Table of Contents 

INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Insured challenges farm policy’s vehicle exclusion

Aaron Wells was driving a 1992 pickup truck owned by his employer, Snider Farms, when he collided with a motorcycle operated by Christopher Walton. Walton died as a result of the accident. His estate filed an action against Wells and the Sniders. In addition to other insurance policies, the Sniders had a farm policy issued by Auto-Owners Insurance Company. The farm policy contained a motor vehicle exclusion for “[b]odily injury or property damage arising out of the ownership, maintenance, or use of: (b) any motorized land vehicle designed for travel on public roads or subject to motor vehicle registration.”

This exclusion further stated that Auto-Owners would cover “a motorized land vehicle used exclusively or kept in dead storage on the insured premises; or not owned or operated by or rented or loaned to an insured person ...” There was an exception to the motor vehicle exclusion: it did not apply to “bodily injury to any residence employee or insured farm employee arising out of or in the course of employment by an insured person.” The trial court found that the motor vehicle exclusion excluded coverage for the accident. The Sniders appealed.

On appeal, Auto-Owners argued that coverage was excluded by the farm policy’s motor vehicle exclusion, and the Sniders argued that the exception to the exclusion applied. The Court of Appeals of Indiana agreed with Auto-Owners. In reaching its decision, the court reasoned that the truck was a motor vehicle designed and used for travel on public roads and that it was, in fact, a registered vehicle. It was not kept in dead storage, nor was it used exclusively on the Snider Farms premises. In addition, Wells himself did not claim any bodily injury, and the deceased victim was not an employee of Snider Farms. Thus, the court concluded that the trial court did not err by finding that the exclusion applied.

Walton’s estate also filed claims against Snider Farms for negligent hiring, entrustment and supervision. Wells and the Sniders argued that the farm policy did not exclude coverage for these claims. The trial court found that there was no coverage for these additional claims, and the Court of Appeals agreed. According to the court, under policies containing motor vehicle use exclusions, where the immediate and efficient cause of the injury was the use of the vehicle, there was no coverage for negligent supervision. It was clear that Wells’ own negligent use of the pickup truck caused the accident and gave rise to the lawsuit. Thus, the trial court correctly found that the farm policy did not provide coverage for the additional claims.

The decision of the trial court in favor of Auto-Owners was affirmed.

Wells vs. Auto-Owners Insurance Company-No. 88A04-0606-CV-288-Court of Appeals of Indiana-April 16, 2007-864 North Eastern Reporter 2d 356.

Day care operator claims coverage for molestation

For 25 years, Vicki Dobson operated a day care center in her home in Bloomington, Indiana. For 10 of those years she watched a girl referred to as “T.B.”—most recently before and after school and during the summer. On April 4, 1996, Vicki agreed to watch T.B. all day because she was too sick to go to school. At some point during that day Vicki left T.B. and three other children in the care of her husband, Murl, so she could care for her mother-in-law who lived across the street. While she was gone, Murl molested T.B.

In May 1997, T.B., her parents and others sued the Dobsons. At the time of the molestation incident, the Dobsons had a homeowners insurance policy issued by State Farm Fire & Casualty Company. They immediately notifed State Farm of the lawsuit. Within six days, State Farm sent the Dobsons two letters. One acknowledged receipt of their notification and explained that an investigation was underway. The other raised the issue of whether State Farm was required to defend or indemnify the Dobsons or whether coverage was excluded by the policy’s childcare exclusion to the extent that the claim arose out of childcare services provided by the Dobsons.

Eventually State Farm denied coverage, claiming that “Murl and Vicki Dobson were providing full-time childcare services for many children and have done so for many years.” According to State Farm, Murl’s molestation of T.B. did not constitute an “occurrence” under the policy because it was excluded by the childcare exclusion.

The Dobsons agreed to assign to T.B. all rights it had against State Farm arising from their homeowners policy. The agreement also provided for a money judgment of $375,000, conditioned upon T.B.’s promise not to execute on the [Dobsons’] personal assets. In turn, T.B. filed an action against State Farm seeking coverage. After several procedural disputes, the trial court eventually found in favor of State Farm, holding that the policy’s childcare exclusion applied. T.B. appealed.

The childcare exclusion in the State Farm policy contained an exception that provided: “This exclusion does not apply to the occasional childcare services provided by any insured, or to the part-time childcare services provided by any insured who is under 19 years of age[.]” The policy also contained a severability clause that provided: “This insurance applies separately to each insured. This condition shall not increase our limit of liability for any one occurrence.” On appeal, T.B. argued that the policy was ambiguous and should be construed in favor of the insured. According to T.B., the severability clause language allowed the policy to be interpreted to allow general coverage for each insured; the childcare exclusion excluded coverage for each insured separately, and the exception to the childcare exclusion applied when only occasional childcare was provided by “any insured.”

The Court of Appeals of Indiana disagreed. It noted that “the purpose of a severability clause is to spread protection, to the limits of coverage, among all of the … insureds. The purpose is not to negate bargained-for exclusions which are plainly worded.”

According to the court, the childcare exclusion applied because Vicki provided non-occasional childcare services to T.B., a fact that was undisputed by the parties. The key was not whether Murl’s childcare services were occasional; rather, the issue was whether Vicki’s childcare services were occasional. Because Vicki’s childcare services were non-occasional, the exception to the exclusion did not apply and there was no coverage for T.B.’s molestation. Accordingly, the decision of the trial court was affirmed.

Bruce vs. Dobson-No. 53A04-0609-CV-533-Court of Appeals of Indiana-June 22, 2007-868 North Eastern Reporter 2d 831.

Did discovery bar arbitration?

In August 2004, Richard Capps sued Daniele Virrey and Jerry Linker for injuries he sustained in an automobile accident allegedly caused by Virrey while driving Linker’s van. He sought damages from both Virrey and Linker and uninsured motorist coverage from his own insurer, Nationwide Mutual Insurance Company. On the same day he filed his complaint, Capps served “requests for admissions” on Virrey, Linker and Nationwide. Nationwide filed its answer to the plaintiff’s complaint on October 25, 2004, by which it admitted that “certain acts” of Virrey proximately caused the accident, but it denied the injuries alleged and damages sought by the plaintiff. That same month Capps served “interrogatories and requests for production of documents” on all three defendants. The following year he served second and third “requests for production of documents” on Nationwide. The insurer provided responses to Capps’ requests.

On November 22, 2005, in an attempt to evaluate Nationwide’s liability, Capps and Nationwide participated in mediation. The mediation lasted only two hours, and the parties reached an impasse. On December 9, 2005, Capps sent a letter to Nationwide demanding arbitration in accordance with the terms of the policy.

When Nationwide refused to arbitrate, Capps filed a motion with the court to compel arbitration. That motion was denied. According to the court, Capps waived his right to arbitration by imposing substantial litigation costs on Nationwide and by participating in “discovery” not available during arbitration.

“Discovery” in trial practice includes the pre-trial devices that can be used by one party to obtain information from another party. “Requests for admissions” and “interrogatories and requests for production of documents” are part of the discovery process, a process that is typically governed by the Rules of Civil Procedure.

On appeal, Capps argued that the discovery procedures he used were appropriate because they were contemplated and incorporated into the arbitration agreement between the parties. The Court of Appeals of North Carolina disagreed. It found that Capps’ discovery requests exceeded the scope of what was contemplated by the agreement.

The Nationwide policy provided: “Unless the insured and we agree otherwise, arbitration will take place in the county and state in which the insured lives. Arbitration will be subject to the usual rules of procedure and evidence in such county and state. The arbitrators will resolve the issues. A written decision on which two arbitrators agree will be binding on the insured and us.” According to the court, because of its effective date, the agreement was governed by the Uniform Arbitration Act. That act contains its own rules for discovery, which are substantially different from those in the Rules of Civil Procedure.

The court noted that “arbitration is a process to privately adjudicate a final and binding settlement of disputed matters quickly and efficiently, without the costs and delays inherent in litigation.”

In North Carolina, arbitration cannot be compelled by the court if the opposing party can demonstrate any of the following: (1) it was prejudiced because it was forced to bear the expenses of a long trial, (2) it lost helpful evidence, (3) it took steps in litigation to its detriment or expended significant amounts of money, or (4) its opponent made use of judicial discovery procedures not available in arbitration. According to the court, Capps waived his contractual right to arbitration by participating in judicial discovery not available during arbitration. Thus, the order of the trial court denying Capps’ motion to compel arbitration was affirmed.

Capps vs. Virrey-No. COA06-655-Court of Appeals of North Carolina-June 19, 2007-645 South Eastern Reporter 2d 825.

Was agent bound to increase limits?

Mary and Thomas Avery owned a house in Green Lake, Wisconsin. The house had previously belonged to Mary’s parents, who had used it as a vacation home. When Mary’s parents had owned the home, they had it insured for $150,000. In early 2002, when Mary and Thomas took possession of the property, Thomas contacted Drew Diedrich, part-owner and president of the Diedrich Agency, Inc., to obtain replacement cost coverage. Diedrich had been the Averys’ agent since 1996 and had procured several types of insurance policies on their behalf. Thomas insured the Green Lake property for $150,000, just as Mary’s parents had.

In July 2002, the Averys met with Diedrich and asked him to increase the coverage limit from $150,000 to $250,000. Diedrich did not believe that the coverage increase was justified. He thought the replacement cost for the property would not exceed $150,000 and that the insurance company would be suspicious of a $100,000 increase. When the parties could not agree on the appropriate coverage amount, the Averys planned to contact a contractor to have an independent valuation of the property completed. In the meantime, the property was insured at $150,000.

After the July meeting, Diedrich sent the Averys a letter referencing their plan to obtain a property valuation to determine whether the increased coverage was justified. Eventually the valuation was completed and communicated verbally to the Averys. While the contractor agreed with the Averys that the coverage limit should be at least $250,000, a written estimate was never completed. In addition, Diedrich was never notified of the verbal estimate. The Averys had no further contact with Diedrich after he sent them the follow-up letter, nor did they contact any other agent to procure increased coverage for the Green Lake property.

In September 2002, the Green Lake property was destroyed by fire. The Averys, believing that the cost of replacing the residence exceeded $250,000, sued Diedrich and the Diedrich Agency, Westport Insurance Corporation (Diedrich’s professional liability insurer) and Auto-Owners Insurance Company (the company that issued the $150,000 policy). Auto-Owners eventually was dismissed from the case. Diedrich and Westport claimed that Diedrich had no duty to obtain additional coverage for the Averys because Diedrich never agreed to obtain additional coverage. The trial court found in favor of the Averys, holding that Diedrich, as an insurance agent, had a duty to carry out the Averys’ instructions. Diedrich and Westport appealed, and the court of appeals reversed the lower court’s decision. The Supreme Court of Wisconsin granted the Averys’ petition for review.

The sole question answered by the Supreme Court of Wisconsin was: “If an insured requests an increase in insurance coverage and the insurance agent has not agreed to procure it, does the agent have a duty to procure it?” The Averys argued that an agent who has agreed to procure coverage must procure any requested increase because agents are obligated to carry out insureds’ instructions. The court rejected this rule.

According to the court, the Averys’ proposal would allow an insured to “unilaterally impose a duty on an insurance agent once the agent has agreed to provide any coverage for a property.” The court held that an agent does not have a duty to procure requested insurance until there is an agreement that the agent will do so. In this case, Diedrich did not have a duty to procure the $100,000 additional coverage because he never agreed to do so. Thus, the decision of the court of appeals in favor of Diedrich and Westport was affirmed.

Avery vs. Diedrich-No. 2005AP1730-Supreme Court of Wisconsin-June 27, 2007-734 North Western Reporter 2d 159.

Did insurer waive right to subrogate?

On August 1, 2002, Robert Brewington was riding his motorcycle when he was struck and injured by a vehicle driven by Darrin Hornberger. Brewington filed a claim with his insurer, Farm Bureau Insurance. Hornberger was insured by Citizens Insurance Company.

In September, Farm Bureau wrote a letter to Citizens regarding Brewington’s claim. In its letter, Farm Bureau indicated that its investigation had revealed that Hornberger was legally at fault for the accident. Citizens replied that its own investigation showed that Brewington was 50% at fault. Citizens also advised Farm Bureau that it had offered Brewington $50,000 (the policy limit) to settle his bodily injury claim.

In October, Brewington sent a letter to Citizens complaining that Citizens had failed to provide him with proof of Hornberger’s policy limits, something he had requested in two previous letters to Citizens. He also complained that Citizens had failed to inform him of its position that he was 50% at fault in the accident. According to Citizens, Brewington told the company that he had “no intention of accepting responsibility for an accident for which [he] was in no way at fault.”

On November 13, Farm Bureau sent a letter to Brewington offering to “front” him $50,000 and confirming Farm Bureau’s receipt of certification of the policy limit from Citizens. In this letter, Farm Bureau also asked Brewington not to make any more statements to Citizens without Farm Bureau’s prior approval.

Farm Bureau and Brewington continued to communicate in letters regarding Farm Bureau’s offer to pay Brewington $50,000. Brewington continued to assert that he did not agree with the terms of the Citizens settlement offer and that he did not want Farm Bureau to issue the $50,000. Finally, on March 23, 2004, Brewington sent a letter to Farm Bureau detailing the damages he had suffered as a result of the accident. In that letter he agreed to accept the $50,000 limit of the Citizens policy; however, he also requested an additional amount of $250,000 pursuant to the underinsured motorist provision of the Farm Bureau policy.

On April 2, 2004, Farm Bureau responded by forwarding $50,000 to Brewington and by advising Brewington that Farm Bureau would proceed with the settlement and negotiation of the underinsured motorist claim. Farm Bureau then filed an action against Hornberger alleging that Farm Bureau was subrogated to the rights of Brewington and requesting $6,376 in property damages, $5,000 in medical expenses, and bodily injury compensation of $200,000.

Hornberger filed a motion for summary judgment, claiming that Farm Bureau had waived its right to subrogation because it had not complied with the Indiana statute governing subrogation. The relevant statute provided: “An insurer providing underinsured motorist coverage does not have a right of subrogation against an underinsured motorist if: (1) the insurer has been provided with a written notice that (A) informs the insurer of the existence of a bona fide offer of agreement or settlement between its insured and the underinsured motorist; and (B) includes a certification of the liability coverage limits of the underinsured motorist; and (2) the insurer fails to advance payment to the insured in an amount equal to the amount provided for in the offer of agreement or settlement within thirty (30) days after the insurer receives the notice described in subdivision (1).”

According to Hornberger, Farm Bureau knew of Citizens’ bona fide settlement offer for its policy limits and had received certification of Hornberger’s policy limits on November 13, 2003 (as evidenced in Farm Bureau’s letter to Brewington). Nevertheless, Farm Bureau waited until April 2 to issue the $50,000 check to Brewington.

According to Hornberger, because more than 30 days passed between November 13, 2003, and April 2, 2004, Farm Bureau could not be subrogated to Brewington’s rights. Farm Bureau argued that it did not receive written notice of a settlement agreement until March 23, 2004, the date of Brewington’s letter to Farm Bureau, and that it forwarded the $50,000 to Brewington within 30 days.

The trial court denied Hornberger’s motion.

Hornberger then petitioned the Indiana Court of Appeals to determine whether or not Farm Bureau had waived its right to subrogation. To support its position, Hornberger argued that the statute was ambiguous in terms of what must be contained in the written notice received by the insurer. The court found that the statute clearly required some “reciprocal action” between Brewington and Hornberger/Citizens for the 30-day period to commence. Applying this interpretation, the court found that Farm Bureau received “notice of an agreement or settlement” within the meaning of the statute on March 23, 2004, not on November 13, 2003. Because Farm Bureau forwarded the $50,000 check to Brewington within 30 days of March 23, it did not waive its right to subrogation.

The decision of the lower court denying Hornberger’s motion was affirmed.

Hornberger vs. Farm Bureau-No. 69A01-0611-CV-499-Court of Appeals of Indiana-July 2, 2007-868 North Eastern Reporter 2d 1149.

Agent accused of “flue fraud”

Carvie V. Mason Jr., and Joseph Mason had an Augusta Mutual Insurance Company homeowners insurance policy covering a dwelling they owned. On December 25, 2004, the dwelling was destroyed by fire, and the Masons filed a claim with Augusta Mutual. The insurer denied coverage, claiming that the “Woodburning Stove Inspection Report” accompanying the Masons’ initial application for insurance contained an error. According to Augusta Mutual, the report, which was signed by Carvie Mason, incorrectly stated that the flue for the woodburning stove was constructed of masonry lined with tile.

The Woodburning Stove Inspection Report had been completed by Herbert L. Jones Jr., acting as agent for Augusta Mutual pursuant to an agency agreement between Augusta Mutual and Jones’s employer, Lee-Curtis Insurance Services, Inc. When Augusta Mutual denied coverage, the Masons claimed that they never told Jones how the stove flue was constructed and that Carvie Mason had never signed the report. They filed an action against Augusta Mutual seeking damages for wrongful denial of coverage.

Augusta Mutual, in turn, filed an action against Herbert Jones and Lee-Curtis Insurance Services, Inc., Jones’s employer at the time he completed the report. According to Augusta Mutual, if Jones had submitted the report knowing it was inaccurate and without Carvie’s actual signature, then Jones had committed “fraud in the inducement” and breach of fiduciary duty. Jones and Lee-Curtis argued that the claims were inappropriate, and that if Augusta Mutual had any claims at all against them, those claims must be based in contract, not tort. The lower court agreed with Jones and Lee-Curtis and dismissed Augusta Mutual’s claims with respect to fraud in the inducement and breach of fiduciary duty. Augusta Mutual appealed.

On appeal, Augusta Mutual argued that Jones had stated that the flue was lined with tile and signed Carvie’s name on the report so that he could receive a commission for himself and Lee-Curtis. According to Augusta Mutual, the report contained material facts it relied upon when it issued the policy to the Masons. Jones and Lee-Curtis argued that these facts did not constitute fraud in the inducement because Augusta Mutual did not specify any duties that had been violated beyond the contractual duties contained in the agency agreement between Lee-Curtis and Augusta Mutual.

The Supreme Court of Virginia agreed with Jones and Lee-Curtis. According to the court, the duties that Jones allegedly violated arose solely out of the agency agreement, which required “due diligence in obtaining accurate information and making all necessary inspections required by [Augusta Mutual].” Thus, Augusta Mutual alleged only breach of contractual obligations, not fraud in the inducement. Augusta Mutual’s claim for breach of fiduciary duty failed as well. According to the court, “but for the existence of the agency agreement, neither Jones nor Lee-Curtis would have owed any fiduciary duty to Augusta Mutual.” Emphasizing its commitment to “safeguard against turning every breach of contract into an actionable claim for fraud,” the court held that there was no separate cause of action for breach of fiduciary duty outside of the contractual obligations.

The lower court’s judgment in favor of Jones and Lee-Curtis was affirmed.

Augusta Mutual Insurance Company vs. Mason-No, 061339-Supreme Court of Virginia-June 8, 2007-645 South Eastern Reporter 2d 290. *

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