INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Homeowners insurer denies defamation

In 1999, John Johnson purchased a house in Salem, Missouri, for which he obtained homeowners insurance from Allstate Indemnity Company. On July 9, 2002, the house was destroyed by fire, and Johnson subsequently filed a claim with Allstate. After an investigation, Allstate denied the claim. The company claims adjuster who supervised the investigation sent Johnson a letter detailing the reasons for the denial. The letter included the following language:

“2. The investigation into the facts and circumstances surrounding your claim has led to a reasonable belief and conclusion that you intentionally concealed and/or misrepresented material facts or circumstances concerning your residence, your activities on the date of the loss, the cause of the loss, and the amount, type and value of the property allegedly damaged or destroyed.

“3. The investigation into the facts and circumstances surrounding your claim has led to a reasonable belief and conclusion that you engaged in fraudulent conduct and/or made false statements in this investigation, at your examination under oath and otherwise, concerning this insurance, your property and your claim.”

After his claim was denied, Johnson filed suit against Allstate for “breach of contract and vexatious refusal to pay a claim.” While that case was pending, Johnson filed a petition against Allstate and its claims adjuster for defamation. Johnson’s petition alleged that because of the defamatory statements in the letter he could not obtain insurance, could not develop insurance and business relationships, and had suffered humiliation, embarrassment and other emotional distress. The defamation case went to trial, and the jury eventually found in Johnson’s favor. He was awarded $900,000 in actual damages and $100,000 in punitive damages. Allstate appealed.

On appeal, Allstate argued that Johnson did not prove that he suffered actual reputational harm, a required element of an action for defamation. The Missouri Court of Appeals, Eastern District, Division Two, disagreed. It noted that during the trial Johnson had testified that after Allstate denied his claim, he had attempted to obtain insurance for his house. According to Johnson, he met with five different insurance agents, but after he showed them the denial letter, they all refused to insure him. He testified that his property was currently uninsured, and that this was “something [he worried] about every day.” In addition to Johnson’s testimony, the testimony of various insurance agents revealed that allegations of insurance fraud would almost always result in disqualification from obtaining insurance, and that Johnson was required to reveal these allegations when attempting to obtain insurance. Based on this testimony, the appellate court concluded that there was “competent and substantial evidence” to support the jury’s award.

Allstate also argued that the jury verdict of $900,000 was excessive and the result of the jury’s passion. Again, the court disagreed. It found that there was evidence to support the award of damages to Johnson because of the “damage his reputation has suffered and how the harm ‘is going to stay with him…’”

The decision of the trial court was affirmed.

Johnson vs. Allstate Indemnity Company-No. ED 90476-Missouri Court of Appeals, Eastern District, Division Two-March 17, 2009-278 South Western Reporter 3d 228.

Test drive accident spurs coverage dispute

Stephen Seals was injured in an automobile accident while test driving a car owned by Atlantic Motors. Atlantic’s insurer was Erie Insurance Exchange. Seals made a claim for underinsured motorist coverage under the Erie policy and Erie, in turn, filed a declaratory judgment action asking the court to determine if Seals was entitled to the coverage. The lower court found in favor of the insurer. The Supreme Court of Virginia granted Seals an appeal.

The language of the policy’s uninsured/underinsured motorist coverage endorsement provided: “We will pay, in accordance with the Virginia Uninsured Motorist Insurance Law, all sums that anyone we protect is legally entitled to recover as damages from the owner or operator of an uninsured motor vehicle.” “Anyone we protect” was defined as “anyone else occupying a covered auto.” “Covered auto” was defined as “a motor vehicle…with respect to which the bodily injury or property damage liability coverage of the policy applies.”

To determine if the “bodily injury or property damage liability coverage of the policy applied,” the lower court referenced the “Liability Protection” section of the policy. That section had its own definition of “anyone we protect,” which stated: “The term ‘anyone we protect’ means any person or organization listed below…(2) Anyone else while using an auto we insure with your permission, except…(d) your customer who has other available insurance with limits at least equal to those required by law in the state where the auto is garaged.”

Based on this language and the fact that Seals had “other available insurance with limits at least equal to those required by law in the state where the auto is garaged,” the circuit court determined that Seals was not entitled to either liability or underinsured motorist coverage under the Erie policy. On appeal, Erie argued that Seals was not entitled to coverage under the Erie policy because Seals was not occupying a “covered auto.” Erie also argued that the Virginia underinsured/uninsured motorist statute did not require it to provide Seals with underinsured motorist coverage because Seals was not entitled to liability coverage under the Erie policy.

The Supreme Court of Virginia disagreed with both of the insurer’s arguments. In reaching its decision, the court first noted that Virginia’s “garage keeper’s exclusion” made it permissible for Erie’s policy to exclude Seals from liability coverage. That statute provided, in pertinent part: “Each policy or contract of bodily injury or property damage liability insurance which provides insurance to a named insured in connection with the business of selling…motor vehicles, against liability arising from the ownership, maintenance, or use of any motor vehicle incident thereto, shall contain a provision that the insurance coverage applicable to those motor vehicles shall not be applicable to a person other than the named insured…if there is any other valid and collectible insurance applicable to the same loss covering the other person under a policy with limits at least equal to the financial responsibility requirements specified in [the relevant statutory provision].” Because Seals had other insurance that met the statutory requirements, Erie’s policy could exclude Seals from coverage.

Next, the court addressed the issue of whether or not the policy provided Seals with uninsured/underinsured motorist coverage. As a preliminary matter, the court noted that its finding that Seals did not have liability coverage under the Erie policy was irrelevant to the issue of whether he had uninsured/underinsured motorist coverage. It then focused on the language of the policy. The Virginia Supreme Court found that in reaching its decision the lower court had incorrectly relied on the “Liability Protection” section of the policy. According to the Virginia Supreme Court, the “proper inquiry” was whether Seals was operating a “motor vehicle”…the “Autos We Insure” section of the policy, which provided: “The Declarations shows [sic] which of the following are autos we insure under this policy.” The “Declarations” section of the Erie policy stated: “AUTOS WE INSURE: ANY AUTO-OWNED, HIRED & NON-OWNED AUTOS.” The court concluded that because Seals was operating a vehicle owned by Atlantic, he was operating a “motor vehicle…with respect to which the bodily injury or property damage liability coverage of the policy applied.” Thus, Seals was entitled to underinsured motorist coverage under the Erie policy.

The decision of the lower court was reversed.

Seals vs. Erie Insurance Exchange-Record no. 081331-Supreme Court of Virginia-April 17, 2009-674 South Eastern Reporter 2d 860.

Insurer denies liability in wall collapse

Castle Village Owners Corporation owned a cooperative corporation in New York City. The corporation owned land that was adjacent to a sidewalk and a portion of the Henry Hudson Parkway. The land was surrounded on three sides by a retaining wall. On May 12, 2005, the retaining wall collapsed, causing significant damage. Castle Village’s primary liability insurer was Greater New York Mutual Insurance Company, and Castle Village had also purchased a commercial umbrella liability policy from American International Specialty Lines Insurance Company. The Greater New York policy had limits of $1 million per occurrence; the American International policy limits were $50,000 per occurrence. The American International policy contained an “owned property exclusion” that excluded coverage for “property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property.”

To prevent further damage, the City of New York ordered that “emergency remediation work” be performed. Trocom Construction Company served as the general contractor for the performance of the “emergency work.” The City then sent a letter to Castle Village asking for reimbursement of its costs. The amount requested was in excess of $2 million and included payment certification of approximately $1 million to Trocom. The City and Castle Village then entered into discussions to identify the necessary steps for a permanent solution. At the same time, both insurance companies entered into discussions with the City regarding payment of the “emergency costs,” eventually agreeing that the City would accept $1,250,000 in settlement, that Greater New York would contribute “whatever was left” of its limits, and that American International would pay the difference between the $1,250,000 and the amount paid by Greater New York. American International sent a letter to Castle Village advising it of the settlement negotiations. It also advised Castle Village that by participating in the settlement negotiations, the insurer was not giving up its right to deny coverage in the future for additional claims related to the collapse.

On December 11, 2006, Castle Village informed American International that its Greater New York coverage was exhausted as a result of the settlement with the City and that it was seeking coverage for the work required by the City to restore the wall. American International agreed to provide coverage for third-party claims, but it denied coverage for the permanent wall restoration work. Castle Village sought a court declaration that American International owed it coverage. The court found in favor of the insurer, noting that the policy excluded costs for restoration or repair of the insured’s property. Castle Village appealed.

On appeal, Castle Village argued that because the City of New York required it to repair its property, it was “obligated to pay as a result of liability imposed by law.” This “obligation,” Castle Village argued, rendered the “owned property” exclusion inapplicable. The Supreme Court, Appellate Division, First Department, New York, disagreed. In reaching its decision, the court acknowledged that there were some cases where an “owned property” exclusion could be rendered inapplicable. It stated that in those cases, the issue turned on the nature of the damage. According to the court, the key question was whether the obligation was necessary to stop ongoing and imminent damage to property belonging to another. The court found that the wall restoration work did not constitute this type of damage. It noted that the property had already been repaired so that the immediate danger was over. The court concluded that the American International policy provided coverage for damage to the property of others, and not for the property of the insured, and that in the case of overlap, work on the insured’s property that was necessary to cure (as opposed to prevent) imminent and recurring damage to adjoining property fell outside the exclusion.

The decision of the lower court was affirmed.

Castle Village Owners Corporation vs. Greater New York Mutual Insurance Company-Supreme Court, Appellate Division, First Department, New York-May 5, 2009-878 New York Supplement 2d 311.

Dog bites agent

Patricia Hall contacted Terrence Brennan of the Burt Insurance Agency to apply for homeowners insurance. She communicated three specific insurance needs to Brennan: (1) coverage for her dogs, (2) earthquake coverage, and (3) coverage for a woodburning stove. Brennan found a policy through Buckeye State Mutual Insurance Company.

On January 9, 2003, Brennan helped Patricia fill out an application for the Buckeye State homeowners insurance policy. Question 9 in the general information section of the application asked if the applicant or any tenant had any animals or exotic pets. Patricia told Brennan that she had dogs. Because the question also asked for details regarding breed and bite history, Brennan also asked if any of Patricia’s dogs were “vicious.” When Patricia answered “no,” Brennan marked a “no” next to question 9.

After the application was complete, Brennan handed it to Patricia for her signature. The box where she signed stated in part: “I have read the above application and any attachments. I declare that the information provided in them is true, complete and correct to the best of my knowledge and belief.” However, Patricia did not read over the entire application before she signed it.

In August 2004, one of the Halls’ dogs, a Doberman Pinscher, bit their niece. When the Halls filed a claim under their homeowners policy, the insurer denied the claim and in addition declared the policy null and void for material misrepresentation. Buckeye claimed that Hall answered “no” to the question asking if she had dogs. Buckeye also claimed that it never would have issued a policy to the Halls had it known they had Doberman Pinschers. The Halls filed a lawsuit against Brennan and the Burt agency, alleging negligence, breach of fiduciary duty, and constructive fraud by failing to acquire an adequate insurance policy for them. On October 21, 2008, a jury found that Brennan and Burt were liable to the Halls based on negligent failure to procure a policy. Brennan and Burt appealed.

On appeal, the key issue was whether or not Brennan was negligent in procuring insurance for the Halls, when Patricia specifically advised that she wanted coverage for her dogs, Brennan filled out the application and indicated the Halls had no dogs after Patricia specifically stated that they had dogs, but Patricia signed the application, which included a statement that the application was complete and accurate.

During the trial, Patricia stated that she did not review the application before she signed it because she figured Brennan “went through and…answered all the questions that he was going to ask.” She also noted that she felt rushed to sign the application because “people were coming into the office and the telephone was ringing.” The Court of Appeals of Indiana noted this evidence. The court also noted that Patricia had told Brennan at least twice that she had dogs and that, because Brennan asked her if the dogs were “vicious,” Patricia could have inferred that the application only required that she disclose whether or not she had “vicious dogs.” Finally, the court stated that it was reasonable to infer that Patricia was relying on Brennan’s expertise as an insurance agent and trusting that he accurately completed the application.

The Court of Appeals affirmed the decision of the lower court.

Brennan vs. Hall-No. 64A03-0811-CV-548-Court of Appeals of Indiana-April 21, 2009-904 Northeastern Reporter 2d 383.