Table of Contents 

INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Rail crossing fatalities trigger coverage dispute

Union Pacific Railroad Company hired Tri-State Traffic Control, Inc., to provide traffic control services at its railroad crossings. The contract between the two organizations became effective June 1, 1998, and expired on June 2, 2000. Under the terms of the contract, work was to be performed on an as-needed basis whenever maintenance work caused road closings or changes to traffic patterns at road closings. Tri-State was also obligated to obtain and maintain general liability insurance and to name Union Pacific as an additional insured. Accordingly, Tri-State purchased from Ohio Casualty Insurance Company a $1 million commercial general liability policy and a $2 million commercial umbrella excess liability policy. Both policies had policy periods from January 22, 2000, to January 22, 2001.

Union Pacific was not a named insured on either of Tri-State’s policies. The $1 million primary policy contained an additional insured endorsement that included as an “insured” any person or organization “whom you are required to name as an additional insured on this policy under a written contract or agreement.” The written contract or agreement had to be “(a) currently in effect or becoming effective during the term of this policy; and (b) executed prior to the ‘bodily injury,’ ‘property damage,’ ‘personal and advertising injury.’” Coverage provided to an additional insured was limited to liability “arising out of” the insured’s work for the additional insured. The $2 million umbrella policy contained a similar endorsement. This endorsement included as an “insured” “(1) an organization insured under an underlying insurance policy for damages that are covered under the umbrella policy and the underlying policy as well as (2) an organization ‘for whom [the insured has] agreed in writing prior to injury to provide insurance such as is afforded by this policy but only with respect to operations performed by [the insured] or on [the insured’s] behalf.”

The agreement between Union Pacific and Tri-State expired on June 2, 2000. The organizations agreed, however, that Tri-State would continue to provide traffic control services for Union Pacific pursuant to the terms of their agreement. Two months later, on August 7, 2000, a train collided with a vehicle at a railroad crossing in Arkansas. The driver of the car, Joseph Johnson, was seriously injured, and his wife and daughter were killed. On that day, Union Pacific employees were upgrading the warning devices at the crossing. Tri-State had provided traffic control flaggers at the work site, but at the time of the accident the Union Pacific and Tri-State employees were on their lunch break.

Johnson filed suit against Union Pacific. Ohio Casualty defended Union Pacific in the action under a reservation of rights. The lawsuit was ultimately settled for $12.5 million. Ohio Casualty contributed $3 million to the settlement and reserved its right to deny coverage. The insurer then filed an action alleging it had no duty to defend or indemnify Union Pacific and seeking return of its $3 million along with attorney fees and costs. The district court found in favor of Ohio Casualty and entered a judgment of $3,034,565.76. Union Pacific appealed.

On appeal, Ohio Casualty argued that Union Pacific was not an additional insured because the written Tri-State contract was not in effect on the date of the accident. It also argued that the evidence did not show that there was a causal connection between Tri-State’s work and the accident. Finally, Ohio Casualty argued that a finding in favor of Union Pacific would violate the “known loss doctrine.” (Under the “known loss doctrine,” an insurer is not required to insure against a loss that is known or apparent to an insured prior to the policy’s effective date.)

Applying Arkansas law, the United States Court of Appeals, Eighth Circuit, rejected all three of Ohio Casualty’s arguments. First, the court found that it was not necessary for a written contract between Union Pacific and Tri-State to be in effect at the time of the accident. The parties’ continued mutual performance in accordance with the terms of the contract and the insurance policies’ existence through the date of the accident was enough. The phrase “currently in effect” as used in the additional insured endorsement unambiguously meant in effect on the date the policy was issued. The court also noted that if Ohio Casualty intended the additional insured endorsement to require that the written contract or agreement be in effect on the date of an occurrence, it could have expressly limited additional insured status to the duration of the written contract as opposed to the policy period.

The court quickly discarded Ohio Casualty’s argument that the “known loss doctrine” had been violated. According to the court, the known loss doctrine was not applicable to the facts of the case because the Johnson accident occurred seven months after the policy took effect.

Finally, the court addressed the question of whether the Johnson accident “arose out of” Tri-State’s work for Union Pacific. The lower court had emphasized that the Tri-State flaggers were not present at the time of the accident. The appellate court disagreed with this emphasis. It found that the fact the flaggers were not present at the time was irrelevant. The important thing was that the collision occurred at a construction zone for which Tri-State was responsible. According to the court, the Johnson accident “‘grew out of or flowed from’ the quality of the traffic control at the crossing.” Therefore, Johnson’s claims arose out of Tri-State’s work and were covered by the policies. Ohio Casualty had an obligation to defend and indemnify Union Pacific.

The district court’s judgment in favor of Ohio Casualty was vacated, and the action was remanded to the district court to enter judgment in favor of Union Pacific.

Ohio Casualty Insurance Company vs. Union Pacific Railroad Company-No. 05-3814-United States Court of Appeals, Eighth Circuit-December 4, 2006-469 Federal Reporter 3d 1158.

Parties dispute statute of limitations

On September 28, 1996, Eddie Sellers, a resident of Mississippi, was driving his father’s car when he was involved in an automobile accident in Tennessee. Shane Thurman, a passenger in the car, was seriously injured, and Thurman’s minor son, Dalton, was killed. Eddie was not working for his father at the time of the accident. Eddie and his father, Donald, were named as defendants in a Tennessee lawsuit resulting from the accident.

Donald Sellers had an American States Insurance Company business liability policy for $1 million and an umbrella insurance policy for up to $1 million covering his Mississippi business, Donnie’s Amoco. He had purchased this insurance through Brenda and Eddie Oaks of Oaks Insurance Company, agents for DeSoto Insurance. The umbrella policy provided coverage for business, not personal, liability. The policy was renewed by payment of premiums and was in effect on the date of Eddie Sellers’ accident.

Sellers notified his agents of the accident and asked them to file a claim with American States. On August 26, 1997, American States sent Sellers written notice denying his claim. According to American States, the umbrella policy did not provide coverage because Eddie was not acting in the course and scope of Sellers’ business at the time of the accident. Donald Sellers was eventually found personally liable for the injuries caused by his son’s negligence. He appealed this decision to the Tennessee Supreme Court, but the court refused to hear the case. Sellers then filed suit in a Mississippi court alleging that the Oaks, Oaks Insurance Company and DeSoto Insurance had failed to procure the requested insurance and adequately explain the coverage. This lawsuit was filed in January 13, 2003, more than five years after American States’ denial of the claim for the automobile accident.

The Mississippi statute of limitations provides that “[a]ll actions for which no other period of limitation is prescribed shall be commenced within three (3) years next after the cause of such action occurred, and not after.” Defendants Oaks and DeSoto filed a motion asking the trial court to dismiss Sellers’ lawsuit because the statute of limitations had expired. The trial court denied their motion. They appealed to the Supreme Court of Mississippi, and the court agreed to address the statute of limitations issue.

On appeal, Sellers asserted that the three-year statute of limitations began to run on the date of the “actual injury.” According to Sellers, the “actual injury” occurred when the Tennessee Court of Appeals declared him to be liable for his son’s actions. That date was February 16, 2001, less than three years from the date he filed the lawsuit. The defendants argued that the statute of limitations began to run on the date that American States denied Sellers’ claim: August 26, 1997.

The Supreme Court of Mississippi found that the trial court erred by finding in favor of Sellers. In reaching its decision, the court noted that it was clear that the insurance policies were for business insurance only. Even if Sellers had never received copies of the actual policies, his knowledge of their contents was to be assumed, especially in light of the fact that he had renewed them. The court also emphasized that Sellers knew in August 1997 that his claim had been denied, and at that point he was put on notice that there could be a problem. Sellers was aware of his potential liability on the date American States denied the claim, not the date the Tennessee court found him liable. Thus, the statute of limitations began to run on August 26, 1997, the date Sellers received notice of denial of his claim. More than five years had passed from the date Sellers filed his lawsuit against the defendants, so the lawsuit was barred by the statute of limitations.

The decision of the lower court was reversed, and the court was directed to dismiss Sellers’ claims against the Oaks and DeSoto Insurance.

Oaks vs. Sellers-No. 2006-IA-00005-SCT-Supreme Court of Mississippi-April 12, 2007-953 Southern Reporter 2d 1077.

Business fraud defendant seeks personal umbrella cover

Jon Amato was a defendant in a securities fraud lawsuit filed by Lea Goldblatt and the estate of Noel Goldblatt. The lawsuit alleged that Amato and other officers, directors, and affiliates of Goldblatt’s Bargain Stores, Inc., had wrongfully induced Lea and Noel Goldblatt to pay $1.2 million in exchange for certain ownership interests in organizations they controlled. The complaint alleged that the Goldblatts had never received anything in return for their payments, that Amato had fraudulently induced them to invest $375,000 by making intentional false statements and misrepresentations, that he had breached his contract with and his fiduciary duty to the Goldblatts, that he had violated certain Illinois securities laws, and that he had committed common law fraud.

Amato had a personal umbrella policy with Allstate Insurance Company. The policy provided: “Allstate will pay damages which an insured person becomes legally obligated to pay because of bodily injury, personal injury or property damage, subject to the terms, conditions and limits of this policy. Bodily injury, personal injury and property damage must arise from a covered occurrence. We will not pay any punitive or exemplary damages, fines and penalties.” In addition, the policy provided that Allstate would defend “an insured person sued as the result of an occurrence covered by this policy.” Occurrence was defined as “an accident during the policy period, including continuous and repeated exposure to substantially the same general harmful conditions during the policy period, resulting in bodily injury, personal injury, or property damage.”

The policy defined “personal injury” as damages resulting from: “9(a) false arrest; imprisonment; wrongful detention; (b) wrongful entry; invasion of rights of occupancy; and (c) libel, slander, humiliation, defamation of character; invasion of rights of privacy.”

In addition, the policy excluded from coverage any “occurrence arising out of any act or failure to act by any person in performing functions of that person’s business” and any “occurrence arising out of a business or business property.” Business was defined as “a) any full- or part-time activity of any kind: 1.) arising out of or relating to an occupation, trade or profession of an insured person; and 2) engaged in by an insured person for economic gain, including the use of any part of any premises for such purposes.”

After Allstate informed Amato it would not provide coverage under his policy, it filed a legal complaint seeking a declaratory judgment that it did not owe a duty to defend or indemnity Amato in the underlying lawsuit. The insurer asserted that the alleged injuries were not covered because they did not arise from an “occurrence” that resulted in “bodily injury,” “property damage” or “personal injury.” Allstate also argued that coverage was barred by several exclusions, including the exclusion of coverage for liability arising from an insured’s business activities.

In response to Allstate’s complaint, Amato argued that he was entitled to coverage because his conduct caused “wrongful detention” of the Goldblatts’ property. The trial court disagreed, concluding that it was “quite clear” that the policy was intended to cover wrongful detention of a person, not property. Because the policy was organized in such a way that wrongful detention was grouped with false arrest and imprisonment, it made sense that the wrongful detention was intended to be that of a person, not property. Accordingly, the trial court found in favor of Allstate. Amato appealed.

On appeal, Amato again concentrated his argument on the “wrongful detention” language of the policy. He argued that it was capable of two interpretations—wrongful detention of a person or wrongful detention of property—thus creating an ambiguity. Citing the general rule that ambiguities in insurance contracts are construed in favor of the insured, Amato argued that the provision should be construed to favor coverage. The Court of Appeals of Illinois, First District, Third Division, disagreed. It agreed with the trial court’s “common theme” analysis and found that the policy was intended to cover wrongful detention of a person, not property.

In addition to his “wrongful detention” argument, Amato argued that the policy exclusions, if applicable, relieved Allstate from indemnifying Amato, but not from defending him. To support his argument, he pointed to specific language of the policy. First, under the heading “Insuring Agreement,” the policy provided that “Allstate agrees to provide the coverages indicated on the Policy Declarations.” Second, under the heading of “Defense We Will Provide,” the policy provided that “Allstate will defend an insured person sued as a result of an occurrence covered by this policy.” He then contrasted this language with a third provision: “Allstate will pay damages which an insured person becomes legally obligated to pay because of bodily injury, personal injury or property damage, subject to the terms, conditions and limits of this policy. Bodily injury, personal injury and property damage must arise from a covered occurrence.”

According to Amato, because the first and second provisions did not provide that the duty to defend was subject to the terms, conditions and limits of the policy, then the duty to defend was not limited by the exclusions. The court again disagreed with Amato, stating that his proposed interpretation was “unnatural and unreasonable.” According to the court, the parties “clearly” did not intend that the policy require Allstate to defend Amato in cases that fell under one of the exclusions.

Finally, Amato asserted that the first and second coverage exclusions did not apply because his involvement with the Goldblatts did not arise out of his “occupation, trade, or profession.” Rather, he argued, his involvement arose out of an investment. The court was not convinced by this argument. It found that Amato was a “control person” who had the “ability and power to direct and prevent the alleged fraudulent conduct.” This would qualify Amato’s activity as “business activity” within the meaning of the contract.

The court concluded that Allstate did not have a duty to defend or indemnify Amato because the policy did not provide coverage for wrongful detention of property and because the exclusions applied. In addition, Amato was not entitled to reimbursement of costs or fees.

The decision of the trial court in favor of Allstate was affirmed.

Allstate Insurance Company vs. Amato-No. 1-06-0990-Appellate Court of Illinois, First District, Third Division-March 30, 2007-865 North Eastern Reporter 2d 516. *

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