Insurance-Related Court Cases

Court Decisions

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

Bad faith alleged in injured worker suit

Pulte Home Corporation, a home builder doing business in North Carolina, hired TransAmerica Investment, L.L.C., as a subcontractor to frame houses in a subdivision called Breckenridge. Under its contract with Pulte, TransAmerica agreed to have Pulte named as an additional insured under its commercial general liability insurance policy. TransAmerica complied with this requirement by obtaining an endorsement that provided that Pulte was covered “as an insured but only with respect to liability arising out of [TransAmerica’s] operations or premises owned by or rented to [TransAmerica].”

In October 2001, Marcos Antonio Mejia was injured while he was installing trusses on a house in the Breckenridge subdivision. At the time, Mejia was working for a TransAmerica subcontractor named Rudolfo Sanchez. Mejia claimed that on the day he was injured he was working well above the floor level of the house when a crane operator knocked him from the roof, causing him to fall to the ground. Mejia also claimed that there were no safety devices to protect workers in the event of a fall. Mejia’s injuries were severe and permanent.

In August 2002, Mejia sued Pulte, TransAmerica and the company that employed the crane operator, Morlando Enterprises, L.L.C. Pulte tendered Mejia’s claim to TransAmerica’s commercial general liability insurer, American Southern Insurance Company. The insurer denied any obligation under the policy to defend or indemnify Pulte. Pulte eventually paid approximately $105,000 in legal fees, expenses and expert costs to defend itself in the action, as well as $700,000 to settle Mejia’s claims. It then filed an action against TransAmerica and American Southern claiming both parties had breached their contracts by failing to defend and indemnify it in the Mejia lawsuit. TransAmerica filed a motion asking the court to declare that American Southern was obligated to provide coverage for Pulte’s costs. American Southern sought a declaration that the policy did not cover Mejia’s allegations against Pulte.

The lower court found in favor of American Southern. Pulte and TransAmerica appealed.

Under North Carolina law, when an insurer refuses, without justification, to defend its insured, it cannot deny coverage and is obligated to pay the amount of any settlement made in good faith by the insured. On appeal, the key question was whether American Southern unjustifiably refused to defend Pulte in the Mejia lawsuit. American Southern argued that Pulte was not an “insured” because the endorsement provided that an “insured” was only an “insured” with respect to liability arising out of TransAmerica’s obligations, not the negligence of Pulte itself.

The Court of Appeals of North Carolina disagreed. It found that the allegations of the Mejia complaint indicated that Pulte’s liability was a “natural and reasonable incident or consequence of” TransAmerica’s obligations. There was enough of a connection between the work Mejia was performing and the liability that Mejia was imposing on Pulte to allow the court to conclude that the conduct was “arguably” covered by the additional insured endorsement. Therefore, American Southern was unjustified in refusing to provide Pulte with a defense, and it was obligated to provide coverage to Pulte.

The decision of the lower court was reversed and remanded for judgment in favor of Pulte in the amount of $850,957.74 plus prejudgment interest.

Pulte Home Corporation vs. American Southern Insurance Company and Transamerica Investment, L.L.C.-No. COA06-747-Court of Appeals of North Carolina-August 7, 2007-647 South Eastern Reporter 2d 614.

Insured challenges earth movement exclusion

Mary Ann Cali owned a home in Valley Stream, New York, which was insured by a Merrimack Mutual Fire Insurance Company homeowners policy. During the policy period, the house was significantly damaged when its concrete slab foundation settled, sank and cracked. When Cali filed a claim for her loss, Merrimack denied coverage, stating that the policy excluded losses due to “earth movement …. earth sinking, rising or shifting” and due to the “settling, shrinking, bulging or expansion, including resultant cracking of pavements, patios, foundations, walls, floors, roofs or ceilings.”

In 2005, Cali filed a lawsuit against Merrimack asking the court to declare that Merrimack was obligated to provide coverage. According to Cali, the collapse occurred because decayed wood beneath the foundation created an open space in the soil. This, Cali argued, constituted “hidden decay,” which was a condition covered by the policy. The lower court agreed with Cali; Merrimack appealed.

On appeal, the Supreme Court, Appellate Division, Second Department, New York, found that the exclusion clearly and unambiguously applied to Cali’s property loss. According to the court, the exclusion addressed damage caused directly or indirectly by “[e]arth movement, meaning earthquake; landslide; mine subsidence; mudflow; earth sinking, rising or shifting.” “Earth movement” was excluded “regardless of any other cause or event contributing concurrently or in any sequence to the loss.” In the case of Cali’s property damage, even if the wood decay caused the void in the soil, the damage itself was caused by “earth movement” and was therefore excluded under the policy.

The decision of the lower court was reversed, and the case was remanded for entry of judgment in favor of Merrimack Mutual.

Cali vs. Merrimack Mutual Fire Insurance Company-Supreme Court, Appellate Division, Second Department, New York-August 14, 2007-43 Appellate Division Reporter 3d 415.

Rental car driver demands liability coverage

In May 2005, Brian Shields rented a car from Enterprise Leasing Company. At the time he rented the car, he was offered the option to purchase insurance coverage. He decided to purchase coverage for damage to the rented vehicle as well as personal accident coverage; however, he declined “supplemental liability protection,” i.e., protection for third-party liability.

Soon after he rented the vehicle, Shield rear-ended a car driven by Adam Little. He immediately returned the rental car to Enterprise to obtain a replacement car. At that time he signed an accident report in which, among other things, he stated that his insurance company was Allstate. He claimed, however, that he told the Enterprise agent that he had not made his last payment to Allstate. According to Shields, “[he] hoped that if [he] paid the premium, Allstate would cover the accident.”

In June, MetLife Auto & Home, Little’s insurer, demanded payment of $1,621.36 for the damage to Little’s car. Shields forwarded the MetLife letter to Enterprise with his own letter demanding coverage and threatening to hire a lawyer if Enterprise did not comply. Enterprise employee Jennifer Gwynn contacted Shields on July 13 and explained that because he had not purchased “supplemental liability protection,” he should submit the MetLife claim to his own insurance company. Gwynn followed up with a letter reiterating Enterprise’s position that supplemental liability protection was not automatically included in the rental.

Shields subsequently filed a lawsuit against Enterprise, alleging that Enterprise had a duty to indemnify him for damages to Little’s car. He argued that under the terms of the rental agreement and the State of Washington’s Financial Responsibility Act, Enterprise had a duty to provide coverage for third-party claims. According to Shields, by denying coverage, Enterprise breached the rental agreement, acted in bad faith, and violated the consumer protection laws of the State of Washington. The trial court found in favor of Enterprise and dismissed Shields’ lawsuit. Shields appealed.

On appeal, Shields continued to assert that Enterprise had a duty under the Washington Financial Responsibility Act to provide minimum third-party liability coverage. The Court of Appeals of Washington disagreed. It found that because Enterprise was a self-insured rental car company, it was not subject to the law requiring owners of vehicles to insure for third-party liability.

Because Enterprise did not have a legal obligation to provide third-party liability coverage, and because Shields clearly rejected the coverage offered to him in the rental agreement, Enterprise did not engage in unfair insurance company practices. In short, Enterprise did not have a statutory or contractual duty to provide third-party liability coverage to renters who expressly rejected the option to purchase coverage, and it did not act in bad faith or violate any consumer protection laws.

The decision of the lower court was affirmed.

Shields vs. Enterprise Leasing Company-No. 58690-4-I-Court of Appeals of Washington, Division 1-July 16, 2007-161 Pacific Reporter 3d 1068.

Is CGL insurer liable for auto accident injury?

On January 9, 2002, Frank Gaidosh, a construction site employee, was assigned the duty of accepting delivery of some stone that was being delivered to a work site. David Whitfield was the driver of the dump truck containing the stone. When Whitfield arrived at the site, Gaidosh rode in the truck with Whitfield to show him exactly where to leave the stone. When they arrived at the delivery spot, Gaidosh offered to direct Whitfield as he maneuvered the truck to dump the stone.

Gaidosh exited the vehicle but, despite the fact it was getting dark, did not wear a reflective vest. (There were a vest and a flashlight in the truck, but Whitfield did not offer them to Gaidosh.) The delivery spot was on the south side of a public roadway. Whitfield turned the truck sideways, as Gaidosh made sure that southbound traffic was stopped. At that point, a car approaching on the other side of the street struck Gaidosh, seriously injuring him.

Whitfield was employed at the time by Bogey’s Trucking & Paving, Inc. Bogey’s had a business automobile policy issued by ARI Insurance Companies, as well as a comprehensive general liability policy issued by Indian Harbor Insurance Company. When Gaidosh sued Bogey’s and Whitfield, the trial court determined that ARI was obligated to defend and indemnify Bogey’s, and that ARI must also provide uninsured motorist coverage to Gaidosh. (The driver of the car that struck Gaidosh was an uninsured motorist.) ARI appealed.

On appeal, ARI no longer disputed its obligation to defend and indemnify Bogey’s and Whitfield. However, it did claim that Indian Harbor should share in that obligation and that ARI should not be required to provide uninsured motorist coverage to Gaidosh.

The ARI business automobile policy provided: “We will pay all sums an ‘insured’ legally must pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies, caused by an ‘accident’ and resulting from the ownership, maintenance or use of a covered ‘auto.’” The ARI policy also provided uninsured motorist coverage for the benefit of anyone “occupying” a covered “auto.” “Occupying” was defined as “in, upon, getting in, on, out or off.”

The Indian Harbor comprehensive general liability policy excluded coverage for claims “arising out of the ownership, maintenance, use or entrustment to others of any … ‘auto’ … owned or operated by or rented or loaned to any insured. Use includes operation and ‘loading or unloading.’”

In evaluating the language of the Indian Harbor policy, the Superior Court of New Jersey, Appellate Division, noted that the phrase “arising out of” meant “originating from” or “growing out of” the use of the automobile. It found that there was a “substantial nexus” between the backing up of the dump truck to deposit the stone and the injury to Gaidosh, a passenger who exited the truck to assist the driver. This connection, according to the court, was “too obvious to require or permit further elaboration.” Thus, the court affirmed the trial court’s decision that the language of the Indian Harbor policy excluded coverage for the Gaidosh lawsuit.

The appellate court also agreed with the trial court’s decision that ARI was required to provide uninsured motorist coverage. ARI argued that because he was not in the truck at the time he was injured, Gaidosh was not “occupying” a covered “auto.” The court found that under the facts and circumstances of the case, Gaidosh was in fact “occupying” the vehicle within the meaning of the policy. He was a passenger in the truck when he directed Whitfield to the drop site, and he was only out of the truck for a few seconds before he was struck and injured. Under these circumstances, the court felt he was entitled to uninsured motorist coverage under the ARI policy.

The decision of the lower court requiring ARI to defend and indemnify Bogey’s as well as to provide uninsured motorist coverage to Gaidosh was affirmed.

Bogey’s Trucking & Paving, Inc. vs. Indian Harbor Insurance Co.-Superior Court of New Jersey Appellate Division-July 19, 2007-928 Atlantic Reporter 2d 96.

Pollution exclusion bars recovery

In December 1994, Thomas McGregor, doing business as McGregor Heating & Air Conditioning, installed a new furnace in the home of Peter and Susan Staecker. Six years later, a leak in the supply line caused oil to leak into the ground beneath the Staeckers’ home. The state Department of Environmental Protection issued a notice of responsibility to the Staeckers, directing them to clean up the environmental damage caused by the oil leak. The Staeckers filed a negligence lawsuit against McGregor seeking payment for the cost of the cleanup and lost rental income.

Allamerica Insurance Company was McGregor’s commercial general liability insurer. The Allamerica policy contained a “total pollution exclusion” that excluded coverage for bodily injury or property damage caused by “the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” It also excluded coverage for damages arising out of any “request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of ‘pollutants’….” Pollutants were defined in the policy as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” When McGregor sought coverage under his Allamerica policy for the Staecker lawsuit, Allamerica refused to defend him, claiming that the oil leak was excluded by the pollution exclusion.

McGregor filed a lawsuit against Allamerica seeking a finding that Allamerica was required to defend him in the Staecker lawsuit. The lower court judge found in favor of McGregor; Allamerica appealed.

On appeal, the Supreme Judicial Court of Massachusetts, Worcester, found that Allamerica had no obligation to defend or indemnify McGregor. According to the court, a policyholder reading McGregor’s policy could reasonably expect that oil leaking into the ground constituted a pollutant within the meaning of the policy. Furthermore, the court noted, the primary objective of the Massachusetts statute under which the Staeckers’ cleanup responsibilities were ordered was to “compel the prompt and efficient cleanup of hazardous material.” Spilled oil is “a classic example of pollution, and a reasonable insured would understand oil leaking into the ground to be a pollutant.”

McGregor argued that allowing Allamerica to deny coverage under the pollution exclusion would “effectively eviscerate” his policy because any mishap with his business would include the discharge of oil, soot or smoke. The court was not persuaded by this argument. According to the court, the policy could cover some accidents involving oil or soot incidentally discharged. As long as the policy provided coverage for some acts, it was not “effectively eviscerated.”

The court reversed the lower court’s order in favor of McGregor and remanded the case for entry of judgment in favor of Allamerica.

McGregor vs. Allamerica Insurance Company-Supreme Judicial Court of Massachusetts, Worcester-July 10, 2007-868 North Eastern Reporter 2d 1225. *