Insurance-Related Court Cases 08/05

INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Insurer denies liability in sexual assault case

Cynthia Cain, an employee of Dial Real Estate and Investments, filed a two-count sexual assault action against David Dial. Dial tendered defense of the action to his general liability insurer, Pekin Insurance Company. Pekin refused to defend Dial, claiming it had no duty to defend because Dial’s alleged conduct was intentional and did not arise out of or within the course of his employment. Also, Cain did not seek damages for “bodily injury” as contemplated by the insurance policy.

Pekin filed a declaratory judgment action, asking the court to find it had no duty to defend Dial. Dial assigned to Cain any rights he had against Pekin. The trial court reached a judgment in the underlying sexual assault case, finding in favor of Cain on one count and awarding her $300,000. On the second count, the court found in favor of Dial.

The following October, in an attempt to require Pekin to pay the $300,000 judgment, Cain filed a counterclaim against Pekin in the declaratory judgment action. In her counterclaim, she alleged that Pekin breached its duty of good faith in failing to defend Dial in the underlying tort action. The Circuit Court of Marion County found that Cain’s complaint pled a cause of action that was potentially covered by the insurance contract, and that, therefore, Pekin had breached its duty to defend Dial. Pekin appealed.

The Pekin policy provided coverage for bodily injury caused by an “occurrence.” “Occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy excluded coverage for bodily injury “expected or intended from the standpoint of the insured.” In her sexual assault complaint, Cain had alleged that, as a result of Dial’s inappropriate behavior, she had suffered an upset stomach, headaches, and a loss of normal life. On appeal, Pekin argued that the allegations in Cain’s sexual assault complaint were excluded from coverage because Dial (the insured) could have anticipated his behavior could cause the injury Cain suffered. The Appellate Court of Illinois, Fifth District, agreed. Even though Cain’s complaint was couched in terms of negligence, the complaint alleged a course of conduct that was clearly intentional and not merely negligent or accidental. If Dial behaved as the complaint alleged, Cain’s injuries were a probable result that could have been anticipated by Dial. Thus, Cain’s bodily injuries were excluded from coverage because they were “expected or intended from the standpoint of the insured,” and Pekin had no duty to defend Dial.

The judgment of the circuit court was reversed, and judgment was entered in favor of Pekin.

Pekin Insurance Company vs. Dial-No. 5-03-0646-Appellate Court of Illinois, Fifth District-Opinion Filed January 20, 2005-823 North Eastern Reporter 2d 986.

Is attorney who stole client’s settlement entitled to malpractice coverage?

Attorneys Brian Hubka and Thomas Nathan agreed to join forces and jointly represent Cherry Maxwell in a personal injury lawsuit. In April 1994, the attorneys reached a settlement agreement on behalf of Maxwell. The settlement proceeds totaled $225,000; however, Maxwell never received the proceeds because Hubka converted them for his own use. When the Illinois Attorney Registration and Disciplinary Commission filed a complaint against Hubka, he admitted that he never disbursed the settlement funds to Maxwell.

Five months later, Hubka applied for renewal of his professional liability insurance with Coregis Insurance Company. Hubka had been a Coregis customer since 1993. In his application, Hubka stated that he did not know of any “circumstance, act, error, omission or personal injury which may result in a claim” against him. Based on this application, Coregis renewed the policy for a one-year period ending on November 7, 1996.

On January 20, 1996, Maxwell sued Hubka, Nathan, and Nathan’s law firm, Munday & Nathan. Nathan and Munday tendered their defense to their professional liability insurer, Illinois State Bar Association Mutual Insurance Company. Hubka did not tender his defense to Coregis until September 30, 1996. The trial court entered judgment against Hubka in the amount of $213,414.75. This judgment was eventually paid by ISBA.

On August 8, 1996, Hubka was suspended from the practice of law. On September 4, after hearing of the suspension, Coregis informed Hubka that it would not renew his professional liability policy after the November 7 expiration date.

Three days after Hubka tendered his defense to Coregis, Coregis sent a detailed letter to Hubka informing him that his tender had been received and that his defense had been assigned to attorney Michael Bruck. In that letter, Coregis highlighted exclusions to coverage that could be relevant if Hubka was found guilty of certain named charges. Coregis also reserved its right to refuse to defend or indemnify Hubka. Eventually, on August 14, 1997, Coregis filed a complaint for declaratory judgment against Hubka and Maxwell, seeking a declaration that it owed no duty to defend or indemnify Hubka based on the policy exclusions.

In February 1997, Michael Bruck prepared a letter to Hubka explaining that there was a potential conflict between Hubka’s interests and Maxwell’s interests. The letter explained Hubka’s option to seek independent counsel or waive any potential conflict and consent to Bruck’s representation. There was conflicting testimony as to whether or not Hubka received the letter.

After ISBA paid Maxwell’s entire $213,414.75 judgment, ISBA and Munday filed a declaratory judgment against Coregis, seeking a finding that Coregis had a duty to indemnify Hubka for Maxwell’s judgment. In support of their claim, ISBA and Munday argued that Coregis waived its right to rescind Hubka’s policy, and that it could not raise any policy defense because it did not inform Hubka that a conflict of interest existed. The circuit court found in favor of Coregis. It found that the Coregis policy was void ab initio (since inception) because Hubka had made a material misstatement on his application for renewal of his insurance coverage. ISBA and Munday appealed.

On appeal, ISBA and Munday argued that the trial court erred in finding the Coregis policy was void. They also argued that Coregis waived its right to rescind the policy because it did not do so immediately after learning about Hubka’s misstatement in his policy renewal application. Finally, they argued that Coregis could not raise any policy defenses because it failed to inform Hubka of the potential conflict of interest in its representation of him in the Maxwell lawsuit.

In a lengthy opinion, the Appellate Court of Illinois, First District, Fourth Division, found in favor of Coregis. In reaching its decision, it emphasized the difference between a contract that is void ab initio (since inception) and one that is voidable. A contract that is void ab initio is one that legally never existed. A voidable contract is one that can be ratified and enforced by the obligor. The court disagreed with the lower court’s finding that the Coregis policy was void ab initio; however, it found that the contract was voidable. Under Illinois law, a material misrepresentation grants an insurer the right to rescind the policy, if that right is invoked promptly. The issue, then, was whether Coregis waived its right to rescind the policy by waiting approximately one year after learning of the misrepresentation to file its declaratory judgment action. The court found it did not. In fact, according to the court, Coregis did exactly what insurers must do if they want to preserve their right to deny coverage, refuse to defend, or decline to indemnify.

Immediately after hearing of Hubka’s suspension, Coregis informed Hubka that it would no longer renew the policy. Immediately after it was notified of the Maxwell lawsuit, Coregis sent a reservation-of-rights letter. These actions made it clear that Coregis was not waiving anything. Even if Coregis had filed its declaratory judgment action earlier, the court was not obligated to rule until after the Maxwell lawsuit was resolved. Thus Coregis properly exercised its right to rescission of the insurance contract.

The judgment of the lower court granting summary judgment in favor of Coregis was affirmed.

Illinois State Bar Association Mutual Insurance Company v. Coregis Insurance Company-No. 1-03-2283-Appellate Court of Illinois, First District, Fourth Division-December 16, 2004- 821 North Eastern Reporter 2d 706.

Carrier defends insured but disclaims coverage

Marek Szpakowski was a construction worker employed by City Club Hotel to perform renovation work on property owned by Shelby Realty. On April 17, 2000, Szpakowski fell from a scaffold and suffered serious injuries. City Club and Shelby were insured under a commercial general liability policy issued by U.S. Underwriters Insurance Company. Szpakowski’s counsel sent a letter to Shelby informing it that it might be sued. U.S. Underwriters received a copy of this letter and notice of a claim in July 2000. It confirmed receipt of the notice of claim, referring to City Club and Shelby as “Our Insured.” In December 2000, Szpakowski sued Shelby, Forthright Development, LLC, and Metropolitan Hotels, LLC. U.S. Underwriters received a copy of the complaint around December 13; on December 20, it disclaimed coverage of City Club and Shelby. Nevertheless, it defended Shelby in the Szpakowski action.

In September 2002, U.S. Underwriters filed a declaratory judgment action in the United States District Court for the Southern District of New York seeking a finding that it had no duty to defend or indemnify Shelby, City Club, Forthright and Metropolitan, or their named officers (the defendants). All parties filed motions for summary judgment. As part of this process, the defendants asked for recovery of attorneys’ fees incurred in defending the declaratory judgment action.

The court granted summary judgment in favor of the defendants, holding that U.S. Underwriters’ disclaimer of coverage was untimely as a matter of law. However, the court denied the defendants’ request for attorneys’ fees. The parties appealed. The Second Circuit affirmed and held that U.S. Underwriters’ disclaimer of coverage as to Shelby, Forthright and Metropolitan was untimely. Underwriters was obliged to defend and indemnify Shelby in the Szpakowski action. The complaint against City Club and the named officers was dismissed because those parties were not seeking coverage under the policy. Finally, because there was a conflict in the law regarding attorneys’ fees, two questions were certified to the Court of Appeals of New York. The first question was whether, in a case in which an insurance company brings a declaratory judgment action to determine that it does not have obligations under the policy but has defended in the underlying suit, a prevailing defendant in the action should be awarded attorneys’ fees. The second question was whether, in the “special circumstances” of the case, attorneys’ fees should be awarded.

The Court of Appeals of New York declined to answer the second question, sending it back to the U.S. District or Second Circuit Courts. With regard to the first question, the court found that an insured who is “cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations,” and who prevails on the merits of the case, may recover attorneys’ fees. In this case, Shelby, a named insured under the policy, was cast in a defensive posture by U.S. Underwriters. U.S. Underwriters had a duty to defend Shelby, and Shelby’s recovery of attorneys’ fees was incidental to that duty. Thus the court answered the first certified question, and held that an insured who prevails in an action brought by an insurance company seeking a declaratory judgment that it has no duty to defend or indemnify the insured may recover attorneys’ fees regardless of whether the insurer provided a defense to the insured.

U.S. Underwriters Insurance Company v. City Club Hotel, LLC-Court of Appeals of New York-December 16, 2004-822 North Eastern Reporter 2d 777.

Landfill owners seek coverage for cleanup costs

This case involved a 47-acre landfill located near Belvidere, Illinois, that was operated from February 1969 to June 1988. The plaintiffs in the case were AAA Disposal Systems, M.I.G. Investments, and Jack and Richard Ter Maat. AAA was the company that hauled waste to the landfill, and MIG was the operator. Jack and Richard Ter Maat were principal shareholders and officers of AAA and MIG. During the period from October 1973 through May 1988, the plaintiffs were insured by Commercial Union Insurance Company (three one-year primary general liability policies between 1973 and 1976, with per-occurrence liability limits of $100,000), Continental Casualty Company (six primary general liability policies between 1979 and 1985, with per-occurrence liability limits of $500,000), and American Employers’ Insurance Company (three excess policies between September 1973 and October 1976, with per-occurrence liability limits of $1 million for the first two policies and $5 million for the third).

In 1985 the State of Illinois filed a complaint against the plaintiffs alleging that the landfill was contaminating the waters of Illinois. In 1988 the State received an injunction ceasing all dumping operations. The plaintiffs abandoned the landfill, then sold it to Waste Management of Wisconsin. Eventually, in August 1990, the landfill was placed on the Superfund national priority list.

BFI Waste Systems of North America and other companies, pursuant to an administrative order, conducted “interim remedial measures” (IRMs) necessary to close the landfill. In late 1991 they sought legal action to recover from the plaintiffs past and future costs associated with the cleanup. The plaintiffs were held responsible for 85% of the cost of emergency measures, IRMs, and supplemental emergency removals, for a total of $2,349,116.95. They were also held liable for approximately 27% of the costs not related to the IRMs, for a total of $1,795,318.20. In 1993 the plaintiffs filed a declaratory judgment action against the various insurers, seeking a declaration that the insurers must indemnify them under the terms of their policies.

The trial court found that the plaintiffs did not give the insurers timely notice of an occurrence, and granted summary judgment in favor of the insurers except for the insurers that also provided excess coverage. Subsequently, the plaintiffs and the cleanup companies settled with all of the insurance companies to which summary judgment had been denied, except American Employers’. American Employers’ was eventually found liable for its share of the judgment entered against the plaintiffs after exhaustion of primary policies and any future liability. As part of this pro rata calculation, the court excluded the years covered by insurance policies written by companies that became insolvent. The case was appealed.

On appeal, the plaintiffs argued the insurers were not entitled to summary judgment based on late notice because Richard and Jack Ter Maat gave notice to the insurers “as soon as practicable.” The Appellate Court of Illinois, Second District, disagreed. It was undisputed that in April 1984, Richard Ter Maat signed an inspection report that documented contamination at the landfill. Even if he did not have reason to believe he would become liable to the federal government, Ter Maat knew that there was an “occurrence” under the policies. Despite this, plaintiffs did not give notice to the insurers until 1990 or 1991. This constituted late notice under any reasonable interpretation of the policy provisions. Furthermore, because notice was so late, and the plaintiffs offered no excuse for the late notice, the insurers were not required to show any prejudice that resulted from the late notice.

The plaintiffs and cleanup companies argued that the insurance companies could not raise the late notice argument because they, the insurance companies, failed to timely defend the plaintiffs. However, the plaintiffs had entered into an interim defense agreement pursuant to which they agreed they would not “assert any estoppel or waiver against the Insurers based on an alleged failure or wrongful refusal to defend the Policyholders in relation to the Action.” Because the plaintiffs were bound by this agreement, they could not claim the insurance companies were “estopped” from arguing that notice was late. Accordingly, the court affirmed the lower court’s decision concerning late notice.

Next, the cleanup companies argued that the trial court incorrectly required exhaustion of all primary carriers before the excess carrier, American Employers’, was required to pay. They reasoned that American Employers’ policies were in effect from 1973 to 1976, and that excess coverage should be triggered after exhaustion of the primary coverage in effect in those years only. The court disagreed. The American Employers’ policies clearly set forth their status as excess coverage, and they contained “other insurance” provisions. Furthermore, while it was true that the excess policies listed only certain primary policies on their declarations pages, nothing limited the court from considering other valid and collectible insurance.

The court then evaluated the lower court’s calculation of American Employers’ pro rata share of liability. The coverage provisions of the American Employers’ policies provided the insurer would “[I]ndemnify the insured for all sums which the Insured shall be obligated to pay . . .” The cleanup companies argued that this language supported a finding that American Employers’ was responsible for all sums, regardless of when the damages occurred, and that pro rata allocation was therefore inappropriate. Even if pro rata allocation were appropriate, the cleanup companies argued, the period from October 1, 1985, to June 24, 1988, should be excluded from the calculation because no other insurance coverage was available to plaintiffs during that period (presumably because the companies became insolvent). The court found no merit to either of these arguments. According to the court, these results would “eviscerate the policy periods contained in the policies” and “ignore that insurance coverage disputes are covered by contract law.” The court then held that the trial court erred by excluding from the pro rata calculation the years covered by policies written by companies that became insolvent.

Finally, American Employers’ argued that the trial court erred by holding that its policies covered costs for emergency responses and IRMs. The court agreed with American Employers’. The American Employers’ policies covered damages directly caused by an occurrence, that is, an event or repeated exposure to conditions from 1973 to 1976 that resulted in property damage in those same years. The court found that the need to properly close the landfill was not caused by an occurrence from 1973 to 1976. The IRMs were performed in the early 1990s to properly close the landfill and were performed because the plaintiffs failed to properly close the landfill in 1988. The cleanup companies’ costs for the IRMs were not directly caused by an occurrence, and were therefore not covered under the policies. Thus the trial court erred by including these costs in the calculation.

The decision of the lower court was affirmed in part and reversed in part.

AAA Disposal Systems, Inc., v. Aetna Casualty and Surety Company-No. 2-03-0416-Appellate Court of Illinois, Second District-January 12, 2005-821 North Eastern Reporter 2d 1278. *