November 23, 2005 - Insurance Coverage Digest - November 2005
PENNSYLVANIA
INSURED IS BOUND BY DEFENSE COST REIMBURSEMENT AGREEMENT
Interdigital Communications Corp. v. Federal Insurance Company, 392 F.Supp.2d 707 (E.D.Pa., Oct. 3, 2005).
The insured was sued for commercial disparagement and filed a counterclaim against the plaintiff for patent infringement. The insurer agreed to defend under a reservation of rights, and specifically reserved the right to recover reimbursement for any uncovered defense expenses. The insurer and insured entered into an agreement entitled the "Litigation Expense and Reimbursement Agreement" wherein the insured agreed to reimburse the insurer for defense costs in the event of a court award or settlement of the insured's counterclaim against the plaintiff. When the counterclaim settled, the insurer sought reimbursement of its expenses and the insured took the position that the agreement was unenforceable due to lack of consideration (i.e. because the insurer had a duty to defend, the insured was not receiving anything it wasn't already entitled to). The Court avoided answering the question of whether the agreed upon exchange constituted consideration by holding that the agreement was binding based upon Pennsylvania's Uniform Written Obligations Act, 33 P.S. §6, which provides that an agreement is not unenforceable due to lack of consideration where the writing contains an express statement that the party intends to be bound.
COURT HOLDS THAT PENNSYLVANIA LAW APPLIES TO COVERAGE DISPUTE
Sunoco v. Illinois Nat'l Ins. Co., 2005 WL 2562776 (E.D. Pa, Oct. 12, 2005).
In this case the United States District Court for the Eastern District of Pennsylvania denied a motion for reconsideration of its choice of law decision holding that Pennsylvania law applied to a coverage dispute under a liability insurance policy. The policy in question was issued to an insured with a mailing address in New York, was sent to the insured by a producer located in New York, and was underwritten and countersigned in New York. However, at the time the policy was purchased the insured's insurance and legal departments were located in Philadelphia, the decision to purchase the policy was made in Philadelphia, and the producer's representatives traveled to Philadelphia to negotiate the policy with the insured. The policy was delivered to Philadelphia, and premium bills were sent to Philadelphia where payment was authorized. The Court found that the policy was "made" in Philadelphia (where it was delivered) and that the place of negotiation was also Philadelphia. Applying Griffith v. United Airlines, Inc., 203 A.2d 796 (Pa. 1964), the Court found that Pennsylvania had the most significant interest involved and that Pennsylvania law would therefore apply.
INSURER'S DENIAL OF COVERAGE BASED ON ARSON NOT BAD FAITH
Pirino v. Allstate Ins. Co., 2005 WL 2709014 (M.D.Pa., October 21, 2005).
The insurer issued a landlord's and tenant's policy to the insured. A fire occurred at the insured premises. A fire investigation ensued. An investigator retained by the insurance company and a state fire investigator concluded that the fire was arson. Another fire investigator disagreed and opined that an accidental fire could not be ruled out. The insured was charged with criminal arson and insurance fraud, but the charges were dismissed at a preliminary hearing for lack of evidence. The insurer denied coverage and the insured sued for breach of contract and "bad faith" under 42 Pa.C.S. §8371, contending that the insurer delayed investigation of the claim and denied coverage without a reasonable basis to do so. The Court dismissed the "bad faith" claim on summary judgment, finding that delay alone is not sufficient to compel a finding of bad faith, that the record demonstrated that at least two different fire investigators concluded that the fire was arson, and that the fact that the criminal charges against the insured were dismissed was irrelevant to the determination of whether the insurer's continued denial was reasonable.
PAYMENT OF REDUCED PREMIUM IS SUFFICIENT TO WAIVE ENTITLEMENT TO UM/UIM LIMITS EQUAL TO LIABILITY LIMITS UNDER PENNSYLVANIA'S MOTOR VEHICLE FINANCIAL RESPONSIBILITY LAW
State Farm Ins. Co. v. Gillespie, 2005 WL 2739910 (3rd Cir., Oct. 25, 2005).
The insured applied for and received a personal auto policy in 1971. The initial application selected bodily injury limits of $100,000/$300,000 and UM/UIM limits of $15,000/$30,000. In 1984, Pennsylvania enacted the Motor Vehicle Financial Responsibility Law (MVFRL) which requires all polices to offer UM/UIM limits equal to bodily injury limits unless the insured selects lower limits in writing. 75 Pa.C.S. §§1731, 1734. With the enactment of the new law, the insured was sent a notice advising him that he could have UM/UIM limits equal to the bodily injury limits if he paid one premium, or the limits he currently had if he paid a lower amount. For the next 16 years the insured paid the lower amount. In 2000 the insured was involved in an accident and claimed an entitlement to UIM benefits of $100,000. The issue presented to the Court was whether payment of an insurance premium alone could be an effective waiver of UM/UIM limits equal to bodily injury limits. The Third Circuit wrote that although the Pennsylvania Supreme Court has not answered the question, virtually every other court to consider the issue has determined that payment of the lower premium after receipt of the "Important Notice" required by the MVFRL constitutes a written waiver of limits. Accordingly, the Third Circuit concluded that the insured was limited to $15,000 of UIM coverage.
INSURER RESPONSIBLE FOR REFUNDING PREMIUM RETAINED BY AGENT
Triage, Inc. v. Prime Syndicate, Inc., 2005 WL 2740593 (Pa. Super., Oct. 25, 2005).
Prime Syndicate, a surplus lines carrier, issued a commercial automobile policy to Triage. The policies were transmitted by Prime to United Risk Management Services (URMS), a surplus lines broker. The relationship between Prime and URMS was governed by an agreement which stipulated that URMS was not Prime's agent. URMS delivered the policy to Triage and Triage paid the premiums to URMS. URMS, however, did not forward all of the premiums on to Prime. Triage cancelled the policy mid-term and was entitled to a return of unearned premium, Prime refunded the amount of premium it had actually received, but refused to refund premium paid to URMS, but never sent on to Prime. Triage sued Prime for the remaining refund, and Prime took the position that it was not responsible for premiums paid to URMS but not received by Prime. The trial court rejected Prime's position, finding that URMS was Prime's agent for payment of premium, and that Prime, as principal, was accordingly liable to Triage for the refund. On appeal, Prime argued that the trial court erred by concluding that URMS was Prime's agent because Prime did nothing affirmatively to induce Triage to believe that URMS was its agent. The Superior Court affirmed, explaining that the mere act of letting URMS deliver the policy and collect the premiums was enough to establish ostensible agency, even where the agreement between URMS and Prime itself stipulated that URMS was not Prime's agent. The Superior Court also observed that Pennsylvania's Surplus Lines law mandates that payment of premium to a surplus lines broker is deemed to be payment to the insurer itself. 40 P.S. §991.1614.
NEW JERSEY
POLLUTION EXCLUSION IN INSURANCE AGENT'S PROFESSIONAL LIABILITY POLICY DOES NOT APPLY TO CLAIM FOR NEGLIGENT FAILURE TO OBTAIN COVERAGE
Jackson v. Atlantic, 2005 WL 2757134 (N.J. App. Div., Oct. 26, 2005).
In this case the tenant sued landlord for personal injuries arising from alleged exposure to lead paint in landlord's premises. The landlord filed a third-party complaint against its insurance agent, alleging that the insurance agent had failed to obtain proper insurance coverage for the landlord. The insurance agent tendered the landlord's claim to its professional liability insurer which denied coverage based upon a pollution exclusion in the policy which precluded coverage for bodily injury arising out of the discharge, dispersal, release or escape of pollutants. The Court found that the denial of coverage was improper because the exclusion for bodily injury resulting from pollution was not applicable to claims for wrongful acts in the conduct of an insurance business. The fact that the underlying claim involved lead paint did not mean that the claim against the insurance agent arose from the discharge, dispersal, release or escape of pollutants. The Appellate Division rejected the insurer's argument that the exclusion's reference to claims arising even indirectly from pollutants meant that the exclusion applied. The Court concluded that it would violate the reasonable expectations of the insurance agent to apply the pollution exclusion in this context.
"STEP DOWN" CLAUSE IN NEW JERSEY UIM COVERAGE DOES NOT APPLY WHERE CLAIMANT IS NAMED INSURED UNDER PENNSYLVANIA UIM POLICY
National Union Fire Ins. Co. v. Jeffers, 884 A.2d 229 (App. Div., Oct. 18, 2005).
Claimant was operating a motor vehicle owned by his employer when he was involved in an accident. Claimant collected the liability $100,000 limits of the tortfeasor's vehicle and then sought UIM benefits under a Pennsylvania policy issued to him with limits of $15,000/$30,000 and a New Jersey policy issued to his employer with limits of $1 million. The employer's New Jersey policy contained a "step-down"provision which provided that if the claimant was a named insured under another policy, then the limits provided by the employer's policy would be no greater than that provided by any policy "providing similar coverage" under which the claimant was a named insured. The employer's insurer filed an action seeking a declaration that its limits "stepped down" to the $15,000 provided under the claimant's own policy. The Appellate Division rejected the insurer's position, concluding that the "step down" provision was not applicable because the coverage provided by the claimant's Pennsylvania policy was not "similar coverage" to that provided by the employer's New Jersey policy. The claimant's policy provided, in accordance with Pennsylvania law, "excess coverage"-i.e. it paid benefits to the extent that the tortfeasor's liability limits are insufficient to compensate the claimant for all the damages he sustained in the accident. By contrast, the employer's policy provided, as required by New Jersey law, "gap coverage", which allows the claimant to collect the difference between the tortfeasor's liability limits and the limits of the UIM coverage available to the claimant.
INSURER'S INSISTENCE ON GLOBAL SETTLEMENT FOR ALL INSUREDS IS BAD FAITH UNDER ROVA FARMS
Princeton Ins. Co. v. Qureshi, 882 A.2d 993 (App. Div., Oct. 6, 2005).
A doctor and his two wholly owned medical corporations, Spine Orthopedic and Pain Center, were sued by a patient who sustained very serious injuries when the doctor accidentally injected a caustic substance into the patient's spinal cord. The doctor and medical corporations were covered under a professional liability policy with $1 million limits for each separate insured. The insurer provided a defense without reservation conducted by a single attorney for all of the insureds. At the close of discovery the defense counsel reported to the insurer that there was only a 10% chance of a defense verdict, and that the verdict could range anywhere from $7 million to $10 million. The defense counsel also reported that the court had determined that each of the doctor's corporations was vicariously liable for the doctor's negligence. In settlement negotiations the plaintiff indicated that she was willing to accept the $1 million in coverage available to the Pain Center, but would not accept the doctor's $1 million coverage to release the doctor. The insurer offered $2 million, but insisted it was only available on the condition that the plaintiff release all three of the insureds, the doctor, Spine Orthopedic and the Pain Center. The case did not settle, and a verdict of $5.4 million was entered against the doctor, and by virtue of the vicarious liability, against Spine Orthopedic and the Pain Center as well. The insured defendants assigned their rights against the insurer to the plaintiff, who sued for bad faith under Rova Farms Resorts v. Investors Ins. Co. of America, 323 A.2d 495 (N.J. 1974). The insurer argued that its refusal to accept a settlement demand which did not release the doctor was proper because it needed to take into consideration the interests of all three insureds. The Appellate Division rejected this argument, finding that the insurer knew that an excess verdict was likely to be entered against the doctor, that the insurer knew that insured corporations would be vicariously liable for the verdict, and that the insurer therefore should have settled the case on behalf of the Pain Center where it was possible to do so. The Appellate Division therefore found that the insurer had acted in bad faith with respect to the Pain Center and that it was therefore liable for the entire judgment entered against the Pain Center. In reaching this conclusion, the Court criticized the insurer for failing to hire separate counsel to represent each of the three insured interests, and noting that had such counsel been retained the conflict that the insurer found itself in when deciding whether to settle might not have arisen.
NEW YORK
PROFESSIONAL LIABILITY INSURER HAS DUTY TO DEFEND PHYSICIAN ACCUSED OF ENGAGING IN INAPPROPRIATE SEXUAL RELATIONSHIP WITH PATIENT
Physicians Reciprocal Insurers v. Giulgiano, 2005 WL 2899991 (N.Y.Sup.Ct. Nassau Cty, Oct. 31, 2005).
A physician insured under a professional liability insurance policy was sued by a patient who alleged that she and the doctor engaged in a sexual relationship and that the doctor's sexual contact with her while providing therapeutic counseling and prescribing anti-depressants was negligent and below the standard of care. The insurer denied coverage based on exclusions for sexual acts or intimacy, molestation, harassment, exploitation, or assault, aand for willful, fraudulent or malicious and criminal acts or punitive damages. The court found that there was a duty to defend because the facts alleged in the complaint could be construed as falling within coverage for professional services as they were not cast solely within the exclusion for sexual acts; the alleged causal relationship between the plaintiff's treatment with an antidepressant and the harm alleged were the defining assertions.
"UNINSURED PREMISES" EXCLUSION IN HOMEOWNER'S POLICY BARS COVERAGE
Maroney v. New York Central Mut. Fire Ins. Co., 2005 WL 2777579 (N.Y., Oct. 27, 2005).
The insured ran a boarding stable for horses across the street from her home. A child under the insured's daughter's care was injured by a horse while on the stable premises and sued the insured. The insured sought coverage under her homeowner's insurance policy, and the insurer denied coverage based on several exclusions, including an exclusion for claims "arising out of" premises not insured on the policy (the stable was not an insured location on the policy). The insured argued that the "uninsured premises" exclusion applied only to claims that resulted from a condition of the uninsured premises and was therefore not applicable. The Court disagreed, finding that the term "arising out of" was broader and encompassed not only claims resulting from a condition of the uninsured premises, but also conduct related to the use of the uninsured premises that is causally connected to the injury.
COURT OF APPEALS FINDS NON-CUMULATION CLAUSE EFFECTIVELY LIMITS COVERAGE FOR LEAD POISONING CLAIM TO ONE YEAR'S POLICY LIMIT
Hiraldo v. Allstate Ins. Co., 2005 WL 2759234 (N.Y., Oct. 25, 2005).
The insured landlord was covered by insurer for three consecutive years, each policy providing limits of $300,000. The landlord was sued by a tenant for lead poisoning resulting from exposure to lead paint during each of the three consecutive policy periods. The underlying plaintiff asserted that the landlord's coverage was $900,000, not the $300,000 asserted by the insurer. The policies stated that they applied only to losses that occurred during the policy period, and included a "non-cumulation" clause which provided that the limits of coverage were $300,000, regardless of the number of policies involved. The policies also specified that all bodily injury resulting from one accident or one continuous exposure to the same general conditions was considered part of the same loss. The Court rejected the plaintiff's claim, finding that the policies' defined the injuries as "one loss" and that therefore "non-cumulation" clause was effective to limit the coverage available to one $300,000 policy limit, even though some damage occurred during each of the successive policy periods.
NOTICE TO BROKER IS NOT SUFFICIENT NOTICE TO CARRIER SO AS TO AVOID FORFEITURE OF COVERAGE
Gershow Recycling Corp. v. Transcontinental Ins. Co., 801 N.Y.S.2d 832 (App. Div., Oct. 3, 2005)
A volunteer firefighter was injured while fighting a fire on the insured's premises. The insured maintained that it was not aware of the firefighter's injury. The firefighter sued the insured in April, 2001 for injuries resulting from the fire. The insured was not served until March 2002, and immediately sent the suit papers to its insurance broker. The broker initially sent the papers to the wrong insurer, but realized its mistake and sent the papers to the correct insurer in August 2002. The insurer denied coverage based on late notice. The Court held that notice to the insurer five months after the insured first had notice of the suit was untimely and that whether the insurer was prejudiced by the delay was not relevant. The court also rejected the insured's argument that notice to the broker was sufficient. Notice to a broker is not sufficient as the broker is the insured's agent, not the carrier's.
NOTICE OF ABATEMENT OF LEAD PAINT DOES NOT TRIGGER INSURED'S DUTY TO NOTIFY CARRIER OF POTENTIAL OCCURRENCE
Chama Holdings v. Genarali-U.S. Branch, 802 N.Y.S.2d 461 (App. Div., Oct. 3, 2005)
In 2002 the insured landlord was sued by a tenant for lead poisoning due to exposure to lead paint on the premises and the insured promptly provided notice to the carrier. The insurer denied coverage on the basis of late notice of the occurrence, because in 1990 the insured had received a Notice of Abatement of lead paint issued by the City which indicated that the apartment occupied by the tenant had lead paint and that the minor plaintiff had elevated lead blood levels. The Court found that the denial was improper because while the Notice of Abatement indicated that the child had elevated lead blood levels, it did not indicate that the tenant sustained injury or that her lead blood levels were due to the conditions in the apartment. Accordingly, the landlord had no obligation to notify the insurer of an occurrence potentially covered by the policy based on the 1990 Notice of Abatement.
INSURER NOT BARRED FROM CLAIMING RESCISSION BY FAILING TO RAISE ISSUE IN RESERVATION OF RIGHTS LETTER
Royal Indem. Co. v. Patel, 2005 WL 2573514 (N.D.N.Y., Oct. 13, 2005)
Mr. Patel operated and managed a motel. The motel was owned by a corporation, Nepa, Inc., of which Mr. Patel was the sole member and 100 percent owner. Mr. Patel and his family lived in the motel's manager's apartment. Nepa obtained coverage for the motel from St. Paul Insurance and Vermont Insurance. A fire occurred at the motel, and the loss was covered by St. Paul and Vermont. These two insurers then began a subrogation suit against Mr. Patel and his minor son, who had started the fire by using matches in a Hindu ritual. Mr. Patel tendered defense of this case to Royal, which had issued a homeowner's policy to Mr. Patel as tenant of the manager's apartment. Royal provided a defense under a reservation of rights, but also filed a declaratory judgment action seeking to rescind the policy, claiming that Mr. Patel had made a material misrepresentation on his application when he answered "No" to a question on the application about whether any business was conducted on the insured premises. The Court granted the insurer's motion for summary judgment, finding that the insurer had demonstrated without contravention that the misrepresentation was material because the policy would not have been issued if Patel had answered "yes" to the question. The Court rejected Patel's argument that the misrepresentation was immaterial because the loss had nothing to do with the allegedly misrepresented fact. New York law does not limit rescission to circumstances where the misrepresented fact causes the loss. Finally, the Court rejected the insured's contention that Royal had waived the right to seek rescission by not mentioning it in its reservation of rights letter. The Court noted that a failure to raise a defense, without more, does not create coverage where none exists and Patel had not shown any conduct on Royal's part that would constitute a waiver or that would allow Patel to claim estoppel.