Table of Contents 

INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Insureds challenge mold exclusion

Charles and Karen Melichar maintained homeowners insurance through State Farm Fire and Casualty Company. On March 25, 2002, while the Melichars were away on vacation, their son checked on their house and found that a toilet had overflowed, causing water damage to the home. When they were informed of the problem, the Melichars called State Farm. Their agent told them that the home needed immediate attention, so the Melichars asked whether State Farm “had anybody that did that kind of thing.” State Farm replied that it had someone who could take care of it, and the Melichars told the insurer to go ahead and begin work on the house.

The next day, Laurie Burlile, the Melichars’ daughter-in-law, met with a State Farm adjuster at the Melichars’ home. The adjuster recommended hiring a disaster recovery company. At the time, State Farm had a Premier Service Program for insureds who wanted the insurance company to procure a contractor. Laurie expressed no preference for a particular contractor, so State Farm contacted Western Building Maintenance, a State Farm-approved Premier Service Program contractor.

When Western arrived to perform the repairs, Laurie signed an “authorization to repair” form, using her mother-in-law’s signature. Later, after the Melichars returned from their vacation, Charles Melichar signed an “authorization to repair” form, acknowledging that the couple had agreed to use the State Farm Premier Service Program and authorizing Western to repair the damages resulting from the March accident.

In late July 2002, the Melichars informed State Farm and Western that there was an outbreak of mold in their home. State Farm had the home evaluated by an industrial hygienist, who recommended mold remediation. Western performed the job and, on December 13, 2002, issued a report stating that the remediation was complete. State Farm paid all expenses associated with the March accident and the mold remediation pursuant to the Melichars’ homeowners policy in effect from July 12, 2001, to July 12, 2002.

Later in December, the Melichars noticed that the floor near the washing machine was damaged. Again, they contacted State Farm. Upon further inspection it became evident that Western had inserted a drain hose from the washing machine into a wall cavity where there was no drainpipe. Water had leaked into the cavity, causing structural and mold damage to the property.

On December 27, 2002, State Farm sent a letter to the Melichars stating that the December accident resulted in a second loss that was subject to the Melichars’ homeowners policy in effect from July 12, 2002 to July 12, 2003. Unlike the 2001-2002 policy, the 2002-2003 policy contained a mold exclusion endorsement. State Farm agreed to pay for non-mold-related damages; however, it would not pay for mold-related damages resulting from the December accident.

The Melichars filed suit against State Farm and Western. Western settled for $50,000 and was dismissed from the suit. The case against State Farm went to trial, and the court found in favor of State Farm. The Melichars appealed.

On appeal, the Melichars argued that it was reasonable to interpret all the damages in the case as a single, continuing loss, and that, as such, the entire loss was covered by the 2001-2002 homeowners policy. The Supreme Court of Idaho disagreed. According to the court, the “continuing loss” argument was “incongruous with both the policies’ terms and Idaho case law.” First, the language of both policies provided that the insurance applied only to a loss “which occurs during the period this policy is in effect.” The term “occurs” was not defined, but the court stated that Idaho case law “makes it clear that an accident occurs during the policy period in which the policy holder was actually damaged, and not the period in which the event giving rise to the loss occurred.” The physical and direct cause of the December mold outbreak was the washing machine repair completed by Western. As such, it was a separate loss subject to the Melichars’ second homeowners policy.

The Melichars also argued that State Farm breached express and implied warranties contained in a letter State Farm sent to the Melichars on March 27, 2002. In this letter, State Farm informed the Melichars that Western would “warranty their workmanship labor on building or structural repairs, for a five-year period.” The Melichars argued that State Farm breached a warranty because it did not require Western to provide the Melichars with a written warranty. Again, the court disagreed. It stressed that the Melichars’ remedy was to pursue the contractor (Western), and that they had already done so. They could not pursue State Farm as well just because the $50,000 they had already received was not as much as they thought they were entitled to. Furthermore, there was no agency relationship between State Farm and Western that gave rise to an implied warranty of workmanship performance.

The decision of the district court was affirmed. Neither party was awarded attorney fees on appeal, and State Farm was entitled to costs on appeal.

Melichar vs. State Farm Fire and Casualty Company-No. 31714-Supreme Court of Idaho-January 26, 2007-152 Pacific Reporter 3d 587.

Insured seeks damages under expired policy

Richard Kubow owned a music store called Richard’s Music. In September 2001, he purchased a Hartford Casualty Insurance Company insurance policy through Colony West Financial Services, Inc. The policy became effective September 24, 2001, and was renewable on an annual basis. Effective September 24, 2002, the policy was renewed; however, in June 2003 Hartford informed Kubow it would not renew the policy again because of an unacceptable insurance score.

Kubow’s bookkeeper, Deborah Bolen, sent a fax to Colony West with a note stating: “Attached is the notice of cancellation. Please advise if this can be reconsidered. Also attached is a copy [sic] the insurance statement. Please let me know what period this covers and status of this acct. Thanks.”

In response, Diane Leon, an employee of Colony West, told Bolen in a telephone conversation that the account was current. She did not tell her whether the decision to cancel the insurance would be reconsidered. Because the account was current, however, Bolen assumed the policy would renew and filed the notice without telling Kubow.

The Hartford policy expired on September 24, 2003. The next day, Colony West faxed Kubow a letter in which it offered to obtain insurance for Kubow from St. Paul Insurance. The offer was contingent on Kubow’s sending back an acceptance and a deposit. Over the next couple of days Kubow and his bookkeeper attempted to contact Colony West, but they were unable to do so. Unfortunately, on September 27, fire struck and damaged the music store.

Kubow filed a claim with Hartford, but Hartford denied coverage because the policy wasn’t in effect on the date of the fire. Kubow sued both Colony West and Hartford in state court. He eventually settled with Colony West, but not with Hartford. The lawsuit was transferred to federal court, which eventually found in favor of Hartford. Kubow appealed.

On appeal, Kubow set forth three different theories as to why Hartford should cover the fire damage. First, Kubow argued that he was a “third-party beneficiary” to an Insurance Sales and Service Agreement between Hartford and Colony West. Under this agreement, Colony West had agreed to handle billings, policy renewals, cancellations, coverage change requests, and similar commercial insurance services on certain policies.

According to Kubow, as a” third-party beneficiary” of this agreement, Hartford breached its duties to communicate with him, to place him with another carrier in the event of nonrenewal of the policy, and to act as his agent in the event of tort claims. The United States Court of Appeals, Fifth Circuit, disagreed.

It found that under applicable state law (Mississippi), in order for Kubow to be a “third-party beneficiary,” the contract must have been entered into for Kubow’s benefit. This was not the case. The agreement existed for the mutual benefit of Hartford and Colony West only. Furthermore, even if Kubow were found to be a “third-party beneficiary,” Hartford did not breach the agreement.

Next, Kubow argued that Colony West rescinded its nonrenewal of the policy when Leon confirmed that the account was “current” and sent the proposal to procure a policy from St. Paul Insurance. The court disagreed. Because Colony West never made an express representation that Kubow’s policy would be renewed, the nonrenewal was not rescinded. Furthermore, the proposal could not be interpreted as offering coverage with Hartford because the Hartford policy expired before the letter was sent. Under Mississippi law, an agent’s representations can continue coverage but cannot create it.

Finally, Kubow argued that Colony West was negligent, and that because Colony West was Hartford’s agent, Hartford was liable for its negligence. This argument failed as well. While under Mississippi law Hartford could be liable for Colony West’s misrepre-sentations, the court found that Colony West never made a false representation or any representation that gave rise to liability on the part of Hartford.

For all of these reasons, the court affirmed the district court’s decision in favor of Hartford.

Kubow vs. Hartford Casualty Insurance Company-No. 05-61039-United States Court of Appeals, Fifth Circuit-January 8, 2007.

Is nightclub’s carrier liable for ejected patron’s death?

On June 1, 2003, David Potter, Jr., was killed when he was forcibly evicted from Fat Daddy’s Nightclub in York, Pennsylvania. Potter’s estate and Melanie Sharp brought a wrongful death and survival action against the nightclub and various other entities and individuals, alleging that Potter had been smothered to death when he was evicted. According to the complaint, Fat Daddy’s had, among other things, failed to adequately staff the nightclub, improperly trained and supervised its staff, failed to identify that Potter posed no risk, and failed to administer first aid to Potter.

Fat Daddy’s commercial general liability insurer, QBE Insurance Corporation, filed an action seeking a declaration that it was not obligated to defend or indemnify Fat Daddy’s and the other defendants in the underlying action. According to QBE, the claims in the complaint did not constitute an “occurrence” under the policy. QBE also claimed that the alleged conduct was excluded under the policy’s assault and battery exclusion. The trial court found in favor of QBE, agreeing with both of QBE’s arguments.

Potter’s estate and Melanie Sharp appealed. They argued that the trial court erred in finding that the allegations were not an “occurrence” under the policy. The language of the policy provided coverage for “bodily injury” or “property damage” caused by “an occurrence” where “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” According to the appellants, the complaint “at its core” alleged negligent (accidental) conduct, not assault (purposeful conduct), as the cause of Potter’s death. Thus, it alleged “conduct-negligence” which constituted an occurrence under the policy. The Superior Court of Pennsylvania agreed. According to the court, although the forceful eviction from Fat Daddy’s clearly involved intentional conduct on the part of some of the parties, the complaint alleged legal liability that derived from allegations of negligence. Though the intentional conduct was the most immediate cause of Potter’s death, the negligence leading to the intentional act could nevertheless be considered “an accident.”

Potter’s estate and Sharp also argued that the lower court erred in finding that coverage was excluded by the assault and battery exclusion. Again, the appellate court agreed. According to the court, the “litany of allegations” contained in the complaint purported that Potter’s death resulted from negligence, not assault and battery.

The court reversed the decision of the lower court and found that QBE had an obligation to defend the appellants in the wrongful death and survival action.

QBE Insurance Corp. vs. M & S Landis Corporation-Superior Court of Pennsylvania-January 10, 2007-915 Atlantic Reporter 2d 1222.

Auto insurers seek to deny liability coverage

On February 15, 2002, Cheryl Varjabedian was driving her mother’s car when she collided with a vehicle driven by Daniel Gaffney. Varjabedian lived with her mother at the time. Her mother’s vehicle was covered by an automobile insurance policy issued by New Jersey Manufacturers Insurance Company, with a $300,000 liability limit. Varjabedian’s husband, John, had an automobile insurance policy issued by Motor Club of America Insurance Company for his pickup truck. The Motor Club policy had liability limits of $100,000 per person/$300,000 per accident.

Gaffney sued Varjabedian and her mother, Louise Denney. Because of misrepresentations concerning Varjabedian’s driver’s license, both insurance companies sought to reform retroactively their policies to reduce the liability limits to the minimum limits required by New Jersey statutory law: $15,000/$30,000. After the entry of judgment, the insurers became aware of a New Jersey case, Mannion vs. Bell, that held that fraudulently procured liability coverage was void as to the victim. They then asked the court to amend its decision to hold that they were not obligated to provide any liability coverage. The lower court judge denied their requests. The insurers appealed.

On appeal, the insurers argued that the court erred by not following the decision in Mannion vs. Bell. Varjabedian and Denney argued the court was right not to follow Mannion vs. Bell, because that decision conflicted with the State of New Jersey’s policy to protect innocent third parties. The Superior Court of New Jersey agreed with Varjabedian and Denney and affirmed the orders denying the amendments sought by New Jersey Manufacturers and Motor Club of America.

The court stated that it was convinced that the decision in Mannion was inconsistent with provisions of the state’s Automobile Insurance Cost Reduction Act. It noted: “A person covered with compulsory standard liability insurance with the mandated UM coverage, no matter what the limits, has a right to expect all other drivers with compulsory standard policies will have liability limits of at least $15,000/$30,000 personal injury limits. Such a result is consistent with “[o]ur comprehensive insurance scheme of mandating automobile insurance [which] evinces a strong legislative policy ... assuring at least some financial protection for innocent accident victims.”

The decision of the lower court requiring the insurers to provide minimum liability coverage limits in the amounts set forth by New Jersey statutory law was affirmed.

New Jersey Manufacturers Insurance Company vs. Varjabedian-Superior Court of New Jersey, Appellate Division-March 5, 2007-917-Atlantic Reporter 2d 839.

Day care death triggers dispute over “occurrence”

Sabine Bieber and Denise Smith operated a day care facility called Tiny Tots in Laurel, Montana. On January 31, 2003, one of the children in their care, Dane Heggem, aged 13 months, died from a toxic dose of liquid allergy and cold medicine. Investigators discovered that Tiny Tots had purchased a large amount of that particular medicine, and that neither Dane’s parents, nor any of the day care’s other parents, had given any directions to administer the medicine in that amount.

On March 18, 2003, the Heggems filed an action against Bieber and Tiny Tots seeking compensatory damages for the negligent administration of the medicine. During the discovery process, in answering an interrogatory, Bieber identified Capitol Indemnity Corporation as the day care’s insurer, and the policy limits as $300,000. Heggem’s attorney later offered to settle the case for the $300,000 policy limit. Capitol responded that it would pay that amount. However, shortly thereafter, the Heggems withdrew their offer and demanded $600,000. Capitol refused the demand.

In July 2003, the Heggems filed another complaint against Capitol alleging violation of the Montana Unfair Trade Practices Act (UTPA) and misrepresentation. According to the Heggems, the aggregate limits provision of the Capitol policy provided for a $600,000 limit because there was more than one “occurrence.” Capitol argued that its maximum liability to the Heggems was $300,000, and asked the court to determine that the term “occurrence” limited its liability to $300,000.

In January 2004, the Heggems filed a negligence action against Denise Smith. Soon thereafter, the district court issued its decision regarding the policy limits, concluding that the policy language was clear and unambiguous and finding in favor of Capitol. The Heggems appealed this decision.

The Capitol policy’s “Limits of Insurance” provision stated: “[t]he most we will pay for loss or damage in any one occurrence is the applicable Limit of Insurance shown in the Declarations,” regardless of the number of insureds, claims made, suits brought or persons or organizations making claims or bringing suits. “Occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The policy’s aggregate limit, which was twice the $300,000 limit, was triggered only when there was more than one “occurrence.” The Heggems argued that the policy language did not adequately describe what constituted an “occurrence” and was therefore ambiguous. They then alleged several theories as to why there had been more than one “occurrence,” therefore meeting the policy’s requirement for an aggregate limit.

First, the Heggems argued that (1) Bieber’s administration of the toxic dose to Dane, (2) Smith’s failure to prevent Bieber’s act, (3) the family’s emotional damage suffered when they learned of Dane’s death, and (4) their emotional damage suffered when they learned of the facts concerning Smith’s failure to prevent Dane’s death, all were “occurrences” within the meaning of the policy. The Supreme Court of Montana rejected this theory, emphasizing that both the original complaint and the UTPA complaint alleged only one cause: Bieber’s lethal dose of medication.

Next, the Heggems argued that each alleged dose of medicine given to Dane, and each alleged failure of Smith to warn the Heggems that Dane was being medicated, constituted an “occurrence” within the meaning of the policy. Under this interpretation, the Heggems contended Capitol was liable for the aggregate limits of the policy for two separate years, because they claimed some doses were given to Dane in the policy year prior to the one in which he died. The court rejected this theory as well. According to the court, no doses of medication were alleged prior to the bodily injury claim of the death from the overdose. Therefore, only one occurrence was alleged.

The Heggems’ third interpretation of the policy provided for four occurrences: the loss of Dane’s life, and the emotional distress to the three surviving family members. Again, the court stressed that the only alleged cause of Dane’s death was Bieber’s toxic dose of medication.

The court concluded that the Heggems did not establish that the term “occurrence” was ambiguous. It noted that contract terms are not ambiguous just because the parties disagree over their proper interpretation. It also noted that the emotional distress claims were effects, not causes. The district court did not err in determining that the policy provisions relating to the coverage available were unambiguous and that the overdose was a single occurrence under the policy. Therefore, Capitol did not violate the UTPA by misrepresenting the $300,000 policy limit.

The decision of the district court in favor of Capitol was affirmed.

Heggem vs. Capitol Indemnity Corporation-No. 04-360-Supreme Court of Montana-March 14, 2007-154 Pacific Reporter 3rd 1189. *

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