc. Co. of Hartford v. Lumbermen’s Mut. Cas. Co., 264 Conn. 688 (2003), the Connecticut Supreme Court adopted the pro rata time on the risk allocation method for defense and indemnity costs associated with long latency personal injury claims.  The court held that the pro rata method did not violate the reasonable expectations of the parties since “neither the insurers nor the insured could reasonably have expected that the insurers would be liable for losses occurring in periods outside of their respective policy coverage periods.”  Id. at 710. 

In other states, however, the conversation on which method should be applied continues.  Indeed, approximately thirty states, have not definitively selected one approach.  Two recent state court decisions address the issue with varying outcomes.  Mt. McKinley Ins. Co. v. Corning Inc., No. 602454/02 (N.Y. Sup. Ct. Sept. 7, 2012); State of California v. Continental Ins. Co., 55 Cal. 4th 186 (Cal. 2012).   

Is New York “Team Pro Rata”?

Though New York is widely referred to as a “pro-rata” state, the New York Court of Appeals has not definitively adopted the pro rata approach over the all sums approach.  Thus, raising the question – Is New York Team Pro Rata?

Recently, a New York trial court rejected the all sums approach in favor the pro rata time-on-the-risk allocation for defense and indemnity costs arising from asbestos-related bodily injury claims.  Mt. McKinley Ins. Co. v. Corning Inc., No. 602454/02 (N.Y. Sup. Ct. Sept. 7, 2012) (a copy of the decision can be found here).  In Mt. McKinley, Plaintiffs Lumbermen’s Mutual Casualty Company (“Lumbermen’s”) and Century Indemnity Company (“Century”), primary insurers of defendant Corning Inc.’s former subsidiary, an asbestos manufacturer, brought suit seeking a declaration that the proper method of allocation is pro rata across applicable policies based on the time that the insurance policies covered the risk (i.e., time on the risk).  Lumbermen’s and Century ultimately moved for summary judgment arguing that the court should allocate indemnity and defense costs on a pro rata basis.       

Corning cross-moved for summary argument, arguing for all sums (i.e. joint and several) allocation.  Specifically, Corning argued that the alleged “non-cumulation” or “non-stacking” provisions in various policies require all sums allocation.    

The court disagreed with respect to indemnity costs, finding that the purpose of the “non-cumulation” or “non-stacking” provisions is to prevent the insured from recovering greater liability than that for which was contracted, and that these provisions do not require all sums allocation.  Id. at 16.  Indeed, the court found that adopting pro rata allocation would not render the policy language “mere surplusage,” as argued by Corning, but would instead affect “the intent of the policy’s language of limiting multiple recovery for the same injury in the same policy period.”     

The court also applied pro rata time on the risk allocation to defense costs, noting that, although the policies do not mandate either pro rata or all sums allocation, “the issue is decided as per equity and the facts of the case.”  The court found that equity required pro rata allocation because the all sums approach would force an insurer to pay for that portion of the defense costs attributable to Corning (for periods when it chose to self-insure) and to an insolvent primary level insurer.  That insurer would then be forced to litigate with Corning as to Corning’s own liability for defense costs, as well as those attributable to any insolvent insurers, resulting in a “needless waste of resources” that does not “comport with fairness . . . .” 

California Leaves No Doubt – “Team All Sums,” All the Way

Several months ago, the California Supreme Court left no doubt that California has adopted all sums allocation.  State of California v. Continental Ins. Co., 55 Cal. 4th 186 (Cal. 2012)(a copy of the decision can be found here),   

In State of California, the California Supreme Court affirmed two of its previous decisions which applied a continuous trigger of coverage to long latency claims, and which adopted the all sums rule, respectively.  See Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 655 (1995); Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal 4th 38, 55-57 (1997). 

Specifically, in State v. California, the court was called upon to determine how liability coverage for property damage that occurred at a state-owned environmental clean-up site over the course of many years should be allocated amongst its insurers.  The court found that under the commercial general liability policies at issue, the plain “all sums” language of the agreements compel the insurers to pay “all sums which the insured shall become obligated to pay . . . for damages . . . because of injury to or destruction of property . . . ” and that “[t]his grant of coverage does not limit the policies’ promise to pay “all sums” of the policyholder’s liability solely to sums or damage during the policy period.”  Id. at p. 13. 

The court also found that “stacking” was appropriate under the respective policies. As the court explains, stacking generally refers to the “stacking of policy limits across multiple policy periods that were on a particular risk” so that “when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy.”  The court found that adopting the all sums with stacking approach “stacks the insurance coverage from different policy periods to form one giant uber-policy with a coverage limit equal to the sum of all purchased insurance policies.”  Id. at 15.  Thus, instead of treating a long latency injury as though it occurred in one policy period, it treats all triggered insurance as though it were purchased in one policy period, providing the insured access to “far more insurance” than it would ever be entitled to within any one policy period.”  Id.  The court reasoned that stacking fits with both an insured’s and an insurer’s reasonable expectations, and that an insurer may avoid stacking by specifically including an “antistacking” provision in its policy.  Id. at 16.