Coverage Pointers - Volume XXIII, No. 16
Volume XXIII, No. 16 (No. 610)
Friday, January 21, 2022
A Biweekly Electronic Newsletter
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 and Connecticut appellate courts and Canadian appellate courts. The primary purpose of this newsletter is to provide timely educational information and commentary for our clients and subscribers.
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Happy 2022. I don’t see much of a difference from last year. It’s sort of like a birthday. You feel the same the next day.
Big day for Coverage B. Two appellate cases! There isn’t much to say about the cases that isn’t discussed in my column. But we love the law, so I must say that the issue I wanted to analyze was not discussed by the court…disappointing. Specifically, I recently had reason to examine what perhaps will become a split of authority around the country. In the Third Circuit decision, the claim, among others, was trademark infringement, and as is reasonable, the allegations included, for example, the lessened value of the trademark associated with the product and damage to the owner’s reputation.
Some courts are finding claims for slander or disparagement where such claims are not specifically pled, based on such allegations of, for example, trade infringement and disparagement have similar elements. These claims have been interpreted to allege a disparagement claim, based on the trademark infringement allegations. This makes some sense because a court should not strictly adhere to the labels placed on the claim but rather its content. On the other hand, some courts look at the gravamen of the complaint and if it really is a claim for trademark infringement, courts will not apply disparagement. Some courts will not consider the claims of lost reputation and value as one for disparagement unless the allegations make out the tort elements for disparagement in the state.
This is interesting to me and if you want authority or have any thoughts or knowledge, please reach out!
Lee’s Connecticut Chronicles:
Dear Nutmeg Newsies:
A bit of a departure in my column this week, as we look at whether workers exposed to asbestos on the job had a viable cause of action absent physical injury. But, rest assured, we comment on the likely insurance implications. Read on for more details.
In Connecticut-land, it’s been cold, very cold this past fortnight. With social distancing and mask mandates still in place in these parts, it has made for a lot of stay-at-home days and nights. Luckily, we’ve had some football to help us pass the time. The Bills, upon which I’m sure all my Buffalo colleagues will wax poetic, trounced the Patriots—a real turn of the tables. We likely saw the last of the great quarterback class of 2004, with Ben Roethlisberger probably having thrown his last pass in a NFL uniform, as the Steelers were crushed by the Chiefs. It seems the NFL may have figured out Kyler Murray of the Cardinals as the Rams drubbed them. And, lest we forget about the GOAT. The ageless Tom Brady thrashed the Eagles in a warmup for this weekend’s action against the Rams. Lots of good story lines to follow. Here’s to hoping for some warmer weather and even hotter football action.
And don’t forget to hit me up for bad faith avoidance training.
Keep keeping safe.
Lee S. Siegel
Buffalo Evening News
Buffalo, New York
21 January 1922
BOOST BUFFALO MORE, ADVISES LEHMANN
“Too many organizations invite out-of-town speakers to address their meetings, with the result that Buffalo club members hear a great deal about the progressiveness of other cities and not enough of their own,” said George C. Lehmann, secretary of the Chamber of Commerce, last night at a meeting of the League of Advertising Women.
Clara Haiwig spoke on advertising mediums, and Anne Wild exhibited examples of copy specially prepared for a Buffalo national advertising campaign.
The next meeting will be held February 3, in the Associated Service building.
Editor’s Note: I live in the house in which Mr. Lehmann resided 100 years ago today. About 20 years ago, I chaired the Greater Buffalo Convention & Visitors Bureau, the organization that has the same function as the Chamber of Commerce at that time. Queue the music.
It has been an extremely busy week for me with depositions, EUO’s, and court appearances, so unfortunately, I do not have a case to report this week. I promise to find an interesting case in two weeks!
Stay warm and GO BILLS!!
Patricia A. Rauh
Canadian Paramour Wanted:
Regina, Saskatchewan, Canada
21 January 1922
YOUNG MAN, ALONE, DESIRES acquaintance of a young lady or widow with means, object matrimony. Write Box 1063, Leader Office.
Storm’s SIU Examen:
Having missed the last edition of Coverage Pointers due to my vacation, I am trying to make up for lost time by posting six interesting cases this week:
- In 1st-Party Property Case Involving Issues of Rescission and “Residence Premises”, Plaintiff Ordered to Produce her Driver’s License, Utility Bills, and Income Tax Returns, as Well as Various Specified Records Relevant to her Alleged Damages.
- PIP Insurer May Disclaim Based Upon Facts that Suggest it Maintains a Founded Belief that the Alleged Injury Does Not Arise Out of the Insured Incident Without Establishing by Clear and Convincing Evidence that the Subject Collision was the Product of Fraud.
- Quick Refresher on Proving Liability of Insurance Agents
- 1st-Party Property Claim Unambiguously Excluded from Coverage Under the Water Backup Exclusion.
- Insurer Denied Summary Judgment as it Failed to Prove that All Risk Coverage was Precluded in Alleging the Loss was Not Caused by an “External Cause” or that an “Infidelity Warranty” was Applicable; but was Granted Partial Summary Judgment Dismissing Causes of Action for Breach of the Implied Covenant of Good Faith and Fair Dealing, Bad Faith Claim Handling and Attorneys’ Fees.
- Insurer Granted Default Judgment on its Counterclaim Alleging the Insured Committed Fraud and Intentionally set her House on Fire.
In SIU news on January 12th the U.S. Attorney’s Office issued a press release announcing “the arrest of 13 individuals for $100 million healthcare fraud, money laundering, and bribery scheme. Two indictments charge the defendants, including a NYPD police officer, doctors, an attorney, and others, with healthcare fraud, money laundering, bribery, and other offenses in one of the largest no-fault automobile insurance fraud takedowns in history.” You can read more here.
In honor of Martin Luther King, Jr. Day, this week’s encouraging word quotes a good man: “Life's most persistent and urgent question is: What are you doing for others?” ~ Martin Luther King, Jr.
I hope you have an awesome two weeks until the next edition.
Scott D. Storm
Epidemics, 100 Years Ago:
New York Herald
New York, New York
21 January 1922
Hospitals Filled and Municipal Services Crippled.
Special Cable to The New York Herald. Copyright, 1922, by The New York Herald.
New York Herald Bureau.
Paris, Jan. 20
Paris is having an epidemic of grip which is assuming serious proportions. Although few cases show any signs of becoming critical, all the hospitals are filled, and private sanitariums all have long waiting lists of grip victims seeking admission.
The postal service in the heart of the city has been cut down to three a day owing to the shortage in personnel, which is estimated at 35 per cent. Similar reports are coming from the railways and suburban services are threatening to reduce their schedules. The underground system's management is offering a bonus to temporary workers, but few are attracted by it.
London, Jun. 20.--The latest mortality figures show no abatement in the outbreak of Influenza in the United Kingdom. Last week there were 1,262 deaths from the disease, an increase of 443 over the previous week.
Greater London is still the storm center of the outbreak, 1,021 Londoners having succumbed out of a total of 1,262.
Winter has announced its presence in Buffalo loud and clear this month. There have been multiple blizzards, and I must admit I have gotten considerable entertainment out of watching struggling traffic from my apartment window. I have even seen some plow trucks get stuck. Although I live in downtown Buffalo where the snow is typically worse because of the lake effect, I have been fortunate enough to procure three essentials that make the winter substantially easier: 1) an apartment that is only a 30-second walk from my office; 2) covered parking; and 3) a friend with a hot tub. Life is good.
One case this week: an insured seeking excess policy coverage for inventory loss it suffered during a storm fails to establish that the restoration period for its business after the storm occurred was at least eighteen months long.
Nicholas J. Heintzman
Epidemic in Moscow, 100 Years Ago:
Olean, New York
21 January 1922
(By the Associated Press)
RIGA, Jan. 21.--The typhus is spreading in Moscow, according to the Novyput, official Bolshevik government organ here.
Hello CP Readers,
It is my pleasure to be joining the excellent team of writers for Coverage Pointers. I am looking forward to writing about decisions from the highest courts in the other 49 States.
This January, the Bills’ success and knitting up a storm have been keeping me warm, and I will be on the edge of my sofa watching the next game against the Chiefs!
Until next time,
Katherine A. Fleming (Admission Pending)
Pope on Death Bed:
Brooklyn, New York
21 January 1922
PONTIFF’S DEATH IS IMMINENT
His Holiness in Delirium Begs to Resume Work
RELAPSE FOLLOWS RALLY
Sleeps Peacefully and Takes Nourishment Early Today.
Rome, Jan. 21.--(1:30 P M.)--"The end is imminent," Cardinal Gasparri, emerging from the bed chamber where Pope Benedict XV. lay dying, declared this afternoon.
Cardinal Gasparri was weeping.
He announced that the Pope was delirious and that his Holiness insisted upon resuming his work.
At 1 o'clock this afternoon, it was announced from the Vatican that all hope for Pope Benedict's recovery, based upon his sleep and taking some little nourishment this morning, had been abandoned.
He Becomes Delirious.
The serenity of Pope Benedict gave way this morning. His Holiness, unable to recognize even his physicians, was slightly delirious. He murmured unintelligible phrases.
"The catastrophe is now only a question of minutes," a Bulletin Issued earlier by Professor Marchiafava had said. This statement later was withdrawn.
Editor’s Note: Pope Benedict was head of the Catholic Church from 1914 until his death on January 22, 1922.
North of the Border:
While Ontario and Quebec were hit with the snowstorm of the decade, the sun has been shining in Southern Alberta where it is -30C with the windchill. Winter has not been kind to Canadians, but then, has that ever happened? The current Omicron wave has resulted in very, very high absenteeism across the country, making it difficult for businesses to maintain normal, or even close to normal functioning. However, my espresso extraction technique has dramatically improved, thank you for asking, and, despite winter and Omicron, I continue to motor along with all kinds of opinions and pushing ahead coverage litigation.
My column this week discussions the importance of a Supreme Court of Canada case that was issued in November 2021. The case has a complicated back story that must be understood to appreciate the holding. Bear with the detail to get to the take-aways from the case (or just read the conclusion to the column!)
Dan D. Kohane
Agnes A. Wilewicz
Patricia A. Rauh
INSURANCE COVERAGE/EXTRA CONTRACTUAL LIABILITY TEAM
Dan D. Kohane, Chair
Steven E. Peiper, Co-Chair
Michael F. Perley
Agnieszka A. Wilewicz
Lee S. Siegel
Brian F. Mark
Diane L. Bucci
Scott D. Storm
Brian D. Barnas
Ryan P. Maxwell
Charles J. Englert
Patricia A. Rauh
Nicholas J. Heintzman
Diane F. Bosse
Joel R. Appelbaum
Kyle A. Ruffner (Admission Pending)
Katherine A. Fleming (Admission Pending)
FIRE, FIRST PARTY AND SUBROGATION TEAM
Steven E. Peiper, Team Leader
Michael F. Perley
Scott D. Storm
Brian D. Barnas
Dan D. Kohane
Alice A. Trueman
Jody E. Briandi, Team Leader
Diane F. Bosse
Kohane’s Coverage Corner
Peiper on Property and Potpourri
Dishing Out Serious Injury Threshold
Wilewicz’s Wide World of Coverage
Barnas on Bad Faith
Lee’s Connecticut Chronicles
Off the Mark
Bucci on “B”
Ryan’s Capital Roundup
CJ on CVA and USDC(NY)
Storm’s SIU Examen
North of the Border
KOHANE’S COVERAGE CORNER
Dan D. Kohane
01/18/22 CastlePoint National Ins. Co. v. Mt. Hawley Ins. Co.
Appellate Division, First Department
A Named Insured Isn’t Always a Named Insured
CastlePoint National Insurance Company effectively seeks reimbursement for amounts that it claims Mt. Hawley should have paid to its insured, Trumbull Equities, LLC. The sole issue on appeal is whether Mt. Hawley correctly disclaimed coverage based on the cross-liability exclusions that stated "[t]his insurance does not apply to any liability for any action, claim or 'suit' brought by one Named Insured against any other Named Insured covered under this policy."
For the exclusion to trigger, the cross-liability exclusion, by its plain terms, excludes coverage solely between named insureds. However, while, and while Trumbull was a named insured, the Mt. Hawley policies identified Trumbull as a named insured only in its capacity as owner of a different premises, not the premises where the loss occurred.
Since it was an exclusion being relied upon, which requires strict construction, the exclusion was subject to more than one meaning and thus inapplicable here.
Editor’s Note: Two excellent coverage lawyers battled this one out. Max Gershweir gets the “atta lawyer”.
01/11/22 Hirsch v. Pashman Stein Walder
Appellate Division, First Department
No Harm, No Four. Attorney Malpractice Claim Dismissed Where Underlying First Party Case, Not Timely Sued, had No Merit
It’s the old story of the “case within the case” having no merit, so a legal malpractice claim fails.
A review of the insurance policy at issue in the underlying action brought by the plaintiff against the insurer and the condominium — demonstrates conclusively that plaintiff could not have prevailed in that action even if defendants had not missed the statute of limitation. Thus, plaintiff failed to show, as required to state a cause of action for legal malpractice, that but for the law firm’s conduct he would have prevailed in the underlying action
01/12/22 Bradley v. William Penn Life Ins. Co.
Appellate Division, Second Department
For Life Insurance Policies, Interest is Calculated by the Terms of the Policy and not the CPLR
At the conclusion of a bitterly fought battle over claimant’s rights to coverage under a life insurance policy, the claim was ultimately verified, and William Penn ordered to pay benefits under the policy. That resulted in claimant’s proposed judgment which sought the inclusion of interest at the statutory rate of 9%. William Penn opposed the proposed judgment, and instead argued that interest should have been calculated at the rate identified in the policy; 3%. Over the course of nine years of litigation, the difference in the interest calculation was obviously significant depending on what percentage factor was adopted.
Here, the Appellate Division noted that under the Insurance Law interest definitely attached where a carrier disputes and, resultingly, delays payment. However, the court further ruled that the calculation of the interest is driven by the subject policy and the facts of the case. Those facts dictated 3% was the appropriate calculation.
01/06/22 Singh v. Wesco Ins. Co.
Appellate Division, First Department
Motion to Amend on Claim of Collapse Granted Where Defendant Carrier is not Prejudiced
Plaintiff sought leave to amend his complaint to assert additional allegations aimed at satisfying the Additional Coverage-Collapse portion of the policy. In affirming the trial court’s granting of that request, the Appellate Division noted that because the amended was sought during the pendency of discovery exchange it could not be deemed “patently insufficient” that stage of the litigation.
Moreover, Wesco’s arguments that the proposed amendment prejudiced Wesco’s ability to defend the action was likewise rejected by the Court. Although the subject building had been demolished at the time motion to amend was proposed, it was clear that Wesco had been engaged in investigation of the loss within 4 days of the reported event giving rise to the claim.
01/11/22 Bd of Mgrs. Of Baychester Villas Condominiums vs. Gerald Caliendo Architects and Planners, et al
Appellate Division, First Department
Plaintiff’s Ongoing Engagement with Non-Appearing Defendants Meant that the Action Could not be Dismissed for Failure to Seek a Default Within One Year
Plaintiff commenced this action against at least four entities. Two of those entities appeared, and at least two others did not join issue. After one year passed, the non-appearing defendants moved to dismiss the claims against them as abandoned. Plaintiff opposed on the basis that it did not intend to abandon, and thus maintained that is claims were still ripe for adjudication.
In affirming the trial court, the Appellate Division noted that throughout the year plaintiff extended the courtesy of multiple extension of time to appear to the movants based upon their attempts to resolve issues related to their insurance coverage. Further, plaintiffs maintained communications with the non-appearing defendants throughout the year, and conducted discovery based upon their asserted claims.
In addition, the Court noted that plaintiff’s opposition demonstrated that its claims demonstrated merit and the non-appearing defendants were unable establish how they’d been prejudiced by plaintiff’s failure to seek a default within the one-year time limit established by the CPLR.
DISHING OUT SERIOUS INJURY THRESHOLD
Michael J. Dischley
01/12/22 Adel Shehata v. Jose Koruthu
Appellate Division, Second Department
Jury Could Have Properly Determined that Plaintiff Did Not Sustain a Serious Injury as a Result of the Subject Accident Precluding Plaintiff’s Motion Seeking to Set Aside the Verdict
In an action to recover damages for personal injuries, the plaintiff appeals from a judgment of the Supreme Court, Richmond County (Kim Dollard, J.), entered October 10, 2018. The judgment, upon a jury verdict finding that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d) as a result of the subject accident, is in favor of the defendant and against the plaintiff dismissing the complaint.
The plaintiff allegedly sustained personal injuries in a motor vehicle accident. Thereafter, the plaintiff commenced this action to recover damages for personal injuries. A jury trial on the issues of serious injury and damages was held. The jury found that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d) as a result of the accident. The plaintiff moved, in effect, pursuant to CPLR 4404(a) to set aside the verdict. The Supreme Court denied the plaintiff's motion, and a judgment was entered in favor of the defendant and against the plaintiff dismissing the complaint. The plaintiff appeals.
During the trial, the defendant's counsel elicited testimony from the plaintiff concerning a workers' compensation claim that he filed for the subject motor vehicle accident. The Supreme Court instructed the jury that this testimony concerning workers' compensation was stricken from the record and should not be considered. Thereafter, during summation, the defendant's counsel twice referenced the plaintiff's workers' compensation claim. Each time, the court sustained the plaintiff's counsel's objection and instructed the jury to disregard said comments as they were irrelevant.
The plaintiff asserted that a new trial is warranted because the Supreme Court's instructions did not cure the prejudice resulting from the testimony and summation comments. The plaintiff, however, failed to move for a mistrial on this ground, and, thus, waived his right to seek relief on this ground pursuant to CPLR 4404(a). In any event, in sustaining the plaintiff's objections to the comments and providing curative instructions, the Appellate Court found that the Supreme Court corrected any possible prejudice resulting from the subject testimony and summation comments.
Contrary to the plaintiff's contention, the Appellate Court found that the Supreme Court properly denied his motion to strike the testimony of the defendant's expert on the ground that the expert made prior inconsistent statements in his sworn reports. "It is within the province of the jury to determine an expert's credibility". Instead, the proper remedy for the expert's allegedly inconsistent statements was to impeach his testimony. Further, the Appellate Court did not reach the plaintiff's contention that the court should have stricken the defendant's expert's testimony because it was outside the scope of the defendant's CPLR 3101(d) disclosure. It is the appellant's obligation to assemble a proper record on appeal. Without a complete record that includes the defendant's CPLR 3101(d) disclosure, this Court is unable to render an informed decision on the merits of this issue.
The Appellate Court found that the Supreme Court properly denied that branch of the plaintiff's motion which was, in effect, pursuant to CPLR 4404(a) to set aside the verdict and for judgment as a matter of law. "A motion pursuant to CPLR 4401 or 4404 for judgment as a matter of law may be granted only 'where the trial court finds that, upon the evidence presented, there is no rational process by which the fact trier could base a finding in favor of the nonmoving party'". "In considering such a motion, 'the trial court must afford the party opposing the motion every inference which may properly be drawn from the facts presented, and the facts must be considered in a light most favorable to the nonmovant'". Here, viewing the facts in the light most favorable to the defendant, the Appellate Court found that there was a rational process by which the jury could find that the plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102(d) as a result of the subject accident.
Moreover, the Appellate Court found that the Supreme Court properly denied that branch of the plaintiff's motion which was, in effect, pursuant to CPLR 4044(a) to set as the verdict as contrary to the weight of the evidence and for a new trial. "A jury verdict should not be set aside as contrary to the weight of the evidence unless the jury could not have reached the verdict by any fair interpretation of the evidence". "If the verdict can be reconciled with a reasonable view of the evidence, the successful party is entitled to the presumption that the jury adopted that view". "'Where, as here, conflicting expert testimony is presented, the jury is entitled to accept one expert's opinion and reject that of another expert'". Here, it was a fair interpretation of the evidence for the jury to credit the testimony of the defendant's expert over that of the plaintiff's expert concerning the cause of the injuries to the plaintiff's shoulders.
Wherefore, it was Ordered that the judgment is affirmed, with costs.
WILEWICZ’S WIDE WORLD of COVERAGE (featuring Evan Gestwick)
Agnes A. Wilewicz
12/28/21 Global Reinsurance Corp. Of Am. V. Century Indem. Co.
Second Circuit Court of Appeals
Reinsurers are on the Hook to Pay Defense Costs in Excess of Policy Limits
For decades, reinsurance companies enjoyed special treatment in that they were not liable to pay defense costs incurred by their cedents in excess of the applicable policy limits—a marked difference from the rule applicable to everyday insurers, who often must pay beyond policy limits. But first, a bit of vocabulary is in order. A “reinsurer” is an insurance company that issues insurance policies to other insurance companies to spread their risk farther, enabling them to take on more insureds themselves. A “cedent,” then, is the insurance company insured by a reinsurance company—though formally defined as any party who passes the financial obligation for potential losses to an insurer, this term is generally reserved for holders of a reinsurance policy.
Indeed, the longstanding rule, unique to reinsurers, established by Bellefronte Reinsurance Co. V. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Security Ins. Co. V. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993), was that, regardless of the demand made or the reasonableness of the costs incurred by the cedent, the reinsurer’s obligation to their cedent would always be capped by the policy limit to which the parties agreed.
However, everything changed on December 28, 2021. In holding that the policy limits of a reinsurance policy are not inclusive of defense costs, meaning a reinsurer may be required to reimburse its cedent beyond the limits of the policy, the Second Circuit reasoned that the certificates of reinsurance did not specifically provide that the terms of the reinsurance policy were to differ from the terms of the policies issued by the cedent itself with respect to defense costs, which routinely allow the payment of costs incurred in the course of providing a defense in excess of the policy limits. The key to this decision, as the Second Circuit notes, is that the reinsurance certificates contained a “follow-form clause,” which essentially incorporates the same terms and conditions that are found in the underlying policies (i.e., the one issued by the cedent to the cedent’s own insured(s)) into the reinsurance contracts.
BARNAS on BAD FAITH
Brian D. Barnas
01/07/22 Barrett v. Zurich American Insurance Company
United States District Court, Western District of New York
Bad Faith Claim Dismissed as Duplicative
On April 1, 2018, Barrett was a passenger in a vehicle being driven by Hossainy. The vehicle was rear-ended by a vehicle driven by Bembry. Barrett claims that she was injured as a result.
Hossainy had an insurance policy with Zurich that provided SUM coverage. Barrett made a SUM claim with Zurich after resolving her claim against Bembry for $100,000. After the claim was not resolved, Barrett commenced a lawsuit against Zurich. The lawsuit included a bad faith cause of action.
Zurich moved to dismiss the bad faith claim. The court noted that New York does not recognize a separate claim for breach of the implied covenant of good faith and fair dealing when a breach of contract based on the same facts is pled. Plaintiff’s claim against Zurich alleged breach of contract but did not contain any separate facts supporting a bad faith claim for extra contractual damages. However, Barrett was given 60 days to file an amended complaint curing the deficiencies in her bad faith cause of action.
LEE’S CONNECTICUT CHRONICLES
Lee S. Siegel
01/18/22 Poce v. O & G Indust., Inc.
Appellate Court of Connecticut
Asbestos Exposure Without Physical Harm Fails to State a Cause of Action
The Appellate Court issued a per curiam affirmance, adopting the trial court's opinion (Judge Noble), that plaintiffs’ claims of asbestos exposure, increased risk of contracting disease, and the costs of medical monitoring do not assert a cognizable cause of action at law. The court held that claims of negligence, premises liability, and recklessness require actual physical injury.
The plaintiffs were mason laborers, employed by Connecticut Mason Contractors, Inc. While working on a project at Wethersfield High School, the plaintiffs were repeatedly exposed to asbestos. The work areas designated by the project manager, O & G, entailed the disturbing of floors, walls, and ceilings which, unbeknownst to the plaintiffs, contained asbestos. O & G had actual and/or constructive knowledge of the dangerous project site conditions and O & G was aware of the repeated exposure by the plaintiffs.
O & G argued that the plaintiffs did not allege an actionable harm, because the plaintiffs failed to allege that they suffer from present injury. Rather, the complaint merely alleged an increased risk of future harm. The court agreed that there was no claim. “For more than 150 years, the law in Connecticut, and elsewhere, has limited tort liability to cases involving physical harm to person or property.” Connecticut tort law does not permit recovery based on asbestos exposure in the absence of any present clinical injury or physical symptom of an asbestos related illness or disease, the court noted.
The court, however, refused to strike the plaintiffs’ claims for negligent infliction of emotional distress, because such causes of action do not require a present bodily injury. The elements of a claim for negligent infliction of emotional distress are well settled. A plaintiff must allege an unreasonable risk of causing the plaintiff emotional distress, the plaintiff's distress was foreseeable, the emotional distress was severe enough that it might result in illness or bodily harm, and, finally, that the defendant's conduct was the cause of the plaintiff's distress. (citing Olson v. Bristol–Burlington Health District, 87 Conn. App. 1, 5, 863 A.2d 748 (2005), cert. granted, 273 Conn. 914, 870 A.2d 1083 (2005)).
[Editor’s Note: Connecticut requires actual physical injury (not emotional or bystander injury) in order to trigger “bodily injury” coverage. See Moore v. Continental Cas. Co., 252 Conn. 405, 746 A.2d 1252 (2000). “Several recent decisions of this court have established that emotional distress, without accompanying physical harm, does not constitute a “bodily injury.” Taylor v. Mucci, 288 Conn. 379, 385–86, 952 A.2d 776, 780 (2008) (citing Moore). According to a recent decision emanating from the Sandy Hook shooting, a claim of negligent infliction of emotional injury does not allege a covered “bodily injury.” See USAA Gen. Indem. Co. v. Sklanka, No. UWYCV196048057S, 2020 WL 3790745, at *4 (Conn. Super. Ct. June 5, 2020) (citing Moore and Taylor, among others). As a result, the claims presented by these workers were not likely to be covered by liability insurance.]
OFF the MARK (featuring Kyle Ruffner)
Brian F. Mark
01/11/22 Siplast, Inc. v. Emps. Mut. Cas. Co.
United States Court of Appeals for the Fifth Circuit
U.S. Court of Appeals Finds Duty to Defend where Underlying Claims Asserted Damage to Property Other than the Insured’s Product.
This insurance coverage dispute arose from an underlying suit against Siplast, Inc. (“Siplast”) by a buyer who purchased a roof membrane system to be installed in a school. A few years after the purchase, school officials observed water damage in the ceiling tiles throughout the premises and, even after attempts by Siplast to repair the damage, the school continued to experience leaks and water damage. After a consultant noted significant issues with the workmanship and materials of the roof, the buyer brought suit against Siplast for a violation of the “Siplast Guarantee” that the roof would remain in a watertight condition for 20 years or Siplast would repair at its own cost.
Siplast submitted a claim to its insurer, Employer’s Mutual Casualty Company (“EMCC”), asserting coverage under its commercial general liability policies. EMCC denied coverage based on policy exclusions. The insurance policy contained two relevant exclusions. The “Your Product/Your Work Exclusion”, which excludes coverage of property damage to the insured’s work arising out of its work, and the “Contractual Liability Exclusion”, which excludes coverage for property damage for which Siplast was obligated to pay damage by reason of assumption of liability in contract or agreement.
The district court granted EMCC’s motion for summary judgment and denied Siplast’s motion for partial summary judgment. Siplast appealed.
If a complaint solely alleges facts and damage to the insured’s own products or to recover the costs to repair the insured’s own work, then the allegation is excluded by the “Your Product/Your Work Exclusion”. However, the underlying complaint alleged damage to property other than Siplast’s roof membrane. The complaint alleged damage to other school property such as water damage in the ceiling tiles throughout the school and additional leaks after the repair work. Therefore, the court held this exclusion did not apply. For similar reasons, the court found the complaint presented an “occurrence” under the policy. The complaint alleged that Siplast’s negligence led to the failure of the roof membrane, which caused damage to both the roof itself and to other parts of the school. The failure of the roof and the damages that followed were not intended by insured and were not the natural and expected result of the insured’s actions.
Lastly, the court held the “Contractual Liability Exclusion” did not apply. The Court noted that the Texas Supreme Court has held that “assumption of liability” means the insured assumed liability for damage that exceeds the liability it would have under general law. The court determined that the “Siplast Guarantee” did not open Siplast up to any additional liability, because even absent the Guarantee the allegations would render Siplast liable to repair the roof. Therefore, the court held EMCC had a duty to defend Siplast. Accordingly, the Court reversed the judgment of the district court.
BUCCI on “B”
Diane L. Bucci
01/05/22 Vitamin Energy, LLC v. Evanston Ins. Co.
Third Circuit Court of Appeals
Is This Trademark Infringement? Is it Covered?
In the underlying matter, International IP Holdings, LLC, and Innovation Ventures, LLC, the owners of 5 Hour Energy liquid shots, filed claims against insured Vitamin Energy in the Eastern District of Michigan, for claims including trademark infringement under the Lanham Act, false designation of origin, false advertising, and trademark dilution. It also invoked claims under Michigan law for trademark infringement, indirect trademark infringement, and unfair competition. Vitamin Energy’s insurer, Evanston Insurance Company, refused to defend Vitamin Energy in the Michigan lawsuit.
5 Hour Energy claimed that Vitamin Energy allegedly advertised that its product contained 100 % of the vitamins necessary to deliver the energy, including 1000 mg of vitamin c. According to 5 Hour Energy, the insured’s product did not contain the vitamins it touted but in advertising, Vitamin Energy allegedly compared its product to 5 Hour Energy engaging in “false and misleading comparative advertising.” This, according to the court, potentially stated a claim for Advertising Injury, which is an injury “arising out of oral or written publication of material that libels or slanders ... a person's or organization's products, goods, or operations or other defamatory or disparaging material, occurring in the course of the Named Insured's Advertisement.”
Evanston also argued that untruthfully advertising its own products did not trigger coverage because Vitamin Energy only promoted its own product as opposed to disparaging 5 Hour Energy’s product. Evanston also argued that the court should focus on the gravamen of the dispute, which it alleged was that Vitamin Energy's slogan promoting “up to 7 HOURS of Energy” amounted to trademark infringement.
According to the court, however, Evanston’s focus on the trademark infringement did not defeat the duty to defend. Evanston’s attempt to focus on only one claim in the underlying complaint would not excuse the duty to defend as there were other potentially covered claims, such as disparagement, which could trigger coverage. According to Evanston, under Michigan law, disparagement would constitute “unfair competition,” which the policy did not cover. The court held that 5 Hour Energy’s complaint potentially triggered coverage for and advertising injury, and that Evanston had a duty to defend.
Evanston argued that certain policy exclusions precluded coverage. Included among the exclusions, was the Intellectual Property Exclusion, which states that the policy precludes coverage for:
[A]ny Claim based upon or arising out of Personal Injury or Advertising Injury arising out of piracy, unfair competition, the infringement of copyright, title, trade dress, slogan, service mark, service name or trademark, trade name, patent, trade secret or other intellectual property right[.]
Evanston argued that under Michigan law, a claim for disparagement would be considered “unfair competition,” which was excluded. The court rejected Evanston’s interpretation of Michigan law, noting that Evanston’s proposition would render disparagement coverage illusory.
Evanston then contended that the policy’s “Incorrect Description” and “Failure to Conform” exclusions barred coverage. However, the court reminded Evanston that the gravamen of the complaint was Vitamin Energy's alleged misrepresentation of the ingredients in 5-hour Energy's products, not Vitamin Energy's own products, that creates the possibility of coverage. Also, the knowledge exclusions did not defeat the duty to defend.
I was unable to locate a link to the decision. Please contact me if you would like a copy.
01/06/22 El Grp., LLC v. Utica Nat’l Ins. Grp.
Mass. App. Ct.
Trademark Infringement Lead to a Claim for Slander
El Group, a self-described investment company, and Frank Clegg, entered into an agreement for Clegg to make products that El Group would market online. Clegg terminated the agreement resulting in a lawsuit by El Group. In response, Clegg filed a number of counterclaims against El Group in 155 paragraphs including that Clegg was a “renowned designer and manufacturer of bespoke leather briefcases, bags and other products.” Clegg alleged the El Group “falsely told third parties that Clegg’s products were the result of a “design team,” rather than having been designed by Clegg alone. El Group allegedly falsely told potential consumers that it designed or contributed to the design of Clegg’s products, and that the backlog of orders for their products was due to “improper actions of the Clegg parties.” Clegg alleged that El Group “impugn[ed] the professional reputation of Frank Clegg as a designer and manufacturer.” The court held that while the complaint did not specifically allege a claim for slander, the allegations were enough to raise the possibility that the complaint alleged a “personal and advertising injury,” as defined by the policies.
RYAN’S CAPITAL ROUNDUP
Ryan P. Maxwell
01/18/22 Legislature Introduces CIDA Chapter Amendments
New York State Legislature
Long Awaited Chapter Amendments To The Comprehensive Insurance Disclosure Act Introduced In Both New York Legislative Houses
On December 31, 2021, the new “Comprehensive Insurance Disclosure Act” (“CIDA”) set New York’s defense bar and insurance industry ablaze, after it was signed into law by New York Governor, Kathy Hochul. (Chapter 832 of Laws of 2021). The passage of CIDA resulted in significant amendments to CPLR §3101(f) and the addition of a new CPLR §3122-b. In a previous column, I wrote about CIDA extensively as the law exists today (here), and we have also produced a helpful summary of the necessary disclosures (here).
Governor Hochul signed the bill after an agreement was reached to amend the law following significant pushback on its passage. Earlier this week, those long-awaited chapter amendments were introduced, providing some concrete insight into what the final version of CIDA may look like in the near future.
The language from these proposed chapter amendments is available here. However, now that we have had an opportunity to digest them, here are our notes for you:
Dual certifications would still be required from both defense counsel and the insured-defendant.
The disclosure requirement would only apply to lawsuits files after 12/31/21 effective date, and not retroactively to pending cases.
Disclosures of policies or declarations pages would be required within 90 days after answer is filed, rather than 60 days. Declarations pages may suffice if agreed to by plaintiff, but plaintiff would have option to later request the policies.
Disclosure would no longer require the application to be included.
Disclosure of contact information for person adjusting the claim would still be required, but only name and email address.
TPAs would no longer be required to disclose the name of the person to whom they are reporting.
Disclosure would require provision of the total limits available under the policy after accounting for erosion/offsets.
The amendments eliminate disclosure of lawsuits that may erode the policy and attorney contact information from such lawsuits.
The amendments would eliminate attorney fee disclosure that may have eroded the policy limits.
Instead of a broad “ongoing obligation” to ensure disclosures remain accurate and complete, defendants must make reasonable efforts at the time of the filing of the note of issue, entering into negotiations, or mediation to ensure that information is accurate and complete.
PIP lawsuits would be expressly excluded.
We are closely monitoring the progress of these chapter amendments and will keep everyone apprised of new developments.
CJ on CVA and USDC(NY)
Charles J. Englert III
On paternity leave.
Patricia A. Rauh
See you in two weeks!
STORM’S SIU EXAMEN
Scott D. Storm
01/06/22 Bobbi-Jo Isenberg v. State Farm Fire and Casualty Co.
United States District Court, W.D. Pennsylvania
In 1st-Party Property Case Involving Issues of Rescission and “Residence Premises”, Plaintiff Ordered to Produce her Driver’s License, Utility Bills, and Income Tax Returns, as Well as Various Specified Records Relevant to her Alleged Damages
In litigation arising from a homeowner's fire claim for damages to the premises and personal property, where State Farm had rescinded the policy and denied the plaintiff's claim, State Farm’s motion to compel complete discovery responses to its interrogatories and request for production of documents pursuant to Fed. R. Civ. P. 37 and LCvR 37.1 and LCvR 37.2 was granted in part.
Pursuant to Fed. R. Civ. P. 26(b)(1), parties may obtain discovery regarding:
[A]ny nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable.
The scope of discovery under the Federal Rules is broad, but not unlimited. Rule 26(b)(1) imposes "two content-based limitations upon the scope of discovery: privilege and relevance." In addition, Rule 26(b)(2)(C) provides that—on motion or its own initiative—the court must limit the frequency or extent of discovery if it determines that "the discovery sought is unreasonably cumulative or duplicative or can be obtained from some other source that is more convenient, less burdensome, or less expensive," or that "the proposed discovery is outside the scope permitted by Rule 26(b)(1)." Fed. R. Civ. P. 26(b)(2)(C).
Pursuant to Rule 37, a party who has received incomplete answers to discovery requests may move for an order compelling discovery. Fed. R. Civ. P. 37(a)(1), (4). A party moving to compel discovery bears the initial burden of establishing the relevance of the requested information. The burden then shifts to the party resisting disclosure to show that "the requested discovery (1) does not come within the broad scope of relevance as defined under Fed. R. Civ. P. 26(b)(1), or (2) is of such marginal relevance that the potential harm occasioned by discovery would outweigh the ordinary presumption in favor of broad disclosure."
The Court found the plaintiff to be largely non-compliant granting State Farm’s motion. One of State Farm's reasons for the denial of coverage is that the premises that burned "was not owner occupied as a residence premises." Thus, documents relating to these terms are discoverable. As such, Plaintiff must produce the requested driver's license and utility bills. In regard to her tax returns she also must produce only the first page of her local, state, and federal income tax returns with her social security number and any financial numbers redacted for 2017, 2018, 2019, and 2020, unless Plaintiff wishes to produce the entire returns for each of those years.
Plaintiff also had to disclose all records, bills, proof of payment, credit card statements, photographs, invoices…pertaining to the plaintiff’s alleged damages, as well as documents pertaining to renovations of the property prior to the loss and repair estimates for the loss, in her possession,
Plaintiff also must specifically identify which documents she has previously produced in response to State Farm’s requests that she deems responsive to these specific requests.
Finally, Plaintiff shall produce a list of all personal property items that were lost and/or damaged in the fire.
01/03/22 Kemper Independence Ins. Co. v. Gutterman, MD, PLLC, et al
Supreme Court, New York County
PIP Insurer May Disclaim Based Upon Facts that Suggest it Maintains a Founded Belief that the Alleged Injury Does Not Arise Out of the Insured Incident Without Establishing by Clear and Convincing Evidence that the Subject Collision was the Product of Fraud
Defendant Grayton exited a Kemper insured vehicle, which struck him when it was struck in the rear. Grayton allegedly sustained injuries and sought treatment from the defendant medical providers. Kemper seeks a declaratory judgment that it is not obligated to pay no-fault claims arising out of the accident based upon Grayton's testimony at his examination under oath, leading to a founded belief that Grayton's alleged injuries did not arise from the subject accident or that he made material misrepresentations concerning the accident. Kemper now moves for a default judgment and defendants Averroes Physical Therapy, PC and NYEEQASC, LLC move for leave to submit a late answer.
In support of its motion, Kemper submits the affidavit of the No-Fault claim representative, the police report, photographs, and the transcript of Grayton's EUO, which establish that the circumstances surrounding the collision raised a strong possibility that the alleged injuries and any subsequent treatment by the medical provider defendants were not causally related to the accident. Kemper alleges that Grayton gave suspect answers at his EUO. Kemper maintains a founded belief that the alleged injuries and any subsequent No-Fault treatment were not causally related to the collision and/or did not arise from an insured event.
An insurer may disclaim coverage based upon "the fact or founded belief that the alleged injury does not arise out of an insured incident." Central Gen. Hosp. v. Chubb Group of Ins. Co., 90 N.Y.2d 195, 199 (1997). In meeting its burden, an insurer is "not required to establish that the subject collision was the product of fraud, which would require proof of all elements of fraud, including scienter, by clear and convincing evidence." V.S. Med. Services, P.C. v. Allstate Ins. Co., 25 Misc. 3d 39, 39 (N.Y. App. Term, 2d Dep't 2009). Rather, the insurer must put forth facts that suggest it maintains a founded belief that the injuries or treatments are unrelated to the collision. Plaintiff has done so here.
01/05/22 Leon Banilivi Rugs, Inc. v. Tokio Marine America Ins. Co., et al
United States District Court, S.D. New York
Quick Refresher on Proving Liability of Insurance Agents
Plaintiff requested leave to amend the complaint to add a fourth cause of action against the agent for breach of fiduciary duty which was denied as futile.
Under New York law, insurance brokers have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage. Where a special relationship develops between the broker and client, however, the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage. A special relationship may be established in one of three ways:
(1) the agent receives compensation for consultation apart from payment of the premiums,
(2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent, or
(3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.
The allegations in the proposed amended complaint in this case, namely that Plaintiff contacted Defendant for an insurance policy to cover rugs held in warehouse and retail locations, are insufficient to allege a special relationship.
12/28/21 Jucknik v. Allstate Vehicle and Property Ins. Co.
United States District Court, E.D. Pennsylvania
1st-Party Property Claim Unambiguously Excluded from Coverage Under the Water Backup Exclusion
The plaintiff’s homeowner’s policy insures against "sudden and accidental direct physical loss" and includes the following exclusions:
A. [W]e do not cover any loss which consists of, is caused by, or would not have occurred but for, one or more of the following excluded events, perils, or conditions. Such loss is excluded regardless of a) the cause or source of the excluded event, peril, or condition; b) any other causes contributing concurrently or in any sequence with the excluded event, peril, or condition to produce the loss; or c) whether the excluded event, peril or condition involves isolated or widespread damage, arises from natural, man-made or other forces, or arises as a result of any combination of these forces.
. . .
2. Water or any other substance that backs up through sewers or drains.
. . .
D. [W]e do not cover any loss consisting of or caused by one or more of the following excluded events, perils or conditions. Such loss is excluded regardless of whether the excluded event, peril or condition involves isolated or widespread damage, arises from natural, man-made or other forces, or arises as a result of any combination of these forces.
. . .
5. a) Wear and tear, aging, marring, scratching, deterioration, inherent vice, or latent defect;
. . .
d) Rust or other corrosion;
. . .
If loss to covered property is caused by water or steam not otherwise excluded, we will cover the cost of tearing out and replacing any part of your dwelling necessary to repair the system or appliance. This does not include damage to the defective system or appliance from which the water or steam escaped.
Jucknik discovered that the entire basement floor of his home was covered with sewage and water which escaped from the plumbing system through two floor drains in the basement. Allstate concluded that the losses were caused by "wear and tear" to the plumbing system and denied coverage for the cost of replacing the plumbing system.
Under Pennsylvania law, the interpretation of a contract of insurance is a matter of law for the courts to decide. The Court's objective is to discern the intent of the parties from the language of the policy. To that end, we read the policy as a whole and construe it according to the plain meaning of its terms. The policy must be construed in such a manner as to give effect to all of its provisions. Clear contractual terms that are capable of one reasonable interpretation must be given effect without reference to matters outside the contract. On the other hand, contractual language is ambiguous if it is reasonably susceptible of different constructions and capable of being understood in more than one sense. Ambiguous language must be construed against the insurer.
An insured bears the initial burden to make a prima facie showing that a claim falls within the policy's grant of coverage, but if the insured meets that burden, the insurer then bears the burden of demonstrating that a policy excludes the insurer from providing coverage.
Allstate argues that coverage is precluded by the Policy's exclusion for "[w]ater or any other substance that backs up through sewers or drains" (the "Water Backup Exclusion"). Even assuming, arguendo, that Jucknik has shown that his claim falls within the Policy's grant of coverage, the Water Backup Exclusion is unambiguous and applies here. Jucknik contends that the Water Backup Exclusion is ambiguous. The Policy does not define "back up," "sewers" or "drains." But that does not make the language ambiguous. A policy term is not ambiguous merely because it is not defined in the policy. Rather, the Court interprets those terms according to their plain meaning.
The undisputed facts here fall squarely within the scope of the Water Backup Exclusion. It is undisputed that backed-up water damaged Jucknik's home. That water escaped from two floor drains in Jucknik's basement. Water that backed up through a drain caused Jucknik's property damage, so the unambiguous Water Backup Exclusion applies and bars further coverage.
The Water Backup Exclusion also does not conflict with other terms of the Policy, as Jucknik alleges. Jucknik argues that he is entitled to coverage because the Policy "cover[s] the cost of tearing out and replacing" his plumbing system. However, Allstate only covers those costs "[i]f loss to covered property is caused by water or steam not otherwise excluded." As explained above, the loss to Jucknik's property was caused by the sort of water described in the Water Backup Exclusion. The losses here were caused by water otherwise excluded, so Allstate did not breach its obligations under the Policy when it declined to cover the plumbing system replacement costs.
12/03/21 Hankook Tire America Corp. v. Samsung Fire & Marine Ins. Co., Ltd.
Supreme Court, New York County
Insurer Denied Summary Judgment as it Failed to Prove that All Risk Coverage was Precluded in Alleging the Loss was Not Caused by an “External Cause” or that an “Infidelity Warranty” was Applicable; but was Granted Partial Summary Judgment Dismissing Causes of Action for Breach of the Implied Covenant of Good Faith and Fair Dealing, Bad Faith Claim Handling and Attorneys’ Fees
This is an action to recover damages for breach of an insurance policy and breach of the implied covenant of good faith and fair dealing. All parties move for summary judgment.
This insurance dispute arises from the alleged theft of 5,353 truck and bus radial tires. Plaintiff stores the tires at warehouses including a facility consisting of two warehouses located in Rancho Cucamonga, California (the Warehouse Facility), until they are loaded onto trucks for distribution. Plaintiff utilized non-party Kann Enterprises, Inc. to unload the tires from containers, place them on storage racks, and load them onto delivery trucks for distribution.
Around February 26, 2015, plaintiff learned of an attempted theft of 46 tires from the Warehouse Facility. A security guard observed Kann employees perpetrating the theft. The attempted theft prompted a full inventory check and determined that 5,353 tires were missing since the last full inventory on December 14, 2014. After confirming that none of its employees were involved in the disappearance, plaintiff concluded that the 5,353 tires were stolen by Kann employees. Plaintiff based this conclusion on the fact that Kann employees attempted to steal the 46 tires in February 2015 and the fact that Kann employees handled all of the loading and unloading of tires at the Warehouse Facility.
On or about March 17, 2015, plaintiff submitted a claim in the amount of $1.35 million for the missing tires under a Marine Open Cargo policy issued by defendants, covering the period from January 1, 2015, to January 1, 2016. The Policy is a renewal. The Policies cover "[a]ll lawful goods and or merchandise, incidental to" plaintiff's business, including tires, and contain the following "All Risk Clause":
"Unless otherwise specified below, this policy insures against physical loss or damage from any external cause, except those risks that may be excluded by [the] warranties or exclusions specified in this policy, unless specifically covered elsewhere herein by endorsement, irrespective of percentage".
The Policies also include the following "Infidelity Warranty":
"Warranted free of claims for loss or damage caused by or resulting from misappropriation, secretion, conversion, infidelity, theft or any dishonest act done by or at the instigation of the Assured, the consignee, shipper, supplier or other party at interest in the insured transit or their employees of agents (carriers for hire excepted)"
On November 13, 2015, defendants issued a letter denying plaintiff's claim asserting that the claim was not within the scope of the All-Risk Clause because there was no proof establishing that the loss was the result of an "external cause." In this regard, the letter explained that defendant's investigation revealed that to the extent a loss occurred, "which is not clear given glaring deficiencies uncovered in plaintiff's internal systems, it was very likely the result of internal causes". The letter noted that other than the attempted theft of the 46 tires in February 2015, there was no evidence that the tires were stolen and that given the number of tires unaccounted for, it was not feasible that so many tires could have been stolen by an outside source during such a short period of time.
The letter further stated that the evidence uncovered during defendants' investigation revealed "systemic internal bookkeeping deficiencies and a lack of appropriate controls" and therefore, "to the extent that theft of tires actually occurred, it was likely by employees of plaintiff and/or Kann".
Defendants contended that coverage was also precluded by the Infidelity Warranty inasmuch as it was apparent "based on the number of tires involved," "the number of trailers that would be necessary to move the tires, and the difficulty involved in transporting such a large quantity of tires in such a short amount of time," "that, to the extent any of the alleged lost tires were indeed stolen, such theft could have only been carried out by employees of plaintiff or a party at interest in the insured transit, such as Kann...who had access to the tires over an extended period of time".
Additionally, defendants asserted that plaintiff did not establish that the tires were actually lost, as opposed to being in another one of plaintiff's warehouses or in the possession of a customer. The letter asserted that defendants' investigation revealed that plaintiff had "significant bookkeeping issues which precluded an accurate representation of the inventory on hand".
As a final basis for denying coverage, defendants asserted that plaintiff offered no proof that the alleged loss occurred during the policy period. The letter noted that "the number of tires involved, the number of trailers required to move the tires, and the difficulty involved in the movement, all indicate that whatever happened at the Warehouse took place over an extended period of time. However, plaintiff has not provided any evidence that the entirety of the claimed loss occurred between January 1, 2015, and March 17, 2015".
Plaintiff thereafter commenced this action to recover damages for breach of contract, alleging that the disappearance of the tires was a covered loss. Plaintiff claims that defendants' denial of coverage was unreasonable and issued in bad faith and that they engaged in dilatory tactics which resulted in an eight-month delay before issuing a final coverage determination. In the complaint, plaintiff also seeks a judgment declaring that defendants are obligated to provide coverage for the loss of the tires, as well as consequential and punitive damages for breach of the implied covenant of good faith and fair dealing and the alleged bad faith handling of its claim.
Here, the parties agree that the policies at issue are "all-risk" policies. There is also no dispute that the policies cover tires, and that plaintiff had an insurable interest in the tires. The dispute lies in whether plaintiff demonstrated a loss of the tires. In this regard, defendants contend that plaintiff cannot meet this burden because the tires were not actually missing or stolen from the Warehouse Facility, but rather inaccurately or untimely entered into plaintiff's inventory system, thereby giving the erroneous appearance that they were stolen. Therefore, defendants contend, plaintiff is not entitled to summary judgment on the complaint, and defendants are entitled to summary judgment dismissing the complaint.
Contrary to defendants' contention, plaintiff demonstrated that a loss occurred sometime between December 2014 and March 2015, when one of the policies was in effect. Plaintiff proffers a comparison between a physical inventory conducted on March 14, 2015 and its SAP inventory management program data. In support of its motion, it also submits a report prepared by forensic accountants Matson Driscoll & Damico LLP (MDD), as well as the deposition testimony of Hannah McCannell, the individual who performed the underlying forensic analysis. McCannell testified that MDD was retained to investigate the claim and concludes that the accounting documentation provided by plaintiff validated 90% of the claim and substantiated the loss of 4,807 tires, with a value of $1,191,981.00.
Defendants contend that it is not plausible for someone to steal so many tires in such a short period of time. Defendants also argue that if such a large number of tires were stolen, the theft would have been captured by the surveillance cameras or detected by the security personnel monitoring the Warehouse Facility 24 hours a day. Yet, plaintiff does not offer any surveillance video or eyewitness testimony to support its assertion that the tires were stolen. This, defendants assert, demonstrates that the tires were not stolen.
However, it is not plaintiff's burden to prove that the tires were stolen. The insured need not explain the precise cause of the loss. The very purpose of an all risk policy is to protect the insured in cases where it is difficult to explain the disappearance of the property.
Furthermore, the policies at issue do not include a "mysterious disappearance" exclusion. It is generally held...that absent a policy exclusion for mysterious disappearance, where goods have mysteriously disappeared, all that an all risk insured need show is that loss occurred or furnish the insurer with such explanation as it has in good faith received concerning the cause of loss. If defendants wished to exclude mysterious losses from coverage, they could have done so by incorporating such an exclusion into the policies. "Carriers which do not wish to insure against this broad risk customarily incorporate an exclusionary clause in their policies exempting from coverage unexplained loss, mysterious disappearance or loss or shortage disclosed on taking inventory"; "Absent an exclusion for mysterious disappearance, all risk policies cover the mysterious disappearance or fortuitous loss of the goods insured". Accordingly, the policies cover an unexplained or mysterious loss of tires.
It is noted that while the Policies insure "against physical loss or damage from any external cause," the addition of this phrase to an "all risks clause constitutes no real limitation on the scope of the clause. If the loss did not result from inherent defect, ordinary wear and tear, or intentional misconduct its cause was necessarily external. Where the loss is fortuitous, it is necessarily produced by an external cause. Here, the disappearance of the tires did not result from an inherent defect or ordinary wear and tear, and there is no indication that the tires were missing as a result of plaintiff's own intentional misconduct. Indeed, on these motions, defendants no longer invoke the Infidelity Warranty on the theory that the tires were stolen by plaintiff's employees. Rather, defendants' argument is aimed at the integrity of plaintiff's inventory records and counts.
Defendants assert that plaintiff's physical inventory count is unreliable because there is evidence, including commentary in the MDD report, that due to overcrowding at the facility, inventory sometimes remained on the loading dock for weeks before being transferred to one of the warehouses or a trailer. Defendants contend that plaintiff's count is unreliable because it is not clear whether such tires were counted during the physical inventories. However, plaintiff established through Maggio's affidavits, that such tires were not recorded into the SAP system and were not part of any physical counts. Since these tires were not entered into the SAP system, it was appropriate for such tires to be excluded from the physical inventory taken for the purpose of comparison with the SAP data. In the event they were included in the physical inventory, this would have undercounted the number of tires missing from the Warehouse Facility. There is also no evidence supporting defendants' contention that the December 2014 physical inventory count may have included the tires not yet entered the SAP system or contradicting Maggio's statement that such tires were not part of any physical counts.
The expert affidavit proffered by defendants, even if properly submitted, does not raise an issue of fact. Nor is it sufficient to satisfy defendants' prima facie burden. While the expert references several documents, his conclusions are purely speculative. For example, the expert concludes that "[i]t appears unlikely that over 59 tires per day were removed for over two months straight from the property without [plaintiff's] security providers' noticing" and that "[i]t is possible that the 5,353 tires were never missing". These speculative assertions are insufficient to raise an issue of fact. Moreover, his opinion is largely premised on concerns over the delay in entering certain inventory into the SAP system after it arrives at the Warehouse Facility, which as previously noted, is insignificant for the purpose of evaluating the data relied upon by plaintiff in establishing the disappearance of the tires.
Defendants further contend that plaintiff has proffered no explanation for how 5,553 tires could have illicitly disappeared from the Warehouse Facility and that the only plausible explanation is that the tires went missing, if at all, over an extended period. Therefore, defendants assert, plaintiff has not demonstrated that the loss occurred sometime within the periods covered by the Policies. This contention lacks merit. One of the Policies covered the period from October 11, 2013 to January 1, 2015, and the renewal policy covered the period from January 1, 2015 through January 1, 2016. MDD reconciled plaintiff's physical inventory as of December 13, 2014 with the SAP quantity totals as of that same date, indicating that the loss occurred between December 13, 2014 and March 14, 2015.
Finally, defendants argue for the first time in their reply papers that the policy covering the period from October 11, 2013, to January 1, 2015 is unavailable to indemnify plaintiff for the loss because it contains a one-year contractual suit limitation clause. This clause provides that as a condition of the policy, no action for the recovery of any claim is sustainable unless it is commenced within one year of the calendar date of the physical loss out of which the claim arose. Defendants assert that since plaintiff commenced this action on November 30, 2015, any loss that occurred prior to November 30, 2014 is "time barred" under this clause. However, as just noted, plaintiff demonstrated that the loss occurred after December 13, 2014.
Thus, plaintiff is entitled to summary judgment on its cause of action seeking damages for breach of contract insofar as plaintiff sought coverage under the Policies for the loss of 4,807 tires, representing a loss of $1,191,981.00.
Plaintiff alleges that defendants breached the covenant of good faith and fair dealing by engaging in dilatory conduct and in failing to issue a final coverage determination for eight months. Based on the same factual allegations, plaintiff alleges that defendants acted in bad faith in handling and denying its claim. In addition, plaintiff alleges that defendants' denial of coverage rested on speculative and unreasonable grounds which were refuted by information already provided to them.
On this motion, plaintiff addresses these two causes of action together, asserting that the evidence in the record demonstrates that within four months of receiving the claim, defendants had sufficient information to issue a coverage decision in its favor and violated their own internal claim handling guidelines and policies. Plaintiff further contends that the record evinces that defendants disregarded reports and coverage recommendations made by their own outside adjuster and forensic accountant and continued to make unreasonable and burdensome requests for documents even after these third-party professionals recommended coverage. Plaintiff maintains that the record also shows that defendants failed to engage in good faith settlement negotiations and acted in bad faith during the instant litigation.
As defendants correctly assert, "[t]here is no independent cause of action for bad faith breach of insurance contract arising from an insurer's failure to perform its obligations under an insurance contract"; and a cause of action for the breach of the implied covenant of good faith and fair dealing should be dismissed as duplicative when a breach of contract claim, based on the same facts, is also pled. However, plaintiff contends that the allegations in the complaint go beyond defendants' alleged failure to fulfill their contractual obligations under the Policies and asserts, relying on Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y. (10 NY3d 187 ) and Panasia Estates, Inc. v Hudson Ins. Co. (10 NY3d 200 ), that an insured is entitled to foreseeable consequential damages resulting from the insurer's bad faith handling of a claim. Plaintiff contends therefore, that the court should award it its legal fees as a reasonably foreseeable consequence of defendants' conduct.
In Bi-Economy and Panasia, the Court of Appeals held that "consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting". However, "[n]othing in Bi-Economy or Panasia alters the common-law rule that, absent a contractual or policy provision permitting the recovery of an attorney's fee, ‘[a]n insured may not recover the expenses incurred in bringing an affirmative action against an insurer to settle its rights under the policy'. Since plaintiff cites no provision in the Policies permitting the recovery of attorneys’ fees, plaintiff is not entitled to recover the expenses incurred in this litigation. Thus, the causes of action for breach of the covenant of good faith and fair dealing and for the bad faith handling of plaintiff's insurance claim are dismissed.
01/12/22 McCullough v. MetLife Auto & Home
United States District Court, M.D. Pennsylvania
Insurer Granted Default Judgment on its Counterclaim Alleging the Insured Committed Fraud and Intentionally set her House on Fire
McCullough filed a complaint in Pennsylvania state court against MetLife seeking to force it to pay Plaintiff for a fire claim to the McCullough's home. MetLife removed this action to federal court.
MetLife filed an answer to complaint, along with a counterclaim against Plaintiff for insurance fraud. Plaintiff failed to respond to the counterclaim. MetLife moved for entry of default against Plaintiff, and default was subsequently entered by the Clerk of Court. MetLife then filed this motion for default judgment. Plaintiff has not responded. The motion is granted.
Generally, the entry of a default judgment is disfavored, and a court is required to exercise sound judicial discretion in deciding whether to enter default judgment. This element of discretion makes it clear that the party making the request is not entitled to a default judgment as of right, even when defendant is technically in default and that fact has been noted under Rule 55(a).
"Three factors control whether a default judgment should be granted: (1) prejudice to the plaintiff if default is denied, (2) whether the defendant appears to have a litigable defense, and (3) whether defendant's delay is due to culpable conduct." "But when a defendant has failed to appear or respond in any fashion to the complaint, this analysis is necessarily one-sided; entry of default judgment is typically appropriate in such circumstances at least until the defendant comes forward with a motion to set aside the default judgment under Rule 55(c)." In cases where the defendants fail to appear, courts may enter default judgment "based solely on the fact that the default has occurred."
A consideration of those factors favors a grant of default judgment here. First, MetLife would be prejudiced by its "current inability to proceed with [its] action due to [Plaintiff's] failure to defend." Plaintiff's decision to not respond to the counterclaim would otherwise prevent MetLife from recovering any damages for its claim. Similarly, the second factor weighs in favor of default judgment.
"[Plaintiff] has not responded to the allegations and, thereby, has failed to assert a defense." Finally, there does not appear to be any excuse for Plaintiff's failure to respond to MetLife's counterclaim. Plaintiff initiated this action through counsel and was served with MetLife's answer and counterclaim. Having received that counterclaim, Plaintiff has yet to respond. Because Plaintiff has offered no explanation for her failure to respond, the Court finds that Plaintiff is culpable. Therefore, the Court finds that default judgment is appropriate given the circumstances.
However, a finding that default judgment is warranted "is not the end of the inquiry." The Court must further consider whether the "unchallenged facts constitute a legitimate cause of action." Although defaulting parties do not concede conclusions of law, "the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true." MetLife has filed a single counterclaim asserting a violation of Pennsylvania state law for insurance fraud. The Court will therefore consider whether the allegations in the counterclaim, taken as true, adequately state a claim against Plaintiff.
The facts alleged in the amended complaint, which the Court must accept as true for the purposes of determining whether MetLife has stated a claim, are as follows.
Plaintiff purchased an insurance policy with MetLife, policy number XXXXXXXXXX, for a house located at 616 Rohrsburg Road, Orangeville, Pennsylvania (the "Property"). On or about February 6, 2019, a foreclosure judgment was entered against Plaintiff, and she was served with a notice of sheriff's sale; on or about February 17, 2019, a fire occurred at the Property. "The fire was not sudden and accidental" but was, instead, "intentionally set with two distinct points of origin."
Prior to the fire, Plaintiff removed important documents from the Property and placed them in her vehicle. After the fire, "newly purchased gas cans were discovered at the home . . . with some cans having their caps removed and residual gasoline in the cans." Plaintiff thereafter submitted a claim to Defendant for the alleged loss that resulted from the fire. In doing so, Plaintiff "knowingly presented false, incomplete and/or misleading information concerning the claim and the cause of the fire" and "committed fraud during the investigation." Those facts were material to Plaintiff's insurance claim.
With regard to whether those facts set forth a claim for insurance fraud, Pennsylvania law provides that an individual commits insurance fraud if she "[k]nowingly and with the intent to defraud any insurer or self-insured, presents, or causes to be presented to any insurer or self-insured any statement forming a part of, or in support of, a claim that contains any false, incomplete or misleading information concerning any fact or thing material to the claim." Although this is set forth in a criminal statute, that statute further provides that "[a]n insurer damaged as a result of a violation of this section may sue…to recover compensatory damages, which may include reasonable investigation expenses, costs of suit and attorney fees."
Here, the allegations sufficiently state a cause of action for insurance fraud. The allegations establish that Plaintiff knowingly made false statements on her insurance claim regarding the cause of the fire that destroyed the Property. Those statements were made with the intent to defraud MetLife and obtain an insurance payout to which Plaintiff was not entitled. These statements were also undoubtedly material, as they "would influence the decision of the issuing insurer to" pay out the insurance policy. Because the facts sufficiently demonstrate that Plaintiff knowingly and with the intent to defraud submitted material, false information to MetLife regarding Plaintiff's insurance claim, MetLife has adequately stated a claim for insurance fraud, and is entitled to default judgment.
Because MetLife has adequately stated a claim against Plaintiff, the only remaining consideration is the amount of damages to which MetLife is entitled. However, based on the available information, the Court cannot accurately assess damages. The Court will therefore defer any ruling on damages pending further briefing of the issue.
Nicholas J. Heintzman
01/09/22 Books for Less, LLC v. United Natl. Ins. Co.
Supreme Court, New York County
Insured Seeking Excess Policy Coverage for Inventory Loss Suffered During Storm Fails to Establish that the “Restoration Period” for its Business After the Storm Occurred was at least Eighteen Months Long
Plaintiff Books for Less, LLC (“Books”) is a business which purchases school textbooks in bulk and resells them to wholesalers. The present coverage dispute between Books and its insurer, defendant United National Insurance Company (“United”), arose out of a storm that occurred at Books’ warehouse on August 18, 2011. The storm destroyed Books’ inventory. The relevant United policy which covered the loss was a “Following Form Property Excess of Loss” policy. This excess policy follows the form of United’s primary policy and therefore covers “the actual loss of Business Income” Books sustained due to “necessary suspension of” Books’ operations during the “period of restoration.”
In an early judicial action, the First Department issued a declaratory judgment that United’s policy covered the loss from the storm above the $500,000 limit of the primary policy, if Books provided proof of the “actual business income loss suffered” (emphasis added). Thus, a bench trial was held to determine whether there was any proof of the actual business income loss above $5000,000 under the terms of the policy.
Since United’s policy provided business interruption coverage on an excess basis during the period of restoration, the parties disputed how long the period of restoration lasted. Books claimed 18 months, in which case the damages would exceed $500,000 such that United’s excess policy level would be reached. United claimed the restoration period was 6 months.
The Court found Books’ argument that the restoration period was 18 months unpersuasive because: 1) Books lacked a precise estimate of how many textbooks it had when the storm occurred; 2) Books failed to preserve evidence relating to “open undelivered orders” for the month in which the storm occurred; 3) Books did not explain why the storm prevented it from purchasing new books to cover the upcoming Fall school semester; and 4) Books’ expert witness presented no persuasive evidence to establish that the restoration period was 18 months.
Thus, the Court held that Books had no excess coverage under the United policy.
Katherine A. Fleming
12/22/21 K.G. by Next Friend Ruch v. Smith
Indiana Supreme Court
Indiana High Court Expands Bystander Rule for Sexual Abuse Cases
The Indiana Supreme Court established the bystander rule for negligent infliction of emotional distress in 2000. Groves v. Taylor, 729 N.E.2d 569 (Ind. 2000). This rule expanded on the previous “Direct Impact” and “Modified-Impact” rules by permitting a bystander to recover for emotional trauma even in the absence of a direct impact. In Groves, the plaintiff brought a wrongful death claim and alleged emotional distress from witnessing her brother’s body roll off the highway after being struck by a car. While the court acknowledged the girl had no direct physical impact, the court held there are circumstances in which a plaintiff, while having sustained no direct physical impact, is sufficiently directly involved in a traumatizing event to raise a legitimate claim. Id. at 571.
Under the bystander rule, the bystander must show (1) serious injury or death of the victim; (2) a close familial relationship between the victim and the plaintiff; and (3) direct observation of the incident or its immediate gruesome aftermath, rather than learning of it by indirect means. Courts applying the bystander rule have interpreted the third prong to contain a “temporal” and “circumstantial” proximity requirement. Smith v. Toney, 862 N.E.2d 656 (Ind. 2007). This means the plaintiff must have witnessed the injury at or immediately following the incident, and if the plaintiff arrives immediately after the incident, the scene must be essentially as it was at the time of the incident and the victim must be in essentially the same condition.
In K.G. by Next Friend Ruch v. Smith, however, the Indiana Supreme Court carved out an exception to the proximity requirement of the bystander rule, holding that in some cases of child sexual abuse, a parent or guardian need not show proximity to the tortious act to raise an emotional distress claim. 2021 WL 6063878 (Ind. 2021). In K.G., a mother brought suit against her daughter’s school after learning her daughter, who was receiving instructional and special-needs services, was sexually abused by one of the school’s assistants. Id. at *1. The trial court dismissed all the mother’s claims, holding she failed to satisfy either the modified-impact rule or the bystander rule for emotional distress damages, and the Court of Appeals affirmed. Id. at *2. The Supreme Court of Indiana disagreed, holding that the lack of proximity to the tortious act in no way reduces a parent’s shock of learning of the traumatic event. Id. at *5. The emotional trauma experienced, even indirectly, is sufficiently compelling as to warrant compensation. Id. Therefore, the carve out rule established by the court provided that “when a caretaker assumes responsibility for a child, and when that caretaker owes a duty of care to the child’s parent or guardian, a claim against the caretaker for the negligent infliction of motion distress may proceed when the parent or guardian later discovers, with irrefutable certainty, that the caretaker sexually abused that child and when that abuse severely impacted that parent or guardian’s emotional health”.
The court acknowledged that this must be read as a narrow exception to the bystander rule in order to provide sufficient protection against spurious claims and open-ended liability. The rule still requires both a serious injury to the victim and a close familial relationship between the victim and the plaintiff. In addition, the rule limits the class of plaintiffs to parents and guardians with a close relationship with their child, which ensures a greater degree of direct involvement, and limits the class of potential tortfeasors to those with a duty of care to the child’s parent or guardian.
Editor’s note: Special thanks to our Kyle A. Ruffner for the summary email@example.com.
NORTH of the BORDER
11/18/21 Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada, 2021 SCC 47
Supreme Court of Canada, on Appeal from the Ontario Court of Appeal
A Liability Insurer’s Duty to Investigate is an Obligation Owed to the Insured and does not Require the Insurer to Investigate all Possible Policy Breaches. A Liability Insurer that Undertakes a Defence and Subsequently Learns of a Policy Violation will not be Estopped from Denying Coverage if the Insurer did not have Knowledge of the Violation when it Undertook the Defence
In 2006, RSA issued a policy insuring Steven Devecseri’s motorcycle which offered third party liability limits of $1 million. Devecseri would place himself in violation of that policy if he rode with any alcohol in his bloodstream.
In May of 2006, Devecseri entered the opposing lane of a two-way highway in Ontario and collided head-on with a car driven by Caton. Devecseri was pronounced dead at the scene. Bradfield was riding his own motorcycle behind Devecseri and crashed. Bradfield did not collide with Caton’s vehicle.
An examiner at RSA appointed a third-party adjuster to investigate the collision. The adjuster was tasked with obtaining the police report and a coroner’s report. The adjuster obtained the police report and interviewed witnesses. The adjuster did not order a coroner’s report explaining in his report to the examiner that it is customary for the Accident Benefit handler to order those reports and it may already be in hand. No further action was taken by RSA or the adjuster to obtain the coroner’s report.
Caton and Bradfield each sued Devecseri’s Estate in separate actions. RSA appointed counsel to defend Devecseri’s Estate without issuing a reservation of rights. At common discoveries for those actions, counsel for the parties learned that leading up to the collision, Devecseri was at a restaurant/bar and had been drinking. Within a month of the discoveries, RSA took an off-coverage position. Counsel for the Estate withdrew as counsel of record and RSA was added to both actions as a statutory third party. That meant that upon proof of the policy violation, RSA’s maximum indemnity obligation would drop from the policy limit of $1 million to the statutory minimum limit of $200,000.
Caton’s counsel ordered the coroner’s report which he sent to opposing counsel on the file. The coroner’s report, which was dated in August of 2006, showed that Devecseri had alcohol in his bloodstream of the time of the collision and therefore was in violation of the RSA policy. This report was available at the time RSA undertook the defence of Devecseri’s Estate but RSA did not have this report at that time. Additionally, RSA did not have any other information that Steven Devecseri had consumed any amount of alcohol prior to the collision.
Both injury actions were heading for trial. Just prior to the start of the joint trial, Bradfield settled his injury action against Devecseri’s Estate for $850,000. RSA paid $100,000 of its statutory minimum limits to Bradfield and, with Bradfield’s consent, paid the other half to Caton.
Caton’s action proceeded to trial with a jury. The coroner’s report was placed into evidence for the truth of its contents. A jury found that Devecseri’s Estate was 90% liable for the collision and Bradfield was 10% liable. Caton was awarded damages of $1.8 million. Bradfield succeeded on his crossclaim and received an award against Devecseri’s Estate of 90% of the damages that it must pay to Caton. However, the jury found that Bradfield was a concurrent or alternatively a joint tortfeasor. That finding obligated Bradfield’s insurer, State Farm, to pay the whole of Caton’s judgment, less the $100,000 that RSA had paid to Caton, up to Bradfield’s policy limit of $1 million. Bradfield appealed the finding that he was a joint tortfeasor to the Ontario Court of Appeal and lost. He applied for leave to appeal to the Supreme Court of Canada, but leave was refused.
Thereafter, State Farm/Bradfield initiated this action claiming $800,000 from RSA on the basis that RSA either waived or is estopped from denying coverage and therefore the full policy limits of the policy covering the liabilities of Devecseri’s Estate ought to made available to State Farm/Bradfield.
The Trial Judgment
The coverage action went to trial. The coroner’s report would have determined if Devecseri had alcohol in his blood stream and therefore whether he had violated his policy. As the report was available to RSA if it had been ordered, knowledge of that report was imputed to RSA. By defending without a reservation of rights, RSA waived Devecseri’s policy violation. Having found waiver, the issue of estoppel was moot. State Farm/Bradfield was entitled to a judgment of $800,000.
The Appeal Judgment
RSA appealed to the Ontario Court of Appeal. That court held that the Ontario Insurance Act (like most Insurance Acts of the common law provinces) mandated that a waiver must be writing and affirmatively and unequivocally waive the policy violation. That did not occur and therefore there is no basis to argue that RSA waived the policy breach by defending Devecseri’s Estate.
Further, RSA was not estopped from denying coverage as it did not know about the policy violation until the discovery evidence emerged, which prompted the off-coverage position. Constructive knowledge, or imputed knowledge is not enough to establish an estoppel.
Further, to establish estoppel, it must show that State Farm/Bradfield sustained prejudice. It was argued that in view of the three-year delay between the time that RSA appointed counsel and the decision to take an off-coverage position, prejudice is presumed. There was evidence at trial that the quality of the defence of Devecseri’s Estate’s interests did not change after the off-coverage position was taken. As a result, any presumption of prejudice was rebutted. The trial judgment was vacated, and RSA received its court costs.
The Supreme Court of Canada
Leave to appeal from the decision of the Ontario Court of Appeal was granted in April of 2020. After being granted leave, State Farm/Bradfield settled with RSA and dropped the appeal.
In September of 2020, the Trial Lawyers Association of British Columbia was permitted to be substituted for Bradfield as the appellant. Although the appeal was moot, the Trial Lawyers Association wanted to know how the Court would have decided the issue. An appeal is moot if the dispute is already resolved. Nonetheless, the Supreme Court of Canada may decide to hear a moot case in order to clarify the law on the issue. In February of 2021, the Ontario Trial Lawyers Association was granted intervener status. Both of those Associations are professional associations of plaintiff-oriented civil counsel.
The appeal as to whether RSA waived the breach by is conduct or was estopped from denying coverage was heard in May of 2021. The decision of the Court was issued in November of 2021.
Trial Lawyers conceded, and the Supreme Court agreed, that waiver by conduct was precluded by statute at the relevant time. As a result, the sole issue before the Supreme Court was whether RSA was estopped from denying coverage because it responded to the claims against Devecseri’s Estate long after it could have discovered evidence of Devecseri’s policy breach.
No Basis for Estoppel by Representation or Any Form of Estoppel
The Supreme Court of Canada stated that when applied in the insurance context, estoppel arises most commonly where an insurer, having initially taken steps consistent with coverage, then denies coverage because of the insured’s breach of a policy term, or because of its ineligibility for insurance in the first place. To prevent the insurer from denying coverage, the insured will attempt to show that the insurer is estopped from changing its coverage position based on its prior words or conduct. As a result, Trial Lawyers argument was based on the principles of estoppel by representation, as opposed to promissory estoppel.
In this case, RSA did not know the facts that demonstrated Devecseri’s breach (specifically, that he had consumed alcohol prior to the accident). If RSA did know but had failed to appreciate its legal significance (specifically, that this was a breach), knowledge of that legal significance could have been imputed to RSA, and there may have been a basis for an estoppel (assuming the other elements of estoppel are made out).
However, in this case and regardless of the knowledge issue, RSA did not extend an unequivocal assurance that RSA would continue to provide coverage even if the policy was void. By extending a defence to Devecseri’s Estate, RSA was only communicating that the allegations triggered the duty to defend under the terms of the policy. RSA was not admitting that it would indemnify the third parties. Therefore, in this case, RSA’s continued defence did not signify any inference of continuing coverage upon which third parties such as State Farm/Bradfield could rely.
The appeal was heard by a full bench of seven justices. However, a single justice dissented on the issue of whether the element of promissory estoppel that requires an intention to vary legal rights requires the insurer/promisor’s actual knowledge of the facts underlying the legal right. The test should be whether it was reasonable for the insured to infer from the insurer’s words or conduct that the insurer intended to alter its legal relationship with the insured. The dissent held that it was not reasonable to assume that a defence provided by a liability insurer is an unequivocal affirmation of coverage and therefore Trial Lawyers’ argument fails. State Farm/Bradfield cannot succeed in establishing promissory estoppel (and presumably any form of estoppel) because RSA did not make a promise or assurance that can be reasonably interpreted as intending to alter legal relations with the Devecseri Estate.
Finally, all justices hearing this case were agreed that there was an absence of the final element to establish estoppel: Detrimental Reliance. The Court dismissed the argument that prejudice is presumed when litigation proceeds to an advanced stage. There must be evidence that Bradfield relied to his detriment upon the representation as to coverage… “estoppel requires evidence of prejudice, inequity, unfairness or injustice before courts will give hold …[sic]… a promisor to its promise or assurance…” (para. 51).
The Insurer’s Duty to Investigate
The other interesting aspect of this appeal is the Supreme Court’s analysis of the issue of whether RSA had constructive notice of the contents of the coroner’s report. Trial Lawyers argued that RSA had an obligation to investigate the circumstances of the collision diligently and thoroughly. That argument was roundly rejected.
The Court held that liability insurers are under an obligation to their insureds – not third parties – to investigate claims fairly, in a balanced and reasonable manner. This duty to investigate is grounded in the duties of utmost good faith and fair dealing that govern the relationship between the insurer and the insured. The obligations between the insurer and the insured are reciprocal; while the insurer has the duty to investigate fairly, in a balanced and reasonable manner, the insured is also under a reciprocal duty to disclose facts material to the claim: “RSA owed Mr. Devecseri a duty to investigate the claims against his estate fairly, in a balanced and reasonable manner, and without being zealous or relentless in its search for policy breaches.” (para. 36). Trial Lawyers’ argument fails as RSA did not owe a duty to Bradfield to investigate the claim. As a result, RSA did not have constructive notice of the contents of the coroner’s report which was available if RSA had requested it.
Holding of the Supreme Court of Canada
For these reasons, the appeal was dismissed. Each party to the appeal before the Supreme Court of Canada were ordered to bear their own costs.
This decision is premised upon a complex and very litigious back story. Knowledge of that backstory is necessary to understand the reach of the decision.
Key points arising are:
Liability insurers owe a duty to their insureds (and not third parties) to investigate claims fairly, in a balanced and reasonable manner.
Insureds are under a reciprocal obligation to disclose the facts material to the claim.
Insurers are not required to be zealous and relentless in their search for policy breaches.
Insurers are fixed with knowledge of the facts of their investigation and are deemed to know and appreciate the legal significance of those facts.Insurers will not be imputed with constructive notice of facts that were available but not developed in their investigation.
An insurer’s that undertakes a defence under a liability policy is not communicating an unequivocal representation to indemnify.
An insurer who undertakes a defence and then learns of the facts establishing a policy violation, will not be estopped from taking an off-coverage position in light of the discovery of those facts, regardless of the amount of time that has passed since that the defence was assumed.
To establish estoppel by representation, or any other form of estoppel in the insurance context, the insured must establish the existence of an unequivocal representation that the insurer intends to alter the legal relationship; that the representation affecting that legal relationship was relied upon to the detriment of the insured.
Detriment is some sort of prejudice, unfairness, or inequity. The Supreme Court of Canada had this to say regarding prejudice: “…[Trial Lawyers argue] …. detrimental reliance can be presumed in cases where litigation has progressed to an advanced stage (see Rosenblood Estate, at pp. 156-57). This Court has never opined on such a presumption of prejudice and we decline to do so here, but we nevertheless highlight that the cases upon which Trial Lawyers relies involved claims by the first-party insured, not third-party claimants.”
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