INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Insured claims excess limits under car rental policy

Bierdie Williams rented a car from WRP Enterprises and Thrifty Car Rental (Thrifty) in Georgia. While driving the rental car, she was involved in an accident with Cindy Garnett, who was injured.

Thrifty had contracted with Philadelphia Insurance Company for insurance on the cars it rented. There were two separate coverage rates. The policy language stated: “When the Insured’s rental contract provides the renter with minimum state financial responsibility limits, the following limits of liability are applicable to this policy:

“Bodily Injury Liability $15,000.00 each person/$30,000.00 each accident

“Property Damage Liability $10,000.00 each accident”

The policy further provided: “When the rental contract provides the renter with limits in excess of the minimum state financial responsibility laws, the following limits of liability are applicable to this policy:

“Bodily Injury Liability $100,000.00 each person/$300,000.00 each accident

“Property Damage Liability $50,000.00 each accident”

The rental contract between Williams and Thrifty allowed Williams to purchase an optional, additional insurance policy, as follows: “SLI [supplemental liability insurance] provides Me with a separate policy providing excess coverage against such claims for the difference between the Primary Protection and a maximum combined single limit of $1,000,000 (U.S.) per occurrence for bodily injury, including death and property damage, for other than the Car while the Car is on rent to Me.” Williams decided to purchase this additional policy.

Garnett filed a declaratory judgment action against Thrifty and Philadelphia Insurance Company asking the court to determine what coverage Williams had at the time of the accident. The lower court found that Philadelphia was contractually obligated to provide the $100,000/$300,000 coverage. The Court of Appeals affirmed the lower court’s decision. The Supreme Court of South Carolina agreed to hear the case.

The key issue addressed by the Supreme Court of South Carolina was whether or not, under Georgia law, the Philadelphia policy provided liability coverage in excess of the statutory minimum despite the fact that the lessee (Williams) purchased excess liability coverage. Thrifty argued that the correct approach was to focus exclusively on the Philadelphia contract and ignore the rental contract.

The court disagreed. It stated that Thrifty and Philadelphia agreed “in unmistakable terms” that Philadelphia’s coverage was applicable only when the rental contract provided the coverage. Thus, it was important to evaluate the rental contract as well. Because Williams’ rental contract provided that she purchase the excess coverage through a separate policy outside the rental contract, the excess limits were not provided by the Philadelphia contract. Philadelphia’s higher coverage rate of $100,000/$300,000 was inapplicable.

The judgments of the lower court and the appellate court were reversed.

Garnett vs. WRP Enterprises, Inc.-No. 26566-Supreme Court of South Carolina-November 24, 2008-669 South Eastern Reporter 2d 591.

Insurers deny agents’ E&O claims

Richard Miller, Ed Zeller and Jeremy Kohn were licensed life, accident and health insurance agents. Miller owned his own business, T&M Financial, Inc., and worked with Zeller and Kohn, who were independent contractors.

As part of their business operations, the agents referred several of their clients to Associated Financial Solutions, Inc., a nonprofit debt-adjustment organization; the purpose was to enable the clients to pay insurance premiums and fund their purchase of other insurance products. The agents chose Associated because it was the only company that guaranteed that its services would not have a negative impact on clients’ credit ratings. The agents did not receive compensation for these referrals. They continued to refer clients to Associated for approximately one year before the agents’ clients complained that their debts were not being discharged and that they could not get in touch with Associated.

Although the agents had “checked into the background” of Associated, they did not discover that it was not authorized under Kansas law to perform debt adjustment. In fact, Associated was investigated by the Kansas attorney general’s office; but before the investigation was complete, Associated’s owner, John F. Usher, absconded with approximately $55,000 in client funds. Miller, Zeller and Kohn were also investigated by the attorney general’s office. As a result, they filed claims under their professional errors and omissions policies, issued by Westport Insurance Corporation and Employers Reinsurance Corporation. The insurers denied coverage. The agents eventually settled with their clients for approximately $55,000. They then filed an action against the insurers, alleging that they unjustifiably denied coverage and breached their insurance contract.

The errors and omissions policy provided coverage for loss “caused by any ‘wrongful acts’ committed by the ‘insured agent,’ arising out of the conduct of the business of the ‘insured agent’ in rendering services for others as a licensed life, accident and health insurance agent.” It also provided that Westport and Employers would “have the right and duty to investigate, defend, conduct settlement negotiations and enter into settlements for any ‘claim’ or ‘suit’ for which coverage is provided by the terms of this policy” and would pay “all expenses incurred in the defense of any ‘claim’ or ‘suit’ against the insured alleging any covered ‘wrongful act’ and seeking ‘loss’ on account thereof, even if the ‘claim’ or ‘suit’ is groundless, false, [or] fraudulent.” The policy defined “wrongful act” or “wrongful acts” to mean “any negligent act, error, [or] omission…committed or alleged to have been committed by the insured agent.”

The lower court found in favor of the insurers, and the court of appeals agreed. Both courts based their decisions on the conclusion that the agents did not commit “wrongful acts” within the meaning of the policy because there was not enough evidence to prove they were “negligent.” The case was eventually appealed to the Supreme Court of Kansas.

On appeal, the Kansas Supreme Court found that the lower courts erred because the key question was whether there was a possibility of coverage under the policy language, not whether the agents were negligent. The court then found that the policy language was extremely broad, and that “wrongful acts” could include even an alleged negligent act, error or omission. Thus the insurer had a duty to defend the agents. The court also rejected the application of several exclusions cited by the insurers, specifically an exclusion for “intentional, dishonest, fraudulent, criminal or malicious acts” and for claims “arising out of or in connection with a fraudulent or nonexistent entity.”

The decisions of the lower courts were reversed, and the case was remanded to the district court.

Miller vs. Westport Insurance Corporation-No. 95,768-Supreme Court of Kansas-January 30, 2009-200 Pacific Reporter 3d 419.

“Spontaneous combustion” triggers claim dispute

James and Joan Catlett hired Ryan Bennett and Robert Pesano to apply a protective sealant to the cedar siding on the exterior of their house. Bennett was the owner of the business. While Bennett and Pesano were performing the work, they used drop cloths to catch any drips of sealant that might fall. After the work was finished, the drop cloths were stored in an enclosed porch in the rear of the house.

Later, the Catletts’ house was damaged by a fire. According to the Catletts, the cause of the fire was spontaneous combustion of the sealant chemicals in the drop cloths. The Catletts filed a claim under their Central Mutual Insurance Company homeowners policy. Central Mutual paid the Catletts’ damages, then sued Bennett and Pesano for reimbursement. Bennett’s commercial liability insurer was Nova Casualty Company. Nova agreed to defend Bennett in the Central Mutual action; however, it maintained that Bennett was not covered under the policy because of the operation of certain policy exclusions. It then filed a declaratory judgment action asking the court to find that it was not obligated under the terms of the policy to defend or indemnify Bennett.

The lower court found that the policy exclusions did not apply and that Nova Casualty was obligated to defend and indemnify Bennett in the Catletts’ action. Nova Casualty appealed.

On appeal, Nova Casualty argued that coverage was not applicable by operation of a provision excluding coverage for any “bodily injury and property damage arising out of [s]pray [p]ainting [o]perations.” The Supreme Court, Appellate Division, Third Department, New York, disagreed. The policy did not define the term “spray painting operations.” In performing the work for the Catletts, Bennett and Pesano did not use paint; they used sealant. Because the express language of the policy used the word “paint,” the court found that the exclusion was, at best, ambiguous. It also noted that the sealant was applied with brushes as well as spray. Finally, the court found that reading the exclusion broadly, as Nova Casualty proposed, would allow it to apply to any work performed by Bennett and his employees in the Catlett home.

Nova Casualty also argued that the policy’s “work production” exclusion applied, specifically to damage “to that specific part of real property on which work is being performed…if the ‘property damage’ arises out of such work.” Again the court disagreed. It found that this exclusion was designed to apply to situations where coverage was sought for “contractual liability of the insured for economic loss because the product or completed work is not what the damaged person bargained for.” It was not intended to exclude negligence of the insured. Thus the exclusion did not apply.

The court concluded that neither policy exclusion applied. The decision of the lower court finding coverage under the Nova Casualty policy was affirmed.

Nova Casualty Company vs. Central Mutual Insurance Company-Supreme Court, Appellate Division, Third Department, New York-February 5, 2009-59 Appellate Decisions 3d 777.

Contractor challenges coverage denial

Rhys and Sally Mussman hired T.R. Bulger to install a heating, ventilation and cooling (HVAC) system in a house they were building on the shore of Lake Michigan. The system was a radiant heat system, so the work included the installation of copper piping through which hot or cold water would flow. When the installation was almost finished, a dispute arose between the Mussmans and Bulger. As a result, Bulger left the work site. When the system was subsequently activated, there were problems with water leakage and unusually loud noise. The Mussmans sued Bulger, alleging various wrongs, and Bulger countersued the Mussmans for unpaid invoices. The case went to arbitration; the Mussmans were awarded $2.3 million in damages, and Bulger was awarded $140,000.

Bulger sought coverage for the Mussmans’ losses from his insurer, Indiana Insurance Company, under the products/completed operations coverage in his commercial general liability policy. Indiana Insurance filed a declaratory judgment action against Bulger to determine whether the policy covered the Mussmans’ losses that allegedly resulted from Bulger’s faulty installation of the HVAC system. The court granted summary judgment in favor of Indiana Insurance; Bulger appealed.

On appeal, the Indiana Court of Appeals noted that the Indiana Insurance policy was a commercial general liability policy that included coverage for products/completed operations hazards. According to the court, Bulger’s work as a contractor involved two different types of risks: (1) business risk and (2) risk of occurrences that give rise to insurable liability. The court then noted: “Our supreme court has summed up the distinction between the two risks by stating that a commercial general liability policy ‘does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident.’”

The court found that the Indiana Insurance policy did not provide coverage to Bulger “to the extent that he [was] required to pay the Mussmans damages for the inspection, repair, or replacement of the HVAC system that he installed or for economic damages related to breach of contract and warranty claims.” The court did note, however, that if faulty installation resulted in damage to other parts of the house or to construction materials that did not belong to Bulger, there might be coverage.

The court concluded that there were issues of fact concerning whether Bulger’s faulty workmanship caused property damage to the rest of the Mussmans’ house, whether those damages were included in the arbitration award, and whether they were covered under the Indiana Insurance policy.

The decision of the lower court finding in favor of Indiana Insurance was reversed, and the case was remanded to the trial court for further proceedings.

T.R. Bulger, Inc., vs. Indiana Insurance Company-No. 26A05-0803-CV-167-Court of Appeals of Indiana-February 26, 2009-90 North Eastern Reporter 2d 1110.

Does policy cover host who served minors?

On August 6, 2006, Morgan Brown, Joshua Tucker, Matthew Humphreys and Courtney McDonough were involved in a serious automobile accident. The four individuals, who were under age, were traveling together after attending a party at the residence of Jeff Corra. The vehicle was driven by McDonough, then age 19, who had been drinking at the party. Tucker and Humphreys were killed, and Brown was seriously injured. Corra had been present during the party, to which guests had been invited by his daughter. Corra was convicted on four counts of knowingly providing alcohol to underage persons.

Corra had a homeowners policy issued by American Modern Home Insurance Company. Brown and the estates of Tucker and Humphreys notified Corra that they intended to bring claims under the policy. American Modern Home filed an action seeking a declaratory judgment that Brown, Tucker and Humphreys’ injuries were not covered under the policy and that the insurer had no duty to defend or indemnify Corra.

The American Modern Home policy provided coverage for an “occurrence,” which was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the policy period, in: a. bodily injury; or b. property damage.”

The lower court asked the Supreme Court of Appeals of West Virginia to certify the question of whether knowingly permitting an underage adult to consume alcoholic beverages on a home owner’s property constituted an “occurrence” within the meaning of the policy. The court agreed to certify and answer the question. It found that conduct engaged in knowingly was not an “accident” and thus not an “occurrence” within the meaning of the policy.

The court noted that the criminal conviction for knowingly providing alcohol to minors was immaterial to its decision. According to the court, the key question was whether Corra knowingly permitted underage individuals to consume alcohol on his property. The court concluded that, under West Virginia law, knowingly permitting an underage adult to consume alcoholic beverages on a home owner’s property did not constitute an “occurrence” within the meaning of the American Modern Home homeowners policy.

The certified question was answered.

American Modern Home Insurance Company vs. Corra-No. 33861-Supreme Court of Appeals of West Virginia-December 15, 2008-671 South Eastern Reporter 2d 802.