INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Do the crime, do the time

In February 2007, Charlene Stevens reported that her truck had been stolen from her driveway. She filed a report with the New York state police and filed a claim under her auto insurance policy. Later, Charlene’s son reported that he had in fact had an accident while driving the truck. The truck was found partially submerged in a pond, and the son was arrested and charged with theft. Later it was discovered that Stevens had actually been a passenger in the truck when her son drove it into the pond. She was arrested for insurance fraud, falsely reporting an incident, and offering a false instrument for filing. After she was found guilty and given a prison sentence of two to four years, she appealed.

On appeal, Stevens argued that had she filed a claim with her insurance carrier for the damage to the vehicle, she would have been entitled to coverage. As a result, Stevens said, she could not have had “larcenous intent” to commit the crime as required by criminal law. The Supreme Court of New York, Appellate Division, Third Department, disagreed. As a preliminary matter, the court noted that Stevens would not necessarily have been entitled to coverage under the policy. The court then noted that even if she were entitled to coverage, Stevens’ intent was still to defraud the insurance company. Therefore the criminal court’s verdict was supported by the evidence.

Stevens also argued that she should have been allowed to claim “renunciation” as an affirmative defense to her crime. The court acknowledged that renunciation is available to defendants “under circumstances manifesting a voluntary and complete renunciation of his [or her] criminal effort and, if mere abandonment was insufficient to accomplish such avoidance, by taking further and affirmative steps which prevented the commission thereof.” The court rejected Stevens’ argument that renunciation applied, stating that the crime was committed when she filed the fraudulent claim with the insurance company. Because the crime had already been committed, Stevens could not have prevented the crime through renunciation.

The judgment of the criminal court was affirmed.

People vs. Stevens-Supreme Court, Appellate Division, Third Department, New York-August 13, 2009-65 Appellate Decisions 3d 759.

Contractor digs deep for coverage

Camelot Associates Corporation, a builder of single-family homes, was sued by a group of homeowners who claimed that their homes were constructed at an insufficient elevation. According to the homeowners, the elevation problem caused wet basements, mold and fungus, and other damages. Camelot filed third-party actions against an engineer and contractors who were involved with the project, including J. Lucarelli & Sons, Inc., an excavation contractor. The engineer filed a fourth-party claim against J. Lucarelli, seeking indemnification and contribution for negligence.

Mountain Valley Indemnity Company was J. Lucarelli’s commercial general liability insurer. The Mountain Valley policy excluded coverage for damage to “[t]hat particular part of real property on which you…are performing operations, if the ‘property damage’ arises out of those operations; or…[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The policy defined “your work” as “[w]ork or operations performed by you or on your behalf,” including “[w]arranties or representations made at any time with respect to the fitness, quality, durability, performance or use of ‘your work.’”

When Mountain Valley denied coverage, J. Lucarelli filed an action asking the court to find that the insurer was obligated under its policy to defend or indemnify it. The lower court found in favor of the insurer; J. Lucarelli appealed.

The third- and fourth-party complaints arose out of excavation work performed by J. Lucarelli and sought damages for faulty workmanship. On appeal, J. Lucarelli argued that Mountain Valley owed it a defense because the allegations were broad enough to suggest a reasonable possibility of coverage.

The Supreme Court, Appellate Division, New York, disagreed. In reaching its decision, it noted that “the nature of claims asserted in a complaint is to be determined based upon the facts alleged” and not “the conclusions which the pleader draws therefrom.” The court then noted that the original complaints in the underlying action were for breach of housing merchant warranty, and that subsequent claims did not indicate that any legal duty other than breach of contract had been violated. The court then stated: “Commercial general liability policies like the one involved here were never intended to provide indemnification to contractors from claims that their work product was defective.” The court concluded that all of the allegations fell “solely and entirely” within the policy’s exclusion, and that Mountain Valley was not obligated to provide J. Lucarelli with a defense.

The decision of the lower court was affirmed.

J. Lucarelli & Sons, Inc., vs. Mountain Valley Indemnity Company-Supreme Court, Appellate Division, Third Department, New York-July 2, 2009-64 Atlantic Reporter 3d 856.

Is host liable for guest’s overdose?

On April 6, 2001, 18-year-old Stephen McMaster died of an overdose of the prescription pain relief drug propoxyphene. At the time of his death, McMaster and his mother were overnight guests in the home of John Scaduto. The propoxyphene had been prescribed to Scaduto by his doctor.

McMaster’s mother, Nichole Gallagher, sued Scaduto, claiming that he had negligently left the prescription in a place accessible to McMaster even though he knew McMaster’s emotional state was fragile. Scaduto sought coverage for the lawsuit under his homeowners insurance policy issued by the Massachusetts Property Insurance Underwriting Association. The insurer then filed an action seeking a court declaration that the policy did not provide coverage.

The homeowners policy excluded coverage for bodily injury “arising out of the use, sale, manufacture, delivery, transfer or possession by any person of a Controlled Substance…” The exclusion did not apply to “the legitimate use of prescription drugs by a person following the orders of a licensed physician.” The lower court found that there was no coverage under the policy; Gallagher appealed.

On appeal, Gallagher acknow­ledged that the policy exclusion could apply, but that her son’s death fell under the exception to the exclusion. According to Gallagher, McMaster’s death “arose out of” Scaduto’s legitimate use of the drug because, but for Scaduto’s legitimate use of the drug, it would not have been accessible to McMaster. The Appeals Court of Massachusetts, Suffolk, noted that the argument was somewhat persuasive; nevertheless, it found in favor of the insurer. In reaching its decision, the court emphasized that the excluded use of the drug was the immediate cause of McMaster’s death, and that any “causal contribution” of Scaduto’s use was “decidedly more remote.” The court concluded that the policy’s controlled substances exclusion was applicable.

The decision of the lower court was affirmed.

Massachusetts Property Insurance Underwriting Association vs. Gallagher-No. 08-P-1301-Appeals Court of Massachusetts, Suffolk-August 24, 2009-911 North Eastern Reporter 2d 808.

Assault or accident?

In November 2003, Craig Reid assaulted 17-year-old Jonathan Delgado by hitting and kicking him. Delgado sued him the following March. Reid was insured under an Interinsur­ance Exchange of the Automobile Club of Southern California homeowners insurance policy with liability coverage of up to $100,000.

Delgado’s lawsuit alleged two causes of action. The first was that Reid intentionally struck and kicked Delgado (intentional tort). The second was that Reid “negligently and unreasonably believed” he was engaging in self-defense “and unreasonably acted in self-defense when [Reid] negligently and unreasonably physically and violently struck and kicked [Delgado].”

Reid tendered defense of the lawsuit to Interinsurance Exchange. The insurer denied coverage, claiming that the assault was not covered because it was not an “accident” and therefore not an “occurrence” within the meaning of the policy and because the allegations fell under the policy’s intentional acts exclusion.

Delgado eventually asked the court to dismiss the intentional tort claim. Delgado and Reid then settled the action for $150,000. As part of the settlement agreement, the parties stipulated that Reid negligently believed he was acting in self-defense. Later, in exchange for a payment of $25,000 and assignment of any claims Reid had against his insurer, Delgado agreed not to demand the remainder of the judgment from Reid. Delgado then filed an action against Interinsurance Exchange. The trial court in that action found that the settlement and stipulated judgment between Reid and Delgado were “contrived” to expose Interinsurance Exchange to liability, and thus found in favor or the insurer. The appellate court reversed, finding that Reid’s conduct was potentially an “accident” and thus an “occurrence” under the policy. The Supreme Court of California agreed to review the case.

On appeal, Delgado claimed that Reid’s assault and battery fell within the policy’s definition of “accident” because, from the perspective of the injured party, the assault was “unexpected, unforeseen and undesigned.” The Supreme Court of California rejected this argument and concluded that the injured party’s perspective was not the determining factor. Delgado also argued that Reid’s unreasonable, subjective belief that self-defense was necessary converted his intentional act into an “accident.” Again the court disagreed. It held that an insured’s unreasonable belief in the need for self-defense does not turn the resulting purposeful and intentional act of assault and battery into “an accident” within the meaning of the policy. Therefore Interinsurance Exchange had no duty to defend Reid in Delgado’s lawsuit.

The judgment of the court of appeals was reversed.

Delgado vs. Interinsurance Exchange of the Automobile Club of Southern California-No. S155129-Supreme Court of California-August 3, 2009-211 Pacific Reporter 3d 1083.

Does driver’s fraud bar coverage?

On October 15, 2004, Kelvin Lee Simpson was operating his tractor-trailer when he negligently struck a vehicle owned by the North Carolina Department of Transportation (NCDOT). At the time of the accident he did not have insurance on the vehicle because his North Carolina Farm Bureau Mutual Insurance Company policy had expired for lack of payment of premium. On the day of the accident, Simpson went to the office of a local Farm Bureau agent and paid the past due premium for the policy. He did not tell the agent about the accident. Two weeks later, Farm Bureau issued a policy effective 12:01 a.m., October 15, 2004.

The attorney for the driver of the NCDOT vehicle contacted Farm Bureau in November 2004. Simpson had never notified Farm Bureau of the accident, and he failed to respond to the insurer’s inquiries.

On November 3, Farm Bureau filed a declaratory judgment action asking the court to determine that there was no coverage for claims arising out of the October 15 accident. The lower court found in favor of the driver of the NCDOT vehicle, holding that Farm Bureau provided liability coverage in the sum of $750,000. Farm Bureau appealed.

On appeal, the issue was whether Simpson could retroactively obtain insurance coverage through his own fraud. Farm Bureau argued that, under the terms of the policy, coverage was void because of Simpson’s fraud. Simpson argued that the North Carolina Financial Responsibility Act required that Farm Bureau’s obligation became absolute once the accident occurred. The Court of Appeals of North Carolina found in favor of Farm Bureau. The court found that coverage would have been absolute if the policy was in effect at the time of the accident. However, because the policy was not in effect at the time of the accident, Farm Bureau’s obligation to provide coverage was not absolute.

The decision of the lower court was reversed.

North Carolina Farm Bureau Mutual Insurance Company vs. Simpson-No. COA08-898-Court of Appeals of North Carolina-July 7, 2009-678 South Eastern Reporter 2d 753.