Friday, May 25, 2012

Pennsylvania Court Considers Designated Premises or Project Limitation

In its recent decision in Western Heritage Ins. Co. v. Darrah, 2012 U.S. Dist. LEXIS 71768 (M.D. Pa. May 23, 2012), the United States District Court for the Middle District of Pennsylvania had occasion to reconsider the effect of a designated premises or project limitation endorsement.

Western Heritage insured Darrah’s Automotive and Recyling under a general liability policy.  The policy’s declarations, as originally issued, described Darrah’s business as “Auto Sales/Salvage & Repair Garage.”  This description, however, was amended by a subsequently issued endorsement titled “Limitation of Coverage to Designated Premises or Project.”  The endorsement contained two boxes: one for designating a “Project” and another for designating a “Premises.”  No information was entered in the “Premises” box, but in the “Project Box,” the insured’s operations were described as “Auto Dismantling and Recycling Operations.”  The endorsement further stated “If no entry appears above, information required to complete this endorsement will be shown in the Declarations as applicable to this endorsement.” Finally, the endorsement limited the policy’s coverage to:

“bodily injury”, “property damage” . . . and medical expenses arising out of:

1.   The ownership, maintenance or use of the premises shown in the Schedule and operations necessary or incidental to those premises; or

2.   The project shown in the Schedule.

The insured, Darrah’s Automotive and Recycling, sought a defense and indemnification in connection with an underlying suit brought by an individual who claimed to have suffered scarring and disfigurement while working at Darrah’s premises.  Plaintiff’s initial complaint alleged that he was injured while repairing a vehicle in the repair/body shop.   Western Heritage denied coverage for the suit on the ground that the policy’s coverage was limited to “auto dismantling and recycling operations,” and that plaintiff claimed that he was injured while repairing a vehicle.  In a 2010 decision, the district court agreed with Western Heritage, finding that the effect of the endorsement was to limit coverage under the policy to a specific area of work, and that premises was not a consideration.  See, W. Heritage Ins. Co. v. Darrah, 2010 U.S. Dist. LEXIS 121533 (M.D. Pa. Nov. 17, 2010).  In so ruling, the court rejected Darrah’s argument that the endorsement also provided coverage for injuries happening at the premises identified in the declarations because of the empty “Premises” box, noting that the endorsement limited coverage by operations or by premises.  Thus, because the “Project” box contained information, and the “Premises” box was empty, the endorsement only applied to Darrah’s operations, not its premises.

Following the court’s November 2010 ruling, plaintiff amended his complaint to allege that the premises where is was injured was used for auto dismantling and recycling operations, and that he was injured “while working on repairing a vehicle in the repair/body shop in use in auto dismantling and recycling operations.”  Although the amended complaint did not allege that plaintiff was injured while performing auto dismantling or recycling operations, Darrah’s nevertheless argued that a duty to defend was triggered, since the new allegations demonstrated that “the repair/body shop business was an integral part of the Darrah Defendants auto dismantling and recycling operation.”  Western Heritage argued, on the other hand, that the new allegations only described the premises, but did not alter the fact that plaintiff was injured while performing work outside the scope of the policy’s coverage.

The court rejected Darrah’s interpretation of the amended complaint, observing that merely alluding to the fact that the premises was used in auto dismantling and recycling operations did not mean that “every activity that took place in the repair/body shop was part of that operation.”  The court further observed that Darrah’s argument in effect would circumvent the endorsement by determining coverage based on premises rather than operations – a conclusion the court already had rejected.  As the court explained:

… we infer that the repair/body shop was not being used at that time as part of the dismantling and recycling operation. If the latter operation were happening at the time of Stine's injury, he should certainly have been able to make the necessary allegations, even if he himself was just repairing a vehicle. In fact, if we were to accept Defendants' approach to the coverage issue, coverage would be for the premises where the dismantling and recycling operation took place, but coverage is not for premises or any particular location, as Plaintiff points out, but for a work operation, the dismantling and recycling of automobiles

Tuesday, May 22, 2012

Second Circuit Affirms Duty to Defend Under Professional Liability Policy

In its recent decision in Westport Ins. Corp. v. Hamilton Wharton Group, Inc., 2012 U.S. App. LEXIS 9888 (2d Cir. May 17, 2012), the United States Court of Appeals for the Second Circuit had occasion to consider whether a professional liability carrier had a duty to defend its insured in connection with several underlying lawsuits relating to mismanagement of a workers’ compensation trust.

The underlying suits were brought by former members of the New York Healthcare Facilities Workers' Compensation Trust (the “Trust”), comprised of nursing homes, health care agencies, and hospitals required under New York law to maintain workers’ compensation insurance for their employees or to participate in a self-insured plan.  Certain members brought several lawsuits, in New York state court, against Hamilton Wharton Group, Inc. (and its owner) relating to Hamilton’s management of the Trust.  The suits alleged, among other things, that Hamilton failed to exercise due diligence and/or mismanaged the Trust.  The suits alleged causes of action for negligence, as well as breach of fiduciary duty, breach of contract, and fraud. 

Westport, as Hamilton’s professional liability carrier, took the position that the suits did not trigger Hamilton’s coverage, primarily on the basis that the suits did not arise out of “professional services,” defined by its policy as “the insured's activities for others as a managing general insurance agent, general insurance agent, insurance agent, or insurance broker.”  Thus, Westport argued, the policy’s coverage was limited to the insured’s professional services involving “issuing, procuring, renewing, or processing of insurance products to third-party clients,” and did not encompass Hamilton’s administration of a  workers’ compensation trust.  Westport nevertheless agreed to defend Hamilton in connection with the underlying suits, and brought suit against Hamilton in federal district court seeking a declaration that it had no duty to defend or indemnify Hamilton in the underlying suits.

Prior to taking any discovery, Hamilton moved for summary judgment on the basis that the Westport’s lawsuit was premature.  Hamilton also sought summary judgment as to Westport’s duty to defend the underlying suits.   Westport argued that the underlying complaints did not allege a wrongful act in connection with Hamilton’s performance of insurance procurement services, or at the very least, there was an issue of fact that precluded summary judgment. In a 2011 decision, the Southern District of New York held that Hamilton was entitled to a defense since there was a reasonable possibility that the underlying lawsuit implicated the insured’s professional services, as that term was defined.  Westport Ins. Corp. v. Hamilton Wharton Group, Inc., 2011 U.S. Dist. LEXIS 20535 (S.D.N.Y. Feb. 23, 2011).  The lower court further agreed that Westport’s lawsuit relating to the duty to indemnify should be dismissed on the basis that it was premature.

On appeal, the Second Circuit agreed that the underlying complaints at least had the potential to involve the insured’s professional services, explaining:

Here, the claims asserted against Westport may rationally be said to fall within the Policy's coverage. The "professional services" contemplated by the Policy encompass at least some of the activities alleged in the State Actions, which included, inter alia, allegations that the Defendants were negligent in handling their funds by: continuing to sign up new participants to join the trust; failing to hire an accountant; offering unwarranted discounts to trust members; failing to implement safety audits; and failing to conduct payroll audits.

Thus, the Second Circuit, as did the Southern District of New York, at least implicitly interpreted the policy’s definition of “professional services” in a broader fashion than did Westport.  The Second Circuit further held that the lower court’s ruling concerning prematurity of the duty to indemnify was correct, as the “State Actions have numerous unresolved issues in common, including whether the Defendants were negligent or breached fiduciary or contractual obligations.”

Tuesday, May 15, 2012

Eighth Circuit Addresses Personal Injury Offense of Malicious Prosecution

In its recent decision in Genesis Ins. Co. v. City of Council Bluffs, et al., 2012 U.S. App. LEXIS 9577 (8th Cir. May 11, 2012), the United States Court of Appeals for the Eighth Circuit, in a matter of first impression under Iowa law, considered when the tort of malicious prosecution occurs for the purpose of personal injury coverage under a general liability policy.

In 1977, underlying plaintiffs were arrested and convicted for the murder of a retired police officer.  Their convictions were vacated in 2003 based on evidence that the prosecution had withheld of exculpatory evidence.   Plaintiffs were released from prison and later brought suit against the City of Council Bluffs, the City’s Police Department, and certain police officers.  In addition to alleging civil rights violations, their suits alleged the tort of malicious prosecution.  The City tendered its defense to Genesis Insurance Company, its general liability carrier for the period January 1, 2002 to January 1, 2003 and for the renewal period January 1, 2003 through January 1, 2004.  Genesis disclaimed coverage on the basis that the alleged personal injury offense of malicious prosecution happened when plaintiffs were originally prosecuted, not when their convictions were later vacated.

The Eighth Circuit acknowledged that there was no controlling Iowa law on the issue of when the tort of malicious prosecution occurs for insurance coverage purposes.  Looking to case law from across the country, the court observed that “although there is no agreement on when the tort of malicious prosecution occurs for insurance coverage purposes, the clear majority of courts have held the tort occurs when the underlying criminal charges are filed.”  The court further noted that in Royal Indemnity Co. v. Werner, 979 F.2d 1299 (8th Cir. 1992), the Eighth Circuit, in addressing the issue under Missouri law, held that a malicious prosecution claim accrues with the filing of suit.  The court found no meaningful reason why its decision in Royal Indemnity is inconsistent with Iowa law, explaining that under Iowa law, the occurrence happens when the claimant sustains damages, not when the act or omission causing the damage takes place.   Because a claimant is damaged upon the filing of a criminal complaint, observed the court, it necessarily followed that the occurrence happened at that time.

In reaching its decision, the court considered and rejected the insured’s argument that the Genesis policies were triggered based on allegations of “continuing misconduct and continuing personal injury” through the time underlying plaintiffs were released from prison.  The court refuted the contention that “the tort of malicious prosecution constitutes a continuing injury,” and concluded instead that a claim for malicious prosecution does not trigger multiple policies, but instead triggers only the policy in effect at the time the charges are filed.  

Friday, May 11, 2012

New York Court Rejects $90 Million D&O Settlement

In In re Lehman Brothers Securities and ERISA Litigation, 2012 U.S. Dist. LEXIS 65167 (S.D.N.Y. May 3, 2012), Judge Lewis A. Kaplan, for the United States District Court for the Southern District of New York considered the reasonableness of a settlement between various former Lehman Brothers directors and officers and their insurers.

Beginning his opinion with a reference to Kenny Rogers’ The Gambler, Judge Kaplan observed that when it comes to litigation, one must know when to hold ‘em and when to fold ‘em.  In the context of a class action, he noted, a court must act as the surrogate for the plaintiff class in determining whether a settlement is reasonable, and as such, it fell on him to determine whether to allow the parties “to fold ‘em.”

The class action in In re Lehman Brothers was brought on behalf of investors that had purchased or otherwise held Lehman Brothers securities.  Because Lehman Brothers is in bankruptcy, the defendants were former individual officers and directors and directors of the company.  Before Judge Kaplan was a $90 million settlement between these directors and officers and Lehman Brothers’ insurer, which would be paid to the plaintiff class.  If approved, all claims against the directors and officers would be released, with these individuals paying no amounts from their own pockets.

Lehman Brothers originally had $250 million in available insurance limits.  As a result of defense costs, however, this amount had been reduced to $180 million by the end of 2010.  The insurer took the position that it would contribute to a settlement only on the condition that it resolved all claims against the individual defendants.  The individual defendants took the position that they would not contribute any amounts toward a settlement other than through available insurance funds.  In other words, they would not pay any amounts out of their own pockets.  Notwithstanding, the individual defendants agreed to hire a consultant, a retired judge, to determine whether their combined “liquid” and certain limited “non-liquid” assets exceeded $100 million.  The consultant concluded that these assets were indeed less than $100 million.

With this background in mind, Judge Kaplan considered whether a $90 million settlement was reasonable under the circumstances.  He acknowledged that if the settlement was not approved, the available insurance funds likely would be erode rapidly through payment of defense costs in the various lawsuits pending against Lehman Brothers and their directors and officers.  Should that happen, the directors and officers would be forced to rely on their individual assets, whether liquid or illiquid, to defend and/or settle the litigations.  The amount sought in these suits, he observed, could easily reach billions of dollars.  Judge Kaplan observed that looking only to the individual defendants’ liquid assets did “not permit the Court fully to consider the factors pertinent to approving or rejecting the settlement,” nor was the asset inquiry “as informative as necessary and appropriate for this Court” to consider the reasonableness of the settlement.  Accordingly, Judge Kaplan directed that further inquiry be had into the entirety of the individual defendants assets, liquid and non-liquid, so that the court could determine the reasonableness of the settlement.

Tuesday, May 8, 2012

South Carolina Court Awards Insured Declaratory Judgment Fees Through Appeal

In a matter involving an issue of first impression under South Carolina law, the United States District Court for the District of South Carolina, in its recent decision in Jessco, Inc. v. Builders Mutual Insurance Co., 2012 U.S. Dist. LEXIS 62114 (May 3, 2012), considered whether an insured is entitled to recover fees and costs after successfully litigating a declaratory judgment action on appeal.

The insured, Jessco, had sought a defense and indemnity in connection with an underlying construction defect case.  The insurer, BMIC, denied coverage on the basis that the alleged damages arose out of a breach of contract rather than an occurrence.  The district court held that BMIC had both a duty to defend and indemnify the insured in the underlying matter, and that the insured also was entitled to an award of fees and costs associated with its successful prosecution of the declaratory judgment action.  On appeal, the Fourth Circuit held that the lower court correctly determined that BMIC had a duty to defend and that Jessco was entitled to a recovery of fees and costs. The Fourth Circuit further held, however, that the lower court erred in concluding that BMIC had a duty to indemnify, as the alleged damages arose out of a breach of contract rather than an occurrence.

After the Fourth Circuit issued its decision, Jessco made a motion in the lower court for fees and costs associated with the appeal.  The district court observed that this was a matter of first impression in South Carolina.  It nevertheless found guidance from the South Carolina Supreme Court decision in Hegler v. Gulf Ins. Co., 243 S.E.2d 443 (S.C. 1978), the seminal decision on the issue in which the court held that when an insured is required to retain counsel to successfully force the insurer to provide coverage, the insured should be entitled to recover its fees and costs.  These damages necessarily flow from the insurer’s breach of contract.  Hegler, explained the district court, paved the way for decades of South Carolina case law consistently holding that insureds are entitled to recovery of fees and costs, regardless of whether they are the plaintiff or defendant in a declaratory judgment action.

Jessco argued that while Hegler involved a trial court decision, it should make no difference whether the insured is required to incur fees and costs at the trial or appellate level, since “the insured is doing no more than attempting to protect its contractual right to a defense.”   Thus, so long as the insured is “forced” to litigate its right to coverage, it should be entitled to recovery of its fees and costs.  BMIC, on the other hand, argued that even if this is the rule, Jessco should not be entitled to such a recovery under the circumstances, since the Fourth Circuit reversed on whether BMIC had a duty to indemnify. 

The lower court rejected BMIC’s argument, noting that BMIC’s appeal was on the duty to indemnify and the duty to defend.  As the court explained:

… after prevailing at the trial level, Jessco was forced into the appellate process by BMIC, thereby bearing the expense, just as it was forced to bring the initial declaratory action to protect and enforce its rights. Jessco prevailed at the trial level, and on appeal, the Fourth Circuit found BMIC had a duty to defend and affirmed this Court's judgment and damages award on that issue. The appellate expenses, like the trial level expenses, are damages arising directly out of the insurer's breach of its duty to defend.

The court therefore concluded that Hegler applied equally to appellate cases and trial court cases, and because Jessco was successful on the duty to defend before the Fourth Circuit, it was entitled to recovery of reasonable fees and costs associated with the appeal. 

Friday, May 4, 2012

California Court Denies Rescission of Insurance Policy

In its recent decision in Thompson v. Navigators Ins. Co., 2012 U.S. Dist. LEXIS 60122 (S.D. Cal. Apr. 30, 2012), the United States District Court for the Southern District of California considered whether an insurer was entitled to rescission of a general liability policy issued to a contractor based on misrepresentations concerning the nature of work it would be performing.

Like most rescission cases, the insurer, Navigators, did not learn of the grounds for rescission until its insured, TBI, was named as a defendant in an underlying lawsuit.  TBI had been hired to repair a roof on a commercial structure that had been damaged in a fire.  During the course of the repair work, an employee of another contractor was injured when he fell through a hole in the roof.  After receiving notice of suit, Navigators rescinded the policy based on material misrepresentations made in the policy application.  In the ensuing coverage litigation, Navigators claimed that if it was not entitled to rescission, that in the alternative, coverage was unavailable on other grounds, including the ground that coverage was limited to the insured’s work on residential structures.  The court considered each of these issues on motion for summary judgment.

Navigator’s first basis for rescission was based on TBI’s response to an application question asking whether the insured engaged in “structural demolition.”  TBI answered “no” to this question.  The invoice for the work in the underlying matter, however, stated that TBI was performing “demo roof.”  TBI argued that all contractors necessarily perform some degree of “demo” work when they remove existing parts of structures to complete their jobs.  Such work, TBI contended, is different than the industry understanding of “demolition,” which is demolition and removal of an entire structure.  The court concluded, based on this argument, and because Navigators failed to provide a satisfactory definition in response, that “demolition” as used in the application was ambiguous, and as such, summary judgment was unavailable on this particular alleged misrepresentation.

The court concluded similarly with respect to the application question asking whether there had been or would be “[r]oofing performed by the applicant.”  TBI answered “no” to this question.  TBI conceded that its contract in the underlying matter involved work on a roof.  It nevertheless contended that within the construction industry, roofing generally refers to installation of the waterproofing system, such as shingles.  TBI was not performing this type of work, but instead was performing framing on which waterproofing later would be installed.   Navigators, on the other hand, pointed to the fact that the policy application stated that “[a]ll roofing work must be subcontracted,” thus indicating that any work performed in connection with a roof, whether relating to waterproofing or framing, would not be covered if performed by the insured.  In light of the competing proposed definitions, the court found the term “roofing” to be ambiguous, and thus denied summary judgment on this misrepresentation as well.

The court also rejected Navigators argument that rescission was proper based on TBI’s representation in the application that it performed 100% residential work, and that the project giving rise to the underlying action was a commercial building.  Navigators argued that this misrepresentation was material, since it would have charged a higher premium had it known that TBI was performing work on commercial projects.  The court, however, found a question of fact as to whether Navigators actually would have charged a higher premium.

Finally, Navigators argued that rescission was proper based on TBI’s response to a question as to whether it would perform any repair or remediation of fire damage.  TBI answered no to this question.  While the underlying project was, in fact, repair of a roof that had been damaged by a fire, TBI argued that this misrepresentation was not material, and pointed to inconsistencies in Navigators’ underwriting guidelines as to whether the company would insure such work.  These inconsistencies, the court held, precluded a grant of summary judgment in Navigator’s favor.

Having held that summary judgment was inappropriate on rescission, the court turned to Navigator’s argument that the underlying matter did not fall within the policy’s scope of coverage, which was limited to work on residential structures.  The policy’s declarations identified TBI’s business as “CONSTRUCTION OF RESDIENTIAL PROPERTY NOT EXCEEDING THREE [sic].”  Navigators contended that the declarations defined the policy’s scope, and that as such, TBI’s work on a commercial structure was not within the policy’s coverage.  The court, however, found the policy ambiguous on this point, noting that, “it is not completely clear that the unfinished phrase ‘Carpentry – Construction of Residential Property Not Exceeding Three’ excludes all coverage for commercial property in all situations.”  For instance, explained the court, “TBI may have believed that carpentry was permissible on any type of building but ‘construction’ work was limited to residential property not exceeding three stories.”   More significantly for the court, the policy did not clarify the scope of coverage within the insuring agreement or by endorsement.  In other words, the identification of TBI’s business in the policy declarations, in the absence of any further reference to this in the remainder of the policy, did not definitively define the policy’s scope of coverage, at least for the purpose of summary judgment.

Notwithstanding the court’s ruling against Navigators on rescission and on the scope of the policy’s coverage, the court rejected TBI’s argument that by having rescinded the policy, Navigators was precluded from arguing coverage defenses.  Thus, Navigators was not barred from arguing scope of coverage and other applicable exclusions at trial.

Tuesday, May 1, 2012

RI Court Holds No Coverage for Criminal Proceedings Involving Nightclub Tragedy

In its recent decision in Derderian v. Essex Insurance Company, 2012 R.I. LEXIS 54 (R.I. Apr. 27, 2012), the Supreme Court of Rhode Island had occasion to consider whether under a general liability policy, an insured was entitled to coverage for defending against underlying criminal prosecutions.

The Derderian coverage litigation arose out of the tragic February 2003 fire at The Station nightclub West Warwick, Rhode Island: one of the deadliest nightclub fires in the history of the United States.  The fire resulted in the death of one hundred patrons and left hundreds others injured.  The owners of the club, the Derderians, were indicted on charges of criminal negligence as a result of the incident, and they sought coverage under their general liability policy for their costs in defending the criminal proceedings.  Their insurer, Essex, denied coverage on the basis that the policy only provided coverage for “suits,” specifically defined as “civil proceedings.”

That a general liability policy provides coverage only for civil actions is hardly a novel concept, and the Derderians’ argument that their policy should respond as a matter of course to the underlying criminal matters merited only a limited response from the court.  The court readily agreed that “on its face, the criminal indictments, which cited charges of involuntary manslaughter, do not comport with the term ‘suit’ as it was used and defined in the policy.”  More challenging for the court was the Derderians’ argument that Rhode Island General Law §12-28-5 required Essex to provide a defense.  This statute, referred to as the “Victim’s Rights” statute, states:

 (a) Upon his or her final conviction of a felony after a trial by jury, a civil judgment shall automatically be entered by the trial court against the defendant conclusively establishing his or her liability to the victim for any personal injury and/or loss of property that was sustained by the victim as a direct and proximate cause of the felonious conduct of which the defendant has been convicted. The court shall notify the victim at his or her last known address of the entry of the civil judgment in his or her favor and inform him or her that he or she must establish proof of damages in an appropriate judicial proceeding in order to recover for his or her injury or loss. This section shall not apply to crimes set forth in title 31 arising from the operation of a motor vehicle.  (Emphasis supplied.)

Thus, the insured argued that because under Rhode Island law a criminal conviction results in an automatic civil judgment establishing liability, a criminal proceeding under Rhode Island law must be considered a civil proceeding as well.  Essex argued, in response, that because the underlying criminal proceedings did not specifically seek damages for bodily injury, they could not be considered “suits” for the purpose of the policy’s coverage.  Essex further argued that as a matter of course, general liability policies do not provide coverage for criminal proceedings, and that to interpret §12-28-5 as requiring a general liability policy to provide a defense for such matters would result in an undue windfall for insureds.

The court observed generally that criminal proceedings based on involuntary manslaughter could not be considered civil proceedings for damages.  More pertinently, the court explained that the purpose of §12-28-5 “is to ensure that all victims of crime are treated with respect and receive financial compensation for their losses.”  The criminal proceeding, however, does not establish the losses.  Rather, the court agreed that the statute is merely a “proceed mechanism” that fixes civil liability, but that still requires a separate proceeding to establish damages. The court concluded, therefore, that the statute was not meant to require an insurer to defend its insured in a criminal proceeding.  As the court explained, “ [u]nlike the alchemists of yore, we do not claim the ability to transmute base metal into gold; neither can we transmute a 200-count criminal indictment into a civil proceeding.”