INSURANCE-RELATED COURT CASES

Court Decisions

Digested from case reports published in Westlaw,
West Publishing Co., St. Paul, MN

Homeowners coverage denied to nonresidents

In November 2002, Marcelo Martinez filed a lawsuit against Humbelina Flores, Maria Torres, and Maria’s husband, Martin. Martinez’s minor daughter, Daniela, had been bitten by a dog while she was a guest in the Flores family home in Cicero, Illinois. The home was insured under a State Farm Fire & Casualty Company homeowners policy. The policy, however, was issued to Martin and Maria Torres, not the Floreses. The Torreses had legal title to the home, but they had never lived there. They had purchased the home in their name to assist Humbelina Flores (Maria Torres’s sister) because she had bad credit.

Initially, State Farm agreed to provide a defense for Humbelina and the Torreses, subject to a reservation of rights. Later, however, the insurer declined to accept Humbelina’s tender of defense, first verbally, then later in a letter to her attorney. The lawsuit was eventually settled for $150,000. The Floreses consented to a judgment against them. In exchange, Martinez agreed to release the Floreses and to satisfy the judgment only out of the proceeds of the State Farm homeowners policy. In the meantime, State Farm had filed a declaratory judgment action asking a court to determine that it was not obligated to provide coverage to the Floreses. The lower court found in favor of State Farm, holding that the Floreses did not qualify as insureds under the policy because they were not members of the Torreses’ “household.” The Floreses appealed.

As an initial matter, Martinez argued that State Farm had breached its duty to defend when it promised, then abandoned, a defense to Humbelina Flores, and that State Farm was therefore precluded from raising coverage defenses. The Appellate Court of Illinois disagreed. It found that because State Farm informed Flores in writing that it was denying coverage and then followed up by filing a declaratory judgment action, it had not waived its right to raise its coverage defenses.

The court then evaluated the key question of whether Flores and her husband were covered under the State Farm policy. The policy language provided that the following were insured: “you” (named insured); and, if a resident of your household, “your relatives” and “any other person under the age of 21 who is in the care of a person described above.” The Appellate Court noted that the policy did not define the word “household.” It also noted that the controlling factor as to whether someone was a “resident of the household” was the intent of the party whose residency was in question. Martin Torres testified that he and his wife never lived or intended to live at the address. In addition, there was no evidence that the Floreses ever intended to live where the Torreses lived. Under these facts, the Appellate Court found that the trial court correctly concluded that the Floreses were not covered under the policy because they were not residents of the Torreses’ household when the dog bit Daniela.

The decision of the lower court in favor of State Farm was affirmed.

State Farm Fire and Casualty Company vs. Martinez-No. 1-06-1902-Appellate Court of Illinois, First District, Second Division-August 5, 2008-893 North Eastern Reporter 2d 975.

Assailant’s victim challenges policy exclusion

Patrick and Suzanne McArdle and their son, M.S.M., were neighbors of Jaclyn Larson. In 2004, when M.S.M. was 14 years old, M.S.M. entered Larson’s home and assaulted her with a knife, causing injuries. The knife he used had been given to him by his parents. M.S.M. eventually pleaded guilty to the offense and was convicted of attempted first-degree murder. In December 2005, Larson sued the McArdles for negligence. The McArdles sought coverage under their SECURA Supreme Insurance Company homeowners policy. SECURA agreed to defend Mr. and Mrs. McArdle but not M.S.M, subject to a reservation of rights. SECURA then filed a declaratory judgment action asking the court to find that it was not obligated to defend the McArdles.

The SECURA policy contained both an intentional act exclusion and a criminal act exclusion. The language of the criminal act exclusion provided: “Medical [p]ayments to [o]thers do not apply to bodily injury or property damage…[w]hich:…(3) Results from the criminal acts of any insured.” Another section of the policy contained a severability clause that stated that “[t]his insurance applies separately to each insured.”

The lower court determined that the criminal act exclusion applied and that it operated to bar coverage for any and all claims made by Larson. Larson appealed.

On appeal, Larson argued that the criminal act exclusion should not apply because M.S.M. had a mental illness. According to Larson, because of his mental illness, it was questionable whether M.S.M. had the ability to form an intention to harm her. She reasoned that if his behavior was not “intentional,” it should not fall under the criminal act exclusion. The Court of Appeals of Minnesota rejected Larson’s argument and held that in order to trigger a criminal act exclusion, as opposed to an intentional act exclusion, the insurer had only to establish that a criminal act had been performed, not that there was an intent to injure.

Larson also argued that the criminal act exclusion should not apply because it contained the words “results from” as opposed to “arising out of.” According to Larson, the phrase “results from” should be construed to mean that the negligence, and not M.S.M.’s criminal conduct, should be the focus of the analysis. SECURA argued that the phrase “results from” is the same as “arising out of” and that the focus should be M.S.M.’s criminal act. Again, the Court of Appeals found in favor of SECURA. It found that the criminal act exclusion applied because Larson’s injuries “resulted from” M.S.M.’s attack.

Finally, Larson argued that exclusion of coverage for all of the McArdles was inconsistent with the policy’s severability provision. Specifically, she argued that the McArdles had a reasonable expectation of separate coverage, that the two provisions, read together, were ambiguous, and that they therefore must be interpreted narrowly to provide separate coverage for M.S.M.’s parents. Again, the court disagreed. It did not find that an ambiguity was created when the two clauses were read together. Therefore, there was no reason to evaluate the McArdles’ “reasonable expectation of separate coverage.”

In conclusion, the Court of Appeals of Minnesota found that the criminal act exclusion precluded coverage for Larson’s injuries. The decision of the lower court was affirmed.

SECURA Supreme Insurance Company vs. M.S.M.-No. A07-1736-Court of Appeals of Minnesota-September 2, 2008-755 North Western Reporter 2d 320.

Is new owner’s mold sickness covered by sellers’ policy?

In July 2006, Jeffrey and Vicky Jo Geiger sold a house to Lisa Thies. Prior to the date of sale, the house was insured under a “Home-Guard 2” homeowners policy issued by Hartland Mutual Insurance Company on behalf of itself (for “Property Coverages”) and Grinnell Mutual Reinsurance Company (for “Personal Liability Coverages”).

Shortly after moving into the house, Thies began feeling sick and discovered mold in the house. A professional service issued a report concluding that the home’s windows and/or wall systems had been leaking for years. Thies filed a lawsuit against the Geigers claiming that they knew about the mold problem before they sold the home and accusing them of various types of fraud. The Geigers denied the claims. Grinnell Mutual defended the Geigers subject to a reservation of rights. It then filed a declaratory judgment action asking the court to determine that it was not obligated to defend them.

The parties agreed that the “Personal Liability” portion of the policy was applicable to the facts of the case. Under that section, Grinnell Mutual agreed to “pay compensatory damages for which an ‘insured’ becomes legally liable as a result of ‘bodily injury’ or ‘property damage’ caused by an ‘occurrence’ to which [the personal liability] coverage applies.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the policy period, in: a. ‘Bodily injury’; or b. ‘Property damage.’” The policy defined “bodily injury” to mean “bodily harm, sickness, or disease sustained by a person, including resulting death,” and to also include “mental or physical anguish, pain, or suffering, but only if accompanied by physical symptoms.” The policy defined “property damage” to mean “physical injury to or destruction of tangible property,” and to “not include loss of use unless the property has been physically injured or destroyed.”

In the declaratory judgment action, the lower court found that Thies’s injuries did not constitute an “occurrence” or “accident” while the insurance policy was in effect, and that therefore Grinnell Mutual had no obligation to defend the Geigers in the Thies lawsuit. The Geigers appealed.

On appeal, the Supreme Court of North Dakota agreed with the lower court that the claimed “occurrence” did not take place while the liability policy was in effect. According to the court, the plain language of the policy defined “occurrence” as an accident…which resulted in “bodily injury” or “property damage” during the policy period. Thus, the occurrence happened when Thies was actually damaged, not when the mold accumulated in the home. Because there was no occurrence during the policy period, there was no coverage under the policy.

The decision of the lower court in favor of the insurer was affirmed.

Grinnell Mutual Reinsurance Company vs. Thies-No. 20080017-Supreme Court of North Dakota-September 4, 2008-755 North Western Reporter 2d 852.

Excess insurer challenges punitive damages award

In 2000, the estate of Patrick Canavan filed a wrongful death action against National Healthcare Corporation and National Health Corporation. The lawsuit resulted from injuries that Canavan suffered while he was living in a nursing home owned, operated and/or managed by National Healthcare. The jury found against National Healthcare and awarded the estate punitive damages and attorneys’ fees.

National Health Corporation carried primary insurance with Caliber One Indemnity Company and excess insurance with First Specialty Insurance Company. Caliber One filed a declaratory judgment action asking the court to find that its policy did not provide coverage for punitive damages and attorneys’ fees. The language of the Caliber One policy provided: “We will pay those sums that the insured becomes legally obligated to pay as ‘damages’ because of any act, error or omission in the rendering or failure to render ‘professional services’ by an insured or by any person for whose acts, errors or omissions an insured is legally responsible.”

In the policy, “damages” were defined as “any compensatory amount which an Insured is legally obligated to pay for any claim to which this insurance applies, but does not include injunctive or equitable relief or the return of fees or charges for services rendered.” Coverage for “[a]ny civil, criminal or administrative fines or penalties levied against an insured” was excluded.

The First Specialty policy applied “only to damages covered by the primary insurance and [was] subject to the same terms, conditions, exclusions, definitions and limitations as the primary insurance.”

The trial court found that both the Caliber One policy and the First Specialty policy provided coverage for awards of punitive damages or attorneys’ fees. First Specialty appealed.

On appeal, First Specialty argued that its policy’s definition of “damages” unambiguously limited coverage to damages that were “compensatory” in nature, i.e., damages that compensate the injured party to make him or her “whole.” The District Court of Appeal of Florida agreed. It noted that compensatory and punitive damages serve different purposes, and that the nature of punitive damages as “fines” did not fit within the definition of the policy. The court also found that attorneys’ fees were not covered by the policy because the policy did not expressly provide for them to be covered.

The decision of the lower court was reversed and remanded for further proceedings.

First Specialty Insurance Company vs. Caliber One Indemnity Company-No. 2D07-3257-District Court of Appeal of Florida, Second District-August 15, 2008-988 Southern Reporter 2d 708.