INSURANCE-RELATED COURT CASES

Court Decisions

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

Auto insurer disputes claim of injured worker

David A. Bone was an employee of J.P. Noonan Transportation, Inc., a company that owned trucks that transported oil. Global Companies, LLC, was the operator of an oil loading terminal. Global granted Noonan the right to use its oil loading facilities to load oil into its trucks. The contract between the two companies required Noonan to indemnify and hold Global harmless from all claims “arising out of or in any way connected with the exercise” by Noonan of its rights under the contract.

On September 6, 2002, while “toploading” oil from Global’s terminal to a Noonan trailer, Bone fell from the top of the trailer, suffering serious injuries. The loading terminal had a guardrail for the driver’s side of the trailer but not for the passenger side, and Global was later cited by OSHA for a serious safety violation. While Bone could not remember exactly what had happened, there was evidence that he had fallen while he was attempting to fix a problem with a filler pipe.

Bone filed a lawsuit against Global. Global filed a third-party complaint against Noonan seeking indemnity. Noonan’s commercial automobile insurer, American Home Assurance Company, agreed to assume the defense and to indemnify Global, subject to a reservation of rights. However, it also filed a declaratory judgment action asking the court to find that Noonan’s general liability insurer, First Specialty Insurance Corporation, was obligated to defend and indemnify Global, not American Home.

The First Specialty policy provided: “We will pay those sums that the insured becomes legally obligated to pay, as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.”

The First Specialty policy also contained the following exclusion: “Aircraft, Auto or Watercraft. ‘Bodily injury’ or ‘property damage’ arising out of the ownership, maintenance, use or entrustment to others of any aircraft, ‘auto’ or watercraft owned or operated by or rented or loaned to any insured. Use includes operation and ‘loading or unloading.’”

The lower court found that American Home was obligated to defend and indemnify Global in the underlying lawsuit; American Home appealed.

On appeal, American Home claimed that the cause of the accident was Global’s negligence in failing to have a protective guardrail and a properly working pipe. The language of the American Home 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.’”

According to American Home, the connection between the injury sustained and the loading of the vehicle was not sufficient to hold American Home responsible because the accident did not “result from” the “use” of a covered auto.

The Appeals Court of Massachusetts, Suffolk, disagreed. In reaching its decision, the court focused on the importance of the defective pipe to the negligence claim. It found that because Bone was trying to make the loading pipe work properly when he fell, he was engaged in the “very activity for which the tanker truck was present at Global’s terminal.” These facts supported a sufficient “causal connection” between the loading of the tanker truck and Bone’s resulting injury. Thus, the language of the American Home policy applied.

The decision of the lower court finding that American Home was obligated to defend and indemnify Global was affirmed.

American Home Assurance Company vs. First Specialty Insurance Corporation-No. 07-P-699-Appeals Court of Massachusetts, Suffolk-October 20, 2008-894 North Eastern Reporter 2d 1167.

Can insured recover attorney fees?

Joiy Holder filed a claim for hurricane damage under his State Farm Insurance Company homeowners policy. The adjuster offered $9,065 in covered damages, and this amount was confirmed by a non-binding mediation. After Holder paid the $9,000 deductible, State Farm paid Holder $65. A year later, Holder filed a lawsuit against State Farm. The policy had a binding arbitration clause, which State Farm invoked. After arbitration, State Farm promptly paid the resulting award of $50,178.60.

Holder requested reimbursement of attorney’s fees in the action, but the judge denied the request. Holder appealed.

The District Court of Appeal of Florida, Third District, reversed the decision of the lower court. In reaching its decision it cited a previously decided case that awarded attorney’s fees in a similar situation because “the payment was obviously affected by the lawsuit.” It then noted that Holden’s lawsuit directly resulted in payment of more than 500 times the amount previously offered. Under those facts, the court awarded attorney’s fees, but it did not award interest.

The decision of the lower court denying attorney’s fees was reversed; the decision denying interest was affirmed.

Holder vs. State Farm Insurance Company-No. 3D08-448-District Court of Appeal of Florida, Third District-November 19, 2008-994 Southern Reporter 2d 521.

Absent duty to defend, did insurer act in bad faith?

On February 3, 2005, Responsive Management Systems (RMS) sued Onvia, Inc., accusing Onvia of “fax blasting,” the practice of sending unsolicited advertisements via fax in violation of state and federal law. At the time the lawsuit was filed, Onvia had liability insurance with St. Paul Fire and Marine Insurance Company. Onvia’s insurance broker claimed he faxed St. Paul a copy of the complaint, a tender letter, and a notice form on February 24. St. Paul claimed it did not receive the communication, although there was evidence it was sent. There was also evidence that the February communication was sent again in August.

On November 4, 2005, St. Paul sent a letter to Onvia denying coverage. There were subsequent discussions between the two companies, but St. Paul reaffirmed its denial on March 24, 2006. Onvia defended itself in the lawsuit and eventually settled with RMS for $17.515 million. At that point, Onvia assigned any rights it had against St. Paul to RMS.

On July 26, 2006, St. Paul filed a declaratory judgment action arguing that it had no duty to defend, settle, or indemnify Onvia in the underlying action. RMS, standing in Onvia’s shoes, counterclaimed. The lower court found that St. Paul had no duty to defend, indemnify, or settle the action against Onvia, and that it did not commit bad faith when it refused to defend it. RMS made an additional claim, however, namely that the insurer committed procedural bad faith in violation of Washington state statutory law. Specifically, RMS alleged that St. Paul had failed to timely acknowledge and act upon the notice of claim and tender of defense, and that it did not promptly or reasonably investigate the claim. In response to this allegation, St. Paul argued that it could not be liable for procedural missteps when it did not have a duty to defend.

At this point in the litigation, the Supreme Court of Washington agreed to answer two key questions: (1) whether, under Washington law, an insured has a cause of action against its liability insurer for procedural bad faith, for violation of the Washington Administrative Code, and/or for violation of the Consumer Protection Act even though a court has held that the insurer had no contractual duty to defend, settle, or indemnify the insured; and (2) if the answer to the first question is “yes,” then: Should the court presume damages or require the insured to prove that the conduct caused actual harm, and how should the damages be measured?

With regard to the first question, the Supreme Court noted that under Washington state law, insurers not only have a general duty of good faith, they also have a specific duty to act with reasonable promptness in investigation and communication with their insureds. According to the court, these duties apply regardless of whether a court has held that the insurer did not breach its duties to defend, settle, or indemnify. Thus, the court found that a third-party insured has a cause of action for bad faith claims handling that is not dependent on the duty to indemnify, settle, or defend.

The court then addressed the question of whether or not there was a presumption of harm or whether or not the insured must prove actual harm and damages. On this issue, the court noted that the specific facts of the case controlled. In this case, the alleged misconduct occurred immediately after Onvia notified St. Paul of the lawsuit. Under these facts, there was no presumption of harm. Thus, RMS had to prove actual harm, and its damages were limited to costs incurred as a result of the alleged bad faith.

The certified questions were answered.

St. Paul Fire and Marine Insurance Company vs. Onvia, Inc.-No. 80359-5-Supreme Court of Washington, En Banc-November 26, 2008-196 Pacific Reporter 3d 664.

Does “repair” mean “restoration”?

José Gonzales brought a class action lawsuit against Farmers Insurance Company of Oregon and related companies alleging that, when he elected to repair an insured vehicle that had suffered damage and the vehicle could not be completely restored to its pre-loss condition, the insurer was obligated to pay for the amount of the loss of value to the vehicle. The relevant wording of the policy in question provided that the defendants would “pay for loss to [the] insured car caused by collision less any applicable deductibles.” “Loss” was defined as “direct and accidental loss of or damage to [the] insured car, including its equipment.” The following provision limited liability for the loss:

“Limits of Liability. Our limits of liability for loss shall not exceed: 1. The amount which it would cost to repair or replace damaged or stolen property with other of like kind and quality; or with new property less an adjustment for physical deterioration and/or depreciation.”

The following provision described how the loss would be paid by the defendants: “We will pay the loss in money or repair or replace the damaged or stolen property.”

The rights and responsibilities of the insurer and the insured were described as follows: “RIGHTS AND RESPONSIBILITIES…The insured has the right to payment for the loss in money or repair or replacement of the damaged or stolen property, at the option of the [insurer].”

“Repair” was not defined.

The defendant insurance companies argued that the policy did not cover the diminished value of the vehicle, and that it obligated the insurer only to repair the damaged vehicle. They argued that the plain and ordinary meaning of the word “repair” applied. Gonzales, on the other hand, argued that the plain meaning of the word “repair” included restoration of the vehicle’s pre-loss physical condition and, if that was not possible, payment for diminished value.

The trial court found in favor of the insurers. When Gonzales appealed, the Court of Appeals reversed the trial court’s decision. The case was thereafter appealed to the Supreme Court of Oregon.

On appeal, the Supreme Court of Oregon held that the word “repair” as used in the policy required the defendant insurers to restore the damaged vehicle to its pre-loss condition and that if this could not be accomplished, they must compensate the insured for the diminished value of the vehicle. The court did note, however, that the diminished value did not include the “stigma” that might be attached to a repaired vehicle by prospective buyers.

The decision of the Court of Appeals reversing the lower court’s opinion was affirmed. The case was remanded to the lower court for further proceedings consistent with the Supreme Court decision.

Gonzales vs. Farmers Insurance Company of Oregon-CC9910-11479; CA A128598; SC S054486-Supreme Court of Oregon-October 23, 2008-196 Pacific Reporter 3d 1. *