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Legal Updates, Opinions and Relevant information on Insurance Coverage and Bad Faith Litigation

Carlock, Copeland & Stair, a civil litigation firm, has a reputation for forceful, creative and cost-effective advocacy on behalf of its clients. Formed in 1970 with five attorneys operating out of a downtown Atlanta office, we now have over 75 civil litigation attorneys handling legal matters across the Southeast from offices in Atlanta, GA, Charleston, SC and Chattanooga, TN.

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Does Your Business Policy Actually Protect You? If it has a “Professional Services” Exclusion, it might not

If you did not believe it before, you can believe it now—Ponzi-scheme cases make bad law.  On July 5, 2017, the Eleventh Circuit decided Furr v. National Union Fire Insurance Company of Pittsburgh (No. 15-14716), in which the court considered the impact of a “professional services” exclusion in a bank’s executive and organization liability insurance policy.*  The court held that there was no coverage for anyone because some of the claims asserted were related to the professional services that the bank rendered to the Ponzi scheme.  In denying coverage to everyone, the court reviewed this exclusion:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured alleging, arising out of, based upon, or attributable to the Organization’s or any Insured’s performance of or failure to perform professional services for others, or any act(s), error(s) or omission(s) relating thereto.

The court upheld coverage denial (1) because the policy did not contain a severability provision and (2) because the text of the exclusion prohibited payment if a claim is made against any insured who performed or failed to perform professional services.  To be clear: if anyone was a professional subject to a claim (or performing professional services), no one gets coverage, even non-professionals.

This has two important consequences: First, if a claim is made under a policy with similar contents, then claiming a legal, accounting, or medical error will jeopardize coverage for everyone.  Second, and perhaps more importantly, this particular policy evidently does not protect a bank from claims arising from banking services because those services are professional enough to be encompassed by the exclusion.

Exclusions like the professional services exclusion (and the personal injury exclusion) are designed to keep claims inside the appropriate policy and preclude doubling-up on coverage across multiple policies.  That is fair.  A D&O policy shouldn’t cover personal injury—that is the role of the general liability policy.  But excluding coverage based on a bank’s banking services seems to have left the bank’s executives without any coverage.  That is a harsh result.

I do not mean to sound shrill, but everyone should look at their policies and make sure that they actually have the coverage that they intend to have both from the perspective of whether the company’s services would be included in the “professional services” exclusion and to make sure that an errant claim touching on a professional’s work inside the business does not jeopardize coverage for everyone.

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* I have not actually seen the policy, but this “executive and organizational” policy sounds more like a Director & Officers (D&O) policy than an Errors and Omissions (E&O) policy.

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West Virginia Supreme Court Finds No Ambiguity in Policy’s Exclusionary Language

The West Virginia Supreme Court recently issued an opinion interpreting common exclusionary language in a policy’s earth movement exclusion, as well as an ensuing loss clause in the same policy.  The opinion was the result of a declaratory judgment action brought by the owners of a commercial property in St. Albans, West Virginia, after the property was damaged by a soil and rock slide.  After inspecting the damage, the owners’ insurer, Erie Insurance Property and Casualty Company (“Erie”), denied coverage pursuant to an exclusion in the policy for damages caused by earth movement.  The trial court entered judgment in favor of the owners, finding the exclusion was ambiguous and, therefore, the damages were covered under the policy.  The trial court further found that the policy’s ensuing loss clause was also ambiguous and provided coverage for the loss.

On appeal, the West Virginia Supreme Court reversed the trial court.  The supreme court held that exclusionary language in the policy, which contained the phrase “caused by an act of nature or is otherwise caused,” specifically precluded recovery for earth movement, whether naturally occurring or from manmade causes.  In doing so, the court noted that all other courts which had construed this language reached the same conclusion.  Further, the supreme court stated that the language in question was developed by the Insurance Services Office in 2013 specifically to address potential ambiguities in prior language utilized in insurance policies.  Therefore the court held that the exclusionary phrase “clearly and unambiguously excludes coverage for a landslide resulting from a natural event or otherwise.”

The court went on to address whether the ensuring loss provision in the exclusion, which agreed to provide coverage for “fire, explosion, sprinkler leakage, volcanic action, or building glass breakage . . . for the ‘loss’ or damage caused  by such perils,” was ambiguous and, therefore, provided coverage for the owners’ loss.  Although the trial court found coverage for the owners’ entire loss based on this provision, the supreme court held that the trial court’s “interpretation of the ensuing loss provision is unjustifiable, based upon the purpose and express language of the ensuing loss provision.”  Following the reasoning of courts in other jurisdictions, the West Virginia Supreme Court held that “an ensuing loss provision must not be applied to make an excluded loss reappear as a covered loss.”  Instead, the ensuing loss provision “simply carves out a narrow exception to the exclusion, limiting the scope of what is otherwise excluded under the policy.”  Thus, the ensuing loss provision could not provide coverage for losses unambiguously excluded by the policy.

Although this opinion deals specifically with a policy’s earth movement exclusion, the “or otherwise caused” language addressed in this opinion is language commonly used in other policy exclusions.  Similarly, the ensuing loss provision (also sometimes called a resulting loss provision) is a common feature in many insurance policies.  Thus, the principles utilized by the West Virginia Supreme Court in construing these policy provisions are likely to have applicability to a broader range of insurance policy provisions and exclusions.

The case is Erie Insurance Property and Casualty Company v. Chaber, No. 16-0490 (Jun. 1, 2017), in the Supreme Court of Appeals of West Virginia.  Please contact us if you would like a copy of the opinion or would like to discuss the case further.

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Supreme Court of New Jersey Holds Policy Sublimit Offers No Additional Coverage to Insured for Superstorm Sandy

In a recent opinion, the Supreme Court of New Jersey reversed a prior opinion by the state’s appellate division and reinstated a partial grant of summary judgment to Travelers Excess and Surplus Lines Company (“Travelers”) over damages to an apartment complex as a result of Hurricane Sandy in October 2012.  The policy in question included a $1,000,000 limit for flood loss, as well as a $500,000 sublimit for debris removal.  The owners of the apartment complex submitted a claim for the full $1,000,000 limit for flood damages, as well as an additional $207,961.28 for debris removal.  Travelers refused to pay more than the $1,000,000 flood limit, asserting that the debris removal costs were the result of flooding and, therefore, the owners’ total recovery was limited to the $1,000,000 flood coverage limit, regardless of the sublimit for debris removal.  The trial court agreed and granted partial summary judgment in favor of Travelers, holding that the debris removal sublimit could not be read to increase the flood coverage limit.  A panel of the state’s appellate division reversed the trial court, holding that the policy provided up to an additional $500,000 in coverage for debris removal.

The New Jersey Supreme Court, in a 5-2 decision, reversed the Appellate Division’s decision.  The court held that “[t]he terms of the Policy unambiguously place a $1,000,000 total on recovery for all flood occurrence losses.”  In reaching its decision, the Supreme Court noted that the flood endorsement included language that “[t]he most [Travelers] will pay for the total of all loss or damage caused by Flood” was the $1,000,000 limit.  According to the court’s majority, this language constituted “a hard cap on the amount recoverable for flood damage” and “categorically denies any flood damage coverage in excess of $1,000,000.”  The court went on to hold that “the Flood Endorsement controls the extent of flood coverage and is not modified by the rest of the Policy’s terms,” and noted that other portions of the policy supported its interpretation.  Therefore, the court found it unambiguous that the debris removal sublimit did not increase coverage under the flood endorsement in the policy.

Parts of South Carolina have recently experienced similar damages from several named storms, including October 2017’s Hurricane Matthew, and we have already seen issues arise regarding the interplay between policy coverages and sublimits as a result of damages sustained from these storms.  It is worth noting that the appellate division’s opinion found that the policy unambiguously included additional coverage for debris removal, while the Supreme Court’s opinion found that the policy unambiguously excluded additional coverage for debris removal.  While the decision of the Supreme Court of New Jersey appears to be in line with a number of opinions in other jurisdictions regarding flood policy sublimits, the differing results reached by New Jersey’s appellate courts regarding this policy language demonstrates not only the importance of well-written policy provisions, but also the importance of properly analyzing and interpreting various interrelated policy provisions when making coverage decisions.

The case is Oxford Realty Group Cedar v. Travelers Excess & Surplus Lines Co. (077617), A-85-15 (N.J. 2017), in the Supreme Court of New Jersey.  Please contact us if you would like a copy of the opinion or would like to discuss the case further.

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Multiple Claims Versus a Single Occurrence: Iowa Judge Rules in Favor of Pella Windows

A federal judge in Iowa has issued two rulings in the past two weeks interpreting an ongoing coverage dispute regarding underlying construction defect claims against a window manufacturer. The case arises out of a dispute between Pella Corporation and several subsidiaries (“Pella”) and its insurer, Liberty Mutual Insurance Company (“Liberty”).  The dispute arose out of a number of lawsuits against Pella by various plaintiffs for alleged water intrusion damages resulting from defectively designed, manufactured, or installed windows.[1]  Pella sought reimbursement of defense costs and settlements as a result of each of these claims.

On cross-motions for summary judgment, the District Court for the Southern District of Iowa was asked to determine under Iowa law whether to apply a pro rata apportionment of damages for each policy period or a joint and several “all sums” allocation of damages.  The court was also asked to determine whether each of many claims against Pella was a separate “occurrence” under the Liberty policies or whether each of the claims should be categorized as three or four total occurrences, based on the  type of alleged conduct/omissions on the part of Pella.

In its first order, issued March 22, 2017, the court held that Iowa law would apply a pro rata apportionment of damages under the various policies at issue.  In reaching this decision,  the court rejected Pella’s argument that the non-cumulation provisions of the policy required a finding of an “all sums” allocation.  Instead, the court held that the policy language limiting recovery to damages within the policy period unambiguously provided for a pro rata allocation method, and specifically rejected several findings to the contrary by courts in other jurisdictions.

The court issued a second order on March 31, 2017.  In this order, the court determined that each claim constituted a separate “occurrence” under the policies.  In reaching its conclusion, the court noted the majority rule that the determination of the number of occurrences is based on the underlying cause of the alleged property damage.   However, Pella and Liberty disagreed over the level of generality for applying this standard.  Pella argued that each specific claim had distinguishing facts related to the cause of the damages, while Liberty asserted that the underlying cause should be more generally understood to group together claims for defective installation, a fall through a window, and a couple broad categories of manufacturing or design defect claims.

After reviewing the facts of each of the claims and the language in the underlying policies, the court concluded that both parties made reasonable interpretations of the language in the policies in question.  However, because the policies were subject to multiple reasonable interpretations regarding this issue, the court was constrained to find that the policies were ambiguous as to the interpretation of what constituted an “occurrence.”  Therefore, the court found in favor of Pella, pursuant to Iowa law that an ambiguous policy provision must be construed in favor of the insured.

The case is Pella Corporation v. Liberty Mutual Insurance Company, No.  4:11-cv-00273, in the U.S. District Court for the Southern District of Iowa.  Please contact us if you would like a copy of the order or would like to discuss the case further.

[1] This case deals with a number of “sample claims” that were representative of the larger total number of claims.

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No Bad Faith in Uninsured Motorist Claim Where Damages in Dispute

This Tuesday, the 11th Circuit affirmed a summary judgment granted in favor of State Farm, holding that State Farm was not legally obligated to pay the claim since the amount of damages was in dispute.

Alabama law states that there can be no breach of an uninsured motorist contract, and therefore no claim for bad faith, unless and until the insured proves that he is “legally entitled” to recover. In this case, the record established that the other driver was at-fault. However, the analysis did not stop there.

The Court provided that, to establish that a plaintiff is “legally entitled” to recover, both liability and damages must be proved. Here, the record was clear that State Farm disputed the amount of damages claimed by plaintiff. As such, his claims for breach of contract and bad faith were properly dismissed as premature.

The case is Broadway v. State Farm Mut. Ins. Co., 2017 U.S. App. LEXIS 5350 (March 28, 2017).

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FBI Not Vicariously Liable For Fire Damage

11th Circuit judges Stanley Marcus, Julia Carnes, and Jill Pryor upheld the decision that the FBI was not vicariously liable for fire damage to a Country Inn and Suites hotel caused when FBI Special Agent Michael Siegling (“Siegling”) “negligently discarded“ his cigarette.

Siegling stayed at a Country Inn and Suites hotel in Huntsville, Alabama while attending a voluntary 6-week training course on hazardous materials.  In the evenings, he frequently smoked cigarettes on the balcony of his second-floor hotel room.  After a fire spread one evening at the hotel, rendering an entire wing uninhabitable, the Fire Marshal determined that the cause was a “negligently discarded” cigarette from the balcony of Siegling’s room.  Acadia Insurance Company, which indemnified the hotel, brought a subrogation claim against the United States under the Federal Tort Claims Act.

Acadia argued that the FBI was vicariously liable since it paid for Siegling to stay in a smoking room while attending the FBI training course.  Under Alabama law, the rule for determining whether the conduct of an employee is within the scope of his employment is substantially that if an employee is engaged to perform a certain service, then whatever he does to that end, or in furtherance of the business, is within the scope of the employment.  Solmica of Gulf Coast, Inc. v. Braggs, 232 So. 2d 638, 642 (Ala. 1970).

The 11th Circuit held that Siegling was not acting within the scope of his employment when he discarded the cigarette because he was off duty, not under the FBI’s supervision, and not engaged in activities that furthered its business.  Furthermore, the FBI did not pay for his cigarettes.  Rather, it prohibited employees from purchasing cigarettes with a government credit card.  The 11th Circuit added that no evidence was presented that the FBI was aware that he purchased a smoking room, nor did it require Siegling to stay at that particular hotel.

The decision is Acadia Ins. Co. v. United States, 2017 U.S. App. LEXIS 394 , 2017 WL 83379 (11th Cir. 2017).

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Heritage Decision Fallout Begins as Carrier DENIED Intervention…

The fallout has already begun from the recent South Carolina Supreme Court decision Harleysville Group Ins.v. Heritage Comms., Inc., Op. No. 27698 (S.C. Sup.Ct. field Jan. 11, 2017), which we wrote about a few weeks ago (see Don’t Write Another Reservation of Rights Letter Before Reading This Opinion! Posted January 18, 2017).  We understand that in a hearing on a Motion to Intervene last week, a South Carolina trial court denied the Motion, relying in part on Heritage in reaching its decision.

While the Order has yet to be signed, we have been informed that the Court’s denial of the Motion rested heavily on the recent Heritage decision.  As we understand it, the court held that the Heritage decision indicated a preference for general verdicts in a construction matter, even where this means that an insurer will be responsible for the all covered and non-covered claims in that verdict.  The trial court seemed to consider the potential conflict of interest where the insurer was attempting to both defend its insured and present special questions to the jury in an effort to deny possible indemnification following trial, which we understand it believed unfair to the insured.  Finally, the court seems to have noted that the insurer’s intervention would create a high likelihood of confusing the jury.  It is our understanding that the court concluded that intervention by the insurer was inappropriate, and denied the Motion, noting that a subsequent declaratory judgment action would be a more proper vehicle for asserting that the insured had no right to indemnification under the policy.

This is an interesting decision, as the insurer had asserted the right to intervene based on the ruling in Heritage.  As noted, however, the trial court read the decision differently, holding that it does not entitle the insurer to intervene in the underlying litigation to propound special interrogatories to the jury.  Whether other trial and appellate courts interpret the recent decision in a consistent manner or provide their own interpretation is something we will be watching closely in the coming months.

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Don’t Write Another Reservation of Rights Letter Before Reading This Opinion!

Last week, the South Carolina Supreme Court issued an opinion that is likely to heavily influence the fields of construction coverage law and construction litigation in South Carolina.  The case, Harleysville Group Ins. V. Heritage Comms., Inc., Op. No. 27698 (S.C. Sup.Ct. field Jan. 11, 2017), arises out of the construction of two condominium complexes in Myrtle Beach, South Carolina.  The complexes were constructed by Heritage Communities between 1997 and 2000, during which time various Heritage entities had liability policies through Harleysville.  The last Harleysville policy lapsed in 2001, after which Heritage was uninsured and, ultimately, went out of business entirely.

When Harleysville received notice of the lawsuits against it, it agreed to assume Heritage’s defense under what it believed to be a full reservation of rights.  Following general verdicts in favor of the Plaintiffs in the underlying cases, Harleysville filed a declaratory judgment action seeking a determination that there was no coverage for the losses, or, in the alternative, requesting that the court determine which portions of the general verdicts were covered damages.  The case was referred to a Special Referee, who found that Harleysville failed to properly reserve its right to contest coverage as to the underlying damages constituting faulty workmanship because the reservation of rights letters were not sufficiently specific to put the insureds on notice of Harleysville’s specific defenses.

On appeal, the Supreme Court agreed with the Special Referee.  The Supreme Court held that although the letters identified the particular insured entities, the lawsuits at issue, the allegations against the insureds in the Complaint, the policy numbers, the policy periods, and nine to ten pages of various policy terms relating to, among other issues, the insuring agreement, Harleysville’s duty to defend, and a number of policy exclusions and definitions, the letters lacked sufficient specificity to properly reserve Harleysville’s right to contest coverage, except as to punitive damages.  The Supreme Court noted both the “cut-and-paste approach” to the policy provisions in the reservation of rights letter and the fact that, despite the inclusion of these provisions, “the letters failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage.”  The Supreme Court also noted that Harleysville’s letters did not “expressly put its insureds on notice that it intended to litigate the issues of whether any damages resulted from acts meeting the definition of occurrence, whether any damages occurred during the applicable policy period, what damages were attributable to non-covered faulty workmanship, and whether certain damages resulted from intentional acts by the insured and were thus excluded.”

The court also rejected Harleysville’s contention that subsequent oral reservations were sufficient to put the insureds on notice, without definitively determining whether oral representations may be sufficient in other circumstances.  Thus, the court concluded that the reservation of rights letters were no more than a “general warning” and were “too imprecise to shield” Harleysville.  Finally, the court made note of the more than six-month delay between notice of the lawsuit and the issuance of Harleysville’s reservation of rights letters, but also held that the issue was not raised by either party and, therefore, not preserved for review.

We are still unpacking the full meaning of this decision, not only for reservation of rights letters, but for construction law in general.  In addition to the reservation issue, the Supreme Court also issued rulings affecting recovery for punitive damages under a liability policy, the effects of the use of a general verdict form on subsequent coverage litigation, and the proper time-on-the-risk analysis for damages, including loss of use and punitive damages, among other rulings.  Thus, it is likely that this decision will continue to reverberate through the fields of construction coverage and litigation in South Carolina for years to come.  Stay tuned for a more detailed analysis of this case in Carlock, Copeland & Stair LLP’s next installment of its quarterly construction newsletter, “The Critical Path.”

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11th Circuit To Hear Dispute Over Notice Requirements After Dismissal Without Prejudice

Since 2008, litigation has been ongoing between G.M. Sign, Inc. and Brink’s Manufacturing Co. over allegations that Brink’s violated the Telephone Consumer Protection Act by sending out unsolicited faxes without any ability by the recipient to opt out of receiving the faxes.  The original 2008 lawsuit was dismissed without prejudice in 2009.

G.M. Sign immediately filed an identical suit in Illinois State Court, which settled for $22.54 million.  As part of the deal, G.M. Sign was assigned Brinks’ insurance rights under its policy with St. Paul Fire & Marine Insurance Co.  However, Brink’s did not tender the defense of the action brought in Illinois State Court and did not otherwise provide notice to St. Paul of the fact that the suit had been re-filed.

In 2014, G.M. Sign went after St. Paul in Georgia federal court.  St. Paul responded that it was not required to cover the claim brought in Georgia because, after the 2009 dismissal without prejudice, it did not receive notice of ongoing or re-filed litigation between the parties.  St. Paul maintained that Brink’s failure to provide notice deprived St. Paul of the ability to consider any settlement demand or otherwise resolve the 2009 action.

G.M. maintains that, since the second suit is identical to the first suit, and since St. Paul knew of the first suit, then notice was adequately provided.

Judge Eleanor Ross, serving the Northern Federal District of Georgia, ruled that a dismissal without prejudice “means the suit is over.”  Therefore, an insured must provide notice of a re-filed claim or other litigation, no matter how similar to the first lawsuit it may be.  Because no such notice was provided in this case, Judge Ross relieved St. Paul from having to provide coverage.

The case has made its way to the 11th Circuit Court of Appeals: G.M. Sign, Inc. v. St. Paul Fire & Marine Ins. Co., 1:14-cv-02977.

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U.S. District Court Rules on “Your Work” Exclusion

A U.S. District Court in Florida recently found that the “Your Work” exclusion in a CGL policy barred coverage for a contractor and developer of a condominium project where the only property damage alleged as a result of the insured’s defective and deficient work was to other portions of the insured’s work.

The insurer, Evanston Insurance Company, sought a declaration that it had no duty to defend or indemnify its insured, DiMucci Development Corp. of Ponce Inlet, Inc.  DiMucci constructed a 132 unit condominium complex, the Towers Grande, in Volusia County Florida.  DiMucci acted as the owner, builder, developer, and seller of the Towers Grande.

In 2012, subsequent to the completion of the project, the Towers Grande Condominium Association filed a construction defect case against DiMucci in state court in Florida, alleging, among other things, defects and deficiencies in the roof, exhaust pipe, HVAC system, and water intrusion and other decking/structural issues at the condominium complex.  The underlying complaint also brought claims against DiMucci’s roofing subcontractor, who performed roofing work at the site.  The complaint asserted claims for negligence, breach of implied warranties, and violations of Florida Building Code.

After determining that Florida law applied to the action before it, the District Court first looked at whether or not the underlying complaint alleged an “occurrence” and “property damage,” which would trigger Evanston’s duty to defend under the policies.  The court held that there were sufficient allegations of an “occurrence” under the policy because DiMucci neither expected nor intended structural damage to the property caused by the alleged defects.  The court also held that there were sufficient allegations of “property damage” under the complaint, because DiMucci’s allegedly defective work damaged otherwise non-defective portions of the Towers Grande.

The District Court went on, however, to analyze whether coverage for the alleged damages was excluded pursuant to the “Your Work” exclusion in the policy.  In holding that the “Your Work” exclusion barred coverage, the court noted that DiMucci’s work at the project encompassed the entire project, with the exception of the roof.  The court held that because the allegations of the underlying complaint alleged only that DiMucci’s defective work on a portion of the project resulted in damage to other parts of the project also constructed by DiMucci, the “Your Work” exclusion barred coverage and Evanston had no duty to defend the underlying complaint.  The court distinguished the situation before it from a situation where an insured’s defective work causes damage to other portions of a project that were not constructed by the insured.

The District Court’s interpretation of the “Your Work” exclusion is similar to interpretations by South Carolina’s courts.  The case also highlights the importance of understanding the effect that “Your Work” and other “business risk” exclusions may have on coverage in a given case.

The case is Evanston Insurance Company v. DiMucci Development Corp. of Ponce Inlet, Inc., case no. 6:15-cv-486-Orl-37DAB, in the U.S. District Court for the Middle District of Florida.  Please contact us if you would like a copy of the order or would like to discuss the case further.

 

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