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

Carlock, Copeland & Stair, a civil defense 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 approximately 75 civil defense attorneys handling legal matters across the Southeast from offices in Atlanta, GA, Charleston, SC and Chattanooga, TN.

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Insurer Owes Builder Partial Coverage for $55 Million Judgment.

An insurer who denied coverage in a case which resulted in a $55 million judgment found itself on the losing end of an order in the coverage action related to that judgment. Last week South Carolina District Court Judge Richard Gergel found against Crum & Forster, ordering it to pay $2 million of a $55 million judgment to its insured, Creekstone Builders, Inc., a Texas entity. Judge Gergel also ruled that a jury will be allowed to decide whether Creekstone’s insurer is liable for bad faith. Creekstone SC I, LLC a South Carolina company, performed a renovation to the East Bridge Lofts between 2004 and 2006. Between June 2006 and August 2010 Crum & Forster issued CGL policies to Creekstone Builders and Creekstone SC. However the policies included an exclusion for work in South Carolina.

In the underlying action, East Bridge Lofts POA filed suit against Creekstone SC in Charleston County Circuit Court. When the case went to trial the jury found developers East Bridge Lofts LLC and the Creekstone entities guilty of negligence, breach of warranty, breach of fiduciary duty, unfair trade practices and reckless negligence claims. According to federal filings, Creekstone’s carrier, Crum & Forster, did not participate in the underlying suit other than to attend mediation where it is alleged that they failed to make a meaningful offer. Following the $55 million judgment East Bridge and both Creekstone entities brought an action in federal court for bad faith and breach of contract against Crum & Forster. A subsequent pleading added a claim for reformation of the policies. Monday’s ruling reflects the Court’s answer to cross motions for summary judgment.

In the coverage action Crum & Forster argued that Creekstone was repeatedly warned of the exclusion for work in South Carolina and that Creekstone could have done work in other states which would have been covered under the policy. Further, Crum & Forster argued that Creekstone SC was dormant when the policies were issued. Judge Gergel found that excluding coverage for work in South Carolina while insuring a South Carolina corporation which was licensed only to do business in South Carolina created an ambiguity which must be resolved in favor if the insured, thereby ordering Crum & Forster to pay its $2 million in policy limits. But the case is not over. The Judge also ruled that the outstanding Bad Faith claims are issues of fact for the jury. Thus, whether Crum & Forster will ultimately be held responsible for the entire $55 million remains to be seen.

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Declaratory Judgment Action Filed in Northern District of California Raises Issues as to “Additional Insured” Claims Nationwide

In an interesting Declaratory Judgment Action filed in the California, Travelers Insurance is arguing that Centex Homes does not have the right to independent counsel to fight a construction defects suit under their additional insured policy.  Alternatively, should Centex refuse defense counsel selected by Travelers, Travelers’ duty to defend is extinguished.

On October 28, 2015, counsel for Travelers filed their DJ action captioned:  Travelers Property Casualty Company of America v. Centex Homes et al  in the Northern District of California.  According to the Complaint, Travelers provided policies to Centex’s subcontractor Engeo, Inc.  When the homeowner’s association of the condos at issue sent Centex a Notice of Commencement of Legal Proceedings alleging construction defects, Centex tendered that underlying action to Travelers under the Enego policies as an additional insured.  Travelers apparently appointed defense counsel and agreed to defend Centex in the action however, Centex refused to accept Travelers’ s appointed counsel.  Travelers argues now that this refusal ended Travelers duty to defend Centex.  At the heart of the issue appears to be whether Travelers has a right to control the defense as outlined in the underlying policy with Enego and whether Centex has the right to appoint counsel of its own choosing.

Unlike California (which has codified an insured’s right to independent counsel), South Carolina courts have not accepted the Cumis doctrine.  However, this will be an interesting case to follow for those carriers litigating in our state who have accepted a general contractor’s defense under an additional insured endorsement.  Should the California courts look favorably on Travelers, that might bode well for a carrier’s ability to control the defense of the general contractor when that defense is being provided as an additional insured on a subcontractor’s policy.

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South Carolina flood damage may have long term effect on insurance coverage industry

Senator Lindsay Graham was recently quoted estimating that the damage as a result of recent flooding could amount to $1 billion. These damages will likely include automobile, housing, business, and personal property claims.  This will be in addition to crop loss claims which are estimated at over $300 million according to the Southeast Farm Press. The South Carolina Department of Insurance has established a link on its webpage specific to the flooding to direct consumers as to how to make claims for property and auto damage. For more information click here. Based on the scope of damage being reported, as well as the various types of insurance policies available which may or may not include flood coverage, we anticipate that we will see a significant uptick in coverage litigation over the next year as these claims are made.

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Southern District Grants Summary Judgment To Insurer Where Policy Expressly Excluded Coverage For Its Volunteer Workers

The Southern District recently issued an Order granting summary judgment to an insurance carrier because its policy unambiguously excluded coverage for bodily injuries arising out of the use of any vehicle operated by a “volunteer worker.”  McKeel v. Auto-Owners Insurance Co., 2015 WL 1333998 (S.D.Ga. March 24, 2015).

In McKeel, Plaintiff was involved in a motor vehicle accident when Cuong Nguyen improperly turned into the path of her vehicle.  Plaintiff, who was pregnant at the time, suffered injuries in the accident and prematurely delivered her baby.  Unfortunately, the baby died due to the injuries sustained in the accident.  At the time of the accident, Nguyen was a “volunteer worker” of Limelight Bar and Grill, LLC, which was owned by Nguyen’s brother.

Limelight was insured under a commercial general liability policy issued by Auto-Owners that provided bodily injury liability limits in the amount of $1,000,000.  Auto-Owners denied Plaintiffs’ demand for the policy limits because the policy excluded bodily injuries that arose out of the use of an automobile.

Plaintiffs filed a personal injury suit in the State Court of Bryan County and obtained a verdict against Nguyen in excess of $3,000,000.  Nguyen assigned his interest in any claim he may have against Auto-Owners to Plaintiffs.  Plaintiffs then filed a declaratory judgment action to determine if “the insurance policy at issue covers the events giving rise to the underlying lawsuits.”  Auto-Owners filed a counter-claim for declaratory judgment to determine that it has “no obligation to make payment for any amount relating to the [Plaintiffs’] judgment for damages obtained by them in the Underlying Liability Lawsuit.”  Following discovery, Auto-Owners filed summary judgment arguing that Plaintiffs’ claims are unambiguously excluded by the policy.

The policy contains an exclusion that expressly excludes “’[b]odily injury’ or ‘property damage’ arising out of the ownership, maintenance, use or entrustment to others of any aircraft, ‘auto,’ or watercraft owned or operated by or rented or loaned to any insured.”  The Court determined that based on this clear and unequivocal language, the policy does not provide coverage for any bodily injury that is based on the use of a vehicle operated by an insured.

The issue, then, was whether Nguyen was an insured under the Auto-Owners policy.  The policy defined insureds to include “‘volunteer workers’ only while performing duties related to the conduct of your business.”  It was undisputed that Nguyen was a “volunteer worker” at the time of the accident.  The Court concluded that Nguyen was an insured under the terms of the policy.

Because the policy expressly excluded coverage for bodily injury arising out of the use of any vehicle operated by an insured, the Court granted Auto-Owners summary judgment and found that the policy did not provide coverage for the injuries claimed by Plaintiffs in the underlying lawsuit.

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Conscientious Tenants Aren’t “Real Estate Managers” Under Homeowner’s Policy

The Eleventh Circuit recently upheld a district court’s grant of summary judgment to an insurer in a coverage dispute regarding the death of a two year old child.  In Moon v. Cincinnati Ins. Co., the homeowner’s policyholder leased the insured home to his son and daughter-in-law.  Moon, 2015 WL 342330 (11th Cir. Jan. 27, 2015).  The daughter-in-law was babysitting a neighborhood toddler, and, while under her care, the toddler drowned in the backyard swimming pool.  The decedent’s parents subsequently filed sued against the son and daughter-in-law.

Initially, the insurer defended the suit under a reservation of rights; however, it later denied coverage and withdrew its defense.  The basis for the denial was that the policy did not cover the son and daughter-in-law vis-à-vis their relationship with the father policyholder.  In the tort action, a judgment was entered in excess of $10 million.

After the denial, suit was brought against the insurer alleging breach of contract and bad faith failure to settle claims, as well as punitive damages and attorneys’ fees.  The basis for the claim was that the son and daughter-in-law were covered by the policy because they were acting as “real estate managers” on behalf of the policyholder.  To support this claim, they proffered evidence that the tenants performed routine maintenance on the home.  Because the term was undefined in the policy, the plaintiffs argued that showing that a person took care of property on behalf of the landowner was sufficient to qualify that person for coverage under the “real estate manager” term.

The district court disagreed with the plaintiffs, and the Eleventh Circuit affirmed.  Specifically, the Court held that “[t]he industry term ‘real estate manager’ implicates real estate transactions rather than routine maintenance.”  Under the definition proffered by plaintiffs, “it would transform every tenant, family member or friend living in another’s home, who cuts the yard or paints a wall, into a covered real estate manager.  This is not a reasonable interpretation of real estate manager.”

Additionally, even if the term “real estate manager” did encompass tenants, no coverage would be afforded under these circumstances because the claims arose out of a babysitting job, not duties being performed in the role of a real estate manager.

This case reflects long-standing Georgia precedent that courts will not strain to find ambiguities that do not exist, even when a policy term is undefined.

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Bad Faith Claims: Extra-Contractual Liability in Georgia


Fred Valz will be co-presenting “Plaintiff and Defense Perspectives”, as part of a number of sessions in The Seminar Group’s  Bad Faith Claims: Extra-contractual Liability in Georgia seminar, to be held in Atlanta on Thursday, February 5th and Friday, February 6th, 2015.

The full two-day seminar is available live and on demand, and offers:

GA CLE: 11.7 Credits, including 1.0 Hour of Ethics and 1.0 Hour Professionalism
GA Insurance: 14.0 Hours
IRMI: 7.0 Hours of CRIS Recertification Credits

Event Details/Registration

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Eleventh Circuit holds that Standard for Georgia ROR is “Adequacy”

In evaluating whether an insurer made a proper reservation of rights (ROR), the Eleventh Circuit Court of Appeals, in an unpublished opinion, held that whether the insurer fairly informed the insured of its coverage position is the proper standard in assessing whether coverage defenses were properly reserved.Wellons, Inc. v. Lexington Ins. Co., 2014 WL 1978412 (11th Cir. May 16, 2014).

Lexington insured Wellons, a company that designed and installed an Energy System for Langboard Industries, Inc., a company that manufactures oriented strand board. On November 20, 2004, during the construction phase of the Energy System, a tube bundle collapsed, resulting in extensive property damage. The Energy System was ultimately placed in service by June 2005.

On September 23, 2005 Wellons provided notice to Lexington, pursuant to the 2004 policy, of the tube bundle collapse. Lexington issued a reservation of rights letter on September 30, 2005. The reservation of rights stated, “this letter is not to be construed as a waiver of any of the terms, conditions, or provisions of the Lexington Insurance Company policy, or of any right or policy defense now or hereafter available to the Lexington Insurance Company.”

Wellons was sued, and on September 18, 2007, Lexington sent a second reservation of rights letter. The second reservation of rights stated, “there may be additional policy conditions that may also preclude coverage and this should not be construed as a waiver of other terms and conditions that may apply.” But Lexington retained counsel to defend Wellons against Langboard, and eventually paid limits under the 2004 policy to resolve this suit.

In February of 2006, after the Energy System had been in operation, leaks developed. Wellons retained a consultant, but the superheater ultimately failed. Langboard demanded that Wellons design and install a new superheater. Wellons agreed, but failed to notify Lexington. On August 17, 2006 Wellons notified Lexington of Langboard’s claim for a new superheater, but also of the consultant’s suit filed June 16, 2006, for non-payment for its services to repair the superheater.

On March 2, 2007, Lexington responded to the August 2006 notice by noting two separate claims were embedded in the notice. And, on March 3, 2007, Lexington sent a third reservation of rights letter – noting that Lexington was investigating this matter under a reservation of rights. Lexington further noted the policy required, for coverage to trigger, that “property damage” be caused by an “occurrence” and also highlighted certain exclusions for “Damage to Property,” “Damage to Your Product”, and “Damage to Your Work.” Lexington also stated that the agreement to replace the superheater was without authorization.

On April 25, 2007, Lexington supplemented its March 2007 letter with another reservation of rights letter. This letter stated there was no duty to indemnify or defend Wellons. Specifically, as no suit was filed, the duty to defend was not triggered. Regarding the duty to indemnify, there was no demand beyond the demand to replace the superheater. This letter also quoted pertinent portions of the policy including definitions of “property damage,” “occurrence” and various exclusions – as in the March reservation of rights letter. This position, however, was disputed by Wellons.

Langboard eventually filed a second suit against Wellons, and Lexington defended Wellons under the aforementioned reservation of rights. A jury awarded Langboard $8.5 million in damages. Wellons sued Lexington for indemnification, arguing that Lexington waived its coverage defenses because it did not adequately reserve its rights.

The Eleventh Circuit thoroughly reviewed Georgia law. Specifically, the court examined World Harvest Church, Inc. v. GuideOne Mutual Ins. Co. 287 Ga. 149, 695 S.E.2d 6, (2010) and Hoover v. Maxum Indemnity Co., 291 Ga. 402, 730 S.E.2d 413 (2012). The Eleventh Circuit held that it did not read World Harvest to overrule Georgia authority on specificity. It noted that Georgia law has repeatedly held that an “insurer” is not required to list each and every basis for contesting coverage in the reservation of rights letter. Kay-Lex Co. v. Essex Ins. Co., 286 Ga. App. 484, 649 S.E.2d 602 (2007).

The Court then held that Lexington’s reservation of rights letters were adequate; “a reservation of rights need not specify each and every potential basis for contesting coverage, as long as the reservation fairly informs the insured that, notwithstanding the defense of the insured, the insurer does not waive its coverage defenses.” The Court also noted that Wellons’ failure to object to the defense provided in the second suit provided implied consent to the defense under a reservation, and thereby implicitly consented to the terms of the reservation, including the non-waiver clauses.

The use of multiple reservations of rights with non-waiver clauses proved critical to avoiding costly indemnity obligations for the insurer, Lexington. Most important to the Court’s analysis was that the reservation of rights letters contained non-waiver clauses that specifically reserved Lexington’s right to assert additional coverage defenses. Caution should be noted with respect to reliance on this opinion as it is not binding precedent upon a Georgia Court. The reasoning, however, is very instructive and useful.

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Conference: 1st Annual Bad Faith Litigation Strategies ExecuSummit

November 04, 2014 / Location: Uncasville, CT

Mike Ethridge will serve on the  “Mediating Bad Faith Claims” panel alongside Deanna Johnston of Fireman’s Fund Insurance Company and Steven LaForge of Nationwide Insurance Company at the 1st Annual Bad Faith Litigation Strategies ExecuSummit  on November 4 & 5, 2014.  This one and a half day seminar, to be held at the Mohegan Sun Resort in Connecticut will offer a number of sessions for insurance professionals covering topics such as:

  • Emerging Issues in Bad Faith Claims
  • Primary and Excess Insurers – Bad Faith – Has the Playing Field Changed Register
  • Ethics: Legal Malpractice Concerns and Tips for In-House Counsel
  • Avoiding the Bad Faith Set Up
  • First- & Third-Party Bad Faith Litigation: Recent Developments
  • How to Choose and Use Bad faith and Coverage Experts In Today’s Environment
  • The Impacts and Dangers of Unfair Trade Practices Acts – The Need to be Aware!
  • Bad Faith First Party Third Party Coverage Denials
  • Punitive Damages and the Latest Trends and Theories

Event Details/Registration

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Homeowner’s Policies Do Not Cover Auto Accidents

The appellate courts in Georgia have confirmed that homeowner’s policies clearly do not provide coverage for damages arising from the use of a motor vehicle, regardless of who owned or was operating the vehicle.  Although most homeowner’s policies plainly exclude coverage for such damages, plaintiffs in recent months have attempted to argue that the exclusion should only apply when the vehicle belongs to or was being operated by an insured seeking coverage under the homeowner’s policy.  The Court of Appeals rejected this argument and the Georgia Supreme Court denied cert on the issue.

In April, the Georgia Court of Appeals ruled that the motor vehicle exclusion in a homeowner’s insurance policy barred coverage for damages arising from the death of a teenager killed in a car after allegedly drinking alcohol at the insured’s house.  Sauls v. Allstate Prop. & Cas. Ins. Co., 326 Ga. App. 821, 757 S.E.2d 455 (2014), cert. denied Case No. S14C1093 (Sept. 22, 2014).

On the evening of February 18, 2011, the Plaintiffs’ 16-year-old daughter and 17-year-old son visited the home of a 17-year-old friend. The Plaintiffs alleged that, at the friend’s home, their daughter consumed alcohol, which the friend had obtained with the knowledge, consent, or acquiescence of his father.

Later that evening, the plaintiffs’ son, daughter, and some of their friends had left the party in a vehicle driven by the plaintiffs’ son, when he collided with a moving truck that was disabled and extending into the roadway.  Plaintiffs’ daughter was ejected from the vehicle and died from the injuries she sustained in the accident.

At the time of the accident, the friend’s father was the named insured under a homeowner’s policy issued by Allstate Property & Casualty Insurance Company.  When sued by Plaintiff for the death of his daughter, the friend’s father sought coverage under his homeowner’s policy for the claims arising from the death.

Allstate filed a declaratory judgment action, seeking a judicial declaration as to what, if any, coverage obligation it owed the friend’s father — the homeowner. Specifically, Allstate asserted that because the homeowner’s policy excluded coverage for damages arising out of the use of a motor vehicle and because the damages at issue (the death of plaintiff’s daughter) arose from a motor vehicle accident, there was no coverage under the policy. The trial court granted Allstate’s motion for summary judgment, and the plaintiffs appealed; they argued that their claims were based – not on the use of a motor vehicle – but on the conduct of Allstate’s insureds before the accident in furnishing alcoholic beverages, at their residence, to the driver and to their daughter, who were both minors.

The Georgia Court of Appeals rejected the argument.  In affirming the trial court, the Court of Appeals explained that regardless of the plaintiffs’ theory of liability, the claims would not exist but for the use of a motor vehicle and the policy excluded coverage for damages arising from the use of a motor vehicle.  As such, the court ruled that there was no coverage available under the homeowner’s policy for the plaintiffs’ cause of action.

The plaintiffs petitioned the Georgia Supreme Court for certiorari.  In their petition, plaintiffs urged the court to reverse lower courts’ decisions, claiming that the interpretation of the motor vehicle exclusion was too broad.  Plaintiffs alleged that notwithstanding the plain language of the exclusion, which states that it applies to damages arising from the use of any motor vehicle, the exclusion should be narrowly construed so to only apply to those motor vehicles over which the insured have some ownership, possession, and/or control.  In a single page order, the Supreme Court denied the petition and affirmed the decision of the Court of Appeals.

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