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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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First Circuit, Souter Grant Coverage despite Exclusion

Former Associate Justice of the Supreme Court David Souter returned to his First Circuit roots and participated in an August 2015 ruling declining to uphold a policy exclusion where the injured person was employed by a contractor with no written contractual relationship to the insured. The court’s rationale was the term “contractor” is ambiguous and the ambiguity should be construed against the insurer.

In July 2009, homeowners hired general contractor Benchmark Construction Services, Inc. to renovate their home in Massachusetts. The homeowners hired architect Thomas Huth to design the renovation plans. Huth hired Sara Egan d/b/a Painted Design to do some decorative painting to one of the interior walls of the home. Egan sent her employee, Meghan Bailey, to the perform the painting work. Benchmark did not have a written contractual relationship with Huth (architect), Egan (painter), or Bailey (painter’s employee). On March 5, 2010, while Bailey was applying decorative paint, she fell from a ladder that was standing on top scaffolding allegedly erected by Benchmark.

Bailey sued Benchmark in the Massachusetts Superior Court, alleging she was injured in the fall, Benchmark owed her a duty of care, and Benchmark negligently erected and maintained the ladder and scaffolding. Benchmark sought defense from its insurer, United States Liability Insurance Company (“USLIC”) but USLIC determined Bailey’s claims were not covered under Benchmark’s insurance policy. According to USLIC, an endorsement to the policy specifically excluded Bailey’s injuries from coverage. Therefore, USLIC has no duty to defend or indemnify Benchmark against those claims.

USLIC won on summary judgment, with the district court finding the endorsement to be “unambiguous.” Bailey’s claims were not entitled to indemnity because of a policy endorsement excluding coverage for employees of contractors and subcontractors injured while performing services. The district court said the term “contractor,” which was undefined in the policy, meant “anyone with a contract” and coverage for Bailey’s claims was excluded as her employer had contracted to do painting work.

The panel, including Souter, disagreed with the district court. Finding that “reasonably intelligent people” could differ regarding the meaning. “Anyone with a contract is surely a reasonable definition of the word ‘contractor,’ as the district court found, but so is a more narrow definition focused on the contractual relationship of the injured party and the insured.”

The court determined when disputed terms are “susceptible to multiple reasonable definitions, then the court will apply a reasonable definition that confers coverage, if one exists.” Ultimately concluding USLIC had a duty to defend and indemnify Benchmark in the underlying negligence suit.

The holding could be problematic to insurers because the court granted coverage to an injured party employed by any contractor or subcontractor on the project despite no contractual privity with the insured.

The case is U.S. Liab. Ins. Co. v. Benchmark Const. Servs., Inc., 797 F.3d 116 (1st Cir. 2015). Please contact us if you would like a copy of the case or have any questions.

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Party Claims Coverage as Additional insured based on Oral Agreement with Primary Insured … and just may get it!

Will an oral agreement by your insured be enough to create coverage for a third party? The Seventh Circuit Court of Appeals says yes – in the right circumstances.

Vita Food Products, Inc. is claiming status as an “additional insured” under a policy issued by Cincinnati Insurance Company to Painters USA, Inc.

The policy language allowed Painters to add an “additional insured” to the policy by its own agreement (oral or written) so long as that agreement preceded the “occurrence” and that “a certificate of insurance showing that person or organization as an additional insured has been issued.”

Vita hired Painters to provide painting services on its premises; Vita alleges that prior to work commencing, Painters agreed orally to add Vita as an additional insured on the Cincinnati policy. Cincinnati had not yet issued the certificate of insurance naming Vita as an additional insured when one of Painter’s employees was injured in an accident on Vita’s premises. Cincinnati issued the certificate of insurance a day after the accident.

The policy did not require permission from Cincinnati to create the additional insured status, so long as the two insureds had a relationship that makes the addition of a second insured consistent with the nature and aims of the policy, as when the original insured is providing products or services to the additional insured—as was the case here. The policy only required that a certificate ultimately be issued, which it was.

The certificate of insurance states that it is “issued as a matter of information only,” “confers no rights upon the certificate holder” and “does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies.” The Court held that this language indicates that issuance of the certificate could not be a precondition to coverage, because it is just information and does not alter the policy.

The Court indicated that reference in the policy to the certificate of insurance was ambiguous; issuance of the certificate could be regarded as a prerequisite to coverage or it could be intended merely to memorialize the agreement by its insured.
Stating that an oral agreement is a valid contract, the Court held that if Vita can prove that there was an oral agreement with Painters prior to the accident, it is entitled to coverage under the Cincinnati policy.

This case reinforces the rights of additional insureds and reiterates a court’s willingness to interpret insurance contracts against the drafter and in favor of coverage if an ambiguity can be found.

The case is Cincinnati Insurance Co. v. Vita Food Products, Inc., No. 15-1405, United States Court of Appeals, Seventh Circuit. Please contact us if you would like a copy of the case or have any questions.

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Christmas Comes Early to Crum & Forster in East Bridge Lofts Action – $2 Million Coverage Ruling Reversed

After ruling against Crum & Forster in November 2015 and ordering the insurer to pay $2 million of a $55 million judgment to its insured, South Carolina District Court Judge Richard Gergel reversed his ruling, in an order on the insurer’s motion to reconsider.

In November, Judge Gergel considered competing summary judgment arguments relating to the insurer’s denial of coverage to its insured, Creekstone Builders, Inc., in an underlying construction defect action, which resulted in a $55 million verdict against Creekstone. Crum & Forster denied coverage based on an exclusion in Creekstone’s CGL policies for work performed in South Carolina – an exclusion about which Crum & Forster insisted Creekstone was repeatedly warned before entering the contracts.
While the Judge refused to grant summary judgment on whether Crum & Forster acted in bad faith in denying coverage based on the exclusion, the Judge did rule that Crum & Forster could not enforce the exclusion for Creekstone’s South Carolina operations. Judge Gergel reasoned that enforcing the exclusion for South Carolina operations against a company that was licensed only to do business in South Carolina, created illusory coverage and an ambiguity in the policies, which must be resolved in favor of the insured. Ultimately the Judge concluded that a jury must decide who should pay the $55 million judgment; however, Crum & Forster must pay the $2 million in coverage limits under the policies issued to Creekstone.

But last week, the Judge reconsidered his November ruling, and reversed his earlier decision on whether Crum & Forster can be held legally responsible for the $55 million state court verdict in part or in whole.

In reversing his decision and finding that the SOE in the policies at issue preclude coverage for Creekstone’s South Carolina operations, the Judge considered extrinsic evidence regarding the parties’ intention to exclude South Carolina operations from coverage, which was not considered prior to the November ruling against Crum & Forster. Based on his extensive review of the extrinsic evidence presented that Creekstone had knowledge of the SOE in the policies, the Judge held that “no reasonable jury could find that the parties intended the policies at issue to cover Creekstone SC’s South Carolina operations.”

Concluding that, as a matter of law, the coverage provided under the policies was not illusory and that the SOE in the policies at issue precluded coverage for Creekstone’s South Carolina operations, Judge Gergel granted summary judgment in favor of Crum & Forster as to Plaintiffs’ declaratory judgment claim, Plaintiffs’ breach of contract claims, Plaintiffs’ reformation claim, Plaintiffs’ bad faith denial of coverage claim, and Plaintiffs’ bad faith failure to settle claim.

This ruling comes as good news for those who seek to rely on extrinsic evidence to resolve a coverage dispute. While South Carolina, historically speaking, has been a state slow to embrace the “reasonable expectations” doctrine of interpreting insurance policies, rulings such as this one and similar state court decisions suggest that our Courts may be moving in that direction, at least when the policy at issue contains ambiguities that cannot be resolved by looking at the policy alone. See Bell v Progressive Direct Ins. Co., 407 S.C. 565, 757 S.E.2d 399 (2014), reh’g denied (May 7, 2014) (applying a modified version of the reasonable expectation doctrine in interpreting insurance contracts and explaining the Court “will look to the reasonable expectations of the insured at the time when he entered into the contract if the terms thereof are ambiguous or conflicting, or if the policy contains a hidden trap or pitfall, or if the fine print takes away that which has been given by the large print.”).

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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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