INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Former insurer not liable for loss

Mystic Express leased a warehouse from AMB Property. Pursuant to the lease, Mystic was required to obtain liability insurance and to add AMB and AMB's property manager, Matrix Realty, Inc., as additional insureds. AMB also was required to purchase insurance and, among other things, to maintain and repair the warehouse roof.

Mystic purchased insurance through Jimcor, a wholesale insurance producer acting as managing general agent for Penn America Insurance Company. To pay the premiums, Mystic entered into a premium financing agreement with AICCO, Inc. (Imperial), pursuant to which Imperial paid the annual premium and then billed Mystic in monthly installments. Mystic's broker, Suburban General Insurance Agency, signed the agreement on behalf of Mystic.

The premium financing agreement contained a power of attorney provision that read: "THE UNDERSIGNED INSURED: 2.a. Irrevocably appoints LENDER Attorney-in-Fact with full authority, in the event of default, to (i) cancel the said policies in accordance with the provisions herein, (ii) receive all sums assigned to LENDER and (iii) execute and deliver on behalf of the undersigned all documents, forms and notices relating to the insurance policies listed on the SCHEDULE OF FINANCED POLICIES in furtherance of this agreement."

The initial policy term was from October 2, 2003, to October 2, 2004. On October 2, 2004, Mystic renewed the policy through Suburban. The renewal policy had a term of October 2, 2004, through October 2, 2005.

Beginning in December 2004, Mystic failed to make several premium finance payments on a timely basis. Each time a payment was late, Imperial sent Mystic a notice of intent to cancel with an expiration date. If payment was not received by the expiration date, a notice of cancellation was issued. If Imperial received the payment before the expiration date, Imperial would request the insurer to reinstate the policy.

On June 14, 2005, after Mystic missed another payment, Imperial sent a notice of intent to cancel with a June 26, 2005, expiration date. When no payment was received, on June 27 Imperial sent Mystic a notice of cancellation, effective July 1, 2005. Mystic sent a payment on July 8, and on July 11, Imperial issued a Notice of Request to Insurer for Reinstatement. Before reinstating, Jimcor requested a "no known loss" letter from Mystic, through Suburban. The request stated: "[i]f Jimcor does not receive this letter by 7/22/05, policy will be cancelled as per the Finance Company's cancellation date."

Mystic never submitted the "no known loss" letter, and on September 9, 2005, Jimcor processed the cancellation endorsement. This endorsement stated that the policy was cancelled effective July 1, 2005, and Imperial issued a check returning the premium on September 27.

On July 17, 2005, the roof of the warehouse Mystic had been leasing collapsed, causing damage to the property of Mystic and its customers. Mystic and several of its customers filed lawsuits, and AMB and its insurer settled the claims. AMB then filed a declaratory judgment action asking the court to find that Penn America was obligated to defend and indemnify it, and that Jimcor and Suburban were negligent in causing the policy to be cancelled and for failing to reinstate it. The trial court found in favor of Jimcor and Penn America, dismissing the actions against them. AMB appealed.

On appeal, AMB argued that the policy should not have been cancelled because Imperial had no authority to act as Mystic's attorney-in-fact to cancel the policy. According to AMB, the power of attorney was not valid because neither it nor the notice of acceptance referencing it contained Mystic's notarized signatures.

The Superior Court of New Jersey, Appellate Division, disagreed. It found that the technical requirements of the power of attorney were not governed by the state's general power of attorney statute; rather, the form of power of attorney used by Imperial was expressly authorized by the state's Insurance Premium Finance Company Act. The court also noted that, even if the power of attorney was not properly created, Penn America could rely on Imperial's apparent authority to act on behalf of Mystic because Mystic had allowed Imperial to procure the policy and to renew it for a second year under the finance agreement.

AMB also argued that Imperial did not have the authority to cancel the policy because the policy contained language that stated: "Transfer of Your Rights and Duties Under This Policy: Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured." According to AMB, Mystic could not assign its rights under the contract without the consent of the insurer.

The court disagreed with this argument as well. According to the court, this "consent to assignment" provision was intended to protect the insurer, not the insured, and thus could be waived only by the insurer, not the insured. In addition, the "consent to assign" provision was not applicable. Mystic did not need to transfer its rights because Imperial already had authority to act on Mystic's behalf under the power of attorney clause.

Finally, the court rejected AMB's argument that Jimcor was professionally negligent in failing to obtain reinstatement of the policy.

The decision of the lower court was affirmed.

AMB Property, LP, vs. Penn American Insurance Company-Superior Court of New Jersey, Appellate Division-February 14, 2011-2011 WL 487784 v (N.J. Super. A.D.).

Accident victims waived right to claim excess coverage

On January 25, 2006, Ryan Gades, a volunteer firefighter for the City of Cyrus, Minnesota, was responding to a fire call when his truck collided with a vehicle driven by Thomas Booth. Booth and his wife, Angela, were both injured in the accident.

Gades's truck was insured under a Progressive Preferred Insurance Company personal automobile policy for $50,000. The Booths sought coverage under Gades's policy, but they also believed at the time that they would be covered under the city's Auto-Owners Insurance Company liability policy. Accordingly, they entered into a settlement agreement with Gades and Progressive releasing them up to the limits of the primary liability coverage but reserving the right to pursue claims against Gades for additional damages up to the limits of what they thought was his excess liability coverage under the city's Auto-Owners policy.

The title of the settlement agreement, "Drake v. Ryan Satisfaction and Release," referenced a Minnesota Supreme Court case holding that a claimant could settle with a tortfeasor and the tortfeasor's primary insurer, but could also expressly reserve the right to pursue claims against an excess insurer; the tortfeasor would remain a real party in interest in an action against the excess insurer.

In November 2007, the Booths filed an action against Gades and the City of Cyrus under a theory of vicarious liability (secondary liability of the city for Gades's actions). By the time this lawsuit was filed, the parties had agreed that the city's Auto-Owners policy did not cover Gades. They also agreed that if it had covered Gades, it would have provided excess bodily injury liability coverage of up to $300,000.

The city argued that because Gades was not entitled to excess coverage under the Auto-Owners policy, the settlement agreement released the Booths' claims against him in full and against the city as well. The Booths argued that even if the agreement released Gades, they could still pursue an action against the city. The lower court found in favor of the city. After the court of appeals reversed the decision of the lower court, the Supreme Court of Minnesota agreed to review the case.

On appeal, the Booths continued to argue that they should be able to proceed against the city even though its Auto-Owners policy did not provide excess insurance for Gades. The Supreme Court disagreed. The court noted that the language of the settlement agreement provided that, even if the courts did not give effect to the agreement as in Drake v. Ryan, the Booths "nonetheless agree to waive any action of any kind arising from the 01/25/06 motor vehicle accident against Progressive and Ryan Gades, except to the extent of excess coverage provided to Ryan Gades by Auto-Owners."

According to the court, "The plain language of the Agreement reflect[ed] the clear and unambiguous intention of the parties that all of the Booths' claims against Gades were released except for those claims covered by Auto-Owners." The court also found that because the agreement had the effect of releasing the claims against Gades, the Booths could not proceed in their vicarious liability lawsuit against the city because the city's liability could be no greater than Gades's.

The decision of the court of appeals was reversed.

Booth vs. Gades-No. A08-2054-Supreme Court of Minnesota-August 19, 2010-2010 Westlaw 3257971.

Did driver cross the line into recklessness?

Francis Morehouse was driving north on a highway when his car was struck by a car driven by James Haynes. Haynes was driving south on the same road, and he had crossed into the other lane when he struck Morehouse's car. The stretch of highway where the accident occurred was curvy, and various cautionary signs were posted. The recommended speed for the curves was 25 miles per hour, and the posted speed limit was 45 miles per hour. Haynes admitted to the police that he was driving 45 to 50 mph as he entered the curve, and that he adjusted his radio as he entered the curve.

At the time of the accident, Morehouse was driving without insurance. He filed a lawsuit against Haynes seeking economic and noneconomic damages. The relevant Oregon statute prohibited him from recovering noneconomic damages unless he could prove that Haynes's conduct constituted reckless driving as defined by the statute.

The statute adopted the definition of "recklessly" that was used in the criminal code: "'Recklessly'…means that a person is aware of and consciously disregards a substantial and unjustifiable risk that the result will occur or that the circumstance exists. The risk must be of such nature and degree that disregard thereof constitutes a gross deviation from the standard of care that a reasonable person would observe in the situation."

The trial court found that no reasonable juror could conclude that Haynes had driven recklessly. The parties settled the claim for economic damages, and the trial court entered a judgment in favor of Haynes. Morehouse appealed, and the Court of Appeals affirmed. The Supreme Court of Oregon then agreed to hear the case.

On appeal, the issue was whether the facts on record showed that a reasonable juror could find that Haynes drove recklessly. During his deposition, Haynes testified that he had traveled the route he was driving on the day of the accident about 20 times in the month before the accident. He acknowledged that he knew the road was curvy, and that slow-moving farm vehicles, bicycles, pedestrians, and other passenger vehicles used the highway. He also acknowledged that he saw right-hand arrow signs indicating the sharpness of the curve. However, he did not admit to recalling from previous trips the sharpness of the curve he was driving when he crossed to the other lane nor to seeing some of the cautionary signs.

Applying this testimony, the Supreme Court of Oregon first considered whether the jury could find that Haynes was "aware of and consciously disregarded[ed]" the risk posed by his conduct.

The court found that a reasonable jury could infer that Haynes consciously disregarded the risk of endangering persons or property by driving into the curve at 45 to 50 miles per hour and choosing to adjust his radio at the same time. The court next considered whether the risk was a "substantial and unjustified risk" of endangering persons or property, and whether disregarding that risk was a "gross deviation" from what others would do in a similar situation. Haynes admitted he was negligent; however, he argued that his conduct was not a "gross deviation."

The court acknowledged that this could be the case but noted that the question was one for the jury to decide. The court then concluded that a reasonable juror could find each element of reckless driving. It therefore reversed the decision of the court of appeals and remanded the case to the circuit court for further proceedings.

Morehouse vs. Haynes-No CC 0609-09915; CA A136871; SC S058725-Supreme Court of Oregon-May 19, 2011-WL 1886287.