Coverage Pointers - Volume XX, No. 2

Volume XX, No. 2 (No. 513)

Friday, July 13, 2018

A Biweekly Electronic Newsletter

 

www.hurwitzfine.com

© Hurwitz & Fine, P. C. 2018
All rights reserved
 

As a public service, Hurwitz & Fine, P.C. is pleased to present its biweekly newsletter, providing summaries of and access to the latest insurance law decisions from the New York State appellate courts.  The primary purpose of this newsletter is to provide timely educational information and commentary for our clients and subscribers.

In some jurisdictions, newsletters such as this may be considered Attorney Advertising.

If you know of others who may wish to subscribe to this free publication, or if you wish to discontinue your subscription, please advise Dan D. Kohane at [email protected] or call 716-849-8900.

You will find back issues of Coverage Pointers on the firm website listed above.

 

Dear Coverage Pointers Subscribers:

Do you have a situation?  We love situations.  Bring them on.  The number of calls we get from those who want to bat around a coverage conundrum is astounding.  If we can give you some guidance on the phone, we’re happy to do so.  If it requires research, we’ll tell you.  If it can save you hours of head-scratching and provide you with some direction, we’re happy to accommodate.

This is Friday the 13^th of July, so a number of our 100 years ago stories reference superstitions, even though the July 13, 1918 fell on a Saturday.  It’s amazing how may stories about superstitions were in the newspapers at that time, waiting to be rediscovered by your editor.

July 14, Bastille Day, marks my 41^st anniversary at Hurwitz & Fine, P.C., starting as a law clerk between my first and second year of law school and then joining as an attorney when I was admitted to the New York Bar (along with my good friend and partner Ann Evanko) in February 1980.  When I started, the firm was 45 days old, with four lawyers, four secretaries and a 24-year old kid who knew nothing about law or the legal profession. We worked on IBM Selectrics with carbon paper and dot matrix printers.  No computers, no word processing, no Internet, and all research, of course, was done with books (some of you remember books), either in our limited library or in the County Law Library.  If we had a case in court 50 miles away or more, we’d refer out to another law firm in that town to handle.  What a ride it’s been.

One thing remains the same.  I was taught, at an early age, by Shelly Hurwitz and Bob Fine, to love lawyers and cherish the profession and to always give back to the community and the men and women with whom we serve and practice.  The relationships that have developed and strengthened over the decades has enrich my personal and professional life in ways that are beyond description.

Thank you all for being there for me and with me.  I’ll continue to be there for you.  We’re sending along the Volume XX, No. 2 of Coverage Pointers.  I’ve been publishing it for half of my legal career.

Wednesday next, I will be traveling to Chicago for the National Foundation for Judicial Excellence Symposium.  The NFJE, created originally by DRI, annually provides state appellate judges with an excellent educational opportunity.  Over 160 state appellate judges from 39 states are enrolled in this year’s program.

The week following, I’ll be attending the FDCC Annual Meeting in Maui, after doing some continuing education training at an insurer’s office in Honolulu.

Thanks to my friends at the New York Insurance Association (NYIA) for publishing in their great quarterly mag, what might be the eighth annual article on silly or (what we consider) wrongfully decided appellate cases.  We have one in this issue, what we call the “thousands flee” case, i.e. Court decides …. Thousands Flee. The Third Department found that taking your insured at his word just isn’t good enough sometimes.  Take a look in my column.

 

“When Words Collide: Resolving Insurance Coverage and Claims Disputes,”

Earlier this year, I had the opportunity to review and contribute to an insurance book as it was being written. The book, “When Words Collide: Resolving Insurance Coverage and Claims Disputes,” was published this month and is now available on Amazon in both print and ebookformats. The author, Bill Wilson, CPCU, ARM, AIM, AAM, is a 49-year veteran of the P&C insurance industry. For almost three decades, he assisted independent insurance agents in resolving coverage and claims disputes before retiring in 2016 from the Independent Insurance Agents & Brokers of America (the Big “I”). He now blogs at www.InsuranceCommentary.com and speaks at conventions and conferences around the country on coverage, claims and emerging industry issues.

He refers to the ”When Word Collide” book as “readable reference.” While the book is intended as a dog-eared reference of practical legal and coverage doctrines that are critical in drafting and determining coverage under insurance policies, it is written in a first-person conversational tone laced with humor and illustrated with dozens of real-life coverage and claim scenarios from the author’s experience that spans six decades. His early 19 years of experience working for Insurance Services Office, Inc. (ISO) and its predecessors gives him a unique insight into how and why policy forms are drafted. Priced far less than most “insurance” books, “When Words Collide” packs significant value into its 350 pages and should be a tool in the chest of every industry professional charged with the responsibility of preventing and/or resolving insurance coverage disputes. The book can be ordered from Amazon at the links above or directly from www.WhenWordsCollideBook.com.

That’s it, enjoy ….

 

Goats Run Amok – 100 Years Ago:

 

Man, Woman Fined

The Buffalo Enquirer

July 13, 1918

 

Judge Hager in City Court yesterday fined Lewis Direnzo, 1329 Lovejoy Street and Mrs. Louis Damico, 37 Shiller Street, for allowing their goats to run wild.  It is alleged that the goats in their wanderings got into a war garden and made short work of it.  The people were arrested by Patrolman Patrick King.  Direnzo was fined $5 and Mrs. Damico was ordered to pay $2.

Editor’s note:  Neither house remains on the Erie County tax rolls today.  Perhaps the goats ate the deeds.

 

Jen’s Gems:

Greetings!

Hope all is well.  This week I report on a great case out of a trial court in Putnam County, New York.  This is one of those fact patterns that coverage geeks love because you truly can argue either side.  It involves a daughter who is following her mother home.  They are in separate cars.  The mother makes a turn and then pulls over to wave to her daughter and indicate that she should turn too.  The daughter makes the turn and while doing so collides with a motorcyclist.  The coverage question is whether the mother’s action in waving to her daughter from her vehicle, which was found to be negligent (as the jury believed the wave also meant “all clear”), involved the use or operation of the mother’s vehicle.  A good read.

Until next issue…

 

Jen
Jennifer A. Ehman
[email protected]

 

Living Large in Fort Erie – 100 Years Ago:

 

Given Green Light Fine

The Buffalo Enquirer

July 13, 1918

 

Fort Erie, Ont. – A. Moore, a local man charged with resisting three officers of the law who were attempting to arrest him on a charge of violating the Ontario Temperance Act, was let down lightly by Judge Menne House in police court here with a fine of but $29.

Editor’s Note:  Your editor is scribng this column from Fort Erie, Ontario, with a glass of red wine nearby.  While $29 doesn’t sound like much, letting goats run wild seemed a better choice at the time.

 

John’s Jersey Journal:

The New Jersey state and federal courts have been quieter lately. Summertime is here. Judges in New Jersey are thinking about something other than insurance coverage. Rollercoasters? Picnics? Graduation parties? Weddings? Whatever the judiciary is doing, we hope they are having fun in the sun.

Today’s case from the New Jersey Appellate Division illustrates a critical piece of the claims handling process—issuing a reservation of rights (“ROR”) letter and assigning the defense, and the proper order this must done when insurers are handling New Jersey claims.

In New Jersey, an insurance carrier is entitled to a reasonable amount of time to investigate a claim. There is no requirement that the carrier assign defense counsel as soon as the claim comes in. Where there are facts indicating that coverage issues may be present, a carrier must be careful not to assume control of the defense without first issuing their coverage letter and obtaining the insured’s consent to a reservation of rights defense. Where a carrier fails to do this, the carrier faces steep penalties. If a carrier controls the insured’s defense without notifying the insured of the coverage issues, the carrier is estopped from reserving its right to disclaim coverage and becomes responsible for any judgment against the insured, up to the policy limit. Today’s case exemplifies this principle.

In Drive New Jersey Insurance Company v. D’Alessio et al., the carrier attempted to disclaim $485,000 in coverage to its insured after it had assumed the insured’s defense. The Court held that because the carrier had sufficient facts to be aware of the coverage issues and controlled the defense without issuing an ROR, it was estopped from reserving its right to disclaim coverage. The carrier, therefore, became responsible for $500,000 of the judgment against the insured, instead of $15,000.

When handling New Jersey claims, carriers need to get their coverage position letter out before undertaking the insured’s defense. Carriers are entitled to a reasonable time to investigate a claim. If the carrier has a duty to defend and is reserving its right to disclaim, it is a reservation of rights defense. Under New Jersey law, a carrier cannot provide a reservation of rights defense to its insured unless the insured accepts it.

This can be accomplished in one of two ways:

1.  A signed non-waiver agreement from the insured in which they expressly consent to the ROR defense; or

2.  Acceptance by the insured’s silence.

Acceptance by silence can be accomplished by fairly informing the insured that the ROR defense may be accepted or rejected.

Our practice is to send a non-waiver agreement with the ROR for the insured to sign. We also notify the insured that: (1) they can accept or reject the ROR defense; (2) to contact us immediately if they object; and (3) that if the insured does not object to the reservation of rights within 10 business days, the carrier will conclude that the insured have no objection. If the non-waiver agreement does not come back, the insured’s acceptance by silence allows the carrier to take the necessary steps forward in defending the insured.

Prior to this however, the carrier should not be assuming the defense. As such, defense counsel should be instructed to hold off from filing answers on behalf of the insured, hold off from serving discovery demands, taking depositions, interviewing witnesses, conducting site inspections, and responding to discovery demands. Such acts are regarded as controlling the defense.

One of the easiest ways to address this is to instruct panel counsel to request a thirty day extension on behalf of the insured. This maintains the status quo and the carrier is not controlling the defense. This will give the carrier time to investigate the facts, review the policy, have in-house counsel or outside counsel render a coverage opinion, prepare the denial letter or ROR if necessary, and determine whether the insured accepts or rejects the ROR defense.

Only when the carrier’s ROR is out and the insured’s accepts the ROR defense, should the carrier be controlling the insured’s defense. This is key. As demonstrated in today’s case, carriers who break this rule face dire consequences. New Jersey law deems the carrier to be estopped from denying coverage, and as such, the carrier becomes responsible for the judgment up to the policy limit.

So, if you have a New Jersey claim, or a claim where you think New Jersey law may apply, and it appears there may be coverage issues, it is critical to issue the denial letter or ROR before controlling the defense.

Remember the carrier can:

• Notify the insured that you are in receipt of the claim or suit and are conducting a preliminary investigation into the claim; and

• Obtain an extension to answer or otherwise appear on behalf of the insured.

Courts will not punish carriers for simply maintaining the status quo while the carrier investigates the coverage issues.

If later on, during the claims handling process or the underlying litigation, the carrier learns facts that for the first time implicate potential coverage issues, the carrier can assert those defenses in an ROR or supplemental ROR. The claims professional should clearly document their file when the carrier learned the facts giving rise to a coverage issue. Any ROR or supplemental ROR should be issued within a reasonable time after the carrier learns the basis reserving its rights.

Finally, it is important to note that simply filing a declaratory judgment action against the insured is not sufficient notice to the insured that the carrier wishes to reserve its rights. Even where a carrier plans to file a swift declaratory judgment action, the carrier should issue its ROR to the insured. Failure to do so will result in estoppel and the carrier will find itself on the hook for risks and causes of action that the policy was never meant to cover.

New Jersey is a jurisdiction that is not always friendly to insurers. (Have you seen the pending bad faith bill working its way through legislature? If not, click here for our write-up of it). Speaking of the bad faith bill, there has been no movement. Generally these bills spend a few months in the Assembly. We will report back as soon as anything new develops.

‘Til Next Time,

John
John R. Ewell
[email protected]

 

Being Friday the 13^th, We Offer Articles on Superstitions from Saturday, the 13^th, 100 years ago, Volume I:

 

Navy Superstition

The Daily (Monongahela, PA) Republican

July 13, 1918

 

A visitor on a British battleship was dining with a group of officers when his fork accidentally struck a glass tumbler.  As the glass resounded the officers shouted as one man, “Hun.”  On asking for an explanation the visitor was told that the ringing of the glass meant bad luck.  One officer declared that on every ship he formerly commanded every time a glass was rung a man fell overboard.  This is why officers now cry “Hun” when a table accident occurs, they are hoping to transfer their bad luck to the enemy.

Editor’s Note:  There were two Fridays the Thirteenth in 1918, in September and December.  This is the second in 2018, the first being in April.  Most years have two but for those who prefer fewer, there will be only one each year in 2021 and 2022.

 

Peiper on Property and Potpourri:

Just returning from the IADC meeting in Portugal.  He gets a pass.

 

Friday the 13^th Superstitions, Volume II

 

Japanese Superstitions

Janesville (WI) Daily Gazette

July 13, 1918

 

There are no 4’s, nor 44’s in Japanese telephone directories, because the name of the figure four, “Shi,” is the term for death.

 

Hewitt’s Highlights: 

Dear Subscribers:

We are having some beautiful weather down here on Long Island.  My nephew was just Baptized this weekend and we had a really nice outdoor party at a local park in celebration. I hope you are all enjoying Summer and all that comes with it-swimming, barbecues and time with family outdoors.

As usual, we have our review of serious injury threshold cases for you this edition.  The Third Department case involved a woman whose grandmother ran over her foot with the vehicle. An issue of fact was found as to permanent consequential limitation due to the fact her treating doctor found sensory issues/limitations present in the injured foot compared to the other foot. In a case by the Second Department, disc bulges, tears in the meniscus, and range of motion limitations  were enough to find an issue of fact.

Until next time,

 

Rob                  
Robert Hewitt
[email protected]

 

Superstitions, Volume III:

 

Salt Superstitions

The Bunker Hill (Kansas] Advertiser

July 13, 1918

 

The kernel of all this superstitions seems to be this:  salt cannot be corrupt and has therefore, the title of immortality.  In Ireland it was for long the custom to place a pewter plate containing salt upon the heart of the corpse until burial. Then, with coals and holy water it was thrown into the grave.

 

Wilewicz’ Wide-World of Coverage:

Dear Readers,

So, it’s down to two. In short, the World Cup has nearly concluded its four-week run, and after 62 games in 12 venues around Russia, the final match is this weekend – France v. Croatia. No one could have predicted the whirlwind that has led to this lineup, with so many upsets and surprises. I won’t even discuss Poland’s results (apart from the fact that they should really look into the rules for substitutions coming off the field in the future), but as I wrote in a prior edition, there was no clear favorite throughout. There were underdogs and past winners that had a chance, but I would think that the odds on a France/Croatia final were so slim that bets were not even taken. It should be a great match though, as both countries have shown themselves to be forces to be reckoned with this year

Now, for the other coverage you’ve been waiting for – coverage of coverage. Out of the Second Circuit this week, we bring you two brief but punchy decisions. First, in Pacific Employers Ins. v. Saint Francis Care Inc., the court addressed whether a hospital’s general liability or hospital professional liability policies were potentially implicated when a former doctor was sued for allegedly abusing numerous children over decades. In short, the court found that both policies were potentially implicated and that a duty to defend, at a minimum, was warranted. The claims against the hospital sounded in alleged supervisory liability, so they did not have to address whether sexual assault fell outside the parameters of a professional services contract.

Second, in Medidata Solutions v. Federal Insurance, the court looked at whether a policy that provided coverage for losses stemming from entry of data or change to data elements of a computer system also included coverage for damages from email “spoofing” attacks. That is, spoofing is where an email is disguised to look like it is coming from a legitimate source but is actually fraudulent, but it induces someone to do something damaging. Here, the insured’s employees received what looked like emails requesting various money transfers. They undertook those transfers, inadvertently sending money to the thieves’ accounts. While the carrier took the position that the policy meant to provide coverage for hacking-type intrusions, the court found the language broad enough to cover losses such as the “spoofing” events. It’s a very brief, good read. Links within the attached columns, for those interested.

Until next time! Cześć!

 

Agnes A. Wilewicz
[email protected]

 

Superstitions, Volume IV:

 

Knife Superstitions

The [Indiana, PA] Patriot

July 13, 1918

 

The various knife superstitions are easily explained.  It is unlucky to give a knife to a friend because knives sever things, and might severe friendship but if he gives you a halfpenny in return, the danger is avoided for his gift is a token of continued affection.  It is unlucky to place one’s knife and fork crosswise on an empty plate, because it invites crosses and misfortune, also recalling the Christian symbol of suffering.

 

Barnas on Bad Faith:

Hello again:

I’m still getting over the heartbreak of watching England lose in the semifinals of the World Cup.  Things were looking so bright after a goal in the fifth minute on a dazzling free kick by Kieran Trippier, but Croatia really dominated the second half and England were honestly lucky to even make it to extra time.  Despite the loss, the lads made the country proud and gave me a month of excitement, so all is not lost.  I’m already marking my calendar for Euro 2020.

I have a nice mix of bad faith cases in my column today.  The Sims case is an Eight Circuit decision applying Arkansas law.  A nice win for the insurer, as the court concluded that mere mistakes in judgment and failure to follow company procedures did not amount to bad faith.  Harris is a Tenth Circuit decision applying Oklahoma law.  Oklahoma can be a bit of a problem jurisdiction for insurers on bad faith.  However, this one went in the insurer’s favor, as the court concluded that the insured could not even make out a prima facie case of bad faith.

The final case in my column Schneck is a New York trial court decision that has some nice language about attorneys’ fees and consequential damages.  The court explicitly declined to hold that the Court of Appeals rulings in Bi-Economy and Panasia alter the Mighty Midgets rule that an insured is only entitled to the costs of litigation against its insurer if it is cast in a defensive posture by the insurer and succeeds on the merits.  The court stated that such a ruling would drastically increase litigation expenses, motivate frivolous actions against insurers, and unfairly force insurance companies to consider settling baseless claims because of looming plaintiff legal bills.  No argument here.

 

Have a nice weekend.

 

Signing off,

Brian
Brian D. Barnas
[email protected]

 

Editor’s Note:  Agnes Wilewicz insists that when speaking of England’s Soccer Team, one correctly says “England were” rather than “England was”.  I didn’t have the strength to debate the point.  I was too busy checking on Fridays the Thirteenth.

 

Jews Expelled in Finland:

 

Finn Senate Votes to Expel All Jews

San Francisco Chronicle

July 13, 1918

 

London – July 12. – The Finnish Senate decided to expel all Jews from Finland according to advices from Copenhagen to the Exchange Telegraph.  More than 300 Jewish families will be forced to leave the country.

The Senate justifies its decision on the ground that Jewish financiers placed funds at the disposal of the Red Gardsu.  The Jews declare they were forced by the Red Guards to give up large sums of money.

Editor’s Note:  In August 1918, the Hungarian government did the same thing, seizing the money of the Jewish people that were expelled.

 

Altman’s Administrative (and Legislative) Agenda:  

Howard is visiting Israel.

 

Off the Mark:

Dear Readers,

So far, summer seems to be flying by.  The kids have been enjoying camp and our weekend bike rides to the nearby organic farm.  Lately, we have been planning a trip to South Carolina to visit one of my sisters.  She and her husband had their first child in June.  We are all looking forward to meeting the little guy.

This edition of “Off the Mark” discusses a recent construction defect case from the Appellate Court of Illinois, First District, Sixth Division.   In Country Mut. Ins. Co. v. Badger Mut. Ins. Co., the Appellate Court of Illinois examined the effect of a carrier’s breach of the duty to defend and held that the carrier was estopped from denying coverage.  The Court noted that if an insurer wishes to dispute coverage, it has "two options: (1) defend the suit under a reservation of rights or (2) to seek a declaratory judgment that there is no coverage.  If the insurer fails to take either of these steps and is later found to have wrongfully denied coverage, the insurer is estopped from raising policy defenses to coverage.  The Court pointed out that if the insurer elects to file a declaratory judgment, it must do so before the underlying proceeding is resolved.  In this case, despite broadly plead underlying allegations of property damage, the carrier failed to defend its insured under a reservation of rights and failed to commence a declaratory-judgment action prior to a default judgment being entered against its insured in the underlying action.  Based on a review of the underlying pleadings, it was determined that indeed, the carrier had a duty to defend its insured and failed to do so.  Accordingly, the carrier was estopped from denying coverage and was held liable for the entire amount of the default judgment.

This case presents a great practice tip for all of our readers, whether handling claims directly or offering legal advice.  Don’t wait until it’s too late! Where the underlying complaint contains broad allegations of damage resulting from faulty workmanship, commence an immediate declaratory-judgment action to determine the coverage obligations and if an underlying suit has been commenced, consider providing a defense under a reservation of rights while the coverage issues are litigated.  Such a strategy best protects a carrier from being on the hook for all damages (even those outside the policy period) and allows the carrier to control the defense of its insured.

Until next time …

 

Brian
Brian F. Mark
[email protected]

 

Superstitions – Volume V:

 

Japanese Superstition

Middletown (New York) Times Press

July 13, 1918

 

The Japanese have many curious superstitions about animals, the chief among them is their belief in the supernatural power of foxes.

 

Editor’s note:  For more information see this Wiki article. I realize that nobody will do so, so the link may anywhere.  Just saying.

 

Wandering Waters :

Welcome to another issue of Wandering Waters. I hope all of you have had a wonderful week.

Once again I was completely wrong about LeBron James and his free agency decision. In a relatively quick decision, LeBron James will wear the purple and gold for the 2018-2019 NBA Season.  Many fans were upset as he left his beloved hometown team for a second time.  I will admit, I was upset at first as well.  However, after digesting his monumental decision, I have come to respect it.  The respect stems from LeBron’s decision to join the Lakers was grounded in more than basketball.  That is to say, LeBron was not chasing championships with his recent free agency decision.  Rather, his decision was based upon what was best for his family and what was best for his brand as he eventually transitions from a basketball player.  

With that being said, this week we have two cases from the United States District Court, Eastern District of New York.  I hope you enjoy

Until next time….

Larry
Larry E. Waters
[email protected]

 

Lazy Children Arrested – a Century Ago:

 

Convict 15 Idlers Here

 

Two Youths Arrested on Mother’s Complaint

Found in Bed After Noon

 

The New York Times

July 13, 1918

 

Twelve men in the Bronx and three in Manhattan were convicted yesterday of violating the compulsory work law, among whom were two youths whose arrests had been caused by their mother while they were still asleep in bed late in the afternoon.  All of the Bronx men were released on suspended sentenced by Justices Moss. Salmon and Kernochan in Special Sessions after each promised to get work.

***

Mrs. Katherine Quinn a widow of 108 East 101^st Street, Manhattan called Policeman Groot to take her two sons, Edward, 20 and Michael,18, from their bed.  Mrs. Quinn told Magistrate Simpson in the Harlem Court that her sons had no regular work for three months…

 

Boron’s Benchmarks:

Dear Subscribers:

Q.  OK Google, do we have a duty to defend our insured against this suit?

A.  Sorry, I’m not sure how to help.

Q.  OK Google, can you at least tell me if there is coverage here for what has been alleged in the complaint against our insured?

A.  Sorry, I don’t know how to help with that.

Q.  OK Google, can you at least help me determine if the criminal acts exclusion of this policy applies on this claim?

A.  My apologies, I don’t understand.

Q.  OK Google, who would know the answer to my questions?

A.  Dan Kohane, and others on his Coverage Team, could teach you how to apply the Kohane Coverage Formula to answer your questions.   

Q.  OK Google, what is the Kohane Coverage Formula?

A.  The Kohane Coverage Formula is C = [(WI) – (WO)] + CPC.

Q.  OK Google, can you explain what the letters in the Kohane Coverage Formula stand for?

A.  Yes, I can explain that. The first C stands for Coverage, the WI stands for What’s In, the WO stands for What’s Out, and CPC stands for Compliance with Policy Conditions.

Q.  Ok Google, who’s Dan Kohane?

A.  Dan Kohane is a nationally-recognized insurance coverage counselor who conducts extensive training, consultation and in-house seminars on this highly specialized practice.

 

I hope you know that Dan and the entire Coverage Team here at Hurwitz & Fine stand ready to help you navigate insurance coverage questions which pop up in your claim handling, no matter the complexity. In fact, the more complex the coverage question is, the better, because we love situations even more than Mike Sorrentino.

The whole point of the Kohane Coverage Formula is to provide a logical, easy-to-understand approach to doing a coverage analysis which provides a checklist, if you will, of all coverage questions, and incorporates, without your even realizing it, basic rules of contract construction, and moreover, virtually guarantees you will not miss coverage issues.     

Given that the past two weeks have spanned not only the beginning of summer vacation for many educators and students across our great land, but also included a mid-week Independence Day holiday thrown in for good measure, there is a dearth of Supreme Court decisions from the 49 states other than New York (my Coverage Pointers beat).  So, I’ve written on a sort-of-kind-of-high-state-court appellate decision of the Maryland Court of Special Appeals, which is that state’s intermediate appellate court.  The decision, analyzing commercial general liability coverage issues, is lengthy, but worth your time to read, I think.  Of course, I am a coverage geek, so you may feel differently.  In any event, the decision reflects the appellate court’s thorough, methodical approach to determining general liability coverage issues, such as the coverage grant’s duty to defend, and, the applicability of a criminal acts exclusion.  I think you will agree the opinion reads as if the court applied the Kohane Coverage Formula in reaching its conclusions as to the various coverage issues raised by the appeal.

Here’s hoping this material may be helpful in or for your work.

Regards,

 

Eric
Eric T. Boron
[email protected]

 

Editor’s Note: I am ashamed to tell you that I had no idea who Mike Sorrentino might be, so I looked him up on the Internet.  I may have considered suing him for stealing our “situation” tagline but he seems to have enough problems without me adding to them.

 

Widows Won’t Get Rich:

 

Explain Insurance Plan

Families of Men in the Service Are Not Paid in Lump Sum

New York Times

July 13, 1918

 

Widespread impression that insurance of men in the military is paid in a lump sum after their death led the War Department to make the announcement today that payments of benefits under the War Risk Insurance Act are made over a period of twenty years.

The insurance is payable on the death of the insured on the basis of $5.75 a month for each $1000 of insurance for 240 monthly installments.  For the maximum of $10,000 the beneficiary would receive a payment of $57.50 a months for twenty years.

Editor’s Note:  That’s twice the fine imposed for violating the Ontario Temperance Act (but of course, that was in Canadian funds).

 

Jerry’s No Fault Navigation

Not this week.

 

Prohibition Considered – a Century Ago:

 

What “Bone Dry” Would be in Entire Nation
Middletown (New York) Times Press
July 13, 1918

 

Washington, DC – Some of the effects of nation-wide prohibition would be as follows:

• Loss of $300,000 annual revenue to the federal government;

• Saving of $600,000 spent annually by the American public for drinks aggregating 2,000,000,000 gallons;

• Closing of 1,500 breweries and 200,000 saloons;

• Conservation of approximately 40,000,000 bushels of grain annually;

• More than 200,000 persons, including bartenders and brewery workers will be forced to get new jobs;

• Capital amounting to more than $1,000,000,000 producing a product valued at $722,000,000 annually will be affected  Some of it will be a dead loss and part can be used in new fields of investment;

• Approximately $500,000,000 worth of whiskey will be forced into the market before January 1 or be redistilled for industrial purposes.

 

Headlines:

This week’s headlines, found in the attached edition of Coverage Pointers:

 

KOHANE’S COVERAGE CORNER
Dan D. Kohane
[email protected]

 

• Without Judgment against Insured, Action against Liability Insurer Cannot go Forward
• Release of Claims Following Settlement May Be Set Aside On The Basis Of Fraud or Mutual Mistake as to an Unknown Injury
• Relying on Insured’s Statement not Enough of an Investigation.  Thousands Flee. Insurer Relies on Insured’s Statement that her Dog Never Bit Anyone.  When it Learns that it Did, Coverage is Denied under Previous Bite Exclusion.  Third Department finds Question of Fact on Timeliness of Disclaimer because Insurer only Relied on Answer and May Not have Conducted a Reasonable and Prompt Investigation

 

HEWITT’s HIGHLIGHTS ON SERIOUS INJURY UNDER NO-FAULT LAW
Robert E.B. Hewitt III
[email protected]  

 

• Third Department Holds that No-Fault/Collateral Source Records Are Relevant Regardless of Whether Plaintiff Is Seeking Special Damages
• Second Department Holds that No-Fault/Collateral Source Records Are Relevant Regardless of Whether Plaintiff Is Seeking Special Damages
• Range of Motion Limitations Coupled with Tears and Disc Bulges Enough to Get to a Jury Trial

 

PEIPER ON PROPERTY (and POTPOURRI)
Steven E. Peiper
[email protected]

 

• En route home from the IADC Annual Meeting in Portugal.

 

WILEWICZ’S WIDE WORLD OF COVERAGE
Agnes A. Wilewicz
[email protected]

 

• Second Circuit Finds That Hospital Professional Liability Policy and General Liability Policy Were both Implicated in Action against Hospital for Alleged Sex Crimes Committed by Deceased Endocrinologist
• Second Circuit Determines that Policy Unambiguously Provides Coverage for Email “Spoofing” Attack Damages

 

JEN’S GEMS
Jennifer A. Ehman
[email protected]

 

• Trial Court Finds Driver’s Liability for Improperly Waving on Another Driver Did Not Involve the Use or Operation of the Motor Vehicle She Was In and Trigger, Instead, Homeowner’s Coverage

 

JERRY’S NO FAULT NAVIGATION
[email protected]

 

• Settling in.

 

BARNAS ON BAD FAITH
Brian D. Barnas
[email protected]

 

• Mistakes in Judgment and Failure to Follow Company Procedures did not Amount to Bad Faith
• Insured Failed to Make Out a Prima Facie Case of Bad Faith
• Bi-Economy and Panasia Don’t Change the Mighty Midgets Rule: Absent Bad Faith an Insured is Not Entitled to Attorneys’ Fees for Commencing Affirmative Litigation against its Insurer

 

JOHN’S JERSEY JOURNAL
John R. Ewell
[email protected]

 

• New Jersey Appellate Division Reminds Carriers of Importance of Issuing ROR before Controlling the Insured’s Defense

 

ALTMAN’S ADMINISTRATIVE (AND LEGISLATIVE) AGENDA
Howard B. Altman
[email protected]

 

• Visiting the Holy land.

 

OFF THE MARK
Brian F. Mark
[email protected]

 

• Appellate Court of Illinois Holds Insurer Breached its Duty to Defend its Insured and thus, was Estopped from Denying Liability for the Default Judgment in the Underlying Construction Defects Action

 

WANDERING WATERS
Larry E. Waters
[email protected]

 

• Defendants’ Motion to Dismiss Denied Because Plaintiff’s Good Faith Representation that the Necessary Information Pertaining to the Identity and Citizenship of Defendant’s LLC Members Warranted Jurisdictional Discovery
• Defendants’ Motion for Summary Judgment Granted as Plaintiff Failed to Overcome the “Mailbox Rule” Presumption

 

BORON’S BENCHMARKS
Eric T. Boron
[email protected]

 

• Commercial General Liability Coverage: Duty to Defend; Criminal Acts Exclusion

 

EARL’S PEARLS
Earl K. Cantwell
[email protected]

 

• Federal Arbitration Act Pre-Empts State Arbitration Laws

 

Enjoy…

 

 

Hurwitz & Fine, P.C. is a full-service law firm
providing legal services throughout the State of New York

NEWSLETTER EDITOR
Dan D. Kohane
[email protected]

 

ASSOCIATE EDITOR
Agnes A. Wilewicz
[email protected]

 

ASSISTANT EDITOR
Jennifer A. Ehman
[email protected]

 

INSURANCE COVERAGE/EXTRA CONTRACTUAL LIABILITY TEAM
Dan D. Kohane, Chair
[email protected]

 

Steven E. Peiper, Co-Chair
[email protected]
 

Michael F. Perley

Jennifer A. Ehman

Agnieszka A. Wilewicz

Edward B. Flink

Brian D. Barnas

Howard B. Altman

Brian F. Mark

Eric T. Boron

John R. Ewell

Larry E. Waters

Diane F. Bosse

Joel R. Appelbaum

 

FIRE, FIRST-PARTY AND SUBROGATION TEAM
Steven E. Peiper, Team Leader
[email protected]

 

Michael F. Perley

Edward B. Flink

Eric T. Boron

Brian D. Barnas

Howard B. Altman

James L. Maswick

 

NO-FAULT/UM/SUM TEAM
Jennifer A. Ehman, Team Leader
[email protected]
 

Jerry Marti

 

APPELLATE TEAM
Jody E. Briandi, Team Leader
[email protected]

 

Diane F. Bosse
 

Topical Index

Kohane’s Coverage Corner

Hewitt’s Highlights on Serious Injury

Peiper on Property and Potpourri

Wilewicz’s Wide World of Coverage

Jen’s Gems

Barnas on Bad Faith

Jerry’s No-Fault Navigation
John’s Jersey Journal

Altman’s Administrative (and Legislative) Agenda
Off the Mark

Wandering Waters

Boron’s Benchmarks

Earl’s Pearls

 

KOHANE’S COVERAGE CORNER
Dan D. Kohane
[email protected]

 

07/12/18       Carr v. Marsh USA, Inc.

Appellate Division, Third Department

Without Judgment against Insured, Action against Liability Insurer Cannot go Forward

In December 2015, Carr’s car (redundant?) was damaged when it was struck by a tractor trailer owned by Brenntag and driven by Haas, Brenntag's employee, and insured by XL Insurance America (“XL”).  Carr sued Haas, Brenntag, and XL alleging negligence seeking compensation for property damage and a second cause of action sounding in fraud, premised upon a purported scheme to withhold the true identity of the tractor trailer's insurer against all named defendants except Haas. Included as defendants were Marsh USA, Brenntag's insurance broker and  Sedgwick, Brenntag's claims adjuster.  Marsh, Sedgwick, and XL Insurance separately moved for dismissal of the amended complaint.  All claims were eventually discontinued against Haas, Brenntag, and Sedgwick. Only the claims against XL and Marsh remain.

Carr lacks standing to sue XL Insurance for payment of his property damages claim. It is well-established that a plaintiff has no common-law right to seek relief directly from a tortfeasor's insurer due to the lack of privity between them. Its only option is to bring a direct against an insured’s liability carrier under Insurance Law §3420(b) after it obtains a judgment against the insured.  That’s pretty clear law and the Court of Appeals reaffirmed that rule in Lang v Hanover Ins. Co., 3 NY3d at 354. No judgment here against Brenntag was obtained, so no right to sue XL directly exists.

Moreover, there are insufficient allegations, as required by CPLR §3016, to state a claim for fraud against XL.   A fraud claim requires that there be a material misrepresentation of an existing fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation, and damages. The complaint broadly alleges that defendants "knowingly misrepresented the required insurance carrier for the [tractor trailer]," "engaged in a practice of obscuring and delaying any claims without any serious effort to reach an equitable settlement", and are "pursuing [a] strategy of confusion and misrepresentations for profit."

He bases these allegations on the fact that the insurance card provided by Haas at the time of the accident failed to specify the tractor trailer's insurer and that his subsequent efforts to contact said insurer were excessively circuitous.

 

07/05/18         Fimbel v. Vasquez

Appellate Division, Third Department

Release of Claims Following Settlement May Be Set Aside On The Basis Of Fraud or Mutual Mistake as to an Unknown Injury

On January 2, 2014, the passenger of a vehicle was injured when it slid off of Route 17K in Orange County, New York, overturned and hit a tree. During treatment for her injuries, x-rays revealed the existence of rib fractures and a knee effusion, but did not show any acute fractures of her left leg. On January 10, 2014, a Progressive insurance adjuster met with the injured passenger at her home. After discussing her injuries, the parties agreed to a settlement amount of $2,500 in exchange for a signed release of all claims. Three days later, the passenger’s left leg was x-rayed, revealing a fractured fibula.

The passenger filed this lawsuit in December 2016, alleging that Progressive fraudulently induced her signing of the release, as well as violations for the unlawful practice of law under Judiciary Law § 478 and General Business Law § 349. She sought damages for an alleged serious injury as defined under Insurance Law § 5102(d). Defendants moved to dismiss under CPLR 3211 (a)(1), (5), and (7), with each ground for dismissal based upon the existence of the release. Plaintiff countered, contending that the release was procured through fraud, misrepresentation, unfairness, and mutual mistake. The Supreme Court granted the motion and dismissed the complaint. The Third Department Appellate Division, however, disagreed.

A release is governed by contract law principals, and may be set aside on the basis of fraud or mutual mistake. Where a release was garnered by fraud or mutual mistake, it cannot be said that a contract was “fairly and knowingly made.”

Regarding a mutual mistake between the parties, the Third Department acknowledged that a “distinction is drawn between unknown injuries and mistakes as to the consequences of known injuries; a release may be invalidated if the parties mistakenly believed that an injury did not exist when it was executed, but will not be set aside for a mistake pertaining to the 'future course . . . or sequelae of a known injury.” Here, plaintiff’s affidavit indicated, inter alia, that medical professionals had informed her she did not have a leg fracture, and the Progressive insurance adjuster had told her that the pain in her leg was “probably just [a] bruise.” Making no determination as to the validity of these assertions made by the plaintiff, the Third Department agreed with her that she had sufficiently alleged facts indicating that the release may have been procured while operating under a mutual mistake as to an unknown injury, and held that dismissal by the Supreme Court was premature.

Additionally, the Third Department held that plaintiff had sufficiently alleged a cognizable claim of fraudulent inducement in procuring the release. Plaintiff’s affidavit asserted that the adjuster gave her legal advice indicating that her injuries did not qualify as a serious injury under New York law, that $2,500 was a “very good deal,” that pursuing the claim in court would be unlikely to yield a more favorable result, and that in order to receive coverage for medical expenses, she must sign the release. Such allegations indicate sufficient basis to deny a pre-answer motion to dismiss.

Editor’s Note: Thanks to Ryan Maxwell, 3L at UB Law School, for his summary here.

 

07/05/18       Battisti v. Broome Cooperative Insurance Company

Appellate Division, Third Department

Relying on Insured’s Statement not Enough of an Investigation.  Thousands Flee. Insurer Relies on Insured’s Statement that her Dog Never Bit Anyone.  When it Learns that it Did, Coverage is Denied under Previous Bite Exclusion.  Third Department finds Question of Fact on Timeliness of Disclaimer because Insurer only Relied on Answer and May Not have Conducted a Reasonable and Prompt Investigation
On October 20, 2013, while Battisti was visiting Sheryl L. Dieter (“Dieter”) and Paul T. Dieter at their home, their dog bit Battisti, causing injuries. The Dieters timely submitted a claim to Broome, their homeowners’ insurer. On March 11, 2014, two weeks after Broome learned that the dog had bitten Dieter's mother approximately a month before biting Battisti, Broome disclaimed coverage.  It cited a policy provision entitled "Misrepresentation, Concealment or Fraud," which states that the policy does "not provide coverage if, whether before or after a loss: a. An insured has willfully concealed or misrepresented . . . any material fact or circumstance concerning this insurance; or . . . b. There has been fraud or false swearing by an insured regarding any matter relating to this insurance or the subject thereof." Defendant also relied on an exclusion for "Canine Related Injuries or Damages," which states, in pertinent part, that the "policy [does] not apply to any injury to persons . . . caused by any dog . . . in your care . . . when such injury . . . is caused by or contributed to by . . . any canine that has a history of one or more attacks on people, property or other animals that is verifiable from insurance claims records, police or public record sources."

Questions of fact preclude summary judgment.

Broome’s claims manager averred that when she talked to Dieter a few days after the incident, she asked Dieter whether the dog had previously bitten anyone and Dieter answered "[n]o," stating that she was aware that the dog had been abused but was not aware of any history of biting. The insurer then submitted records from a hospital, the county public health department and the town dog control officer, as well as an affidavit from Dieter's mother, indicating that the mother was bitten by the dog approximately one month before the dog bit plaintiff. Dieter submitted an affidavit averring that the dog did not bite her mother, but only scratched her, and she bled because she was taking blood thinners.

Other proof was equivocal so there was a question of fact as to whether Dieter willfully concealed or misrepresented any material fact.

As to the “canine exclusion”, that exclusion does not require proof of prior bites, only of a history of at least one attack on a person or animal that is verifiable from public records. Records from the county public health department and the town dog control officer substantiate that the dog bit, or at least attacked, a person approximately one month prior to when it bit plaintiff. Although Broome established the applicability of the policy's canine exclusion, it was an exclusion and required that it be raised timely or waived under Insurance Law §3420(d).

Broome may not rely on that exclusion unless defendant provided timely notice of disclaimer.

Broome argued that it was entitled to rely on Dieter's statement that the dog had not previously bitten anyone. However, there is a question of fact regarding whether Broome’s claims manager actually asked Dieter if she knew of any prior biting events. If the claims manager never asked that question, the record evidence presents a triable issue of fact as to whether Broome failed to conduct a reasonable and prompt investigation into the potential applicability of the canine exclusion.

If the claims manager asked that question and received a negative answer, as she averred, then defendant would be justified in relying on the representation by its insured.  However, given that the Dieters had owned the dog for only approximately one month, there would still be a triable question of fact regarding the reasonableness of Broome’s investigation. As neither party established, as a matter of law, the reasonableness or unreasonableness of the delay in the disclaimer, neither party was entitled to summary judgment.

Editor’s Note:  Insured’s statement wasn’t enough?  Oh come now.

 

HEWITT’s HIGHLIGHTS ON SERIOUS INJURY UNDER NO-FAULT LAW

Robert E.B. Hewitt III

[email protected]  

 

07/13/18       Altieri v. Liccardi

Appellate Division, Third Department

No-Fault/Collateral Source Records Are Relevant Regardless of Whether Plaintiff Is Seeking Special Damages

In July 2010, plaintiff was injured after defendant, her aunt, drove over her right foot with a car. Plaintiff thereafter commenced this action alleging that she sustained a serious injury within the meaning of Insurance Law § 5102 (d). In the bill of particulars, plaintiff claimed a serious injury under the permanent consequential limitation of use of a body organ or member, the significant limitation of use of a body function or system and the 90/180-day categories. 

The Appellate Division held that defendant met her initial burden of demonstrating that plaintiff's alleged foot injury did not constitute a serious injury under the permanent consequential limitation and significant limitation of use categories. Plaintiff's medical record from Albany Memorial Hospital indicated that plaintiff was seen in the emergency department and that she had a contusion on her right foot, she was able to bear weight and walk without difficulty, her "toes [were] okay without subungual hematoma" and the X ray of her right foot revealed "no bony abnormality or fracture." According to a report by a physician who examined plaintiff in August 2010, plaintiff had no swelling in her foot, her neurovascular structures were normal and her x rays were likewise normal. Plaintiff also had an MRI taken in August 2010, and the MRI report indicated that plaintiff had "mild to moderately severe bone bruising/osseous contusions." Defendant also submitted reports from an orthopedic surgeon, who noted, upon an examination of plaintiff in August 2010, that she had "no sign of forefoot abduction, severe bruising, swelling or point tenderness" and that an examination in October 2010 revealed "no palpable tenderness, pain, bruising or pain with range of motion." A physician who conducted an independent medical examination of plaintiff and reviewed her medical records concluded in his report that plaintiff, as a consequence of the accident, did not suffer a serious injury but rather had "a right foot contusion with radiographic evidence of bony contusions, now resolved." The physician stated that the radiographic evidence failed to document any evidence of a fracture and that plaintiff's physical findings "have essentially been negative throughout her course of treatment." The physician also noted that plaintiff had full range of motion and that plaintiff was capable of a single leg toe stance and toe walking on both lower extremities.

Plaintiff was thus required to submit competent medical evidence based upon objective medical findings and diagnostic tests to support her claim of a serious injury.  In order to establish a permanent consequential limitation or a significant limitation of use, the medical evidence submitted by plaintiff must contain objective, quantitative evidence with respect to diminished range of motion or a qualitative assessment comparing the plaintiff's present limitations to the normal function, purpose and use of the affected body organ, member, function or system. Plaintiff presented an affirmation from a treating physician, who averred that, based on findings from a sensory nerve study that he conducted, plaintiff's "right deep peroneal sensory response was attenuated compared to her left (non-injured foot)" and that "[t]he difference was found to be 50-55% which was of some significance in terms of side to side differential." The treating physician further opined that the sensory nerve study revealed objective signs that plaintiff had "an injury to the deep peroneal sensory branch of the right foot" and that such injury was permanent. Plaintiff also submitted an affirmation from a treating orthopedic surgeon, who discussed the testing performed on plaintiff, and concluded that the findings indicated that she sustained a crush injury to her right foot and that her injuries would be "chronic in nature." The Appellate Division thus found a triable issue of fact exists as to whether plaintiff sustained a serious injury under the permanent consequential and significant limitation of use categories.

Plaintiff's claim under the 90/180-day category, however, should have been dismissed. The reports and records from plaintiff's medical providers did not contain any restrictions or limitations on her daily activities. Indeed, plaintiff was discharged from the emergency department at Albany Memorial Hospital in good condition with instructions to elevate her foot and treat it with ice and to take ibuprofen. Plaintiff still attended school and the limitations placed upon her with respect to sports and physical education, even for an extended period, was not enough to meet the serious injury threshold. Because the record fails to disclose any triable issue of fact regarding plaintiff's claim under the 90/180-day category, it should have been dismissed.

As for liability, the Court held summary judgment was properly awarded to plaintiff.  Plaintiff testified that, prior to entering defendant's car, she leaned in to move items out of the way so that she could sit on the seat. Before plaintiff finished moving the items, the car moved and ran over her right foot. Plaintiff denied being inside the car before the car moved. Although defendant testified that she saw plaintiff do not get inside the car, Defendant stated that she never checked, nor did she know for sure, whether plaintiff was fully inside the car prior to moving.

 

07/11/18       Cajamarca v. Osatuk

Appellate Division, Second Department

No-Fault/Collateral Source Records Are Relevant Regardless of Whether Plaintiff Is Seeking Special Damages

The plaintiff commenced this action to recover damages for personal injuries allegedly sustained in a motor vehicle accident. A preliminary conference order directed, over the plaintiff's objection, that the plaintiff provide the defendant with "no-fault/collateral source authorizations" within 45 days. The plaintiff moved for a protective order preventing disclosure of records relating to the plaintiff's receipt of no-fault benefits, arguing that such records are not discoverable where, as here, the plaintiff does not seek to recover unreimbursed special damages.  The Appellate Division overturned the lower court and required the records be produced. They held that in an action relating to a motor vehicle accident, a plaintiff's medical records relating to treatment following the accident are material and necessary to the defense of a plaintiff's claim to having sustained a serious injury within the meaning of Insurance Law § 5102, in addition to any claim to recover damages for loss of enjoyment of life. Accordingly, since the plaintiff's no-fault records were material and necessary to the defense of this action, the Supreme Court should have denied the plaintiff's motion for a protective order.

 

07/11/18       Castillo v. MTA Bus Company

Appellate Division, Second Department

Range of Motion Limitations Coupled with Tears and Disc Bulges Enough to Get to a Jury Trial

On April 2, 2012, the then-72-year-old plaintiff was a passenger on a bus owned by the defendant, MTA Bus Company. The complaint alleged that the bus accelerated rapidly, causing the plaintiff to be violently thrown to the floor and resulting in her injuries.

The defendant MTA moved for summary judgment on liability. In support of the liability branch of the motion, the defendant submitted the plaintiff's deposition testimony, in which she testified that she "didn't make any steps" after boarding the bus, and that the bus driver "drove right away." The plaintiff further testified: "[The bus driver] just slammed me to the back . . . of the bus . . . . She drove away at a fast pace and that's when I landed all the way to the back of the bus in a seated down position with my left leg under me." According to the plaintiff, her fall was of sufficient force that she lost consciousness. The defendant also submitted the deposition testimony of the bus driver, who testified that the plaintiff was sitting in a seat when the bus driver drove away from the bus stop. The motion was denied and at trial, the jury found defendant was negligent and that the negligence was a substantial factor in causing the accident. The Appellate Division upheld the decision, finding the evidence submitted by the defendant in support of that branch of the motion failed to eliminate triable issues of fact as to whether the movement of the bus at issue was unusual and violent.

As for damages, the plaintiff submitted evidence that she sustained disc bulges in almost the entirety of her cervical spine—C2-3 through C7-T1—resulting in diminished range of motion. She also submitted evidence that she sustained lumbar disc bulges at L3-4 and L5-S1, resulting in left S1 radiculopathy, meaning that a loss of function in the S1 nerve caused weakness and loss of sensation in the plaintiff's left leg. Further, the plaintiff presented testimony that she sustained torn lateral and medial menisci in her left knee, requiring arthroscopic surgery, and that she may need a knee replacement in the future. Moreover, according to the trial testimony, the plaintiff developed postconcussive syndrome following the accident, and she will experience the effects of postconcussive syndrome for the rest of her life. The jury found that the plaintiff sustained a serious injury within the meaning of Insurance Law § 5102(d), and awarded her the sum of $500,000 for past pain and suffering and the sum of $1,000,000 for future pain and suffering over 10 years.  The Appellate Division held defendant met its prima facie burden of showing that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d) as a result of the subject accident. Defendant submitted competent medical evidence establishing, prima facie, that the alleged injuries to the cervical and thoracolumbar regions of the plaintiff's spine did not constitute serious injuries under the permanent consequential limitation of use or significant limitation of use categories of Insurance Law § 5102(d). In opposition, however, the plaintiff submitted evidence raising triable issues of fact as to whether she sustained serious injuries to the cervical and thoracolumbar regions of her spine. Therefore, it was appropriate for the motion to be denied and the jury to decide the issue. The Appellate Division found the award of damages for past and future pain and suffering did not deviate materially from what would be reasonable compensation.

 

PEIPER ON PROPERTY (and POTPOURRI)

Steven E. Peiper

[email protected]

 

En route home from the IADC Annual Meeting in Portugal.

 

WILEWICZ’S WIDE WORLD OF COVERAGE

Agnes A. Wilewicz

[email protected]

 

07/06/18       Pacific Employers Ins. Co. v. Saint Francis Care Inc., et al.

United States Court of Appeals, Second Circuit

Second Circuit Finds That Hospital Professional Liability Policy and General Liability Policy Were both Implicated in Action against Hospital for Alleged Sex Crimes Committed by Deceased Endocrinologist

The late Dr. George Reardon was an endocrinologist at Saint Francis. Over the course of three decades, he allegedly sexually abused many of the children who were in his care. His crimes came to light when, after his death, a large number of pornographic images of children were found hidden behind a false wall in his home. Around 160 of his victims brought suit in Connecticut (via consolidated uniform complaint) against the Hospital for failure to protect them, corporate negligence, breach of fiduciary or confidential relationship, breach of the special duty of care owed to children, and other state law torts.

At issue in the coverage portion of the litigation that ensued was whether, and which, counts of the complaint implicated either the hospital’s general liability coverage or their hospital professional liability (HPL) policies. First, the court noted that the litigation only alleged supervisory liability, so they did not need to address the issue of whether, under Connecticut law, sexual assault fell outside the parameters of a professional services insurance contract such as the HPL coverage here. Since the policies at issue provided coverage for failure to supervise a doctor, that sufficed for a finding that the HPL coverage was implicated at a minimum. However, the Circuit would not overturn the lower court’s decision denying a leave to amend the complaint (presumable to craft the pleadings into coverage), since there was no abuse in discretion found.

As to the duty to defend, the court wrote: “We need not decide here whether dual duties to defend arose under the policies, as PEIC’s complaint sought a declaration that the district court ‘determine and declare that the Insurer Defendants owe a duty to defend Saint Francis Hospital under their respective general liability policies because the allegations are potentially within that coverage.’ The uniform complaint alleges claims that potentially implicate GL coverage alone, and, therefore, would not be swept under the non-concurrency clause, as Travelers urges. To hold otherwise would allow Travelers to cabin all the claims under the policy with the smaller coverage amount, despite the fact that at least some of the underlying claims would likely fall under the GL part. Thus, as the uniform complaint implicated the GL duty to defend, the relief sought in Count III was appropriately granted, regardless of whether there was also an HPL duty to defend. For this reason, we also decline the Hospital’s invitation to allocate defense costs between the GL and HPL parts in the first instance on appeal. The Hospital could have made a motion for such relief below, and may bring a new action if it so desires.”

 

07/06/18       Medidata Solutions, Inc. v. Federal Insurance Company

United States Court of Appeals, Second Circuit

Second Circuit Determines that Policy Unambiguously Provides Coverage for Email “Spoofing” Attack Damages

The insured Medidata had a policy with Federal Insurance. Following an email “spoofing” attack, which cost them over $5.8 million in damages, they sought coverage under their policy. (“Spoofing”, the court explained, is “the practice of disguising a commercial e-mail to make the e-mail appear to come from an address from which it actually did not originate. Spoofing involves placing the ‘From’ or ‘Reply-to’ lines, or in other portions of e-mail messages, an e-mail address other than the actual sender’s address, without consent or authorization of the user of the e-mail address whose address is spoofed.”)

Their policy with Federal did provide coverage for losses stemming from any “entry of Data into” or “change to Data elements or program logic of” a computer system”. The carrier held the position that the spoofing attack was not covered because the policy only applied to hacking-type intrusions.

In looking at the policy as a whole, the court found that it actually did unambiguously provide coverage for this event. While the insured conceded that no hacking had occurred, “the fraudsters nonetheless crafted a computer-based attack that manipulated Medidata’s email system, which the parties do not dispute constitutes a “computer system” within the meaning of the policy. The spoofing code enabled the fraudsters to send messages that inaccurately appeared, in all respects, to come from a high-ranking member of Medidata’s organization. Thus the attack represented a fraudulent entry of data into the computer system, as the spoofing code was introduced into the email system. The attack also made a change to a data element, as the email system’s appearance was altered by the spoofing code to misleadingly indicate the sender. Accordingly, Medidata’s losses were covered by the terms of the computer fraud provision.”

While the carrier had argued that the insured did not sustain a “direct loss” as a result of the spoofing attack, the court rejected that argument. The spoofed emails prompted employees to make money transfers on the same day of receipt. Since New York courts equate “direct loss” to proximate cause, there were clearly direct losses here. The chain of events that unfolded following the sending/receipt of the emails was direct. Just because the employees had to take affirmative steps in between to make the damages happen did not take the matter out of a “direct loss” or proximate cause analysis.

 

JEN’S GEMS

Jennifer A. Ehman

[email protected]

 

06/26/18       Nationwide Mut. Fire Ins. Co. v. Oster

Supreme Court, Putnam County

Hon. Victor G. Grossman

Trial Court Finds Driver’s Liability for Improperly Waving on Another Driver Did Not Involve the Use or Operation of the Motor Vehicle She Was In and Trigger, Instead, Homeowner’s Coverage

This is a lengthy, but good read.  On August 31, 2011, Lisette Oster (“Lisette”), and her daughter, Gabrielle Oster (“Gabrielle”), went with a family friend, Andrew Abbene (“Abbene”), to Cycle City in Sloatsburg, New York.  They drove two separate vehicles.  Lisette rode with Abbene in his 1995 BMW and Gabrielle followed in her family’s Honda.

Presumably, after doing whatever needed to be done, Abbene remained at Cycle City while Lisette drove his BMW back to Putnam County.  It is alleged that Abbene instructed Lisette to “make a U-turn onto Harriman Avenue, and travel back in the opposite direction to get onto the New York State Thruway.”

Consistent with these directions, Lisette turned left onto Harriman Avenue and then made a U-turn in a driveway to go back to Route 17 and the New York State Thruway.  After making the U-turn, Lisette stopped her vehicle at an angle on the shoulder where Harriman Avenue meets Route 17 to wait for her daughter to make the same turn.  The engine was running, but the car was not moving.  Lisette could not recall if she placed the vehicle in “park.”

Lisette then saw Gabrielle driving and waved to her through the open driver’s side window “to let her see that that’s where we were turning around, to make sure…that she saw where we were turning around.”  Gabrielle saw Lisette and turned left to go onto Harriman Avenue so she could follow.  As Gabrielle changed lanes to make the turn, a motorcyclist struck her vehicle and was fatally injured.

At the time of the incident, the BMW was insured under an automobile policy issued by State Farm.  The Honda was insured under an automobile policy issued by Allstate, and Lisette was insured under a Homeowner’s policy issued by Nationwide.

Thereafter, a wrongful death lawsuit was commenced by the estate of the motorcyclist.  The suit named Gabrielle, Lisette and Abbene.  As to Lisette, it alleged, among other allegations that “while in the course of operating the aforesaid BMW vehicle owned by Defendant Andrew J. Abbene, did signal, motion and/or wave to the Defendant, Gabrielle M. Oster, who was operating the aforesaid Honda vehicle owned by Lisette M. Oster, to make an illegal U-turn at the stated location.”

Upon receipt of the wrongful death complaint, Nationwide issued a letter denying coverage to Lisette and Gabrielle advising that the Homeowner’s policy explicitly excluded coverage for claims arising out of the “use or operation” of a motor vehicle by an insured, and asserted that this accident occurred from the use of a motor vehicle.  State Farm likewise denied coverage asserting the “accident was not the result of the ownership, maintenance or use” of Abbene’s BMW from which Lisette waved to Gabrielle.

Allstate, as the insurer for the Honda, defended both Lisette and Gabrielle in the underlying action.  The issue of liability was tried before a jury.  The jury was asked the reason for Lisette’s wave, and whether the wave was a substantial factor in causing the accident.  The jury found that it was and placed 20% of the fault for the accident on Lisette.  A damages trial was then conducted and an award was entered in excess of two million dollars.

Nationwide then commenced this declaratory judgment action naming all the parties to the underlying litigation and State Farm.  Of note, the estate answered and interposed cross- and counter-claims alleging bad faith on the part of the insurers.

The court spent the bulk of what is a lengthy decision attempting to determine whether the actions of Lisette constituted “use or operation” of a vehicle noting that if it was use or operation the loss would be covered under the State Farm policy, and if it was not, it would be covered under the Nationwide policy.  The court was clear that to make any other determination would be to allow a motor vehicle to utilize the road in New York without protecting others, which would be contrary to public policy.

The court began by reciting the jury’s finding that Lisette was negligent by waving as she did, and that her negligence contributed to the injuries and death of the motorcyclist.

Citing a Second Department decision, the court noted that “an accident arising from the ‘use,’ ‘must have arisen out of the inherent nature of the automobile and, as such, inter alia, the automobile must not merely contribute to the condition which produces the injury, but must, produce the injury.”  Here, the vehicle was parked, and Lisette waved to her daughter through its open window, similar, in the court’s view, to the park car and open window through which the dog in Reyes reached out to bite the pedestrian.

Ultimately, the court concluded that Lisette was not using or operating the BMW at the time of the loss.  It noted that the BMW was not performing any transportation function at the time of the accident.  The accident did not take place within the BMW’s natural territorial limit, and the BMW did not “produce the injury.”  “[W]here the operation or driving function of an automobile or the condition of the vehicle itself is not the proximate cause of the injury, the occurrence does not arise out of its use or operation.”  Accordingly, since the accident was not the result of the ownership, maintenance or use” of the Abbene vehicle, but was merely the location for which Lisette waved to her daughter, State Farm’s denial of coverage was proper, and Nationwide’s improper.

The court next considered the bad faith claims.  In finding no bad faith, the court held that “it is not ‘bad faith’ where, as here, there was an arguable basis for denying coverage.  Nationwide conducted some investigation and took a position that a denial was warranted.  Its actions flowed from that decision.  To the extent that the decision denying coverage was a close question (as discussed herein), it cannot support a finding of ‘bad faith.’”

 

JERRY’S NO FAULT NAVIGATION

[email protected]

 

Settling in.

 

BARNAS ON BAD FAITH

Brian D. Barnas

[email protected]

 

07/03/18       Sims v. State Farm Mutual Automobile Insurance Company

United States Court of Appeals, Eighth Circuit

Mistakes in Judgment and Failure to Follow Company Procedures did not Amount to Bad Faith

In 2008, while a senior in high school, Sims was involved in a two-vehicle crash.  Her car was rear-ended by an underinsured 16-year-old who was texting while driving.  Sims suffered numerous soft-tissue injuries as a result of the crash.  Sims sued the underinsured driver and he settled for $50,000, which was the limit of his insurance coverage.  Sims filed a claim for her remaining damages under her own underinsured motorist policy, provided by State Farm, seeking the policy limit of $100,000.  She submitted past medical expenses of about $21,000, and expert reports that predicted future medical costs and economic losses that well exceeded the policy maximum.  She also attached medical records documenting her injuries.

State Farm assigned the claim to claims adjuster Dean Ripley.  Ripley sought the assistance of a State Farm medical professional to help assess the medical records Sims had provided.  This review indicated that Sims had received treatment for “soft tissue” injuries for longer than the typical six-week period.  Ripley, in consultation with claims supervisor Oscar Rodriguez, sought clarification from Sims’s treating chiropractor.  The chiropractor explained that Sims suffered from torn ligaments, an injury that could not be expected to heal in six weeks, could not be repaired by surgery, and was likely permanent.  After receiving this information, Ripley suggested that State Farm might want to ask for an independent evaluation of Sims’s injuries, but Rodriguez asked Ripley to prepare an offer of settlement based on the information he already had.

Ripley estimated that, after deducting the $50,000 Sims had already received from the underinsured driver, Sims’s damages were between $66,297.12 and $101,297.12.  He provided his calculations to Rodriguez and asked for authority to settle Sims’s claim for up to $99,786.72.  Rodriguez replied that most of Sims’s medical expenses were from 2008 and it was unclear from the records whether she was still receiving treatment.  In his view, a sympathetic jury would value this claim at $100,000 at most, and he authorized Ripley to settle for a maximum of $50,000 (the estimated value of the claim minus the $50,000 from the underinsured driver).

Ripley first offered Sims $25,000, which she swiftly rejected.  Ripley told Sims that the offer was based on available information and suggested that she provide any additional information she had to support her claim.  Sims did so, and Ripley increased the offer to $35,000.  Sims rejected the revised offer, reiterating her claim for the policy maximum of $100,000.  When that sum was not forthcoming, Sims filed this lawsuit. State Farm paid Sims $25,000 for undisputed medical expenses after the suit was filed.

State Farm won summary judgment on the bad faith claim.  To be successful on a bad faith claim under Arkansas law, an insured must show affirmative misconduct by the insurance company, without a good faith defense, and that the misconduct is dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy.

In this case, Sims argued that State Farms investigation of her damages should have been more thorough and that it should have given greater credence to the medical evidence she submitted.  However, these allegations fell short of the standard for bad faith.  Sims also asserted that the determination that most of her medical expenses were from 2008 was erroneous, but provided no evidence that the allegedly mistaken assessment was based on anything more than mistake or bad judgment.  In addition, Sims claimed that State Farm failed to follow its own manual by giving her the benefit of the doubt when evaluating her claim.  The court concluded that even if State Farm’s employees failed to follow its own procedures, it still did not amount to bad faith.

 

 

07/02/18       Harris v. Progressive Direct Insurance Company

United States Court of Appeals, Tenth Circuit

Insured Failed to Make Out a Prima Facie Case of Bad Faith

Ms. Harris was insured by Progressive.  She had taken her vehicle to a repair shop owned by Marcy.  In the early morning hours on March 15, 2015, thieves entered the repair shop, drove Ms. Harris’ vehicle around the parking lot in an attempt to steal it.  The thieves drove the vehicle into the dumpster, and might have tried to break the shop’s fence by hooking a chain to the truck and gate.  The vehicle was also driven into a gate.  Later in the morning, Marcy found the truck, noted the damage to the body, and determined that there was trouble with the engine.

Ms. Harris reported the attempted theft and the damage to Progressive.  The Progressive policy contained an exclusion for wear and tear or mechanical breakdown or failure, but the exclusion did not apply if the damage was the result of theft of a vehicle.  Progressive sent an investigator to photograph the vehicle and inspect the damage.  Marcy eventually provided a repair estimate for the mechanical damage over $7,000.  The estimate was much greater than anticipated by progressive and led to further investigation.  A forensic expert took an oil sample to ascertain whether the damage to the engine identified by Marcy was caused by the theft or mechanical failure/wear and tear.  The test results were inconsistent with Marcy’s findings and led Progressive to conduct additional investigation.  The vehicle was brought to another mechanic, Dewberry, who determined that the engine issues were likely due to two cracked cylinder heads in the engine.

Progressive advised Ms. Harris that the engine would have to be torn down to verify the cracked cylinder heads, and that Progressive considered the cracks a mechanical failure unrelated to the theft.  Dewberry believed that the problem could be fixed with a coolant flush that Progressive offered to pay for.  However, Ms. Harris declined, insisting on the advice of Marcy that there was an issue with the head gasket.  Progressive then issued a partial denial letter.  It paid $2,008.03 for body damage to the vehicle but disclaimed coverage for the engine damage.

Harris brought an action for breach of contract and bad faith.  Under Oklahoma law, the elements of bad faith are (1) coverage under the insurance policy and that the insurer was required to take reasonable actions; (2) the actions of the insurer were unreasonable under the circumstances; (3) the insurer failed to deal fairly and act in good faith toward the insured in its handling of the claim; and (4) the breach of the duty of good faith was the direct cause of the damages the insured sustained.  The level of culpability required is reckless conduct.  Once the insured makes a prima facie showing, the burden shifts to the insurer to demonstrate that a legitimate dispute existed and that it had a reasonable basis to deny the claim.  It is then up to the insured to show that the denial of coverage was made in bad faith.

Here, the court concluded that Harris could not make out a prima facie case of bad faith because she could not show that Progressive acted unreasonably in handling her insurance claim.  Her arguments that Progressive did not tell her she could keep her car even if it was totaled and that it revoked its apparent offer to pay for the entirety of the loss were rejected.  Viewing the claim in its totality, the court concluded that Progressive appropriately investigated the claim and reasonably asked for additional investigation after Marcy’s high estimate.  There was also nothing in the record to support Ms. Harris’ contention that Progressive treated her suspiciously.  The Court also determined that Progressive’s investigation was thorough and reasonable.

 

06/18/18       Schneck v. First Unum Life Insurance Company

Supreme Court, New York County

Judge Crane

Bi-Economy and Panasia Don’t Change the Mighty Midgets Rule: Absent Bad Faith an Insured is Not Entitled to Attorneys’ Fees for Commencing Affirmative Litigation against its Insurer

Eric Schneck is an attorney and practiced law for about twenty years before suffering an injury in 2009.  He contended this injury rendered him disabled and unable to work as a lawyer.  In 2008, plaintiff purchased a long-term disability insurance policy from First Unum.  In May 2009, plaintiff submitted a claim to defendant for LTD benefits under the LTD Policy.  In July 2009, Defendant approved the claim and began remitting benefit payments to plaintiff retroactive to May 24, 2009.

The LTD Policy provides that plaintiff's monthly benefits under the policy will be reduced by the amount of disability or retirement benefits he is eligible for under Social Security.  Defendant, through a letter dated July 19, 2009, approved plaintiff's disability claim, advised plaintiff of this provision in the LTD Policy, and requested plaintiff apply for Social Security Disability Insurance ("SSDI”).  In January 2010, the Social Security Administration ("SSA") denied plaintiff's self-prepared application for SSDI benefits

Subsequently, in August 2010, Plaintiff hired non-party GENEX, a company that specializes in assisting individuals applying for Social Security benefits, to help with his reapplication for SSDI benefits.  In 2011, defendant ceased making LTD Policy benefit payments to plaintiff.  In June 2012, despite GENEX's representation, the SSA again denied plaintiff's SSDI claim.  In August 2012, plaintiff, as insured, commenced this action, alleging defendant breach of contract the terms of the LTD Policy.

GENEX continued to represent plaintiff in his pursuit of SSDI benefits.  In May 2014, the SSA approved plaintiff's SSDI claim following a hearing before an Administrative Law Judge.

In December 2015, plaintiff filed a Second Amended Complaint and demanded recovery of attorneys' fees because defendant engaged in bad faith conduct by violating at least four provisions of a nationwide settlement agreement with state and federal insurance regulators while processing Schneck's claim for LTD benefits, and thereby breached the implied covenant of good faith and fair dealing in the LTD Policy.  The RSA stemmed from nationwide accusations that defendant maintained unfair claim settlement practices involving their group and individual long-term disability insurance policies.  Plaintiff alleged that defendant failed to evaluate his claim for LTD benefits in accordance with the RSA.

This court, on the record, did not grant defendant's summary judgment motion on breach of the implied covenant of good faith and fair dealing claim because of outstanding material issues of fact. Plaintiff then sought to recover attorneys' fees he incurred in bringing this action.

First, the court noted that the Mighty Midgets rule did not provide Plaintiff with a basis for recovering attorneys’ fees because he commenced the lawsuit.  Unum did not case Plaintiff in a defensive posture.

However, the court noted that an insured may recover attorneys’ fees upon making as showing that the insurer had such bad faith in denying coverage that no reasonable carrier would, under the given facts, be expected to assert the denial of coverage.  Here, Plaintiff still had a cause of action pending for breach of the implied covenant of good faith and fair dealing.  Accordingly, the court declined to dismiss the claim for attorneys’ fees on summary judgment.  While the court noted that there is a strong presumption against finding bad faith, the existence of bad faith could not be determined as a matter of law in connection with Defendant’s motion.

The court also declined to hold that the Court of Appeals rulings in Bi-Economy and Panasia alter the Mighty Midgets rule.  The Court stated that such a ruling would drastically increase litigation expenses, motivate frivolous actions against insurers, and unfairly force insurance companies to consider settling baseless claims because of looming plaintiff legal bills.  Similarly, it would be inappropriate to impose a reciprocal mandate on insureds, forcing insured plaintiffs to remunerate well-capitalized insurance companies for their legal fees defending against affirmative policyholder actions.

 

JOHN’S JERSEY JOURNAL
John R. Ewell

[email protected]

 

07/09/18       Drive New Jersey Insurance Co. v. D’Alessio, et al

Superior Court of New Jersey, Appellate Division

New Jersey Appellate Division Reminds Carriers of Importance of Issuing ROR before Controlling the Insured’s Defense

Drive's insured, Louis A. D'Alessio, Jr., struck and killed a pedestrian. At the time, D'Alessio was using his personal vehicle to deliver bagels for his employer, Bagel Express. The pedestrian's estate sued D'Alessio and Bagel Express. D'Alessio had a $500,000 policy from Drive, covering his personal vehicle. The Drive policy had an exclusion for use of the vehicle to make business-related deliveries. The exclusion stated that, if the vehicle was used for that purpose, the coverage was reduced to the minimum allowed by law, or $15,000. Eventually, Drive sought to invoke the policy exclusion, but Drive did not do so until after it undertook to defend D'Alessio in the wrongful death lawsuit.

The wrongful death complaint was filed on February 12, 2015. In April 2015, Drive retained counsel for D'Alessio, and the attorney filed an answer on D'Alessio's behalf on April 27, 2015. On July 16, 2015, Drive filed the DJ action against D'Alessio, Bagel Express, Bagel Express’ insurer, and the pedestrian's estate. Drive did not seek a stay of the wrongful death litigation, and that lawsuit continued, with the Drive-retained attorney representing D'Alessio.

After discovery closed in the DJ action, summary judgment motions were filed. The summary judgment record discloses that Drive never asserted that it served D'Alessio with a ROR letter. Nothing in the summary judgment record reflected that Drive ever put D’Alessio on notice that there was a coverage issue.

The Appellate Division held that Drive could not undertake the defense of its insured, without giving the insured advance notice that Drive intended to deny most of the coverage the policy provided and that it would defend under a reservation of that right. Even if a formal ROR letter were not required, an insurer must timely invoke a policy exclusion. The undisputed summary judgment evidence established that Drive neither timely invoked the exclusion nor served its insured with a reservation of rights letter.

Since 1962 it has been the law in New Jersey that a carrier cannot control the defense, without notice to the insured of a reservation of the insurer’s right to disclaim coverage, and then eschew its obligation to provide the coverage. This has been re-affirmed year after year. The New Jersey Supreme Court has clearly held “[I]f a carrier defends an action in the face of a coverage issue, the carrier must pay the judgment (unless the insured expressly agreed to a reservation of that issue)”.

The obligation applies to policy exclusions as well as claims of non-coverage. The New Jersey Supreme Court has instructed that:

Under certain circumstances an insurance carrier may be estopped from asserting the inapplicability of insurance to a particular claim against its insured despite a clear contractual provision excluding the claim from the coverage of the policy. The strongest and most frequent situation giving rise to such an estoppel is one wherein a carrier undertakes to defend a lawsuit based upon a claim against its insured. If it does so with knowledge of facts that are relevant to a policy defense or to a basis for noncoverage of the claim, without a valid reservation of rights to deny coverage at a later time, it is estopped from later denying coverage.

In addition, the ROR must be timely:

[W]here, after timely notice, adequate opportunity to investigate a claim, and the knowledge of a basis for denying or questioning insurance coverage, the insurance carrier fails for an unreasonable time to inform the insured of a potential disclaimer, it is estopped from later denying coverage under the insurance policy …

Here, Drive continued to represent D'Alessio in the wrongful death suit, while also suing him in the DJ action, without his agreement to the reservation of rights defense. In New Jersey, simply filing a declaratory judgment action against the insured is not sufficient notice to the insured that the carrier wishes to reserve its rights. The Appellate Division affirmed the trial court’s grant of summary judgment against the carrier.

*Disclaimer: This is an unpublished decision which has precedential value in only limited circumstances. This particular case was decided based upon well-settled New Jersey case law, and those cases do have precedential effect.

 

ALTMAN’S ADMINISTRATIVE (AND LEGISLATIVE) AGENDA

Howard B. Altman

[email protected]

 

Visiting the Holy land.

 

OFF THE MARK
Brian F. Mark

[email protected]

 

06/29/18       Country Mut. Ins. Co. v. Badger Mut. Ins. Co.

Appellate Court of Illinois, First District, Sixth Division
Appellate Court of Illinois Holds Insurer Breached its Duty to Defend its Insured and thus, was Estopped from Denying Liability for the Default Judgment in the Underlying Construction Defects Action

In this declaratory judgment action, Country Mutual Insurance Company (“Country”) sought a declaration that it was not required to indemnify its former insured, Roe Construction, Inc. (“Roe”), for a default judgment against Roe in an underlying action alleging damage from Roe's negligent construction work.  The plaintiffs in the underlying action filed a counterclaim against Country, asserting that Country breached its duty to defend Roe and was thus liable for the amount of the default judgment.  After cross-motions for summary judgment, the trial court determined that Country breached its duty to defend Roe in the underlying lawsuit and was thus liable for the default judgment.

Country issued a commercial general liability insurance policy to Roe, which was effective April 13, 2005.  The policy was renewed after April 13, 2006, but Roe subsequently cancelled the policy as of July 25, 2006.  The policy covered "bodily injury" and "property damage" but only if such damage was "caused by an 'occurrence'" during the policy period.  The term "property damage" was defined to mean: "a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not

physically injured. All such loss of use shall be deemed to occur at the time of the 'occurrence' that caused it."

The term "occurrence" was defined to mean "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."  The policy also specified a number of exclusions.

The underlying action asserted allegations that Roe negligently performed work on a residence in Chicago, which was owned by Dr. Steve Gelsomino.  Gelsomino was insured under a homeowner's insurance policy for the property through Badger Mutual Insurance Company (“Badger”).  According to the complaint, on August 1, 2005, Gelsomino "contracted with" Roe "to perform construction and remodeling work, including an addition placed on the third floor" of the property.  The complaint alleged that the property was damaged as a result of Roe's "negligent failure to perform construction work properly."  The complaint did not specify when the property damage occurred.  However, the complaint alleged that the plaintiffs "learned on March 3, 2010 [that] the property damage sustained was caused by the work performed" by Roe.  The complaint included multiple counts alleging that as a result of Roe's negligence, the building "sustained property damages, including water damage."  The complaint further alleged that, under Gelsomino's homeowner's insurance policy, Badger compensated Gelsomino for damages that were proximately caused by Roe's negligence.  Badger alleged that it had "paid the damages sustained as a result of the negligent work" and thereby became a bona fide subrogee of Gelsomino "for a claim in the sum of $212,073.80."  Thus, Badger sought a judgment in this amount.  The complaint also alleged that, as a result of Roe's negligence, Gelsomino sustained additional damages of $30,590.18, which were not covered under his policy with Badger.  The underlying complaint also sought recovery of these damages by Gelsomino.

Country was tendered with defense of the underlying lawsuit, but refused to defend Roe.  No one else appeared on behalf of Roe and on August 6, 2012, the court in the underlying action entered a default judgment against Roe in the amount of $222,108.63.

Eight days after the default judgment, Country commenced the declaratory judgment action against Roe, Badger, and Gelsomino.  The declaratory judgment complaint plead that "[t]he position of Country Mutual is that the [underlying] [l]awsuit does not allege an occurrence of bodily injury or property damage caused by an occurrence during the policy period, which is not otherwise excluded."  As such, Country alleged that it had no duty to defend or indemnify.  Country alternatively pleaded that a number of policy exclusions applied to preclude coverage.  Additionally, Country pleaded that it had no "obligation for any covered damages after its policy terminated or was cancelled on July 25, 2006."

After answering the declaratory judgment complaint, Badger and Gelsomino filed a four count counterclaim for declaratory judgment against Country, alleging that, during Roe's work at the property, "[w]ater penetration was observed in late 2005 and Roe was notified."  The counterclaim pleaded that in February 2010, "Gelsomino contacted Country and informed them the water leaks started in 2005."  According to the counterclaim, Country subsequently contacted Siebert Engineers, Inc. (“Siebert”) to investigate, and Siebert prepared a report concluding that "the water penetration was due to faulty workmanship of Roe."  The counterclaim attached a copy of Siebert's report, which was dated March 3, 2010.  The Siebert report includes a summary of an interview with Gelsomino in which Gelsomino stated that he started having problems with moisture/water intrusion into the home toward the end of the construction project. He approximated that he began to notice some small problem areas in the fall of 2005, but that the moisture/water intrusion was substantially more pronounced in the spring/summer of 2006.

The counterclaim contained four counts.  Count I sought a declaration that Country Mutual "had a duty to defend and indemnify Roe for the property damage that happened as a result of the negligence of Roe in 2005" and that Country was liable for the full amount of the default judgment.  Count II sought a declaration that "Country breached [its] duty to Roe by failing to defend under a reservation of rights, and failed to file a declaratory action during the pendency of the litigation and therefore [is] estopped from now raising policy defenses."  Count III pleaded that Country's declaratory judgment action was "untimely as a matter of law" because it was commenced after the default judgment in the underlying lawsuit.  Count IV alleged "bad faith claim handling" by Country, and sought attorney's fees and costs pursuant to an Illinois Insurance Code.

Country moved for judgment on the pleadings with respect to Count IV of the counterclaim, which the trial court granted.  Thereafter, Country filed an Amended Complaint, which added a new defense to coverage based on lack of notice.  Country alleged that, although Gelsomino testified in his deposition "that he started complaining in 2005" to Roe, Country did not receive notice of any potential problem with Roe's work until February 2010.  Country thus alleged that Roe had breached the "notice condition in the policy by failing to notify Country as soon as practicable of an occurrence which may result in a claim."

Badger and Gelsomino answered Country's amended complaint and asserted an affirmative defense, that Country "is estopped from raising any policy defenses" because it had failed to defend the underlying lawsuit or to commence its declaratory judgment action while the underlying lawsuit was still pending.

The parties filed cross-motions for summary judgment with respect to Country's declaratory judgment complaint and the remaining counts of Badger and Gelsomino's counterclaim.  The trial court granted Badger and Gelsomino's motion and denied Country's motion.  The trial court began its analysis by discussing "whether this case deals with the duty to defend or the duty to indemnify."  The trial court recognized that the "duty to indemnify is much narrower" than the duty to defend.  The court also recognized that there were "no findings of fact" in the underlying case because it ended in a default judgment.  The court reasoned that: "Accordingly, in evaluating Country Mutual's duty to indemnify, the court will use the framework of whether Country Mutual had a duty to defend Roe" in the underlying lawsuit.

The trial court analyzed whether Country had a duty to defend the underlying action, stating that it would primarily focus on the allegations underlying the complaint and only consider additional materials that would otherwise be appropriate to consider.  The trial court rejected Country's argument that the complaint did not allege an "occurrence" under the policy.  The court found that although the underlying complaint did not specify which property was damaged, it did generally imply damage to personal property. The court also noted that invoices and correspondence in the record indicated that Country "knew of the damage to other parts of the house besides the project" before the underlying complaint was filed.

The trial court next addressed "whether the occurrence happened during the term of the policy period" and found that there was no material issue of fact as to whether Country was aware of the potential that the occurrence happened during the term of the policy period," such that "there was a potential for coverage."  The trial court cited a reservation of rights letter from Country to Roe in which Country stated that its policy "may not cover the loss that [Roe] claim[s] occurred on or about July 20, 2006."  The court also noted the portion of the Siebert report reflecting Gelsomino's statements about when he first noticed water intrusion.  The trial court reasoned that at a minimum Country was aware of the potential that the date of loss could have been prior to July 25, 2005 and thus was aware of the potential for coverage," triggering its duty to defend.

The trial court determined that Country breached its duty to defend Roe.  Citing an Illinois Supreme Court decision, the court recognized that an insurer who breaches the duty to defend is "estopped from denying coverage in suit to collect the judgment."  In turn, the trial court concluded that Country was "also estopped from denying coverage in an action to collect on the default judgment."  Accordingly, the trial court granted Badger and Gelsomino's motion for summary judgment and denied Country cross-motion for summary judgment.  The trial court also ruled that Country was liable "for the entire default judgment" entered in the underlying action.

Following the trial court’s decision, Country filed an appeal.  In its appeal, Country argued that the trial court erred in finding a duty to defend and that estoppel applied to hold Country liable for the default judgment.  Country claimed the trial court engaged in "speculation" and "incorrectly determined" that there was covered property damage before the cancellation of the policy in July 2006.  Country further claimed that instead of discussing whether it had a duty to defend, the trial court should have required Badger and Gelsomino to prove that there was "covered property damage during the policy period."  Country asserted that there was "overwhelming" evidence that the damage occurred after the policy was cancelled.  Country also argued that the court improperly considered materials beyond the complaint.  Additionally, Country asserted that the "trial court erred by creating coverage by estoppel," and that estoppel cannot "create policy coverage beyond the term of the policy."  Country argued that issue of whether damage occurred during the policy's term is not a "policy defense" subject to estoppel.  Thus, Country asserted that the trial court erred in using estoppel to hold it liable "for the entire amount sought by Badger and Gelsomino for all damages occurring years later" after the policy was cancelled.

The Appellate Court of Illinois began its review by analyzing the trial court’s duty to defend analysis.  The Court aptly rejected Country’s claim that the "duty to defend was not at issue because there were no defense costs, stating that the reason there were "no defense costs" in the underlying action was because no one (including Country) defended Roe in the underlying action, leading to a default judgment.

The Court also rejected Country’s claim that, because there was a default judgment, it was not subject to a "duty to defend" analysis.  The Court noted that the first step in an estoppel analysis is to determine whether a duty to defend exists and that this is true even after a default judgment.

The Court acknowledge that in a declaratory judgment action where the issue is whether the insurer has a duty to defend, a court ordinarily looks first to the allegations in the underlying complaint and compares those allegations to the relevant provisions of the insurance policy.  If the facts alleged in the underlying complaint fall within, or potentially within, the policy's coverage, the insurer's duty to defend arises.  A court is not limited to the allegations in the complaint in determining whether an insurer has a duty to defend.  Under certain circumstances it is proper for the court to examine evidence beyond that contained in the underlying complaint to determine the insurer's duty to defend.  One such circumstance is where the insurer possesses knowledge of true but unpleaded facts that, when taken together with the allegations in the complaint, indicate that the claim is within or potentially within the policy coverage.

With this analysis in mind, the Court concluded that the allegations in the underlying complaint triggered the duty to defend under the policy.  The Court recognized that, in finding that Country had a duty to defend, the trial court relied, in part, on statements within documents outside the complaint or the policy.  Although Country argued that the trial court erred in considering those statements because they cannot be considered "true" facts that were known to Country, the Court concluded that it need not address whether those statements were properly considered by the trial court because the allegations of the underlying complaint, on their face, alleged facts at least potentially bringing the lawsuit within the scope of coverage under the policy.  As such, the Court held that those allegations triggered Country's duty to defend.  Specifically, the Court found that the allegations of the underlying complaint raised a potential of "property damage" that occurred within the policy period.  The underlying complaint alleged that Roe's negligent construction work caused Gelsomino's building to sustain "property damages, including water damage."  Although such allegations do not specify what particular property was damaged, given the minimal pleading threshold to trigger a duty to defend, the allegations raised at least the potential that there were damages covered under the policy.

Similarly, the underlying allegations raised a potential that at least some of the damage occurred within the policy period, that is, between April 2005 and July 25, 2006.  Although the complaint did not specifically allege when the property damage occurred, the underlying allegations asserted property damage occurring sometime between August 2005 and the time the plaintiffs "learned" of the damage in March 2010, which undoubtedly overlaps with the policy period.  Thus, the underlying complaint alleged at least the potential that some of the damages were covered.  Therefore, the Court found that the complaint triggered Country's duty to defend.

After concluding that Country had a duty to defend, the Court looked to whether Country had breached that duty.  The Court noted that the law is clear regarding an insurer's options once its duty to defend is triggered.  If the insurer wishes to dispute coverage, it has "two options: (1) defend the suit under a reservation of rights or (2) to seek a declaratory judgment that there is no coverage.  If the insurer fails to take either of these steps and is later found to have wrongfully denied coverage, the insurer is estopped from raising policy defenses to coverage.  The Court also pointed out that if the insurer elects to file a declaratory judgment, it must do so before the underlying proceeding is resolved.

In light of the above, the Court determined that Country clearly breached its defense obligation as it received notice of the underlying action and failed to defend Roe under a reservation of rights.  Furthermore, Country did not file its declaratory judgment complaint until several days after the default judgment in the underlying action.

The Court rejected Country's assertion that application of estoppel in this case "creates coverage" for damages occurring beyond the policy term, noting that Country fundamentally misunderstood the concept of estoppel.  The trial court did not make a finding that any damages were actually covered, but determined that Country's breach of its duty to defend estopped it from denying coverage.  Country's claim ignores the equitable roots of estoppel.

Country argued that it is unfair to hold it liable for property damages that may have been incurred after the policy's expiration.  In rejecting this argument, the Court stated that this is the result that estoppel calls for where, as in this case, an insurer breaches its duty to defend.   The Court emphasized that Country's dilemma is of its own making.  It had a duty to defend the underlying lawsuit (or initiate a declaratory judgment action while the underlying suit was pending).  Had it done so, it could have litigated the coverage issues it now attempts to raise.  However, Country inexplicably failed to do so.  Thus, the Court held that Country was estopped from now arguing that any of the alleged damages were not covered.

Finally, Country asserted that estoppel is limited to "policy defenses" and should not prevent Country from asserting that the damages occurred beyond the expiration of the policy, arguing that "finding coverage for damages that have taken place over subsequent years is not a policy defense."  The Court acknowledged that estoppel has been described as precluding an insurer from raising "policy defenses," but noted that the Illinois Supreme Court has broadly and explicitly held that estoppel prevents an insured from "denying coverage" once it has breached its duty to defend.  That doctrine encompasses cases such as this, in which the insurer attempted to deny coverage by claiming that some or all of the alleged damages may have occurred after the policy period.

In light of the foregoing, the Court held that Country was liable for the amount of the resulting default judgment.

 

WANDERING WATERS

Larry E. Waters
[email protected]

 

07/05/18       Burlington Insurance Company v. MC&O Masonry, Inc., et al  

United States District Court, Eastern District of New York

Defendants’ Motion to Dismiss Denied Because Plaintiff’s Good Faith Representation that the Necessary Information Pertaining to the Identity and Citizenship of Defendant’s LLC Members Warranted Jurisdictional Discovery

Plaintiff, The Burlington Insurance Company (“Burlington”) issued Defendant MC&O Masonry Inc., (“MC&O Masonry”) two commercial liability policies of insurance in or about 2008.  In April 2014, Defendants FSLM Associates LLC (“FSLM”), and First Avenue Builders, LLC (“First Avenue”), commenced a lawsuit against MC&O and others (the “underlying action”).  The underlying action sought recovery for MC&O’s faulty repair work at a building owned by the builders. Burlington provided a courtesy defense to MC&O Masonry but not to Defendant MC&O Contracting, Inc. (“MC&O Contracting”).     

Burlington commenced the current declaratory judgment action seeking among other relief that the policies held by MC&O Masonry did not provide coverage for the underlying action. In response Defendants FSLM and First Avenue moved to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(1) and 12(b)(7) for failure to adequately plead diversity jurisdiction and failure to join indispensable, non-diverse parties.

In assessing the motion to dismiss, the court began its analysis with the law on diversity jurisdiction.  The court noted that “[f]or jurisdictional purposes . . . a limited liability company is a citizen of the state or states where its members are citizens.”  It was undisputed that Plaintiff was a North Carolina corporation.  In addition, it was undisputed that the MC&) Defendants were New York corporations prior to dissolution.

However, the court found issue with Plaintiffs’ jurisdictional allegations concerning Defendants FSLM and First Avenue. The court noted that Plaintiffs failed to allege the identity or citizenship of the members of Defendants FSLM and First Avenue.  Nevertheless, as permitted by law the court found jurisdictional discovery was appropriate.  The court reasoned that Plaintiffs’ attorney’s good faith representation that the necessary information as to the identity and citizenship of the LCC members of Defendants FSLM and First Avenue were not publically available, warranted jurisdictional discovery.

Next, the court considered Defendants FSLM and First Avenue’s argument that Plaintiff failed to join a party under Rule 19, which warranted a dismissal.  The court noted that when considering a Rule 19 motion it “must base its decision on the pleadings as they appear at the time of the proposed joinder.”  Applying this standard, the court concluded that Defendants FSLM and First Avenue failed to satisfy the threshold requirement because they failed to show that the other insurers were necessary parties.  The court reasoned that the Pleadings did not indicate or imply that the insurers would have any interest in the interpretation of an insurance policy between Plaintiffs and MC&O Masonry and MC&O Contracting. 

In sum, the court denied Defendants FSLM and First Avenue’s motion to dismiss.  Further, the court ordered that the parties conduct limited discovery to determine the identity and citizenship of the members of Defendants FSLM and First Avenue.        

 

07/06/18       Ovsey Tarnarider v. 21st Century Ins. Farmers Group, Inc.

United States District Court, Eastern District of New York

Defendants’ Motion for Summary Judgment Granted as Plaintiff Failed to Overcome the “Mailbox Rule” Presumption

In May 2017, Plaintiff was involved in a car accident, which resulted in a lawsuit in New York State court.  Plaintiff filed a claim for indemnification by Defendants 21st Century Insurance and Financial Services, Inc., (“Century Insurance”) and Farmers Group, Inc. (“Farmers”) (collectively “Defendants”), alleging that there was coverage for his claim.  In April 2017, Defendants disclaimed coverage and alleged that a notice of cancellation was issued to Plaintiff in March 2017.  Plaintiff did not dispute that he failed to pay his premiums.

However, Plaintiff contends that he never received the required notice of cancellation.  After Defendants refusal to indemnify Plaintiff, Defendants sent two faxes to Plaintiff’s attorney.  Each fax contained copies of the notice of cancellation and the certificate of mailing for the notice of cancellation.  The first fax had the correct mailing address for Plaintiff but the certificate of mailing had appeared to have the incorrect address.  The second fax, which was sent to Plaintiff’s attorney a few minute later, contained Plaintiff’s correct address and the address on the second certificate of mailing for the notice of cancellation was correct.

Plaintiff filed the current declaratory judgment action against Defendants seeking among other relief that Defendants have an obligation indemnify him for his liability in the New York State court car accident action.  Plaintiff’s complaint mainly alleged that Defendants attempted to cover up and doctor the certificate for the notice of cancellation of mailing by faxing the second copy.

Defendants moved for summary judgment. Defendants’ main argument is that they are entitled to summary judgment based upon the “mailbox rule” and that there was no genuine issue of fact to overcome the “mailbox rule.”  In assessing Defendants’ argument regarding the “mailbox rule,” the court first noted that under the “mailbox rule” “proof of an office procedure followed in the regular course of business which established that a notice was properly addressed and mailed gives rise to a rebuttable presumption that the notice was actually received by the person to whom it was addressed.”  Further, the court acknowledged that New York requires “only personal knowledge of the mailing procedures to establish the regular office procedure and not personal knowledge of the particular mailing.”  Importantly, the court noted “once the mailbox presumption arises, a party’s mere allegation that it did not receive the letter or notice does not rebut the presumption.”

Applying the well-established mailbox rule in New York, the court found that the affidavits submitted by Defendants were sufficient to invoke the mailbox rule.  The court disregarded Plaintiff’s argument that he never received the cancellation notice, as such denial was immaterial to rebut the presumption.

Next, the court considered whether a reasonable jury could return a verdict in favor of Plaintiff based upon the first fax appearing to list the wrong address.  The Court concluded that a reasonable jury would not rule in favor of Plaintiff.  The court reasoned that a jury would have to find among other conclusions that Defendants’ employees immediately noticed the discrepancy in the address and that employee determined it was the best course of action to doctor the certificate of mailing and to fax a second copy to Plaintiff’s attorney.  In addition, the court reasoned that the jury would have to find that all of these events occurred despite the reasonable evidence that the numbers were different in the address due to the fax machine. Further, the court noted that the even if such jury existed, the court would have to set aside its verdict as speculative as such verdict would be unreasonable.

In sum, the granted Defendants’ motion for summary judgment and the Clerk was directed to enter a judgment, dismissing the Complaint.      

 

BORON’S BENCHMARKS

Eric T. Boron

[email protected]

 

06/28/18       Harleysville Preferred Ins. v. Rams Head Savage Mill, LLC

Court of Special Appeals of Maryland

Commercial General Liability Coverage: Duty to Defend; Criminal Acts Exclusion

I know it’s the equivalent of preaching to the choir by reminding you that insurers have two significant obligations to their insureds under a commercial general liability (CGL) policy: a duty to defend and a duty to indemnify. The duty to defend is a contractual obligation almost always found in CGL policies, such as, for example, in Harleysville’s CGL Form CG 00 01 12 04, a policy at issue here. With the costs of litigation continuing to rise in our sue first/investigate later society, the insurer-funded defense of a liability action may often be the more valuable benefit of a liability policy for an insured, as compared to the insurer’s duty to indemnify.  And, we all know that courts routinely hold that the duty to defend is broader than the duty to indemnify.

A significant portion of the opinion here considers Harleysville’s duty to defend.  The highly offensive facts alleged in the complaints at issue were held to trigger Harleysville’s duty to defend the defendant LLC, but not the LLC’s principal/employee Mr. Muehlhauser, who was the sole (we hope) bad actor here.

Instructive in this decision is the manner in which the court considered the meaning of the phrase “invasion of the right of private occupancy of a room”, which phrase was contained within the grant of coverage for personal and advertising liability set forth in Coverage B of Harleysville’s CGL Form.  The trial court had found that language to be ambiguous.  The Maryland Court of Special Appeals however, found the phrase to be unambiguous, while ruling the policy afforded coverage for the defendant LLC.  In so ruling, the court followed a case it believed to be directly on point, a Fifth Circuit case from 2001 applying Mississippi law, because the policy there was “nearly identical” and the claim there was “similar”.  I’ll leave it to you to compare the shockingly nauseating facts of the Fifth Circuit case to the awful facts of this case to determine whether the claims were similar.

Finally, I presume you too will find the allegations of the underlying complaints do not allow for any potentiality that the bad actor, Mr. Muehlhauser, who had insured status under the CGL policy because it was alleged he was acting within the scope of his employment by the defendant LLC, might not be found to have acted criminally.  As such, the criminal acts exclusion applied, and Harleysville had no duty to defend him.

Seems to me there is a lot about coverage analysis to learn from this decision.  As there is most times that we apply C = [(WI) – (WO)] + CPC when analyzing coverage issues.

 

EARL’S PEARLS
Earl K. Cantwell
[email protected]

 

05/08/18       U.S. ex rel Red Hawk Contracting Inc. v. MSK Construction Inc.

District Court for the Middle District of North Carolina

Federal Arbitration Act Pre-Empts State Arbitration Laws

In this case, the Court ruled that an arbitration clause between a South Carolina general contractor and a North Carolina subcontractor was enforceable based on the Federal Arbitration Act (“FAA”). The federal statute was held to prevail and supersede over various competing state arbitration statutes.

MSK Construction was the general contractor on a project in North Carolina who entered into a subcontract with Red Hawk Contracting for certain preliminary demolition, earthwork, and related services. Red Hawk filed a claim for money owed and MSK filed a motion to dismiss or stay the claim because the subcontract contained an arbitration provision. The Court granted the motion to stay pending arbitration.

One problem was that the arbitration clause was based on a South Carolina statute which provided that the arbitration had to be conducted in South Carolina and be governed by South Carolina law. Red Hawk countered by arguing that a North Carolina statute voided that arbitration clause because a North Carolina statute renders an arbitration clause void if it makes the contract / subcontract subject to the laws of another state, or provides that the exclusive forum for litigation, arbitration, or other dispute resolution process, is to be located in another state. In short, the South Carolina statute gave preference to a South Carolina venue, but the North Carolina statute voided such venue preference in favor of out of state parties or contracts. The Court essentially had to determine if the Federal Arbitration Act pre-empted the North Carolina statute, and the Court answered this question “Yes”.

The FAA governed because it was applicable, and only generally applicable contract defenses such as fraud, duress, or unconscionability can invalidate an arbitration agreement without going against the FAA. The North Carolina statute was not such a “general” contract defense and could not operate to pre-empt the FAA from jurisdiction and operation. Since the FAA was the applicable law, Red Hawk’s claims against MSK were referable to arbitration, and the Court stayed the claims pending arbitration. But there was one further complication.

Red Hawk had also filed a Miller Act claim with the bonding company to recover under MSK’s payment bond. Red Hawk argued that since the bonding company was not party to the subcontract, the claim against the bonding company did not fall under the arbitration clause scope, and the FAA would not apply in any event to this claim. While the Court generally agreed on this point, it ultimately ruled that the bonding company’s liability would rely on common issues of fact to be settled during the arbitration, and it ordered in the interest of judicial economy that the entire action, including the Miller Act claim, be stayed and sent to arbitration.

Since the FAA is a national statute and is based generally upon the Commerce Clause, it applies in both state and federal courts, and here took precedence over protective state legislation that sought to dictate or protect arbitration venue, choice of law, and other particulars. As evidenced by this case, sometimes there is a major battle between the parties with respect to the dispute resolution forum before digging down into Red Hawk’s earthwork and sewer contract.

This case is a good example of what happens when there are competing arbitration clauses, or competing state statutes, that have different takes on the arbitration clause. In such a situation, the Federal Arbitration Act may well pre-empt and prevail. State arbitration legislation seeking to enforce venues, protect in-state parties, dictate in-state jurisdiction etc. may run afoul of the FAA which would contain no such limitations, restrictions, or mandates. In short, arbitration legislation that seeks to protect in-state contracts or parties may run afoul of the FAA which in this case compelled the case into arbitration, contradicted the North Carolina statute, but also refused to necessarily enforce the South Carolina venue provision. Where, when and how the arbitration proceeded, presumably, would be left for AAA Construction Arbitration proceedings.

This case also attests to the judicial preference to enforce arbitration clauses when and where possible, since the Court even stayed the Miller Act claim which was not technically subject to the arbitration clauses.