INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Damages sought in death from illegal drug
In May 2002, Janice Aeschlimann filed a complaint against Robert Long and others seeking damages related to the death of her daughter, Sara. The complaint alleged that someone put a methamphetamine drug in Sara’s drink, causing a toxic overdose. Long was accused of “knowingly participat[ing] in the chain of distribution” of the drug that was eventually ingested by Sara. At the time of Sara’s death, Westfield National Insurance Company insured Long under a homeowners policy, and Westfield Insurance Company insured him under a personal umbrella policy. Long tendered the suit to Westfield National and Westfield for defense and indemnification. Both policies contained the following exclusion: “We do not provide coverage for: Bodily injury … arising out of the use, sale, manufacture, delivery, transfer or possession by any person of a Controlled Substance(s) as defined by the Federal Food and Drug Law.” Citing this exclusion, Westfield National and Westfield sought a declaration that they were relieved from their duty to defend or indemnify Long. The trial court found in favor of the insurers, stating that the allegations in the Aeschlimann complaint “fall squarely” within the language of the exclusion.

Long appealed, arguing that the drug exclusion in the policies was inapplicable because the complaint did not directly link him to the act that caused Sara’s death. The Illinois Court of Appeals was unconvinced, citing earlier case law that found an insurer has no duty to defend its insured “if the underlying complaint alleges facts that, if true, would exempt the insured from coverage.” The court found it was clear that Sara’s death arose out of the sale, delivery, transfer, or possession of methamphetamine. The only activity alleged against Long was his distribution of an illegal drug. Therefore, the exclusion applied, and the insurers were not obligated to defend or indemnify.

The decision of the lower court was affirmed.

Westfield National Insurance Company vs. Long-No. 2-03-0556-Appellate Court of Illinois, Second District-June 10, 2004-811 North Eastern Reporter 2d 776.

Is retailer covered for negligence in assembling display unit?
Lechmere, Inc., had a retail store in Cambridge, Massachusetts, where it sold Nintendo Game Boy software products. As part of its sales strategy, Lechmere in August 1993 purchased a large interactive Game Boy display unit that consisted of a display pedestal, a 20-inch JVC television monitor, and a Game Boy interactive demovision display which housed the software. The unit was 72 inches high, 36 inches wide, and 18 inches deep, and it weighed 218 pounds. The unit was manufactured by KCS Industries, Inc., for Nintendo, Inc., which in turn sold the unit to Lechmere. Sometime before August 1994, Lechmere assembled the unit. On August 2, 1994, five-year-old Tony Makrigiannis was injured when the top portion of the unit fell on top of him as he was attempting to use it.

In 1997, Tony (with his parents and next friends) sued Nintendo and Lechmere, alleging several forms of negligence. At the time of the accident, Nintendo had a liability insurance policy with Sumitomo Marine and Fire Insurance Company, Ltd. The policy included a vendor’s broad form endorsement covering “[a]ll vendors authorized by the Named Insured,” which included Lechmere. When Lechmere demanded defense and indemnification, Sumitomo refused. The negligence action went to trial, and Lechmere was found 100% negligent. After a bench trial on a third-party action by Lechmere against Sumitomo, the trial court judge ruled that Sumitomo owed Lechmere a defense and indemnification because Tony’s claims fell within the scope of the vendor’s endorsement. Sumitomo appealed.

Under the Sumitomo policy, Lechmere was the named vendor and Nintendo was the named insured. The “Persons Insured” provision of the policy included the vendor as an insured, but “only with respect to the distribution or sale in the regular course of the vendor’s business of [Nintendo’s] products.” Excluded from coverage was “demonstration, installation, servicing or repair operations, except such operations performed at the vendor’s premises in connection with the sale of the product” (emphasis added).The policy did not define the terms “distribution” or “sale.”

On appeal, Sumitomo argued that the display unit was not a “product” under the terms of the endorsement because the unit itself was not for resale. It also argued that the vendor’s endorsement was intended to protect a vendor in products liability suits, not to protect a vendor for its own independent acts of negligence. The Supreme Judicial Court of Massachusetts was not convinced by either argument. The court found the unit was indeed a “product” within the scope of the endorsement language because Tony was attempting to use the top part of the unit when it fell on him. As such, the unit was a “product” and was covered by the policy. The court also found the endorsement did not limit coverage to claims of product defects. A reasonable vendor, reading the language of the endorsement, would expect coverage in these circumstances. The policy did not expressly exclude coverage when injury resulted from the vendor’s negligence. If Sumitomo intended these results, it could have excluded coverage. The court concluded that the vendor’s endorsement covered Lechmere’s own negligence and that Sumitomo, Nintendo’s insurer, must indemnify Lechmere.

The judgment of the lower court was affirmed.

Makrigiannis vs. Nintendo of America, Inc.-Supreme Judicial Court of Massachusetts, Middlesex-October 13, 2004-815 North Eastern Reporter 2d 1066.

Without criminal warrant, does policy cover fraud?
Thompson & Ward Leasing Company, an auto leasing business, held a business insurance policy with Cincinnati Insurance Company. The policy included coverage for losses arising out of title problems with vehicles acquired by Thompson & Ward. This case involved two automobile purchase transactions between Thompson & Ward and a motor vehicle dealer, Beverly Hills Auto Collection (“BHAC”). According to a Thompson & Ward employee, BHAC contacted Thompson & Ward regarding proposed leases for two Porsches. Thompson & Ward obtained credit information, secured lease financing, and entered into lease contracts with the lessees. It then paid BHAC for the two automobiles, financed for $90,897 and $102,921, respectively. If the transaction had gone as planned, BHAC would have provided Thompson & Ward with the necessary paperwork to obtain title on behalf of the financial institution, and the financial institution funding the leases would have reimbursed Thompson & Ward for the purchase price of both cars. Unfortunately, the vehicles were the subject of a fraudulent transfer by a BHAC principal, Randy Cohn; Thompson & Ward never received reimbursement.

Thompson & Ward attempted to make a claim for its loss under its business insurance policy with Cincinnati Insurance. The relevant language of the policy provided: “We will pay for your loss due to the acceptance, in good faith, in exchange for merchandise, money, or services, any titles to automobiles, if the titles are proven to be fraudulent, counterfeit, or forged and a criminal warrant is obtained for the arrest of the person or persons executing the titles.”

The term “title” was defined as “a written document of ownership issued by governmental authority.” In addition, “loss” occurs “when [the insured] must return an automobile to its rightful owner after [the insured] acquired it by accepting a fraudulent, counterfeit, or forged title.”

Cincinnati denied coverage, arguing that, under the language of the policy, Thompson & Ward had not suffered a covered loss because it had never received “title” to the vehicles as defined in the policy and because no criminal warrant had been issued for the arrest of Randy Cohn.

After hearing the evidence, the trial court found that there was no credible evidence that a warrant had been issued for Randy Cohn’s arrest. Accordingly, it found there was no coverage under the Cincinnati Insurance policy. Thompson & Ward appealed, arguing that, even if the lower court’s evidentiary finding was correct, the precondition to coverage under the policy was against public policy, unconscionable, and should be read out of the policy.

The Court of Appeals of Ohio agreed with the lower court’s decision that there was no showing that an arrest warrant existed. It then addressed Thompson & Ward’s public policy and unconscionability arguments. The court stressed that the insurance contract was an arm’s-length agreement between two businesses that were free to contract as they saw fit. It also noted that the requirement of proof of criminal prosecution is common in policies in order to reduce the risk of collusive claims. Finally, the terms of the policy were clearly spelled out, not “hidden in a maze of fine print,” and were therefore not illusory. The court concluded there was nothing to support Thompson & Ward’s claim that the policy language was unconscionable and against public policy.

The decision of the lower court was affirmed.

Cincinnati Insurance Company vs. Thompson & Ward Leasing Company-No. 03AP-1172-Court of Appeals of Ohio, Tenth District, Franklin County-July 29, 2004-815 North Eastern Reporter 2d 1126.

Insured challenges UIM claim filing time limit
On March 16, 1999, Debra Parish was injured in an automobile accident. As of July 2001, she had recovered $1,842.10 for her medical treatment under the med-pay provision of her Country Mutual Insurance Company insurance policy. The following September, she had surgery as a result of the accident.

The other driver involved in the accident was insured by GEICO Direct Insurance. In December 2002, Debra settled with GEICO for the limits of the policy: $20,000. She and her husband, Troy, then informed Country Mutual of their intent to file a claim under the underinsured motorist provision of their policy.

Section 2 of the Country Mutual policy listed a series of conditions pertaining to the uninsured and underinsured motorist coverage the policy provided. One of the conditions stated there was a two-year limitation for an insured to initiate proceedings for recovery of a claim. By the time Debra informed Country Mutual of her intent to file a claim, more than three years and nine months had elapsed since the accident occurred. Citing the limitation contained in Section 2 of the policy, Country Mutual denied any underinsured motorist coverage.

In June 2003, Troy and Debra filed a complaint against Country Mutual, asking the trial court to declare they were entitled to underinsured motorist coverage. Country Mutual filed a motion to dismiss. The lower court sided with Country Mutual, and Troy and Debra appealed.

On appeal, Troy and Debra argued that the time-limitation provision in the Country Mutual policy was against public policy. While they acknowledged that the underinsurance provision at issue had been upheld by several courts in the past, they nevertheless argued their case was unique because Debra “did not in any way appreciate the value of her damages” before the two-year time period had elapsed.

The Appellate Court of Illinois was not convinced by their argument. It reasoned that an insured can sufficiently allege a cause of action for underinsured motorist benefits if she has sufficient facts to proceed against the tortfeasor. According to the court, the only additional requirement is a showing that the insured’s damages and insurance coverage exceed the tortfeasor’s liability insurance. In this case, it was enough for Troy and Debra to be aware of the other party’s limited insurance coverage and that their damages could exceed that coverage. This was knowledge that was easily attainable, not something confidential or outside the scope of information to which Troy and Debra had access. Stating that public policy does not require invalidation of a clearly written provision simply to avoid disappointment to an insured, the court found the time limitation provision did not violate public policy.

The judgment of the trial court was affirmed.

Parish vs. Country Mutual Insurance Company-No. 4-03-1014-Appellate Court of Illinois, Fourth District-July 28, 2004-814 North Eastern Reporter 2d 166.

Term in agent’s E&O policy found ambiguous
Life insurance agent Glenn Guffey recruited several North and South Carolina life insurance agents to sell a Great American Reserve Insurance Company tax-deferred annuity product called the Flex II. When he trained the agents, Guffey told them that Flex II did not have any commission or other fees that would reduce the amount of the premiums used to build up the value of the policy. In fact, Flex II did have a front-end load. When the agents’ customers complained about misrepresentations regarding Flex II, the South Carolina Department of Insurance investigated. Most of the agents admitted that they had misrepresented the Flex II. Subsequently, they incurred liability to their customers, costs of regulatory proceedings, and defense of civil lawsuits. To recover their losses, they then initiated a lawsuit against Guffey and Great American, claiming they incurred damages as a result of Guffey’s and Great American’s misrepresentations.

American Home Assurance Company was Guffey’s professional liability insurer, and as such represented Guffey in the lawsuit. The declarations page of the American Home policy provided that its limits of liability were $250,000 for “Each Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts” (emphasis added) or $750,000 in the aggregate. During the Guffy litigation, the trial court ordered that the “remaining policy limits” be tendered to the court and held in an interest-bearing account. However, the court did not determine the amount of the policy limits. The agents filed a motion to establish American Home’s indemnity obligations under the policy. The trial court found the language on the declarations page to be ambiguous, and eventually ordered American Home to tender an amount up to the aggregate limit of $750,000. American Home appealed that order.

The Court of Appeals of Indiana found the term “interrelated” in the policy to be ambiguous, and thus construed the term against American Home. According to the court, three factors supported its finding of ambiguity: First, “interrelated” has no common understanding as to its meaning. Second, the policy did not define the term. Third, the definition of “interrelated” can be read restrictively or more expansively. The court then adopted the restrictive meaning, which required a mutual relationship or connection. Because each alleged wrongful act did not affect another act that in turn affected it, the court found no mutuality. Thus, the claims were separate and distinct acts. The court concluded that the limit of liability available to satisfy any judgment was $750,000.

The judgment of the lower court was affirmed.

American Home Assurance Company vs. Allen-No. 29A04-0311-CV-570-Court of Appeals of Indiana-September 9, 2004-814 North Eastern Reporter 2d 662. *