Insurance-Related Court Cases 09/05

INSURANCE-RELATED COURT CASES

COURT DECISIONS

Digested from case reports published in the North Eastern Reporter 2d,
West Publishing Co., St. Paul, MN

City seeks damages from defunct company’s former insurers

Studebaker Corporation was a Michigan corporation that, beginning in the 1850s, produced wagons and later automobiles in the city of South Bend, Indiana. Studebaker’s manufacturing facilities encompassed 104 acres of land and 3.65 million square feet of buildings in the city. Studebaker stopped manufacturing automobiles in December 1963, and eventually combined with Worthington Corporation to form a new company, Studebaker-Worthington, Inc. Studebaker was reincorporated as Hallpark Enterprises, Inc., and transferred its assets to Saraband Properties, Inc., a wholly owned subsidiary of Studebaker-Worthington. Saraband also assumed “all of the liabilities and obligations of [Studebaker] existing on [November 22, 1967].” The original Studebaker Corporation was dissolved by Hallpark in 1968.

After Studebaker stopped manufacturing automobiles in South Bend, the facilities were used for a variety of other operations. In the early 1990s, the city conducted an environmental evaluation of the premises and found there were environmental releases affecting the soil and groundwater at those facilities and grounds. As the owner of significant portions of the former Studebaker facilities, the city filed a complaint for damages and declaratory relief against Certain Underwriters at Lloyd’s, London, and Certain London Market Insurance Companies, Century Indemnity Company, and Zurich American Insurance Company (Insurers), the insurers alleged to have provided insurance to Studebaker between 1949 and 1963.

The city also sued McGraw-Edison Company, the alleged successor to Studebaker. The insurers filed motions to dismiss the complaint, alleging the city did not have a claim against them. The city asked for appointment of a receiver to represent Studebaker’s interests, particularly with respect to the pursuit of coverage under the company’s insurance policies. The trial court granted the insurers’ motion to dismiss, and denied the city’s motion for appointment of a receiver. The city appealed.

On appeal, the insurers argued that the city’s action was barred by the “direct action rule,” a rule that bars a third party from pursuing a claim based on the actions of an insured directly against the insurer. The city acknowledged the existence of the direct action rule but asserted that its case fell under an exception to the rule. The Court of Appeals of Indiana agreed. It found that the kinds of actions that have been allowed as exceptions to the direct action rule are actions seeking only a declaration of the insurer’s responsibilities should the allegations regarding the insured’s conduct be proved. The city was not seeking any direct compensation from the insurance company, only a declaration that, if it were to prove its underlying case, the insurers would be obligated to provide coverage. Thus the city’s action fell under the exception to the direct action rule.

The Insurers and McGraw-Edison also argued there was no environmental liability to be covered by the insurance because Michigan law barred any claims against Studebaker as of 1971, two years after Studebaker was dissolved. The court disagreed. Had the city named only Studebaker as a party, the court would have agreed with the insurers’ argument. However, the city also sued McGraw-Edison, alleging it was successor to Studebaker’s assets as well as its insurance policies and liabilities existing at the time of dissolution. Thus Michigan law did not require dismissal of the city’s action against the Insurers.

The decision of the trial court dismissing the city’s action against the insurers was reversed, and the case was remanded to the trial court for further action. The decision of the trial court denying the city’s motion to appoint a receiver was affirmed.

City of South Bend v. Century Indemnity Company-No.49A02-0403-CV-201-Court of Appeals of Indiana-January 18, 2005-821 North Eastern Reporter 2d 5.

Insurer denies duty to defend under employee benefits liability

Kathleen Grant was a veterinarian and a past employee and part owner of Twin Maples Veterinary Hospital. She filed a lawsuit against Warren Snead and Craig Clouse, her business colleagues, who were still employees and part owners of the hospital. In her complaint, Grant alleged that Snead and Clouse had attempted to “squeeze [her] out” as a minority shareholder without paying her the value of her common stock in the corporation and her share of bonus pool money.

Twin Maples, Snead, and Clouse were insured by Cincinnati Insurance Company under a businessowners policy and an umbrella policy. The BOP included veterinary professional liability coverage and employee benefit liability coverage. Twin Maples promptly notified Cincinnati of the lawsuit, but Cincinnati refused to defend. According to Cincinnati, the allegations contained in Grant’s complaint were not covered under the policy because the policy language covered only negligent acts and expressly excluded claims arising from dishonest, fraudulent, criminal, or malicious acts. In addition, Grant’s entitlement to the bonus money did not arise through her employment relationship with Twin Maples and was, therefore, not an “employee benefit” within the meaning of the policy.

Twin Maples, Snead, and Clouse incurred more than $70,000 in attorneys’ fees and costs defending themselves in the action. They then brought suit against Cincinnati, claiming Cincinnati had breached its contract with them and had acted in bad faith. They filed a motion for summary judgment on the issue of the bonus money, asking the court to find that the employee benefit endorsement of the policy obligated Cincinnati to defend against that particular claim. The trial court found in favor of Cincinnati on that issue. Twin Maples, Snead, and Clouse appealed.

The employee benefit liability coverage endorsement of the Cincinnati policy provided: “We will pay those sums that the insured becomes legally obligated to pay as damages because of injury to: (1) An ‘employee’; or (2) A person who was formerly employed by you; . . . caused by any negligent act, error or omission committed by an insured or any other person for whose acts the insured is legally liable, arising out of the ‘administration’ of the insured’s ‘employee benefit programs . . . We will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for injury to which the insurance policy does not apply.” The endorsement excluded claims arising out of “[a]cts, errors or omissions of any insured that are dishonest, fraudulent, criminal or malicious.”

On appeal, Cincinnati argued that the employee benefit endorsement covered only negligent conduct, not the “fraudulent” or “malicious” conduct Grant alleged. The Court of Appeals of Ohio, Second District, Montgomery County, agreed. It found that the endorsement clearly and unambiguously covered only an “act, error, or omission” that was negligent. There was nothing in Grant’s complaint that could support mere negligence on the part of Snead, Clouse, and Twin Maples. Because Grant did not rely upon any negligent conduct as the basis for her claims, her claims did not fall within the endorsement’s coverage provision, and Cincinnati was not obligated to defend.

The judgment of the trial court was affirmed.

Twin Maples Veterinary Hospital, Inc., vs. Cincinnati Insurance Company-Court of Appeals of Ohio, Second District, Montgomery County-February 4, 2005-824 North Eastern Reporter 2d 1027.

Worker seeks UIM coverage from employer

Forest Olmstead was on his way to work at Checkmate Boats, Inc., when he was injured in a car accident. Checkmate was insured by New Hampshire Insurance Company under business auto and general liability insurance policies. After settling with the party at fault for that party’s liability limit of $50,000, Olmstead sought underinsured motorist (UIM) coverage pursuant to Checkmate’s policies with New Hampshire.

The trial court held that Olmstead was entitled to UIM coverage under the business auto policy because, insofar as he was acting within the course and scope of employment at the time of his accident, he was driving and occupying a “covered auto.” The court alternatively held that UIM coverage arose by operation of law because no waiver of UIM coverage was signed. New Hampshire appealed.

The declarations page of the business auto policy stated: “ITEM TWO-SCHEDULE OF COVERAGE AND COVERED AUTOS. This policy provides only those coverages where a charge is shown in the premium column below. Each of these coverages will apply only to those ‘autos’ shown as covered ‘autos.’ ‘Autos’ are shown as covered ‘autos’ for a particular coverage by the entry of one or more symbols from the COVERED AUTO Section of the Business Auto Coverage Form next to the name of the coverage.” For purposes of liability coverage, the vehicles that are defined as “covered autos” are “Specifically Described ‘Autos,’” “Hired ‘Autos’ Only,” and “Non-owned ‘Autos’ Only.” For purposes of UIM coverage, only autos owned by the corporation are defined as “covered autos.”

The UIM coverage endorsement stated that when a corporation is the named insured, UIM coverage is afforded to “[a]nyone ‘occupying’ a covered ‘auto’ or a temporary substitute for a covered ‘auto.’” The endorsement did not define “covered auto.”

On appeal, New Hampshire argued that the trial court erred in finding that Olmstead’s car was being used in the business or personal affairs of Checkmate at the time of the accident. In addition, New Hampshire questioned the trial court’s finding that, since Olmstead’s car was a covered auto for liability purposes, Olmstead was an “insured” as defined by the policy’s UIM endorsement because he was “anyone ‘occupying’ a covered ‘auto.’”

The Court of Appeals of Ohio, Sixth District, Erie County, agreed with New Hampshire. It found that, even though other types of vehicles were defined as “covered ‘autos’” for purposes of liability coverage, for purposes of UIM coverage, Checkmate specified that only vehicles owned by the corporation would be considered “covered ‘autos.’” The declarations page clearly and unambiguously stated that there was UIM coverage only for “those ‘autos’ shown as covered ‘autos.’” Because the UIM endorsement did not define “covered ‘auto,’” the declarations page controlled. Furthermore, once it was determined Olmstead was not occupying a vehicle owned by the corporation, it was not necessary for the court to determine whether Olmstead was within the scope of his employment at the time of the accident.

The appellate court also addressed the lower court’s alternative finding that UIM coverage arose by operation of law because there was no waiver of coverage. Ohio law in effect at the time of the policy provided that UM coverage “in an amount of coverage equivalent to the automobile liability or motor vehicle liability coverage” must be offered. Otherwise, coverage would arise by operation of law. The court found that, because Checkmate purchased UIM coverage in the amount of $1 million, it had complied with the law, and that there was no need to create coverage by operation of law.

The judgment of the lower court was reversed, and the case was remanded to the trial court for further consideration.

Olmstead vs. New Hampshire Insurance Company-No. E-04-017-Court of Appeals of Ohio, Sixth District, Erie County-January 7, 2005-824 North Eastern Reporter 2d 158.

No bad faith found in subrogation action

State Farm Mutual Automobile Insurance Company brought a subrogation action against Patrick Culbertson to recover $2,740.43 paid for repairs to State Farm’s insured’s vehicle and a rental vehicle. Culbertson filed a notice, pursuant to a court rule, requesting that State Farm produce its insured, Penny Cutshaw, at trial and arbitration. State Farm filed a package that included proof of payment by State Farm, a rental bill, a repair bill, photographs of Ms. Cutshaw’s damaged vehicle, and a notice to produce Culbertson at trial and arbitration. At the mandatory arbitration hearing, State Farm presented testimony of its claims representative and presented Culbertson as a witness. The arbitrators found in favor of State Farm, and awarded it $2,500 plus costs. The arbitrator noted that Penny Cutshaw was not present at the arbitration hearing but did not make a finding of bad-faith participation on the part of State Farm.

Culbertson rejected the arbitration award and filed a motion to bar State Farm from presenting evidence or testimony at trial. According to Culbertson, sanctions were appropriate because State Farm did not comply with Culbertson’s request to produce Ms. Cutshaw at the arbitration hearing. State Farm argued it was not required to produce Ms. Cutshaw under the court rule cited by Culbertson, because Ms. Cutshaw was not a party to the action. The trial court agreed with Culbertson, and sanctioned State Farm under a court rule that required parties to an arbitration process to participate in good faith and in a meaningful manner. State Farm asked the court to reconsider, but this request was denied. The court eventually found in favor of Culbertson.

On appeal, State Farm argued that the trial court abused its discretion in finding that the insurer acted in bad faith. According to State Farm, it participated meaningfully in the arbitration process and did not act in deliberate disregard of the rules of the court. The Appellate Court of Illinois, First District, Fifth Division, agreed. According to the court, State Farm subjected its case to the type of adversarial testing expected at trial. There was nothing in the record that indicated State Farm exhibited disregard for the rules of the court or of the arbitration process. In addition, it was up to Culbertson, as the alleged party at fault, to bear the responsibility for filing an appropriate notice to produce. Because Ms. Cutshaw was not a party to the subrogation lawsuit, the court rule cited by Culbertson was inappropriate. The correct approach would have been to issue a subpoena directly to Ms. Cutshaw.

For all these reasons, the appellate court found that the trial court abused its discretion in granting Culbertson’s motion to bar State Farm from presenting evidence or testimony at trial.

The judgment of the trial court was reversed, and the case was remanded.

State Farm Mutual Automobile Insurance Company vs. Culbertson-No. 1-03-2392-Appellate Court of Illinois, First District, Fifth Division-January 21, 2005-823 North Eastern Reporter 2d 209.

Stolen Picasso triggers coverage dispute

Ronna Lerner was the executrix or administratrix of the estate of the late Nora Bergman. Ms. Bergman owned an original oil painting by Pablo Picasso which, after her death in 1998, her estate decided to sell. The painting was insured by Redland Insurance Company. The Redland policy provided in part that Redland agreed to pay “the agreed value in the schedule” for any covered total loss to scheduled articles. The agreed value for the painting listed in the schedule was $858,500. The policy also provided that, if there was other insurance available that applied to the property, the Redland insurance would apply as excess insurance over the other insurance.

The estate entered into an agreement with the Richard Gray Gallery to sell the painting on consignment. Under the agreement, the painting could not be sold for less than $2 million net to the estate. In addition, the painting was to stay in the sole custody and control of the gallery. Despite this condition, however, the gallery allowed an art dealer, Michel Cohen, to remove the painting from the gallery to show it to a potential buyer. Cohen told the gallery he had sold the painting for $2.2 million and tendered a check for that amount, less a $100,000 commission. He later put a stop payment on the check. In fact, Cohen had sold the painting for an amount in excess of $4 million.

On March 20, 2001, the estate filed suit against the Richard Gray Gallery and its insurer, Zurich American Insurance Company, to recover the value of the painting. The declared value of the painting under the Zurich policy was $2 million.

While it was pursuing recovery from Zurich, the estate contacted Redland regarding the disappearance of the painting. Redland requested more information from the estate, including the documents for proof of loss. According to Redland, the estate informed it that it did not intend to supply Redland with the requested information because it expected to resolve the claim through the Richard Gray Gallery and its insurers. Redland continued to pursue the matter, and sent a letter to the estate reminding it of its obligations under the policy to cooperate with Redland in the investigation of the matter and to refrain from entering into any kind of agreement that would jeopardize any of Redland’s rights of recovery.

The estate eventually settled with Zurich in exchange for $2,005,000 from Zurich and $5,000 from Richard Gray. In addition, the estate executed a release, and agreed to cooperate with Zurich in its efforts to recover the insured value of the painting under the Redland policy, based on a theory that the market value exceeded the agreed value stated in the Zurich policy. At that point, Redland filed a declaratory judgment action, asking the court to find it had no duty to indemnify the estate or its assigns for any loss. The trial court concluded that the Redland policy was excess insurance, and that the insurable value was fixed at $858,500 with respect to the Redland policy, but not with respect to all other insurance. Accordingly, it found in favor of Redland; Zurich appealed.

On appeal, the Appellate Court of Illinois, First District, Fifth Division, agreed with the trial court that the Redland policy was excess insurance. The policy stated that “[i]f at the time of loss or damage there is available any other insurance which would apply to the property in the absence of this policy, the insurance under this policy will apply only as excess insurance over the other insurance.” However, the appellate court disagreed with the trial court’s characterization of the Redland policy’s $858,500 value assigned to the painting. It found that the Redland policy did not attempt to estimate the value of the painting at all; rather, the $858,500 amount was an assessment of damages in the event of a loss. Thus, the Redland policy was a “valued policy.” As such, forcing Redland to pay Zurich based on a market value theory would be inequitable, because the parties did not insure the same risks. The court concluded that the trial court did not err in granting summary judgment in favor of Redland.

The decision of the lower court was affirmed.

Redland Insurance Company vs. Lerner-No. 1-03-2657-Appellate Court of Illinois, First District, Fifth Division-February 10, 2005-824 North Eastern Reporter 2d 1096. *