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INSURANCE-RELATED COURT CASES COURT DECISIONS Digested from case reports published in Westlaw,  Insurer denies existence of 1960s policy ACMAT Corporation was in the business of installing acoustical ceilings in commercial buildings. Since 1988, ACMAT had been named in several lawsuits seeking compensation for damages caused by exposure to asbestos. The alleged injuries dated back to the 1950s. At that time, ACMAT was called Acoustical Materials Corporation, and was a subsidiary of a New York corporation called Waldvogel Brothers, Inc. ACMAT searched its records hoping to locate insurance coverage applicable to the injuries alleged in the lawsuits. It did not find insurance policies; however, it did find evidence that Greater New York Mutual Insurance Company had insured Acoustical Materials Corporation. A certificate of insurance issued by an authorized representative of Greater New York indicated that Acoustical Materials Corporation had in effect through January 1, 1966, a products liability and comprehensive general liability policy with bodily injury limits of $500,000 per person and $1 million per accident. ACMAT brought the certificate to the attention of Greater New York. Greater New York denied the policy ever existed. ACMAT filed an action seeking a declaration that Greater New York had issued the policy and that the policy was in full force and effect from January 1, 1964, to January 1, 1968. The trial court found that Greater New York did in fact issue a comprehensive general liability and products liability policy with limits of $500,000 per person and $1 million per accident. The court also found that coverage was in effect from January 1, 1965, to January 1, 1966, and that the policy and its “similar predecessors and successors” were in effect from January 1, 1964, to January 1, 1968. Greater New York appealed. On appeal, Greater New York tried to establish that the trial court should not have decided the case because, for technical, procedural reasons, it did not have the authority to decide such a case. The Appellate Court of Connecticut disagreed with these procedural arguments. It then proceeded to hear Greater New York’s substantive arguments, specifically that the evidence did not properly prove the existence of an insurance contract and that the certificate of insurance was “suspect.” During the trial, ACMAT presented evidence including (1) the certificate of insurance itself; (2) letters from Greater New York acknowledging receipt of workers compensation claims submitted by Acoustical Materials Corporation for employees injured during the years 1964, 1965, 1966 and 1967; (3) documents from 1967 and 1968 detailing Acoustical Material Corporation’s transfer of its insurance coverage from Greater New York to Aetna Life and Casualty Company; (4) a deposition from Acoustical Materials Corporation’s previous owner stating that he had obtained insurance coverage for his company from Greater New York; (5) the testimony of an agent who sold Greater New York insurance coverage to Acoustical Materials Corporation in 1962; and (6) the testimony of a Greater New York employee who issued the policy to Acoustical Materials. The appellate court concluded that there was sufficient evidence to support the trial court’s findings regarding the insurance policy, and that the trial court’s decision was reasonable. The judgment of the lower court was affirmed. ACMAT Corporation vs. Greater New York Mutual Insurance Company-No. 25099-Appellate Court of Connecticut-April 12, 2005-869 Atlantic Reporter 2d 1254. Split decision on false statements in application Okie Dokie, Inc., was the owner of a nightclub called “Dream” located in the District of Columbia. C.J. Thomas, Inc., Okie Dokie’s insurance broker, procured from Burlington Insurance Company a commercial general liability insurance policy covering Dream. In the application, Dream was described as a “Restaurant/Bar with a Dance Floor.” The application also stated that Dream’s prior insurance carrier had canceled its policy because Dream had a dance floor. In addition, it stated that Dream did not sponsor “Social Events,” and that its sales were made up of $3 million in food sales and $1 million in liquor sales. Shortly after Burlington issued the policy, a police officer named Hakim Farthing was killed by an underage drunk driver who was suspected of drinking at Dream. Farthing’s estate sued Okie Dokie for $50 million. Burlington paid some costs associated with the Farthing lawsuit, including a $410,000 settlement; however, it claimed it had no duty to defend or indemnify Okie Dokie in the action. It filed its own action against Okie Dokie and C.J. Thomas, seeking a declaration that it had no duty to defend or indemnify. It also requested rescission of the policy as well as reimbursement of all costs it had already paid. The United States District Court, District of Columbia, decided the case. Because Okie Dokie’s corporate offices were in the District of Columbia, and because the Farthing case was brought in D.C., the law of the District of Columbia applied. In its complaint, Burlington claimed that in making its decision to issue the policy, it reasonably relied on one or more false statements and omissions in the application. Specifically, Burlington claimed C.J. Thomas failed to disclose that Dream: (1) was a nightclub, (2) hosted concerts, (3) sought the patronage of 18- to 20-year-olds, (4) derived over 25% of its revenue from the sale of alcoholic beverages, and (5) regularly featured an “open bar.” According to Burlington, C.J. Thomas had a duty to reveal these facts because they would have affected Burlington’s decision to issue the policy. During the trial, Ms. White, the C.J. Thomas account executive who worked with Okie Dokie, testified regarding the circumstances surrounding the insurance application process. According to White, the original liquor liability application stated that liquor sales could be as high as $1.5 million—40% of total sales. Eleven days later, the estimated liquor sales figure was changed to $1 million—25% of sales. This was the figure that was eventually used for the commercial general liability application. White testified that the change in estimated liquor sales did not “raise any red flags with her” because the liquor liability application requires only that an establishment classified as a restaurant have liquor sales that are less than 75% of its annual total sales. She also stated that it did not seem strange to her that Dream’s estimates had changed because “it was a new business.” Burlington argued that White violated her duty of care because she failed to tell Burlington that the liquor sales estimate had changed. The court, however, disagreed. It found that there was nothing in the record to prove that White violated her duty of care. In its pleadings, Burlington had stated merely that C.J. Thomas was “indisputably” obligated to disclose that a previous liquor liability application contained a different sales estimate. The court therefore denied Burlington’s negligent misrepresentation claim. Burlington also argued that it had a right to rescind its contract because the application contained a false statement. According to Burlington, the sales figures listed on the application materially affected its decision to insure Okie Dokie. It testified that it had stated it was not interested in the Okie Dokie account if liquor sales were higher than 25% of total sales. It also testified it had submitted a binder to its agent showing that it considered the level of alcohol sales to be an important factor in its decision to cover Okie Dokie, and that it would non-renew the account if it found actual sales to be higher than 25%. In response to Burlington’s claim, Okie Dokie argued that C.J. Thomas was responsible for any false statement on the application. The court disagreed. Because C.J. Thomas was acting as Okie Dokie’s agent, Okie Dokie was liable for its acts. Okie Dokie also argued that Burlington was not entitled to rescission of the insurance contract because it chose non-renewal of the account as its only remedy. Again, the court disagreed. D.C. law provides that “proof that an application for insurance contains a false statement which materially affects the acceptance of risk or hazard assumed by the insurer is sufficient to defeat a claim under the policy.” Thus, Burlington was not limited to non-renewal of the policy as its only remedy. Finally, Okie Dokie argued that Burlington was required to conduct its own independent investigation of the facts contained in the insurance application. According to Okie Dokie, because Burlington knew the previous insurer canceled its policy because Dream had a dance floor, Burlington should have been on notice that Dream was not a traditional restaurant. The court was not convinced. Burlington had a right to rely on the statements made in the application. It had no duty to investigate the sales figures, and the sales figures provided in the application affected its decision to provide coverage. Thus, the court found that Burlington was not obligated to provide coverage. Burlington also argued that Okie Dokie was “unjustly enriched” because it received the benefit of the commercial general liability coverage even though coverage was barred. The court agreed. In addition, it found that Burlington had been deprived of the money it paid in the settlement for a period of over one year, and awarded prejudgment interest to Burlington. The parties’ motions were granted in part and denied in part. Burlington Insurance Company vs. Okie Dokie, Inc., and C.J. Thomas, Inc.- No. CIV.A. 03-2002(RMU) - United States District Court - District of Columbia-October 18, 2005-398 Federal Supplement 2d 147. Insurer challenges agent’s binding authority Warnock Capital Corporation was in the business of purchasing and rehabilitating parcels of realty for resale. Demonaco Agency, Inc., an insurance broker, procured a Hermitage Insurance Company commercial general liability insurance policy for Warnock. Demonaco placed the order through Jersey Link, Inc., a wholesale broker for Hermitage. The policy provided coverage for personal injury claims in an amount up to $1 million per occurrence for the period from April 13, 2001, through April 13, 2002. The policy contained a “coverage extensions” provision that provided $250,000 of coverage for newly acquired property. Pursuant to this provision, coverage was conditionally extended until (1) 30 days after its acquisition, (2) Warnock reported the property’s value to Hermitage, or (3) the policy expired. If Hermitage agreed to insure the newly acquired property, an endorsement would be issued. In March 2002, Warnock acquired some new property. Demonaco issued a binder temporarily extending $200,000 in coverage under the Hermitage policy. It also submitted an application to Jersey Link for an endorsement to add the new property to the policy. However, on April 5, 2002, Hermitage notified Jersey Link that it was rejecting the application. Two days later, Warnock’s newly acquired property was damaged by fire. Several people were injured, and an infant was killed. Anticipating legal action, Warnock demanded coverage under the Hermitage policy. Hermitage disclaimed coverage on April 12, 2002. When a negligence and wrongful death action was filed against Warnock, Warnock filed a separate action seeking a declaration that Hermitage was obligated to defend and indemnify it. The New York Supreme Court, Kings County, found that Hermitage was obligated to indemnify Warnock in the underlying action in an amount up to $1 million and to provide coverage for first-party property damage in an amount up to $250,000. Hermitage appealed, arguing that it was not bound by the coverage extensions because it rejected Warnock’s application two days before the fire. Hermitage also claimed that neither Demonaco nor Jersey Link had authority to issue a binder on its behalf. On appeal, the New York Supreme Court, Appellate Division, Second Department, held that the lower court correctly found that the agreement clearly extended the policy to Warnock’s newly acquired property. It also found that the evidence submitted by Warnock regarding Hermitage and Demonaco’s business relationship established that Demonaco had authority to issue a binder on behalf of Hermitage. Finally, the court found that Hermitage’s April 5, 2002, rejection of coverage was merely conveyed to Jersey Link, and that Warnock was not notified of the disclaimer until five days after the fire. Thus, the court found that Hermitage was obligated to defend and indemnify Warnock in the underlying action in amount up to $1 million. The property damage coverage, however, was reduced from $250,000 to $200,000 because the binder issued by Demonaco was for only $200,000. The case was remitted to the Supreme Court, Kings County, for entry of judgment consistent with the decision of the Appellate Division. Warnock Capital Corporation vs. Hermitage Insurance Company-Supreme Court, Appellate Division, Second Department, New York-September 26, 2005-21 New York Appellate Decisions 3d 1091, 803 New York Supplement 2d 606. Does auto exclusion apply to negligent driver? Builders Mutual Insurance Company issued a commercial insurance policy to North Main Construction, Ltd. The policy excluded from coverage “‘Bodily injury’ or ‘property damage’ arising out of the ownership, maintenance, use or entrustment to others of any aircraft, ‘auto’ or watercraft owned or operated by or rented or loaned to any insured.” Under the policy, “use” included “operation and ‘loading or unloading.’” North Main employee Ronald F. Exware, Jr., was driving a company vehicle when he crossed a median and struck and injured Gajendra and Poonam Sirohi. Exware was intoxicated at the time. Builders Mutual filed an action for declaratory relief, asking the court to find that it had no duty to defend or indemnify North Main and Exware in the resulting lawsuit. The injured parties, Gajendra and Poonam Sirohi, participated in the Builders Mutual declaratory judgment action, arguing that Builders Mutual should provide coverage under its policy. In support of its case, Builders Mutual asserted that North Main knew Ronald Exware had an unusually bad driving record, yet he was allowed to drive a company vehicle anyway. This resulted in negligent entrustment of a North Main employee with a company vehicle as well as negligent driving. In addition, Builders Mutual claimed that North Main created an atmosphere of tolerance and acceptance of alcohol and drug use among its employees. According to Builders Mutual, North Main officers knew that alcohol and marijuana consumption took place in the North Main offices, yet they did nothing to prevent or stop this behavior. Accordingly, North Main was negligent in its employee hiring, supervision, and retention practices. The lower court found in favor of Builders Mutual as to all claims for negligent entrustment and negligent driving. However, as to the claims for negligent hiring, negligent supervision, and negligent retention, the court found in favor of Gajendra and Poonam Sirohi. Builders Mutual appealed. On appeal, the issue was whether claims for negligent hiring, supervision, and retention were excluded from coverage under the commercial insurance policy. The Court of Appeals of North Carolina found that the automobile exclusion applied. In reaching its decision, the court looked to the actual cause of the injuries to determine whether a cause separate from the use of the vehicle resulted in the injuries. It found that Gajendra and Poonam Sirohi’s injuries resulted from Exware’s use of the automobile, not from a separate cause. Accordingly, the automobile exclusion applied. The court held that the lower court erred in finding in favor of the Sirohis. The case was remanded to the lower court for entry in favor of Builders Mutual. Builders Mutual Insurance Company vs. North Main Construction, Ltd-No COA04-1717-Court of Appeals of North Carolina-February 21, 2006-625 South Eastern Reporter 2d 622. Business pursuits exclusion debated Shoney’s Inc., a restaurant tenant, brought an action against its landlord, Donald Hedrick, for damages stemming from environmental contamination at its restaurant site. A gas station had been located at the site in the past, and petroleum contamination was later found to exist. Shoney’s sought property damage and personal injury liability coverage under a homeowners policy issued to Hedrick by Mid-American Fire & Casualty Company. The policy excluded coverage for property damage and personal injury arising from the “business pursuits” of the insured. The lower court granted partial judgment in favor of Shoney’s and partial judgment in favor of Mid-American. The Court of Appeals of Indiana held that the homeowners policy did not cover the remediation costs for the petroleum contamination. However, because the court applied the wrong policy exclusions, it granted a petition for rehearing. The key issue was whether the property damage and the personal injury arose out of Hedrick’s business pursuits. It was undisputed that Hedrick owned the property at the time the leakage occurred and that there was soil and groundwater contamination at the time he owned the property. Thus, his ownership of the property served as the basis of the liability claim so long as his ownership was not a “business pursuit.” Shoney’s argued that Hedrick merely owned a piece of land, and that the property damage and personal injury did not arise out of his business pursuit. They emphasized that Hedrick was a college professor and that his ownership of the property did not rise to the level of “business pursuit.” However, the evidence showed that Hedrick regularly engaged in various real estate ventures, and that he often made more money from these investments than he did as a college professor. According to the court, it was obvious that Hedrick earned an additional livelihood through this commercial activity. In fact, Hedrick was also involved with the ownership and construction of a Comfort Inn located adjacent to the property. He had purchased the former gas station property in hopes of finding someone to build a restaurant that would be convenient for hotel guests. The court held that Mid-American was not obligated to defend or indemnify in the Shoney’s lawsuit because Hedrick’s ownership of the property was a “business pursuit” that was excluded under the language of the homeowners policy. The decision of the trial court in favor of Shoney’s was reversed and remanded for an entry in favor of Mid-American. Mid-American Fire & Casualty Company vs. Shoney’s Inc.-No. 49A02-0503-CV-235-Court of Appeals of Indiana-March 3, 2006-843 North Eastern Reporter 2d 548. * |
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