Table of Contents 

INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Did insurer break glass agreement?

Progressive Casualty Insurance Company, an automobile insurer, hired Cascade Auto Glass, Inc., to replace and repair automobile glass for its insureds. The parties entered into a pricing contract, effective April 22, 1999, that established the rates Cascade would bill Progressive for parts and labor. The contract specifically stated that the pricing agreement was “solely for the purpose of [e]nsuring a fair price for work completed by [Cascade].” There was no termination date in the contract, but the parties agreed that either party could cancel the agreement at will.

In November 1999, Progressive hired Safelite Auto Glass to administer its glass repair and replacement claims. The following May, Safelite sent a letter to Cascade advising it of new pricing standards to be effective June 5, 2000. Additional letters were sent on June 30, 2000, May 13, 2002, and September 15, 2003. Each of the letters claimed to supersede all prior pricing agreements with Progressive. During this time, Cascade continued to perform repairs for Progressive’s insureds. Progressive paid the lower rates listed in the Safelite letters. Cascade then sued Progressive, claiming that Progressive had breached the pricing agreement. The trial court found in favor of Progressive; Cascade appealed.

On appeal, Cascade argued that because Safelite was not a party to the agreement, it did not have authority to terminate it. The Court of Appeals of Washington, Division 2, disagreed. It found that there was sufficient evidence that Safelite had authority to act as Progressive’s agent. The letters were headed “Progressive,” “Progressive Insurance” or “Progressive National Claims Group,” and they read as if they were written by Progressive. The letters each explained that Safelite was administering the glass program and that invoices should be sent to Progressive. In short, there was no reason for Cascade to be confused about whether the new price structure came from Progressive or its authorized agent.

Cascade also argued that the letters did not terminate the original pricing agreement because the termination notice was deficient. According to Cascade, the letters were unsigned, mass-mailed to other glass replacement companies, and failed to give adequate notice. The court disagreed. It found that Cascade’s own evidence suggested that pricing terms could be altered or revoked through informal means. It was not necessary for the letters to be signed by an individual or to be labeled specifically as “termination notices.” Neither did it matter, as Cascade claimed, that the letters were “sent to every glass company in the country, whether they had a price agreement or not.”

Cascade also argued that Progressive had attempted to unilaterally modify the agreement, not terminate it. This argument failed as well. According to the court, a contract that can be terminated at will can also be unilaterally modified. Progressive’s letters clearly signaled that it was no longer willing to pay according to the original pricing agreement. Cascade performed glass work after it received the letters, thus signaling its acceptance of the new pricing agreements.

Finally, Cascade argued that Progressive breached its individual insurance contracts with its insureds that required Progressive to pay a reasonable amount for repairs. The court found that it was evident that both Cascade and Progressive intended the agreed terms to satisfy the obligations between them, including Progressive’s obligation to pay a “fair” price for repairs.

The decision of the lower court in favor of Progressive was affirmed.

Cascade Auto Glass, Inc., vs. Progressive Casualty Insurance Company-No. 33780-1-II-Court of Appeals of Washington, Division 2-October 31, 2006-145 Pacific Reporter 3d 1253.

Bad faith alleged in UIM claim

For 30 years, Dean and Kathie Noble had purchased insurance products from State Farm Mutual Automobile Insurance Company. Historically, they discussed insurance transactions together, then Dean would complete the transaction by telephone or in person. On May 3, 1996, Dean went to the State Farm office to procure a personal umbrella liability policy. The Nobles were already insured under an automobile policy providing liability, medical payments, and underinsured motorist coverage in the amount of $100,000 per person. Kathie Noble did not accompany her husband when he procured the umbrella policy, so she was not present when he signed a document rejecting UIM coverage under that policy.

On July 12, 1997, Kathie was involved in an automobile accident in which she suffered injuries, including ongoing damage to her knees. She was unable to work for some time after the accident, and completely lost her ability to work full time in the future. Her lost wages through 1998 totaled $13,642.80, and her estimated future lost wages were approximately $10,000 per year.

The Nobles reported the accident to State Farm on July 14, 1997, and the insurer began paying Kathie’s medical bills on July 23, 1997.

In November 1997, the Nobles filed a lawsuit against the driver of the other vehicle involved in the accident. The other driver admitted that he was 100% at fault, and he settled with Kathie for $25,000, the maximum of his insurance coverage. The Nobles notified State Farm that they might have a UIM claim and, in March 1999, amended their legal complaint to include State Farm as a defendant.

In July 1999, State Farm offered the Nobles $40,000 to settle their claim. One month after this offer was made, however, a new claims representative was assigned to the case. In reviewing Kathie’s medical bills she agreed that $40,000 was appropriate; however, because of Kathie’s permanent partial impairment (PPI) rating, an independent medical examination was ordered. There was a long delay before the examination was actually performed in July 2001.

On August 19, 1999, the Nobles offered to settle the lawsuit for $60,000. The following January, they increased the offer to $75,000. State Farm re-evaluated Kathie’s claim, taking into account her approximate total lost wages of $13,642.80 and her total medical bills of $12,978.49. The insurer again deemed $40,000 to be appropriate and offered that amount to the Nobles. The Nobles rejected the offer, stating that they would accept $62,643.48 to settle their claim. In the meantime, the claims representative noticed she did not have an up-to-date total for Kathie’s lost wages. Upon review, she learned that Kathie had received disability benefits from her employer; however, Kathie’s attorney would not allow State Farm to access information as to exactly how much she had received. In addition, State Farm’s attorney failed to ask the Nobles for that information.

Accordingly, the claims repre-sentative was forced to estimate the amount of the disability payments. She then concluded $40,000 was still a fair offer. The parties attempted to arbitrate the claim but were unable to agree regarding the members of the arbitration panel. Eventually, the Nobles amended their complaint to include a bad faith claim against State Farm. At this point, the Nobles’ settlement demand was $60,000, and State Farm’s offer was still $40,000.

The jury trial commenced. The Nobles’ counsel estimated Kathie’s total lost wages to be $175,769.20. He also requested $600,000 in pain and suffering. The trial court found, as a matter of law, that the umbrella policy included UIM coverage. The jury then awarded the Nobles a verdict of $1,061,896.51 on the Nobles’ claim for UIM benefits. The jury also awarded $500,000 for breach of good faith and fair dealing. State Farm appealed.

On appeal, State Farm argued that the trial court should not have decided the issue of whether or not Kathie had UIM coverage under the umbrella policy. According to State Farm, the jury should have decided whether Dean had authority to bind Kathie when he rejected UIM coverage under the umbrella policy. The Court of Appeals agreed with State Farm. According to the court, the mere fact that the Nobles were married was not enough to establish that Dean could bind Kathie. There was evidence aside from the marriage that could allow an inference that Dean was acting as Kathie’s agent. This was a question for a jury, so the court found the cause should be remanded to decide this issue.

The court then addressed the Nobles’ bad faith claim. The court noted that in June 1999, when State Farm offered the Nobles $40,000 to settle their claim, the Nobles were only contemplating receiving UIM coverage under the automobile policy. Thus, including the $25,000 received from the other party involved in the accident and medical expenses already paid by State Farm, the Nobles stood to receive $77,000 when they had $100,000 in coverage. According to the court, it was only when the Nobles “discovered” the possibility of recovering UIM benefits under the umbrella policy that their demands began to increase. In addition, all of their bad faith arguments centered on the existence of UIM coverage under the umbrella policy or events that occurred long after State Farm extended the original $40,000 settlement offer. Thus, the court concluded that because the Nobles’ bad faith claim was based on State Farm’s actions with respect to UIM coverage under the umbrella policy, and because the issue of whether or not there was UIM coverage was remanded to the trial court, the jury’s bad faith verdict and award should be vacated.

The judgment of the trial court was reversed, and the jury verdicts and damages awards were vacated.

State Farm Mutual Automobile Insurance Company vs. Noble-No.45A03-0509-CV-449-Court of Appeals of Indiana-October 6, 2006-854 North Eastern Reporter 2d 925.

No cover for discrimination

Jack Combs was the manager of a San Rafael, California, apartment complex. Combs was sued by Fair Housing of Marin in federal district court for racial discrimination. His liability insurer, State Farm Fire & Casualty Company, defended Combs under a reservation of rights. During the litigation, Combs asked State Farm several times to settle the claims against him. State Farm refused, citing, among other things, Section 533 of the California Insurance Code, which provides that “[a]n insurer is not liable for a loss caused by the willful act of the insured … “

Combs eventually lost his case when, in March 1999, the district court entered an order striking his answer and entering his default. The court found that Combs failed to produce documents as ordered, that his failure to produce those documents was a “willful and bad faith attempt to obfuscate the discovery process and mislead FHOM and the court,” that he “misrepresented to both counsel and to the court the very existence of such documents,” and that his “gamesmanship” had caused prejudice. After finding “direct evidence of racial animus … amply present on [the] record,” the district court awarded Fair Housing of Marin $508,000 in attorney fees. After appeals that continued all the way to the U.S. Supreme Court, the attorney fees were increased by an additional $131,000.

Combs’ State Farm policy was an “Apartment Policy” that provided comprehensive liability coverage for bodily injury, property damage, personal injury and advertising injury. The policy required State Farm to defend any claim or suit seeking damages payable under the policy even if groundless. In addition, the policy provided, in relevant part, that “[I]n addition to the Limit of Insurance, we will pay, with respect to any claims or suit we defend: … 5. All costs taxed against the insured in the suit …”

After the judgment was entered against Combs, State Farm refused to pay any portion of it. Combs then filed an action against State Farm for breach of the insurance contract. The lower court held in favor of State Farm, concluding that Combs’ liability for intentional race discrimination precluded insurance coverage, including the award of attorney fees. Combs appealed.

On appeal, Combs acknowledged that coverage for compensatory and punitive damages for racial discrimination was barred by Section 533 of the Insurance Code. He did argue, however, that because State Farm provided a defense, the supplementary payments provision of his policy required State Farm to reimburse him for attorney fees. The Court of Appeal, First District, Division 3, California, disagreed with Combs’ argument. According to the court, liability in this case was caused by and incurred as a result of Combs’ intentional racial discrimination. To permit Combs, a wrongdoer, to insure against the consequence of his wrongdoing would allow him to be indemnified for damages he would have to pay as a result of his willful misconduct. This result would undercut sound public policy, and would allow the offender to avoid what could be a significant consequence of the wrongdoing.

The judgment of the lower court was affirmed.

Combs vs. State Farm Fire & Casualty Company-No. A111813-Court of Appeal, First District, Division 3, California-October 16, 2006-143 California Appellate Reporter 4th 1338.

Counterfeit shampoo goes down the drain

K&M Industries, Inc., sold more than $2 million worth of hair care products bearing the logo “TIGI” to membership retailer Costco. K&M represented that the products were manufactured by a company called TIGI. As it turned out, the products were later found likely to be counterfeit. Because K&M could not provide proof of authenticity, Costco could no longer sell the products and had to destroy them.

Costco made a claim against K&M asserting that K&M had breached the Uniform Commercial Code warranties of title and against infringement; it demanded arbitration of the issue. K&M had a commercial general liability policy and an umbrella policy issued by Hartford Casualty Insurance Company. However, Hartford declined to defend K&M in the arbitration proceed-ing. The arbitrator awarded Costco approximately $2.4 million in damages.

Costco filed a declaratory judgement complaint against Hartford seeking relief and damages. The lower court ruled in favor of Costco and ordered Hartford to pay Costco’s judgment against K&M, as well as prejudgment interest. Hartford appealed.

Hartford’s duty to defend and indemnify under the policy was triggered by K&M’s liability for damages because of “property damage” caused by an “occurrence.” Property damage was defined as “physical injury to tangible property” or “loss of use of tangible property that is not physically injured.” On appeal, Hartford argued that for property damage to be covered under the policy, it must be damage to property of a third party. The Court of Appeals of Washington, Division 1, disagreed with this theory; however, the court did evaluate coverage in the context of the policy’s “damage to the product” exclusion.

The “damage to the product” exclusion provided: “This insurance does not apply to … ‘Property damage’ to ‘your product’ arising out of it or any part of it.” For the purpose of this exclusion, “your product” includes “warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of ‘your product.’” Costco argued that the “damage to the product” exclusion did not apply because the UCC warranties were not specifically listed in the definition of “your product.” According to Costco, it would have been easy for Hartford to list these warranties in the policy language in order to protect itself from such claims. Because it chose not to, argued Costco, a loss arising from a breach of these warranties should not be excluded from coverage.

The Court of Appeals disagreed with Costco’s argument. It found that coverage applied “only when the insured’s work or product, once relinquished or completed, accidentally causes injury to persons or damage to other property.” According to the court, the insurance was not intended to cover circumstances that were the result of an ordinary business risk assumed by the insured. In addition, the court noted that “damage to your product” exclusions were added to commercial general liability policies so that the policies remained liability policies and not performance bonds. The risk of liability for selling Costco a product other than what was bargained for was an ordinary contractual or commercial risk within K&M’s control, not a liability risk of the type that a general liability policy was intended to insure against.

The decision of the lower court was reversed and remanded for entry of judgment in favor of Hartford.

National Clothing Company, Inc., vs. Hartford Casualty Insurance Company-No. 6750-1-I-Court of Appeals of Washington, Division 1-October 23, 2006-145 Pacific Reporter 3d 394. *

CONTACT US | HOME