Tuesday, February 26, 2013

5th Circuit Holds No Coverage for Trucking Accident

In its recent decision in Canal Indem. Co. v. Rapid Logistics, 2013 U.S. App. LEXIS 3772 (5th Cir. Feb. 22, 2013), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider whether a trucking liability policy provided coverage for an underlying lawsuit brought by an injured independent contractor.

Canal Insurance Company insured Rapid Logistics, a motor carrier company, under an auto policy satisfying Rapid Logistic’s public liability requirements.  Rapid Logistics contracted with an individual named Oralia Sanchez to use Ms. Sanchez’s truck for delivery certain goods.  Ms. Sanchez, in turn, hired Rafael Olivas to operate the truck.  While operating the vehicle pursuant to the Rapid Logistic’s contract, Mr. Olivas was involved in an accident causing him to sustain various injuries.  Mr. Olivas later brought suit against Ms. Sanchez and Rapid Logistics.   Canal denied coverage to Rapid Logistics on the basis that Mr. Olivas, technically, was an insured of Rapid Logistics.  The United States District Court for the Southern District of Texas agreed, and ruled in favor of Canal on summary judgment.

The district court’s ruling was based on an exclusion in the Canal policy applicable to bodily injury to an “’employee' of the 'insured' arising out of and in the course of: (1) Employment by the 'insured;' or (2) Performing the duties related to the conduct of the 'insured's' business . . . .”  Relying on the federal Transportation Code’s definition of “employee,” set forth in 49 C.F.R. § 390.5, the lower court concluded that Mr. Olivas was an employee, since the term is defined to include independent contractors.   On appeal, Rapid Logistics argued that the district court erred by looking to the Transportation Code’s definition of employee rather than the definition in the Canal policy, which defined “employee” to include leased workers and exclude temporary workers.

The court noted that in a prior decision, it had relied on the definition of employee in 49 C.F.R. § 390.5 for the purposes of determining coverage under a similar policy.  Consumers Cnty. Mut. Ins. v. P.W. & Sons Trucking, 307 F.3d 362, 366 (5th Cir. 2002).  It nevertheless concluded that it need not even reach this issue in determining Rapid Logistic’s right to coverage, since the Canal policy provided coverage for “Anyone else while using with your permission a covered 'auto' you own, hire or borrow except: (1) The owner, or any 'employee,' agent or driver of the owner, or anyone else from whom you hire or borrow a covered 'auto.'”  The court reasoned that the exception in this grant to coverage precluded coverage for Mr. Olivas’ suit, explaining that:

Here, Rapid Logistics admits that Sanchez owned the truck that it had hired and that Olivas was Sanchez's employee driver. Accordingly, on its face, this provision applies to exclude coverage for Olivas. Here, Rapid Logistics' version of the facts shows that the policy does not provide coverage for Olivas. Accordingly, under either the provisions of the code or the policy, Canal did not have a duty to defend.

Friday, February 22, 2013

South Carolina Court Holds No Coverage for Blast Fax Case Under E&O Policy

In its recent decision in BCS Ins. Co. v. Big Thyme Enters., 2013 U.S. Dist. LEXIS 20051 (D.S.C. Feb. 14, 2013), the United States District Court for the District of South Carolina had occasion to consider whether an alleged violation of the Telephone Consumer Protection Act triggered coverage under a professional liability policy.

BSC Insurance Company insured agents of Blue Cross and Blue Shield of South Carolina under an agents and brokers professional liability policy.  One of these agents, and his insurance agency, were named as defendants in an underlying suit alleging violations of the Telephone Consumer Protection Act based on defendants’ action in sending unsolicited facsimiles.  Plaintiff also alleged a cause of action for conversion for having wrongfully misappropriating plaintiff’s paper, fax machines, toner, and employee time.  BSC provided its insureds with a defense under a reservation of rights, and later commenced a declaratory judgment action. 

BCS argued, among other things, that the insureds’ conduct in sending unsolicited facsimiles did not trigger the policy’s insuring agreement, which among other things required a wrongful act arising out of the insured’s “professional services.”  The policy defined “professional services” as “specialized services rendered to a Client as a licensed Life, Accident and Health Insurance Agent.”  BCS argued that sending unsolicited faxes to non-clients as part of an advertising campaign does not involve the insureds’ “specialized knowledge or training as an insurance agent or agency.” The insureds, on the other hand, argued that advertising was central to its business and as such should be considered a professional service.   The court found in BCS’s favor, concluding that sending advertising does not fall within the category of contemplated “special services,” and as such, the policy was not triggered in the first instance.

The court further noted that even if the insureds’ actions in sending facsimiles could be considered professional services, the policy also required that the insured’s professional services be rendered to or on behalf of a client.  Because the facsimiles were sent unsolicited to potential clients rather than actual clients, the court concluded that this requirement of the policy was not satisfied, thus serving as an additional ground for noncoverage. 

Tuesday, February 19, 2013

Pennsylvania Court Holds Drywall Claims Arose Out of Single Occurrence

In its recent decision in Cincinnati Ins. Co. v. Devon International, 2013 U.S. Dist. LEXIS 20659 (E.D. Pa. Feb. 15, 2013), the United States District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, had occasion to consider whether a series of Chinese drywall-related claims, arising out of the insured’s importation of a single batch of defective drywall, were properly considered a single occurrence, or multiple occurrences.

The insured, Devon, was a U.S.-based sourcing agent for Chinese manufactured products.  In 2006, it was retained to procure drywall manufactured in China.  Devon subsequently made a single purchase of drywall from Shandong – a Chinese manufacturer – and then shipped the drywall to Florida for use in construction.  The majority of the drywall was shipped to Devon’s initial customer; however, Devon also sold a portion of the drywall to other individuals and entities in Florida for use in construction.  In 2009, Devon received a letter from its initial customer seeking a defense and indemnification in connection with a “multitude” of Chinese drywall claims filed in several jurisdictions.  These underlying plaintiffs alleged damage in late 2008 and throughout 2009.

Cincinnati Insurance Company insured Devon under consecutive general liability policies, the first of which was issued for the period November 20, 2008 to November 20, 2009, and the second for the period November 20, 2009 to November 20, 2010.  The policies provided coverage for property damage arising out of an occurrence, but only to the extent the property damage occurred during the policy period.  Cincinnati and Devon disputed whether the underlying claims should be considered multiple occurrences, thus potentially triggering coverage under both of Cincinnati’s policies, or a single occurrence triggering coverage only under one of the policies.

The court looked to the Pennsylvania Supreme Court decision in Donegal Mutual Insurance Co. v. Baumhammers, 938 A.2d 286 (Pa. 2007), which it observed was the seminal Pennsylvania decision regarding number of occurrences.  The Baumhammers court adopted the “cause” test for determining number of occurrences, as opposed to the “effects” test, which it described as the minority approach.   Under this test, explained the Devon court, all of the underlying property damage claims would be considered a single occurrence if all such claims arose out of a single “proximate cause” over which Devon had control.   The court found this test satisfied, explaining:

Here, all the injuries to the underlying plaintiffs and claims against Devon originate from a common source: Devon's single purchase and shipment of defective drywall from Shandong. Moreover, Devon "had some control" over the cause of the injuries, in that it chose to purchase and distribute the defective drywall. Therefore, the Court finds that there is only one "occurrence" for purposes of insurance coverage.

Further relying on Pennsylvania law regarding trigger of coverage, the court explained that the property damage happened when the damage first manifested itself in a manner that a reasonable person would observe an injury.  Noting that the property damage first manifested itself while Cincinnati’s first policy was in effect, the court concluded that the single occurrence happened during the first policy period and could not be considered as also happening during the second policy period.  As such, only the earlier of the Cincinnati policies was triggered.

Tuesday, February 12, 2013

Montana Court Addresses Business Risk Exclusions

In its recent decision in Lukes v. Mid-Continent Cas. Co., 2013 U.S. Dist. LEXIS 17979 (D. Mont. Feb. 11, 2013), the United States District Court for the District of Montana had occasion to consider the application of the business risk exclusions, in particular exclusions j(5) and (6), to allegations of construction defects.

The insured, Bernie Rubio, was alleged to have been hired to design and construct a single-family residence in 2006.  The complaint specifically alleged that the insured subcontracted out the installation of siding, and that the claimant took possession of the home in 2007.  Claimant alleged that the siding warped and pulled away from the house, which allowed for water intrusion and resulting exterior and interior damage.  Among other things, the complaint alleged that the insured or its subcontractor failed to install proper flashing, which also allowed for water intrusion.

Rubio was insured under a general liability policy issued by Mid-Continent.  Mid-Continent disclaimed coverage to Rubio on the basis of its policy’s business risk exclusions, specifically j(5) and (6), which barred coverage for:

j.    "Property damage" to: . . . .

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations;" or

(6) That particular part of any property that must be restored, repaired, or replaced because "your work" was incorrectly performed on it.

While the court agreed that these exclusions are generally considered unambiguous under Montana law, their application was not certain under the alleged facts.

In considering j(5), the court appeared to have limited its application to work being performed at the time the complaint was filed rather than at the time the property damage occurred.  As such, the court cursorily held the exclusion inapplicable because “Rubio is no longer performing operations on any part of the [claimant’s] home.”

By contrast, the court found j(6) inapplicable because of an exception to the exclusion applicable to property damage included in the products-completed operations hazard.  The policy defined products-completed operations hazard as:

a.   Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:

(1)       Products that are still in your physical possession; or
(2) Work that has not yet been completed or abandoned. However, "your work" will be deemed completed at the earliest of the following times:

(a) When all of the work called for in your contract has been completed.
(b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site.
(c) When that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.

Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.

The claimant, suing as Rubio’s assignee, argued that j(6) did not apply, at least for duty to defend considerations, because the complaint did not allege when the property damage occurred, thus leaving open the possibility that the damage at least started while the home was still being constructed.  For instance, the allegation of failure to install flashing left open the possibility that water intrusion commenced during the construction process and prior to the completion of construction.  The court found this argument persuasive, explaining:

Here, the Amended Complaint does not unequivocally state that the damage to the Lukes' home only occurred after work was completed. Some of the damage may have occurred before the house was completed. Thus, some part of the Lukes' claims may not be included in the products-completed operations hazard.  (Emphasis supplied.)

This possibility, concluded the court, was sufficient to at least trigger Mid-Continent’s duty to defend.  Whether Mid-Continent had a duty to indemnify, however, was subject to a finding of actual property damage occurring outside of the products-completed operations hazard.

Friday, February 8, 2013

Minnesota Court Holds Patient Bodily Injury Exclusion Applicable

In its recent decision in Volk v. ACE Am. Ins. Co., 2013 U.S. Dist. LEXIS 15450 (D. Minn. Feb. 5, 2013), the United States District Court for the District of Minnesota had occasion to consider the application of a patient bodily injury exclusion in the general liability coverage section of a policy issued to a healthcare provider.

The insured, North Country Home Care, Inc. (“North Country”), was in the business of providing personal care attendant (“PCA”) services.  One of the individuals to whom it provided such services, a mentally-handicapped individual, was blinded as a result of a BB gun accident that happened while under North Country’s supervision.  At the time of the accident, North Country was insured by ACE under a combined general liability and healthcare professional liability policy.  The general liability coverage was provided on an occurrence basis whereas the professional liability coverage was provided on a claims made basis.  The ACE policy was in effect from July 5, 2005 through June 26, 2006, which was the date that North Country sold its assets and ceased operations. 

In 2009, the guardian for the injured individual gave notice of its intent to file suit.  This notice was forwarded to ACE, which denied coverage on the basis that the incident was properly considered for coverage under the policy’s professional liability insuring section, but that coverage was not available thereunder since the claim was not made while the policy was in force.  ACE also disclaimed coverage under its policy’s general liability coverage on the basis of an exclusion titled Patient Exclusion that barred coverage for “[a]ny loss, cost or expense arising out of 'bodily injury' to your patients.”  The underlying claimant subsequently entered into a settlement with North Country and later brought suit against ACE, arguing that the Patient Exclusion was inapplicable.

The claimant’s primary argument was that the exclusion did not apply since the injured person was not a “patient” of North Country, but instead was a “recipient” or “consumer” of North Country’s PCA services.  Claimant further argued that the term “patient” was ambiguous since it was not defined by the policy.  The court disagreed, concluding that the term “patient” could only be considered ambiguous if read in isolation from the policy.  Looking to the policy as a whole, however, the court observed that the terms “recipient” or “consumer” were not used, whereas the term “patient” was used in both coverages.  Notably, the policy’s professional liability coverage applied to acts or errors arising out of North Country’s “professional healthcare services,” a term defined as services provided by the insured to “care for or assist your patients.”  The court noted that if claimant’s assertions regarding a distinction between patient and recipient or consumer were correct, then the policy’s professional liability coverage could never be triggered by North Country’s PCA services (which was its primary business), and the coverage provided thereunder would be illusory – an impermissible result for the court.  The court therefore concluded that the claimant necessarily qualified as a patient, and that as a result, the Patient Exclusion was applicable.

The claimant further argued that North Country was statutorily required to maintain liability coverage, and that North Country had a reasonable expectation of coverage.  The court rejected both arguments.  With respect to statutory requirements under Minnesota law, the court observed that North Country had long since ceased operations by the time suit was filed, and that it was not required to maintain coverage indefinitely.  With respect to reasonable expectations, the court held that because the policy was unambiguous, and did not provide illusory coverage as argued by claimant, the doctrine of reasonable expectations was not a relevant consideration.

Tuesday, February 5, 2013

Ohio Court Holds E&O Policy Not Triggered By Underlying Misappropriation

In its recent decision in Entitle Ins. Co. v. Darwin Select Ins. Co., 2013 U.S. Dist. LEXIS 14218 (N.D. Ohio Feb. 1, 2013), the United States District Court for the Northern District of Ohio had occasion to consider whether a title insurer errors and omissions liability policy was triggered by the insured’s indemnity obligations pursuant to a series of closure protection letters.

Darwin insured EnTitle Insurance Company, a title insurer, under a professional liability policy with the following insuring agreement:

The Insurer will indemnify the Insured for Loss, including Defense Expenses, from any Claim or Extra-Contractual Claim first made against them during the Policy Period or any applicable Extended Reporting period and reported in accordance with Section VIII(G) of this Policy, for Professional Liability Wrongful Acts committed on or after the date of incorporation or formation of the Named Insured and prior to the end of the Policy Period.

The policy defined Professional Liability Wrongful Acts, and the related term Professional Services as follows:

2)   Professional Liability Wrongful Act- any actual or alleged act, error, omission, misstatement or misleading statement in the performance of or failure to perform Professional Services....by any Insured, or by an individual or entity for whom the Company is legally responsible.

3) Professional Services-services performed by the Company or any Insured Person on behalf of the Company, for a policyholder, customer or client of the Company, pursuant to a policy of insurance issued by, or a written contract with, the Company, in the usual and customary conduct of the Company's business, for a fee or other business consideration.

In connection with its business, EnTitle hired an agency named Direct Title to offer its title insurance product as a “non-exclusive policy issuing agent.” EnTitle offered “closing protection letters,” obligating EnTitle to reimburse its clients for any loss stemming from Direct Title's fraud, dishonesty or negligence in the handling of the closings of title insurance.  Direct Title was later discovered to have misappropriated amounts from client escrow funds, and as a result, these clients demanded reimbursement from EnTitle under the closing protection letters.  EnTitle, in turn, sought indemnification from Darwin under its errors and omissions policy on the theory that Direct Title had committed Professional Liability Wrongful Acts for which EnTitle was legally responsible.  Darwin denied coverage to EnTitle on the basis that EnTitle’s indemnity obligations pursuant to the letters did not arise out of  a “Professional Liability Wrongful Act” and that these obligations did not otherwise qualify as covered Loss under the policy.

In considering the coverage issue, the court observed that to qualify as a “Professional Liability Wrongful Act,” there must be an act, error, omission, misstatement or misleading statement either by EnTitle, as the policy’s insured, or by another entity for whom EnTitle was “legally responsible.”  Thus, the court focused on the issue of whether EnTitle was legally responsible to its clients for Direct Title’s malfeasance.  EnTitle argued that closing protection letters are customary in the title insurance industry, and as such, a practice that Darwin could have expected EnTitle to engage in.  

The court agreed that the protection letters were customary in the industry and, in fact, that Darwin knew EnTitle issued these letters.  This, however, was not determinative of the coverage issue for the court.  Instead, the issue was whether EnTitle was legally responsible for Direct Title’s wrongful act.  Darwin argued, and the court agreed, that EnTitle had no legal responsibility to its clients resulting from Direct Title’s malfeasance.  Instead, EnTitle’s liabilities were a matter of contract.  The court recognized a distinction:

The issuance of [closing protection letters] did not make EnTitle legally responsible for Direct Title. Instead, the [closing protection letters] made EnTitle contractually responsible. A contractual obligation to pay is not the same as a legal obligation to pay …  In addition, even with EnTitle's contractual right to inspect the accounts of Direct Title, the right to inspect an agent's accounts does not demonstrate the control necessary to hold a title insurer liable for the agent's mismanagement of escrow funds.

The court went on to conclude that EnTitle’s obligations under the protection letters did not qualify as “Loss,” a term expressly defined to exclude “amounts due under any contract.”  Further, the Darwin policy excluded coverage “for actual or alleged liability under any express contract or agreement.”  The court agreed that this exclusion applied.  The court also identified a moral hazard in allowing EnTitle to insure contractual obligations such as those set forth in the protection letters, explaining:

A company could enter into a contract safe in the assumption that if he later decides to engage in an act which might be considered a breach, the insurance company will step forward to cover the consequences of his act if he was wrong; and if he was right, he still walks away with no consequence to himself. Such a practice is inimical to the entire concept of insurance.

Friday, February 1, 2013

Oklahoma Court Holds No Coverage for Medical Malpractice Claim

In its recent decision in Admiral Ins. Co. v. Thomas, 2013 U.S. Dist. LEXIS 10754 (W.D. Ok. Jan. 28, 2013), the United States District for the Western District of Oklahoma had occasion to consider the scope of coverage afforded under a medical malpractice liability policy.

The insured, Dr. Rupert Thomas, is a physician in the Oklahoma City area.  Dr. Thomas, through a retail and surplus lines broker broker, applied for a professional liability policy to insure his practice.  The policy, issued by Admiral, provided coverage for claims arising out of “medical incidents,” defined as an “act, error or omission arising out of the: (1) furnishing of ‘professional services’ by the insured.”  “Professional services,” in turn, was defined by the Admiral policy as “work performed by you for others involving specialized training, knowledge and skill in the pursuit of the business stated in the Declarations.”  Finally, the policy’s declarations identified Dr. Thomas’ practice as “gynecology-major surgery.”  Dr. Thomas was later sued for alleged medical malpractice arising out of the delivery of an infant.  Admiral denied coverage for the underlying suit on the grounds that its policy expressly limited coverage to medical malpractice claims arising out of Dr. Thomas’ gynecological or surgical procedures, and as such, did not insure medical pursuits outside of these fields, such as obstetrics. 

Dr. Thomas conceded a distinction between gynecology and obstetrics, and the court observed this distinction in the case law as well.  Gynecology, explained the court, did not include the delivery of a baby.  Thus, while the court agreed that the underlying suit alleged a “medical incident,” the court concluded that:

… the malpractice claim arises from an alleged error occurring during the delivery of a baby. Thus, the claim falls within the definition of obstetrics, not gynecology. Because the policy did not insure Dr. Thomas for medical incidents arising from providing the professional service of obstetrics, the claim is not within the scope of coverage provided by the policy.

Conceding the limitation of coverage in the policy, Dr. Thomas argued that he had expressed a desire to have at least retroactive coverage under the policy for obstetrics.  While this information was communicated to the surplus lines broker, that broker did not convey the same information to Admiral.  The court observed that by Oklahoma statute, a surplus lines broker is the agent of the insured, not the insurer.  As such, the court rejected Dr. Thomas’ argument that the broker’s knowledge of Dr. Thomas’ request for limited obstetrics coverage could be imputed to Admiral.  Accordingly, the policy would be enforced as written with coverage only for gynecology and surgical practices.