Insurance-Related Court Cases 10/05

INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Insurer barred from presenting evidence

Government Employees Insurance Company (GEICO) paid $3,867.33 for property damage related to a traffic accident involving Rosalyn Walton, GEICO’s insured, and David Smith. After paying for the property damage and related expenses, GEICO filed a subrogation action against Smith seeking reimbursement of its expenses. During the pre-trial discovery process, Smith asked GEICO to produce, among other things, the adjuster named on the damage estimate for Walton’s vehicle. Later, Smith supplemented the request, asking GEICO, in addition to the original request, to produce “JOHN CIULLO-GEICO ESTIMATOR.” A mandatory arbitration hearing was held on August 19, 2002. At that time, GEICO produced neither its claims adjuster (whose name was actually Frank Cirillo) nor John Ciullo. The arbitrators decided in favor of GEICO and awarded GEICO $2,489.29, plus costs of $138.73. However, the arbitration panel also found that GEICO acted in bad faith by failing to produce Frank Cirillo and John Ciullo.

On September 5, 2002, Smith filed a motion to bar GEICO from producing evidence at trial because the arbitrator had indicated that GEICO did not participate in good faith during the arbitration proceedings. GEICO responded by stating that it did not produce John Ciullo because he was not an employee of GEICO. According to GEICO, while Ciullo did prepare the original repair estimate, he did so as an employee of C.D.E. Body Shop II, Inc. Smith’s request misidentified Ciullo as a GEICO adjuster; therefore, GEICO was not required to produce him. The proper approach, argued GEICO, was for Smith to subpoena John Ciullo directly.

On October 10, 2002, Smith’s motion to bar GEICO from presenting evidence at trial was granted. GEICO fought this decision, and eventually both parties submitted oral arguments regarding whether or not GEICO should be allowed to introduce evidence. The trial judge, hesitant to second guess the arbitrator’s opinion, denied GEICO’s motion to reconsider the decision barring GEICO from presenting evidence. The court eventually found in favor of Smith, and GEICO appealed.

On appeal, the issue was whether or not it was an abuse of discretion for the trial court to sanction GEICO by barring it from producing evidence. GEICO argued that it did not produce Ciullo because it was not required to do so under the court rule cited in Smith’s motion to produce. According to GEICO, the trial court improperly expanded the court rule to apply to a witness who was not a party nor an officer, director, or employee of a party. The Appellate Court of Illinois, First District, was not convinced. While the court acknowledged it would have been proper for Smith to issue a subpoena directly to Ciullo, the burden was on GEICO to demonstrate why its noncompliance with Smith’s request was reasonable. Furthermore, in addition to refusing to produce John Ciullo, GEICO refused to produce its adjuster, Frank Cirillo. Given these two refusals on the part of GEICO, the trial court judge did not abuse his discretion in barring GEICO from presenting evidence or witnesses at trial.

The trial court’s award of summary judgment in favor of Smith was affirmed.

Government Employees Insurance Company vs. Smith-No. 1-03-2438-Appellate Court of Illinois, First District-February 8, 2005-824 North Eastern Reporter 2d 1087.

Reinsurers deny insurer’s defense cost claim

Factory Mutual Insurance Company entered into an agreement with Bull Data Systems, Inc., to provide property insurance covering the risk of loss or damage to Bull Data’s personal computer inventory stored in a warehouse in Seclin, France. The indemnification limit under the policy was $48 million. Factory Mutual also obtained reinsurance from various London reinsurers, which subscribed to a reinsurance agreement covering a period of 12 months, beginning on June 1, 1991. This agreement provided, in pertinent part: “LIMIT: US$ 7,000,000 any one occurrence p/o US$ 13,500,000 any one occurrence excess of US$ 25,000,000 any one occurrence.” In addition, the “CONDITIONS” section of the agreement stated that “Reinsurers agree to follow the settlements of the Reassured in all respects and to bear their proportion of any expenses incurred, whether legal or otherwise, in the investigation and defense of any claim hereunder.”

That June, a fire destroyed Bull Data’s Seclin, France, warehouse. Bull Data filed a claim with Factory Mutual. Suspecting arson, Factory Mutual denied the claim. Bull Data brought suit against Factory Mutual in France, and Factory Mutual unsuccessfully sued Bull Data in the United States. When litigation expenses for the lawsuits reached close to $35 million, Factory Mutual settled the claims with Bull Data for nearly $100 million. It then sought payment from the reinsurers consisting of the $7 million limit and an additional $5 million to recover its proportionate share of litigation expenses that the reinsurers owed Factory Mutual for having defended the Bull Data claim.

The reinsurers sought to annul the reinsurance agreement, claiming material nondisclosure and misrepresentation on the part of Factory Mutual. The parties’ disagreements eventually resulted in a declaratory judgment action in the Supreme Court, New York County. The court declared that the reinsurers’ obligation to pay their proportionate share of litigation expenses was not subject to the stated indemnity limit of $7 million. The reinsurers appealed. The Appellate Division reversed the decision of the Supreme Court and declared that any portion of the loss adjustment expenses that the reinsurers were obligated to bear was subject to the $7 million limit. The case was then appealed to the Court of Appeals of New York.

On appeal, the reinsurers contended that their liability to pay was subject to the $7 million cap negotiated under the policy. Factory Mutual argued that the reinsurers’ liability to pay the defense expenses was separate and apart from the indemnification cap in the policy. The Court of Appeals agreed with the reinsurers. In reaching its decision, it noted that to require the reinsurers to reimburse litigation costs beyond the stated limit in the policy would render meaningless the liability cap negotiated in the policy. According to the court, Factory Mutual was seeking to “saddle the reinsurers with a portion of a litigation bill that exceeds the negotiated policy limit by more than 70%.” It did not matter, as Factory Mutual argued, that the policy was property insurance rather than liability insurance, which normally encompasses the obligation to pay legal expenses. This distinction did not provide a sufficient basis to extend the reinsurers’ liability beyond the limit. According to the court, the reinsurers were entitled to rely on the policy limit to set their maximum risk exposure. Accordingly, the order of the Appellate Division was affirmed.

Excess Insurance Company vs. Factory Mutual Insurance Company-Court of Appeals of New York-December 2, 2004-822 North Eastern Reporter 2d 768.

Insureds seek UIM under umbrella policy

On July 12, 2002, Carol McLean was seriously injured in an automobile accident with a van. At the time of the accident, Mrs. McLean and her husband, Terence, had an automobile insurance policy with State Farm Fire and Casualty Company, with liability and uninsured/underinsured motorist (UM/UIM) limits of $100,000 per person and $300,000 per accident.

The McLeans were also insured by State Farm under an umbrella policy with liability limits of $1 million. The umbrella policy was originally effective on February 21, 1989, and was written without UM/UIM coverage. Subsequently, on April 7, 1997, the McLeans signed a written form rejecting UM/UIM coverage, and the policy was renewed without coverage. The policy was also renewed on February 21, 2002, with a renewal certificate that included a paragraph that stated: “You have been provided the opportunity to purchase Uninsured Motor Vehicle Coverage, including underinsured motor vehicle protection, in an amount equal to your limits for bodily injury liability coverage. A named insured or an applicant has declined to purchase Uninsured Motor Vehicle Coverage (including underinsured motor vehicle protection). If you want to purchase Uninsured Motor Vehicle Coverage or have questions, please contact your agent.”

The driver of the van, Russell Arn, filed a personal injury action against Mrs. McLean. Mrs. McLean then filed a counterclaim based on her own injuries. In a third-party complaint, the McLeans also claimed that they were entitled to UIM benefits under their State Farm umbrella policy. The trial court entered judgment in favor of State Farm and dismissed the McLeans’ claim for UIM coverage under the umbrella policy. The McLeans appealed.

At the time the McLeans’ umbrella policy was issued, Ohio law provided for two-year policy guarantee periods. Under the law, commencement of each policy period brought into existence a new contract. Applying that law, at the time of the accident, the latest new contract would have been effective on February 21, 2001. At that time, the law required a policy to contain UM coverage unless such coverage had been expressly rejected by the insured. If such coverage was not expressly rejected, coverage arose by operation of law. In addition, insurance policies could not be altered during the two-year period except by agreement of the parties as provided by law.

On appeal, State Farm argued that subsequent amendments to the law in effect in 1989 eliminated the obligation to offer UM coverage on February 21, 2002. One amendment (S.B. 267, effective September 21, 2000) provided: “Nothing in this section prohibits an insurer from incorporating into a policy any changes that are permitted or required by this section or other sections of the Revised Code at the beginning of any policy period within the two-year period set forth in division (A) of this section.” According to State Farm, S.B. 267 allowed insurers to make changes in policy provisions during the two-year guarantee period. Because the umbrella policy was written as a one-year policy, State Farm could modify or change the provisions when the policy was renewed at the beginning of the February 21, 2002, policy period. State Farm claimed it did make these changes, and that these changes were authorized by another amendment (S.B. 97, effective October 31, 2001). S.B. 97 deleted the requirement that insurers provide UM/UIM coverage. It also eliminated the possibility of such coverage arising by law. According to State Farm, the paragraph inserted into the February 21, 2002, renewal certificate informed the McLeans that the coverage was not included in the policy.

In contrast to State Farm’s arguments, the McLeans claimed that UM/UIM coverage arose by operation of law when the new policy was issued on February 21, 2001. According to the McLeans, the contractual rights in effect at the time the new policy was issued on February 21, 2001, could not be changed during the two-year guarantee period.

The Court of Appeals of Ohio, Second District, Greene County, agreed with State Farm. It found that it was proper to determine which laws applied by beginning at the original effective date of the umbrella policy and counting forward in two-year increments. At the time of the February 21, 2002, renewal, State Farm did not have to offer or include UM/UIM coverage, there was no need for an express rejection of coverage, and UM/UIM coverage could no longer be implied by law. Accordingly, State Farm acted appropriately in instructing the McLeans that UM/UIM coverage was not provided.

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

Arn vs. McLean-No. 2004-CA-77-Court of Appeals of Ohio, Second District, Greene County-February 18, 2005-825 North Eastern Reporter 2d 181.

Insured challenges pollution exclusions

Loop Paper Recycling operated a paper recycling facility in Riverdale, Illinois. In July 2000, vandals set fire to an unknown amount of cardboard that was located at the facility. Residents of the surrounding neighborhood were concerned about the possible effects of smoke and toxic substances that flowed into their neighborhood as a result of the fire. They filed suit against Loop Paper, seeking damages for medical diagnosis, testing and monitoring of their health.

Connecticut Specialty Insurance Company was Loop Paper’s commercial general liability insurer. Connecticut agreed to defend in the case but reserved its right to deny coverage. The policy covered bodily injury and personal injury liability; however, under the terms of the policy, they were subject to a “total pollution exclusion” and an “absolute pollution exclusion,” respectively.

Connecticut Specialty filed a declaratory judgment action in September 2001, arguing that under the terms of the policy it owed no duty to defend or provide coverage. The circuit court found in favor of Connecticut Specialty. Specifically, it found that, while the underlying plaintiffs sufficiently alleged they suffered “bodily injury,” there was no coverage under the policy’s “total pollution exclusion.” The court also found that the plaintiffs failed to allege “personal injury” and that, even if they did, the “absolute pollution exclusion” barred coverage. Loop Paper appealed.

On appeal, Loop Paper argued that the language of the Connecticut Specialty policy did not support a finding that coverage for bodily injury was barred by the policy’s total pollution exclusion. The relevant provision of the policy excluded coverage in circumstances that would not have occurred but for “the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.” However, there was a qualification to this exclusion: It did not apply if the injury resulted from “heat, smoke or fumes from a hostile fire” (such as vandalism). However, this “hostile fire exception” did not apply if the premises was used for the “handling, storage, disposal, processing or treatment of waste.”

Loop Paper argued that the “hostile fire exception” to the total pollution exclusion applied, because the plaintiffs’ complaint did not state sufficient facts to conclude the cardboard was “waste” (defined as “material to be recycled, reconditioned, or reclaimed”) within the meaning of the policy.

The Appellate Court of Illinois, First District, Fourth Division, disagreed. In reaching its decision, it reasoned that the policy definition of “waste” was controlling, and that there was sufficient reference in the complaint to the Riverdale plant as a “recycling facility,” and to the cardboard as the product to be recycled, for the cardboard to fit within that definition. Because the cardboard was “waste” within the meaning of the policy, and because the burning cardboard was the basis for the plaintiffs’ lawsuit, the total pollution exclusion barred coverage for bodily injury.

Loop Paper also took issue with the lower court’s finding that the absolute pollution exclusion barred coverage for personal injury liability. Under the policy, the absolute pollution exclusion barred coverage for “personal injury” arising “out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.” According to Loop Paper, application of this provision to the Riverdale facility fire was overly broad. The appellate court disagreed. The court acknowledged that broadly interpreting absolute pollution exclusions could produce absurd results. However, courts in the past had recognized a reasonable limitation to the applicability of similar provisions. Specifically, they had found that pollution exclusions were meant to apply to cases involving “traditional environmental pollution.” The court adopted this reasoning. In the case of the Riverdale facility, the court found that the release of toxins by the burning cardboard constituted traditional environmental pollution. Thus, the absolute pollution exclusion barred coverage for personal injury.

The decision of the trial court was affirmed.

Connecticut Specialty Insurance Company vs. Loop Paper Recycling-No. 1-03-2988-Appellate Court of Illinois, First District, Fourth Division-February 17, 2005-824 North Eastern Reporter 2d 1125. *