INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Insurer deletes wind coverage after hurricane

In June 2004, Delores Graham applied for homeowners insurance, including windstorm coverage, through the John Lee Insurance Agency in Naples, Florida. In her application, Graham was asked to indicate the “distance to Gulf,” i.e., the distance of her home from the Gulf Coast. In her answer, she indicated that her home was three miles from the Gulf. The application was submitted to The Levings Group, the surplus lines agent for insurer Lloyd’s Underwriters at London. Levings issued a binder for coverage effective June 9, 2004. The actual policy was subsequently issued, and it included windstorm coverage.

Shortly after issuing the policy, Levings had the home inspected. The inspection report indicated that the home was one and one-quarter miles from the Gulf. Lloyd’s claimed that after it received the inspection report, it contacted the John Lee Agency and asked it to “please send endorsement request to increase coverage to $150,000 and X-wind or send proof of replacement cost and distance to coast.” (“X-wind” appeared to mean “delete windstorm coverage.”)

This document contained the word “FAX” at the top and was dated July 12, 2004, but it contained no facsimile time or date markings or a fax confirmation report. Lloyd’s also claimed that on August 11 it sent a letter to Lee reiterating the “X-wind” issue and the question of the proximity of the home to the Gulf. The record did not establish whether either of the above-mentioned documents was ever actually faxed or mailed to John Lee Insurance. Graham claimed she never knew about any of these communications.

One August 13, 2004, Hurricane Charley struck the Florida Gulf Coast, causing damage to Graham’s home. Three days after the hurricane, Levings sent Lee an endorsement deleting windstorm coverage from Graham’s policy. Graham, unaware of the policy change, submitted a claim for the hurricane damage to her home. Lloyd’s denied the claim, and Graham sued.

Lloyd’s asserted that it justifiably denied coverage because Graham had made a material misrepresentation in her application when she stated that her home was three miles from the Gulf. According to Lloyd’s, it would not have issued the policy with windstorm coverage had it been aware of the home’s true distance from the Gulf. (Lloyd’s underwriting guidelines prohibit underwriting wind damage coverage for homes within two miles of the shoreline.)

Graham claimed that the application was ambiguous in terms of how the distance was to be calculated. She also argued that Lloyd’s waived its right to deny coverage because it failed to notify her of the coverage question and did not change the policy until after the hurricane struck. The trial court found in favor of Lloyd’s; Graham appealed.

On appeal, the District Court of Appeal of Florida, Second District, reversed the decision of the trial court. It found that the distance from Graham’s house to the shoreline was a matter that was still in dispute, and that this was a question of fact to be resolved by the trial court. The court noted that Graham testified that she calculated the distanced based on her own experience driving and walking to the shoreline. Lloyd’s, on the other hand, argued that the distance should be calculated “as the crow flies.”

According to the court, “reasonable persons could disagree as to the meaning of the distance question as stated on the application or on how to measure that distance.” The court further noted: “A man on the street purchases his insurance policy in very much the same way that he purchases his automobile or his reaper or other chattels. He knows no more about the making of a contract of insurance than he does about the making of an automobile, and he naturally relies upon the skill and good faith of those who hold themselves out to be experts in such matters, by advertising their wares for sale. It would seem to be the clear duty of the insurer, professing to draw an instrument protecting the applicant’s property against certain defined perils, to exercise due diligence to supply a policy which will effect the purpose intended.”

The court also found that whether or not Lloyd’s waived its right to deny coverage by failing to give Graham timely notice of changes to her coverage was an issue of fact to be decided by the trial court. While Lloyd’s claimed it contacted Lee, it had not proved that Lee was Graham’s agent. If Lee was not Graham’s agent, then Graham did not receive proper notice. These were issues to be decided by the trial court.

The decision of the lower court was reversed.

Graham vs. Lloyd’s Underwriters at London-No. 2D06-3621-District Court of Appeal of Florida, Second District-September 19, 2007-964 Southern Reporter 2d 269.

Beer can toss triggers coverage dispute

On September 23, 2001, Jordon Sexton was severely injured in an automobile accident. The accident occurred when Clint Restemayer, a passenger in a Jeep driven by Toby Blansit, threw beer cans onto the roadway. Sexton’s vehicle was behind the Jeep. When he saw the beer cans, Sexton swerved to avoid hitting them. His car left the road, then overturned several times.

Blansit’s parents had a homeowners policy issued by Omaha Property & Casualty Insurance Company that was in effect at the time of the accident. Toby Blansit was an insured under the policy. Sexton sued Restemayer and Blansit in April 2003, and informed Omaha of his lawsuit. Another insurance company, American Standard Insurance Company of Wisconsin, initially provided Blansit’s defense.

In November 2003, however, American Standard demanded that Omaha assume the defense. Omaha denied coverage to Blansit for Sexton’s claim, asserting that “motor vehicle liability” coverage was excluded by the policy. According to Omaha, liability for bodily injury or property damage arising out of the “[m]aintenance, occupancy, operation, use, loading or unloading of such vehicle or craft by any person . . .” was excluded.

Sexton was eventually awarded $4 million in damages. He then filed an equitable garnishment action against Omaha seeking payment up to the $300,000 policy limit plus interest and costs. Omaha alleged there was no coverage due to the motor vehicle liability exclusion. The trial court disagreed and entered judgment in favor of Sexton. Omaha appealed.

On appeal, Omaha argued that the Sexton lawsuit arose out of the use of a motor vehicle and, therefore, was excluded from coverage under the homeowners policy. The Missouri Court of Appeals, Southern District, Division Two, disagreed. It found that the throwing of beer cans was “unconnected with the inherent use of the motor vehicle in question.” The same accident could have been caused if someone had thrown beer cans from the side of the road. Thus, because there was no “causal connection” between Blansit’s use of the Jeep and Sexton’s injuries, the policy exclusion did not apply. Omaha was required to pay $300,000 plus interest at a rate of 9% on the $4 million judgment.

The judgment of the trial court was affirmed.

Sexton vs. Omaha Property and Casualty Insurance Company-No. 27828-Missouri Court of Appeals, Southern District, Division Two-August 31, 2007-231 South Western Reporter 3d 844.

Insurer denies coverage based on title transfer

On June 1, 2002, Luz Hurtado, a New York resident, agreed to sell her 1992 Honda Accord to her cousin, Gilma Velesquez, a New Jersey resident. Gilma was purchasing the car for her daughter, Angela Saray. Hurtado signed and dated the certificate of title for the Accord as “Seller” and delivered the title and car to Gilma. Her plan was to leave the New York license plates and insurance on the car for about three weeks to give Gilma time to return to New Jersey, register the car, and obtain new insurance. Gilma’s daughter, Angela, signed the title as buyer (also on June 1). The space for the odometer reading was left blank.

On the date of the sale, the Honda was covered by a Progressive Group automobile insurance policy. Under the policy’s automatic termination provision, coverage terminated when a person other than the owner or a resident relative took ownership of the car. “Owner” was defined by the policy as “any person who . . . holds legal title to the vehicle.” Another provision of the policy stated that “[t]his policy may not be transferred to another person without our written consent.”

On June 17, Gilma’s other daughter, Lina, was driving the Honda when she was involved in an intersection accident with a vehicle driven by Joffrey Veintimilla. Lina had a Liberty Mutual Fire Insurance Company policy on her own car. Hurtado reported the accident to Progressive and cancelled the policy on June 18.

Veintimilla filed a personal injury lawsuit on behalf of himself and his wife. Progressive filed a declaratory judgment action asking the court to declare that the Progressive policy had terminated June 1 pursuant to the automatic termination provision. Liberty Mutual asked the court to require Progressive to provide coverage. The lower court judge found that the Progressive automatic termination provision did not apply because “[t]here was never perfected transfer of ownership” and because the certificate of title had not been filed. Thus, the court found that the Progressive policy was still in effect at the time of the accident. Progressive appealed.

On appeal, Progressive argued that the automatic termination provision of the policy was triggered on June 1 because the assignment of the certificate of title from Hurtado to Saray was proper and fully executed when Gilma took possession of the Honda on that day. Lina argued that Progressive could not deny coverage because she and Hurtado had a “reasonable expectation of coverage” because Hurtado planned to continue and pay for coverage for three weeks after Gilma took possession of the car.

The New Jersey Superior Court, Appellate Division, disagreed with Lina’s argument but found in her favor under a different theory. According to the court, the relevant issue was not the intent of the parties; rather, the issue was whether “for insurance purposes, ‘legal title’ and, hence, ownership under the Progressive policy was effectively transferred at the time of the accident by a proper and fully executed assignment of the certificate of title within the contemplation of [New Jersey’s Motor Vehicle Certificate of Ownership Law].” The court found that by not filling out the odometer reading, Hurtado did not strictly comply with the law. Therefore, the transfer of ownership was not complete, the automatic termination provision was not triggered, and Lina was covered under the Progressive policy’s omnibus liability clause. The decision of the lower court was affirmed.

Progressive Group vs. Hurtado-New Jersey Superior Court, Appellate Division-June 14, 2007-Atlantic Reporter 2d 607.

Did endorsement cover intrastate commerce?

ER Transport Services, Inc., a Florida corporation, was registered with the Federal Motor Carrier Safety Administration as an interstate motor carrier. As such, it was required to maintain federally mandated liability insurance with an “MCS-90” endorsement. Accordingly, ER Transport had an insurance policy, issued by Transportation Casualty Insurance Company, that included the MCS-90 endorsement.

On February 23, 2004, ER employee Arturo Rosello was driving a tractor-trailer owned by ER Transport when he was involved in an accident. While en route from Virginia Beach, Virginia, to Suffolk, Virginia, Rosello collided with an automobile driven by Craig Heron. Heron and his wife were killed, and their daughter was seriously injured.

To ascertain its obligation under the policy, Transportation Casualty filed a motion asking the court to find that the policy provided no coverage for the accident because the accident occurred during intrastate, not interstate, commerce. The court found that the MCS-90 endorsement would be applicable only when an insured vehicle transports property in interstate commerce (from one state to another). Because Rosello was driving from one Virginia location to another Virginia location, he was driving in intrastate, not interstate, commerce. Thus, the court found that the MCS-90 endorsement did not apply. The estates of Mr. and Mrs. Heron and the guardian for their daughter appealed.

On appeal, the Supreme Court of Virginia noted that the lower court had concluded that the language of the endorsement should be interpreted in light of the federal statutes and regulations that mandated its use. Accordingly, because the Federal Motor Carrier Safety Act applied only to interstate commerce, the MCS-90 endorsement should apply only to interstate commerce.

The Supreme Court of Virginia disagreed with the lower court’s rationale. It chose instead to emphasize the plain language of the written insurance contract. Pursuant to the language of the contract, and in consideration of the premium, the insurer agreed to pay “any final judgment recovered against the insured for public liability resulting from negligence in the operation, maintenance or use of motor vehicles subject to the financial responsibility requirements of Sections 29 and 30 of the Motor Carrier Act of 1980, regardless of whether or not each motor vehicle is specifically described in the policy and whether or not such negligence occurs on any route or in any territory authorized to be served by the insured or elsewhere.” The contract language did not limit the coverage in terms of interstate or intrastate commerce. The court found that the language was clear, and that the endorsement applied to the accident.

The judgment of the lower court was reversed, and the case was remanded with directions to enter declaratory judgment consistent with the Supreme Court’s decision.

Heron vs. Transportation Casualty Insurance Company-Record No. 061813-Supreme Court of Virginia-September 14, 2007-650 South Eastern Reporter 2d 699.

“An eye for an eye” in agents’ dispute

Steve Silveus owned an insurance agency located in northern Indiana. In 1994 his long-time friend and former business associate, Richard Goshert, began selling crop insurance for Silveus pursuant to an “independent contractor engagement agreement” with Steve Silveus Insurance Agency, Inc. In 1998, Goshert signed an identical agreement with Steve Silveus Insurance Agency, Inc., in his capacity as president of Goshert Crop Insurance, Inc.

Paragraph 2 of the agreement provided that the agreement would “continue until the expiration of thirty (30) days after either party shall give thirty (30) days’ written notice of termination.” The agreements also contained a covenant for Goshert not to compete with Silveus in the crop insurance business during the term of the agreement or for three years after the termination of the agreement in numerous counties in Indiana, Michigan, Ohio, and Illinois.

Also in 1998, David Goshert, one of Richard Goshert’s sons, began selling crop insurance for Silveus pursuant to an identical agreement. Then, in 2000, Rick Goshert, also the son of Richard Goshert, began selling crop insurance for Silveus pursuant to an identical agreement.

Rick Goshert also was hired to serve as Silveus’s IT manager. In that capacity, Rick had access to and control of Silveus’s computer databases and backup tapes. He also helped develop computer programs and software for the business.

In 2001, the relationship between Silveus and the Gosherts began to deteriorate. Specifically, the Gosherts believed that Silveus’s name on sales materials was too prominent. In response, Silveus changed the name of his agency from Steve Silveus Insurance Agency, Inc., to Silveus Insurance Group, Inc. At that time he also asked the Gosherts to sign new agreements as independent contractors. The Gosherts refused to sign the agreements because they were concerned that their personal liability would increase as a result.

In December 2001, Rick Goshert resigned his position as the agency’s IT manager; however, he continued to work as a salesperson. The Gosherts and Silveus met to discuss their business relationship, but the situation continued to deteriorate. On January 9, 2002, Silveus discovered that Rick Goshert had attempted to prevent agents other than the Gosherts from accessing certain programs on their computers. In addition, the Gosherts had drafted a letter to be sent to Silveus customers and prospects informing them that they intended to start a new agency and that customers’ needs would be better served through the Goshert agency.

On January 11, with two months remaining in the crop insurance sales season, and without 30 days’ notice, Silveus terminated Richard, David, and Rick Goshert. The Gosherts then formed Goshert Insurance, LLC, and began sending letters to Silveus customers and prospects. Silveus filed a lawsuit against the Gosherts alleging, in part, violation of the covenants not to compete contained in their independent contractor agreements. The Gosherts countersued, claiming, among other things, that Silveus had breached their agreements by failing to give them 30 days’ notice of termination.

The trial court found that by failing to give the Gosherts 30 days’ notice, Silveus had materially breached the agreements. In addition, because Silveus’s breach was material, and he was the first party to breach the agreements, the court found that Silveus could not claim damages for breach on the part of the Gosherts. The court awarded the Gosherts $512,170.92 in damages. However, the court did find that Rick Goshert had taken some computer tapes and had, therefore, misappropriated trade secrets. For this offense, the court awarded Silveus identical damages of $512,170.92, thereby offsetting the Gosherts’ damages.

Both parties appealed. Silveus claimed that the trial court erroneously concluded that he breached the agreements by failing to give the Gosherts 30 days’ notice, and that even if he did breach the agreements, the breach was not material. According to Silveus, there were two provisions in the agreements governing the subject of termination, and the more specific provision—one dealing with the termination and buyouts of vested salespersons—should prevail. That provision, argued Silveus, applied to the Gosherts and contained no notice requirement.

The Court of Appeals of Indiana disagreed. It found that the two provisions served two different purposes. One governed the term of the agreements whereas the other addressed the financial consequences of termination of vested salespersons. Therefore, the 30 days’ notice requirement was applicable to the Gosherts, and Silveus had breached the requirement. The court also found that because Silveus’s failure to give 30 days’ notice deprived the Gosherts of their ability to complete their crop insurance sales for the year, the breach was indeed material.

Silveus also argued that the Gosherts were the first to breach the contract by taking action to form their own insurance agency. The court disagreed. It found that the Gosherts’ actions constituted planning, but that planning with no further action was not a breach. The Gosherts were guilty, however, of misappropriation. There was enough evidence at the trial court level to conclude that Rick Goshert took backup tapes containing trade secrets.

The court concluded that the trial court properly awarded the Gosherts damages for breach of the 30 days’ notice provision, and that those damages were properly offset by the same amount to compensate Silveus for the Gosherts’ misappro-priation of trade secrets. Both parties were required to pay their own attorney fees.

The decision of the lower court was affirmed.

Silveus vs. Goshert-No. 34A03-0603-CV-88-Court of Appeals of Indiana-September 12, 2007-873 North Eastern Reporter 2d 165. *