Insurance Developments

Louisiana District Court Dismisses Insurer’s Third Party Complaint Arising From Faulty Hurricane Isaac Repairs

In a recent decision involving property damages allegedly sustained during Hurricane Isaac, the United States District Court for the Eastern District of Louisiana, granted summary judgment in favor of a third-party defendant roofing contractor.  Specifically, the court found that the insurer’s third-party complaint failed as a matter of law because the insured’s complaint against its insurer did not assert any allegations arising from the roofing contractor’s defective emergency repairs which would render the contractor liable to the insurer.   Cedar Ridge, LLC v. Landmark American Insurance Company, et al, C.A. No. 13-672, 2014 WL 295068 (Jan. 27, 2014).      

On April 10, 2013, Cedar Ridge, LLC, (“Cedar Ridge”) filed a complaint against its insurer Landmark American Insurance Company (“Landmark”) for breach of contract with respect to roof damage allegedly sustained to its Riverlands Shopping Center (“Riverlands”) as a result of Hurricane Isaac.  Following Hurricane Isaac, Roof Technologies, Inc. (“Roof Tech”) conducted emergency mitigation on the roof.  Landmark denied coverage for Cedar Ridge’s insurance claim on the grounds that the work performed by Roof Tech caused additional damage to Riverlands which was precluded from coverage under the policy’s exclusions for “faulty, inadequate or defective . . . workmanship, repair, construction, renovation, remodeling, grading, [and] compaction,” and for “faulty, inadequate, or defective . . . materials used in repair, construction, renovation, or remodeling.” 

Following the commencement of the suit against it by its insured, Landmark filed a third-party complaint against Roof Tech asserting that, in the event that Landmark was held liable for any of the claims asserted against it by Cedar Ridge, Roof Tech was liable to Landmark for the damage it caused to the property as a result of its defective workmanship.  Roof Tech moved for summary judgment on the basis that it cannot be found liable to Landmark because Cedar Ridge’s complaint is premised solely on hurricane damage, and not on any allegation that Roof Tech performed faulty repairs relating to the hurricane damage.  

In granting Roof Tech’s motion for summary judgment, the district court first affirmed the general principal that if a third-party complaint does not allege that the third-party plaintiff is liable for all or part of the principal demand, then the third-party complaint fails as a matter of law.  In this case, the court found that the only admissible evidence supported Roof Tech’s position that Cedar Ridge’s complaint did not encompass the damages allegedly caused by Roof Tech.  Thus, the court concluded that Landmark’s third-party complaint against Roof Tech was baseless. 

To read a copy of the court’s decision click here

New York District Court Permits Recoupment of Defense Costs

Applying New York law, the United States District Court for the Southern District of New York held that a D&O insurer which reserved its right to recoup uncovered defense costs could do so even if it failed to affirmatively seek recoupment of such costs in a prior coverage action.  Women’s Integrated Network, Inc. v. U.S. Specialty Ins. Co., Case No. 7:12-cv-07072-VB, 2014 WL 894501 (S.D.N.Y. Mar. 7, 2014).

The insurer, U.S. Specialty Ins. Co. (“USSIC”), insured Women’s Integrated Network, Inc. (“WIN”) under a Directors, Officers, and Organization Liability Insurance Policy, which provided, in relevant part, that USSIC would “pay covered Defense Costs on an as-incurred basis” if WIN was sued, but also that, “[i]f it is finally determined that any Defense Costs paid by the Insurer are not covered under this Policy, the Insureds agree to repay such non-covered Defense Costs to the Insurer.”  When WIN was sued by a former employee for wrongful termination, USSIC initially denied coverage, but eventually agreed to pay a portion of WIN’s defense costs subject to a reservation of rights.  In its reservation of rights letter, USSIC wrote that it reserved the right “to take the position at a later date that coverage is not available for any aspect of [the relevant] Complaints, including but not limited to fees and costs incurred in the defense.” 

In a coverage action commenced by WIN, the Court granted USSIC’s motion for judgment on the pleadings, holding that there was no coverage under the Policy either for defense costs or for the settlement of the underlying claim against WIN.  USSIC subsequently demanded repayment of the defense costs it had paid in defense of the underlying wrongful termination litigation.  WIN refused and, instead, filed an action seeking a declaration that USSIC was not entitled to recoup its costs.  USSIC filed a counterclaim based on WIN’s failure to repay the uncovered defense costs on demand.

In addressing USSIC’s motion for summary judgment, the Court rejected WIN’s argument that res judicata precluded USSIC from bringing its recoupment counterclaim because it could have, but failed to, bring that claim in the prior coverage action.  More specifically, the Court noted that “[o]nly compulsory, and not permissive, counterclaims are subject to res judicata,” and USSIC’s counterclaim was not compulsory because it was “ripe” until it was “finally determined” that there was no coverage.  Moreover, the Court found that the “actionable conduct” giving rise to USSIC’s counterclaim – i.e., WIN’s decision to bring a declaratory judgment action rather than repaying the defense costs upon USSIC’s demand – occurred after the filing of the underlying coverage action and, thus, res judicata did not apply.  As a result, the Court granted summary judgment in favor of the insurer.

Cyber News: Developments at ICANN

Last week, the US Commerce Department said it would relinquish its supervisory role over ICANN, the Internet Corporation for Assigned Names and Numbers, in 2015.  This is part of a larger trend reducing the role of the US in international Internet governance.  Our partner Vince Vitkowsky explained the background to this in an article for Cyberinquirer late last year: Snowden Affair Fuels the Conflict for Control of the Internet

Fifth Circuit Holds CGL Policy Does Not Cover Completed Operations

Last month, the United States Court of Appeals for the Fifth Circuit found that the U.S. District Court for the Southern District of Mississippi erred when it determined that a subcontractor’s insurer had a duty to defend the general contractor as an additional insured under its commercial general liability (CGL) insurance policy.  The Fifth Circuit held that, while claims for liability under a CGL policy can be brought after ongoing operations are complete, the underlying liability cannot be due to the completed operations. Carl E. Woodward, LLC v. Acceptance Indemnity Ins. Co., No. 12-60561 (5th Cir. Feb. 11, 2014).

 

In November 2005, concrete subcontractor DCM Corporation, LLC (“DCM”) obtained a  CGL policy from Acceptance Indemnity Insurance Co. (“Acceptance”), naming general contractor Carl E. Woodward, LLC (“Woodward”) as an additional insured, in connection with the construction of condominiums on the Mississippi Gulf Coast. DCM worked on the project from January 2006 to October 2006, and the entire project was completed in August 2007.  Over a year later, the purchaser of the condominiums sued the seller and Woodward.  The seller filed cross-claims against Woodward, alleging faulty construction and damage arising out of construction.

Although Woodward sent Acceptance a copy of the complaint and an expert report  stating conclusions about the nature and effect of defective work done by DCM, Acceptance refused to defend based on policy language limiting coverage to “liability arising out of [DCM’s] ongoing operations performed for [Woodward].”  Though not quoted in Acceptance’s denial letter, the policy endorsement making Woodward an additional insured also excluded from coverage property damage occurring after “[a]ll work . . . to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed.”  In resulting litigation, the District Court concluded that Acceptance had a duty to defend Woodward in an arbitration regarding the faulty construction claims.  However, the Fifth Circuit reversed.

On appeal, the Fifth Circuit held that claims for liability under a CGL policy need not be alleged during ongoing operations.  In other words, claims need not be asserted in litigation or otherwise during the named insured’s ongoing operations to fall within the scope of coverage.  Nonetheless, the Court held, “the underlying liability cannot be due to ‘completed operations.’”  In support of its conclusion, the Court noted that allowing coverage based on an allegation that the additional insured failed to follow plans and specifications would effectively transform the CGL policy into a performance bond.  Because Woodward’s liability arose out of DCM’s completed operations, rather than DCM’s ongoing operations, Acceptance had no duty to defend under the CGL policy.

To Read More on Carl E. Woodward, LLC v. Acceptance Indemnity Ins. Co. click  here

Fourth Circuit Holds an Insured May Recover Damages for Aggravation and Inconvenience

The United States Court of Appeals for the Fourth Circuit recently ruled that an insured may recover damages for aggravation and inconvenience under West Virginia law where the insurer, in breach of the policy, refused to defend its insured.  Graham v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 13-1517 (4th Cir. Feb. 3, 2014). 

Robert Graham (“Graham”) was the executive director of two West Virginia nonprofit corporations when he was sued by the State of West Virginia for allegedly manipulating members of each corporation to pay him exorbitant salaries and benefits.  Graham sought coverage under a commercial general liability policy issued by National Union Fire Insurance Company of Pittsburgh, Pa (“National Union”), to one of the corporations.  The corporation was a named insured under the policy, and the policy extended coverage to “any elected or appointed official, executive officer, commissioner, director, or member of the corporations while acting within the scope of his duties as such.”  Graham contended he qualified as an insured under the policy and demanded National Union defend him in the underlying suit.  National Union denied coverage and Graham hired counsel at his own expense.  The underlying suit was eventually dismissed as moot after Graham was removed as executive director from both corporations. 

Thereafter, Graham brought suit against National Union alleging National Union breached its duty to defend and sought damages for the cost of defending the claim, prejudgment interest, attorneys' fees, and additional damages for aggravation and inconvenience. The parties filed cross-motions for summary judgment on the issue of whether Graham could recover prejudgment interest and damages for aggravation and inconvenience. The district court granted National Union’s motion for summary judgment and held Graham could not recover these damages under West Virginia law.

On appeal, the Fourth Circuit affirmed the district court's denial of prejudgment interest, but vacated summary judgment regarding aggravation and inconvenience damages, and remanded for further proceedings to permit Graham to prove that he incurred aggravation and inconvenience due to National Union’s breach of contract.  In so ruling, the Court extended West Virginia Supreme Court precedent that permits an insured to recover consequential damages in the form of an award for aggravation and inconvenience in the context of first-party coverage.  The Fourth Circuit explained that an insured is entitled to the full array of consequential damages regardless of whether the coverage afforded is first-party or third-party.

For more on Graham v. National Union Fire Ins. Co. of Pittsburgh, Pa. click  here

First Circuit Confirms Power of Arbitration Panels to Determine Preclusive Effect of Prior Awards

In Employers Ins. Co. of Wausau v. OneBeacon American Ins. Co., 744 F.3d 25 (1^st Cir. Feb. 26, 2014), the First Circuit Court of Appeals upheld the decision of a district court that arbitration was the proper forum for determination of the preclusive effect of a prior arbitration award. This decision followed from an arbitration between OneBeacon and Swiss Re where Swiss Re prevailed and the District Court of Massachusetts confirmed the award.  Subsequently, OneBeacon demanded arbitration with different reinsurers, including Wausau, in respect of the same claims and under the same reinsurance agreement that was at issue in the prior arbitration. Wausau then petitioned the District Court of Massachusetts for a declaratory judgment that the prior arbitration award had preclusive effect on the arbitration pending between OneBeacon and Wausau. The district court denied the petition, holding that “the preclusive effect of a prior arbitration is a matter for the arbitrator to decide.” Nat’l Cas. Co. v. One Beacon Am. Ins. Co., C.A. No. 12-11874-DJC 2013 WL 3335022 at *8 (D. Mass. July 1, 2013).

The First Circuit relied upon the arbitration agreement, which it concluded was broadly worded to cover all disputes, including disputes over the preclusive effect of prior arbitration. The court relied as well on the “broad agreement among the circuit courts that the ‘effect of an arbitration award on future awards is properly resolved through arbitration.’” The court rejected Wausau’s assertion that by confirming the arbitration award the federal court rendered a judgment whose preclusive effect only a federal court could determine. The court reasoned that because a confirmation award does not typically involve a review of the merits of the case, such an award is of limited scope and is distinct from the arbitration award. As such, a determination of the preclusive effect of the arbitration award by a subsequent arbitrator does not infringe on the prerogatives of the federal court to protect its own judgments.

New York Court of Appeals Confirms Broker May Be Liable for Failing to Properly Advise an Insured to Obtain Additional Coverage

In a recent decision, the New York Court of Appeals refused to dismiss a lawsuit by an insured against its insurance broker on the grounds that a special relationship potentially existed between the parties.  Voss v. Netherlands Ins. Co., No. 11 (February 25, 2014).

Deborah Voss (“Voss”) owned several businesses in Liverpool, New York and used CH Insurance Brokerage Services (“CHI”) as her insurance broker to purchase property insurance, professional liability coverage and business interruption insurance for her businesses.  CHI and Voss began their relationship in 2004 when CHI recommended Voss obtain a comprehensive policy that afforded $75,000 in coverage for business interruption losses.  

In 2006, Voss purchased a new building that was double the square footage of her prior space and moved all three of her businesses into this one building. As part of the move, Voss again discussed her insurance needs with CHI and the policy was ultimately renewed with the $75,000 in business interruption coverage. Shortly thereafter, the property experienced multiple problems with the roof and Voss temporarily closed the businesses.  In the midst of the problems in 2007, Voss met with CHI to discuss renewal of her policy.  The policy was renewed but her business interruption limits were lowered to $30,000.

In 2008, Voss sued CHI for its failure to advise her as to the proper limits of the business interruption coverage.  CHI moved for summary judgment contending that no special relationship existed between the parties, and in the absence of a specific request by Voss for coverage, CHI could not be liable for failing to recommend or obtain higher limits. The trial court granted CHI’s motion for summary judgment and the Appellate Division affirmed holding that, although a triable question of fact was raised as to whether a special relationship existed, it was irrelevant because any breach by CHI was not a proximate cause of Voss’ loss, which arose from the insurer’s late payment of the claims and Voss’ awareness of the policy limits. 

 

The Court of Appeals reversed.  The Court first acknowledged the general rule in New York is that insurance brokers “have a common-law duty to obtain requested coverage for their clients and they have no continuing duty to advise, guide or direct a client to obtain additional coverage.”  However, it went on to explain that when a special relationship exists between the broker and client, there can be liability even without a special request for coverage. The three situations where a special relationship may exist are where: (1) the broker receives compensation for services beyond commission; (2) there is a question regarding coverage with the client relying on the expertise of the broker; and (3) there is a course of dealing over time that puts the broker on notice that their advice is being specially relied upon by the client.

 

Applying that standard, the Court found that CHI failed to establish it was entitled to summary judgment because it did not submit sufficient evidence demonstrating the absence of a special relationship.  Moreover, the Court held that Voss raised a triable issue of fact based upon her alleged reliance upon CHI’s expertise with respect to business interruption insurance, and contrary to the determinations of the Appellate Division, proximate cause was not negated by the fact that Voss was aware of the policy limits of that the insurer was late in paying the claims.

 

To read the Opinion on Voss v. Netherlands Ins. Co. click  here

North Carolina Enters Captive Insurance Arena, While Maryland May Pass

The purpose of North Carolina House Bill 473, which was signed into law on June 19, 2013, was to “establish the procedures for the organization and regulation of the operations of captive insurance companies transacting insurance business within [North Carolina] and thereby promote the general welfare of the people of [North Carolina].”  Since the state’s Captive Insurance Act actually took effect in October 2013, the North Carolina Department of Insurance (“NCDOI”) has issued four captive insurance company licenses as follows: West & Joyce Insurance Company (issued December 30, 2013); Cade Reassurance, LLC (issued December 31, 2013); SR Insurance, LLC (issued December 31, 2013); and Synergy Insurance, Inc. (issued December 31, 2013).  In January 2014, the NCDOI also named Debbie Walker as its Director of Captive Insurance.  Walker stated that it is her goal and the goal of the NCDOI “to make North Carolina a respected and leading captive domicile.”     

Meanwhile, Section 1, Chapter 407, 2013 Laws of Maryland – which was also signed into Law in June 2013 – required the Maryland Insurance Administration (“MIA”) to examine methods of establishing and regulating captives within the State and to make a recommendation whether Maryland should establish a captive insurance industry in the first instance.  The MIA issued a report in December 2013, finding that “there is no evidence to support a conclusion that becoming a captive domicile would create actual economic benefit to Maryland.”  Accordingly, it recommended “that the General Assembly forego captive legislation at this time.”     

 

Click here to read the Maryland Insurance Administration’s December 2013 report.  

New York’s Highest Court Re-Establishes the Rule That an Insurer’s Failure to Defend Does Not Prevent It from Relying on Policy Exclusions

In 2013, New York’s Court of Appeals unintentionally departed from existing precedent and ruled that an insurer who breached its duty to defend is precluded from subsequently relying on policy exclusions.  This unexpected and unusual holding was reversed when the Court allowed re-argument, vacated its prior decision, and issued a new decision on the grounds that it had “failed to take account of controlling precedent.”   K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., 22 N.Y.3d 578 (N.Y. 2014). 

The case involved a legal malpractice claim arising from loans backed by mortgages that K2 made to a company partly owned by the attorney.  The attorney had failed to record the mortgages.  The insurer declined to defend, relying on the “insured’s status” and “business enterprise” exclusions.  It later conceded that the refusal to defend was wrong.

In its first decision, the Court of Appeals did not address its prior case, Servidone Construction Corp. v. Security Ins. Co., 64 N.Y.2d 419 (N.Y. 1985).  Upon reconsideration, the Court found that its first K2 decision and Servidone “cannot be reconciled,” and that “to decide this case we must either overrule Servidone or follow it.  We choose to follow it.”  Thus it re-affirmed the rule that an insurer who breaches its duty to defend may later assert policy exclusions that do not rely on the facts established in the underlying litigation.

This was a 4-2 decision.  That is, two of the Judges would have been happy to overrule Servidone sub silento.  Likely in response to the dissenters, the majority wrote that “[w]hen our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise.” 

The Court made another observation.  In an earlier case, Lang v. Hanover Ins. Co., 3 N.Y.3d 350 (2004), the Court had said that “an insurance company that disclaims in a situation where coverage may be arguable is well advised to seek a declaratory judgment.” The K2 Court said “[t]hat continues to be sound advice.”

Applying New York Law, Delaware Court Holds Horizontal Exhaustion Applies to Primary and Umbrella Policies, but Not Excess Policies

Applying New York law, a Delaware Superior Court predicted that New York’s Court of Appeals would not require policyholders to horizontally exhaust excess policies in long-tail coverage cases.  Viking Pump, Inc. v. Century Indemnity Co., C.A. No. 10C-06-141 FSS CCLD, 2014 WL 1305003 (Del. Super. Feb. 28, 2014).

Plaintiffs Viking Pump, Inc. and Warren Pumps, LLC (“Plaintiffs”) sought coverage from primary, umbrella, and excess insurers for asbestos claims filed against them.  After eight years of litigation and a three-week trial, the Delaware court held that, under New York law, “all sums” allocation applied, but the principle of horizontal exhaustion was required.  The excess insurers filed a motion, arguing that horizontal exhaustion
applies to all layers of coverage, such that all first-layer excess policies must be exhausted before any second-layer policy is triggered.  Plaintiffs, on the other hand, argued that horizontal exhaustion applies to primary and umbrella policies only and, thus, once those have been exhausted, all excess policies are triggered.

The Court agreed with Plaintiffs, finding that New York’s high court would hold that horizontal exhaustion applies to primary and umbrella policies, but not excess policies.  In reaching this conclusion, the Court noted that “New York emphasizes the policies’ purposes as evidenced by their language, premium amounts, and other indicators.  New York has also unequivocally held that only policies insuring the same risk should respond simultaneously and that ‘other insurance’ clauses are not relevant in allocating damages to policies over different periods.”

This matter is currently on appeal.