Insurance Developments

The Connecticut Supreme Court Holds the Make Whole Doctrine Does Not Apply to Insurance Policy Deductibles

In a decision released yesterday, the Connecticut Supreme Court addresses the following questions of first impression, on certification from the Second Circuit Court of Appeals: (1) is the make whole doctrine recognized as the default rule under Connecticut law, and if so, (2) does the make whole doctrine apply to insurance policy deductibles under Connecticut law?  Fireman’s Fund Insurance Company v. TD BankNorth Insurance Agency, Inc.  The Court answered the former in the positive, and the latter in the negative.

Fireman’s Fund stems from a 2006 fire loss which destroyed a portion of a housing development which was under construction.  Prior to the fire, Haynes Construction Company (“Haynes”) retained TD Banknorth Insurance Agency, Inc. (“TD Banknorth”) as its agent to arrange insurance for a housing development it was constructing.  TD Bank procured a builders risk insurance policy from Peerless Insurance Company (“Peerless”) and an inland marine insurance policy from The Hartford Insurance Company (the “Hartford”).   Following the fire, Peerless denied coverage because the location of the loss was not listed in its policy – an error of omission by  TD Banknorth.  Haynes then asserted a claim against TD Banknorth for its negligent omission.

TD Banknorth was itself insured under an errors and omissions policy issued by Fireman’s Fund Insurance Company (“Fireman’s Fund”).  That policy had a deductible of $150,000 per claim.  TD Banknorth gave timely notice of the loss to Fireman’s Fund, who settled with Haynes for $354,000.  Of that sum, TD Banknorth contributed $150,000 – its deductible – Fireman’s Fund contributed the remainder.  As part of the settlement, Haynes assigned its rights against Peerless and the Hartford to Fireman’s Fund and TD Banknorth and they ultimately recovered $208,000 which was deposited in an escrow account.

Thereafter, Fireman’s Fund commenced the above-referenced  lawsuit seeking a declaratory judgment that it was entitled to all of the escrow funds.  TD Banknorth counterclaimed that under Connecticut’s make whole doctrine, it was entitled to recover its deductible from the escrow funds.   The District Court granted summary judgment in favor of the Fireman’s Fund, holding that the subrogation clause of the error and omissions policy abrogated Connecticut’s make whole doctrine.  On appeal, the Second Circuit found that the boilerplate subrogation clause was inadequate to abrogate the make whole doctrine, and that said doctrine is not limited to first party losses.  Fireman’s Fund also argued in the alternative, that the make whole doctrine does not apply to deductibles.  Finding no controlling authority on this issue, the Second Circuit certified the issue to the Connecticut Supreme Court. 

The Connecticut Supreme Court ultimately agreed with Fireman’s Fund, holding that although the make whole doctrine – which restricts the enforcement of an insurer’s subrogation rights until after the insured has been fully compensated for its injuries – is sound policy and the default rule for Connecticut insurance contracts  an insured is fully compensated for the purposes of the make whole doctrine when it receives compensation equal to the full amount of its loss, less the value of its deductible.  The Court agreed with Fireman’s Fund’s rational that a deductible is not part of the loss to which the make whole doctrine applies and that to conclude otherwise would essentially convert the policy into one without a deductible, thereby providing TD Banknorth with an unbargained for windfall at the expense of Fireman’s Fund.

  Download Fireman’s Fund Insurance Company v. TD BankNorth Insurance Agency, Inc

 

New York Court Specifies Definition of “Designated Premises”

On April 3, 2013, the Supreme Court of New York granted an insurer’s motion for summary judgment in part, declaring the insurer had no duty to defend and indemnify its insured in an underlying claim because the insurance policy did not cover the portion of the property where the accident occurred.  Seneca Ins. Co. v. Cimran Co, 963 N.Y.S.2d 182 (App. Div. 1st Dep’t 2013).

Following a construction accident on its property, Cimran Company (“Cimran”), filed a claim with its insurer, Seneca Insurance Company (“Seneca”).  Upon receiving the claim, Seneca reserved its rights to disclaim coverage and/or rescind the policy, stating that further investigation of the claim was needed.  Shortly thereafter, Seneca sent Cimran a notice of cancellation, and cancelled the policy because the building was currently under construction. 

Next, Seneca filed a declaratory judgment action, seeking a declaration that it had no duty to defend Cimran in the underlying action because the accident did not take place at the “designated premises” covered in the policy, and a declaration that the policy was void ab initio based on the defendants’ material misrepresentations.  Cimran argued that the accident occurred in the “designated premises” and that Seneca’s cancellation of the policy effectuated a waiver of the rescission claim, or estopped it from seeking rescission of the policy.  Both sides moved for summary judgment, and the motion court denied the motions.   

On appeal, the court ruled that the “designated premises” in the policy was limited to the one-story building which existed when the policy was issued.  Since the accident occurred on the steel framing of the fourth floor of the construction site, the court found there was no coverage under the policy.  Consequently, the Appellate Division held that the denial of Seneca’s cross motion should be modified to the extent of declaring that it had no duty to defend and indemnify Cimran in the underlying personal injury action. 

With respect to a declaration that the policy was void ab initio based on Cimran’s material misrepresentations, the court held that the cross motions for summary judgment on this issue were properly denied.  In particular, the court held that there is an issue of fact regarding whether or not Cimran was contemplating performing construction work on the property when the policy was issued and whether Cimran made material misrepresentations on the insurance application.

Dissenting in part, the Hon. Abus-Salaam argues that summary judgment on the duty to defend and indemnify was properly denied because the documents submitted in support of plaintiff’s position were only verified by counsel, who had no personal knowledge of the location of the accident.  He argues that these statements “fail to qualify as proof in admissible form,” and, thus, plaintiff failed to make a prima facie showing of entitlement to summary judgment.  The majority notes that these same documents formed the basis for defendant’s claim for insurance coverage, and, as such, there is no reason why the court cannot hold, as a matter of law, that those documents fail to establish a valid basis for coverage under the purchased policy.  

Download Seneca Ins v. Cimran

New York Court Expands the Scope of Discovery in Bad Faith Cases

In a recent decision, the Supreme Court of New York granted an insured's request for production of documents in a bad faith action, after determining that the insurer failed to prove that the documents were protected by work product privilege. Estee Lauder Inc. v. One Beacon Ins. Co., 2013 NY Slip Op, Docket No. 602379/05 (April 15, 2013). 

The insured, Estee Lauder Inc., (“Estee Lauder”), brought a declaratory judgment action and claims for breach of contract against its insurer, One Beacon Insurance Company (“One Beacon”).  Specifically, Estee Lauder sought an order compelling One Beacon to pay for costs and to indemnify it for underlying claims brought by the State of New York relating to the alleged dumping of hazardous materials in landfills.  Initially, One Beacon prevailed on summary judgment but on appeal the decision was reversed, and in 2009 New York’s Appellate Division held that Estee Lauder was entitled to all reasonable fees and expenses incurred in defense of ongoing litigation, plus judgment interest accruing from the date of One Beacon’s repudiation of its duty to defend.

In 2012, Estee Lauder filed an amended complaint adding a cause of action for bad faith, pertaining to the delay in payment of defense costs from the 2009 judgment.  Estee Lauder sought documents relating to One Beacon’s delay in paying the court ordered defense fees.  The documents Estee Lauder requested during discovery were: (1) written recommendations as to the readjustment process; (2) large payment requests sent to the insurer; (3) documents referenced during the readjustment process; (4) notes taken at the insurer’s meetings regarding the claim; (5) adjustment period correspondence concerning justifications for the delay of payment (excluding correspondence with litigation counsel solely respecting strategy and tactics); (6) communications showing approval of counsel with respect to the readjustment; (7) the result of any review conducted by counsel of the defense expenses submitted; (8) documents of first investigations that the insurer claimed it needed to revisit as part of the readjustment; and (9) progress notes created during the readjustment period.    

One Beacon denied the request and argued that the documents were protected under the attorney-client privilege because the documents were created during the “midstream of litigation.”  The court rejected OneBeacon’s argument, finding that One Beacon failed to show that the documents were “predominantly of a legal character.”  The court found that OneBeacon is not entitled to a categorical privilege because it is unclear whether all of the documents sought are privileged.  Specifically, the court found that the payment of a covered client’s attorneys fees is “an ordinary part of an insurers business,” and the Appellate Division already resolved the question of whether OneBeacon must pay this subset of Estee Lauder’s claim. Thus, these documents cannot be considered attorney work product simply because they were created during the “midstream of litigation.”  In ordering One Beacon to turn over the nine categories of documents, the court also noted that the documents sought in this case were created after Estee Lauder filed its complaint and were not documents pertaining to the initial denial of coverage, and are therefore discoverable absent a showing that the document was protected by work product privilege.      

Download Estee Lauder v. One Beacon

Florida Supreme Court Reverses Decision In Favor of Insurer on Overhead and Profit

In a case decided last week, the Supreme Court of Florida reversed an earlier decision of the trial court permitting an insurer to withhold certain portions of a replacement cost payment, including costs for overhead and profit of a general contractor, until the insured actually repaired or contracted for repairs of the damaged property.

In Trinidad v. Florida Peninsula Ins. Co., No. SC11-1643, 2013 WL 3333823 (Fla. July 3, 2013), plaintiff Amando Trinidad filed a claim with his homeowner’s insurer, Florida Peninsula Insurance Company, after fire damaged his home in Miami.  Id. at *1.  Florida Peninsula admitted coverage and made a partial payment pursuant to Trinidad’s replacement cost policy, but withheld amounts for a general contractor’s overhead and profit because Trinidad had not actually made repairs to the home or hired a general contractor to make the repairs.  Id.  In an action for breach of contract by the insured, the trial court agreed with the insurer’s approach, holding that “Florida Peninsula was not required to include overhead and profit costs in its loss settlement payment to Trinidad . . . because Trinidad had not actually incurred those costs.”  Id. at *2-3.

However, in a 5-2 decision, Florida’s highest court reversed.  Reasoning that the purpose of a replacement cost policy (as opposed to an actual cash value policy) is to “cover the difference between what property is actually worth and what it would cost to rebuild or repair that property,” the Court concluded that overhead and profit must necessarily be included in the replacement cost of a covered loss in any case where the insured is “reasonably likely” to need a general contractor for repairs.  Id. at *3-4.  The Court noted that “[i]f overhead and profit were not included in the scope of replacement cost insurance where it is reasonably likely the insured will incur those costs, then no other repair costs, such as labor and materials, would be considered replacement costs.  Simply put, overhead and profit are no different than any other costs of a repair that the insured is reasonably likely to incur. . . .”  Id. at *6.

The Court then determined that neither § 627.7011 Fla. Stat. (2009) nor the applicable policy permitted Florida Peninsula to withhold payment of overhead and profit costs until Trinidad actually incurred them.  Id. at *4-9.  More specifically, the Court found that a close reading of the statute at issue demonstrated that “costs ‘reasonable and necessary’ to the repair are included in the replacement costs the insurer is statutorily required to pay, regardless of whether the property is [actually] repaired.”  Id. at *6.  The Court added that “[b]ecause the insurance policy in this case provides that Florida Peninsula will pay ‘[t]he replacement cost of that part of the building damaged for like construction and use on the same premises,’ Florida Penninsula was required by the policy’s unambiguous terms to include overhead and profit in its payment for Trinidad’s covered loss, assuming Trinidad establishes that he is reasonably likely to need a general contractor for repairs.” Id.

Download Trinidad v. Florida Peninsula Ins. Co.

 

For additional information about this case or other insurance law issues affecting your company, please contact Robert Laurie today.