INSURANCE-RELATED COURT CASES

COURT DECISIONS

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

Get it in writing: Arbitration gone awry

In January 2003, Remodeling Dimensions, Inc., a home remodeling contractor, entered into an agreement to build an addition on one side of a house and to install trim on windows in the original part of the house. The agreement provided that disputes arising out of the construction work would be resolved by binding arbitration through the rules of the American Arbitration Association. After RDI began working on the project, the home owner asked RDI to remove and reinstall the master bedroom window in the original part of the house; RDI complied.

RDI completed the project in June 2003. In May 2004, the house sustained storm damage. While the damage was being repaired, the home owners noticed damage to the siding of the house, so they hired a consultant to conduct an inspection. The consultant discovered significant moisture and related damage in several areas. In the spring of 2006, the home owners hired a second consultant, who also found moisture damage and recommended repair work.

The home owners and RDI disagreed as to the cause of the moisture and damage, and in July 2006 the home owners served a demand for arbitration on RDI and sought $264,100 in damages. The home owners claimed that RDI's construction work was defective and that it caused water damage to the house. They also claimed that RDI was negligent because it failed to warn them of defects in the original construction of the house, which would have enabled them to file claims against the original builder within the time period allowed by statute.

RDI's insurer was Integrity Mutual Insurance Company. RDI tendered the home owners' arbitration demand to Integrity, and by September 7, 2006, Integrity had appointed an attorney to represent RDI in the arbitration proceedings. On September 21, the AAA appointed an arbitrator to decide the case. On September 22, Integrity sent RDI a reservation of rights letter, questioning whether the home owners' claims were covered under the policy and reserving its right to deny coverage regardless of the outcome of the arbitration.

In January 2007, Integrity sent RDI another letter, informing RDI that it and its counsel would need to "fashion an arbitration award form that addresses the coverage issues and your respective burdens." The letter further stated: "If, for example, the arbitration award ultimately rendered makes it impossible to determine whether any of the damages awarded involve 'property damage' that occurred during the Integrity policy period, Integrity will not be responsible to indemnify an ambiguous award."

The arbitrator awarded the home owners $45,000 for "basic house repairs," $2,000 for "flat roof repair," $1,000 for "final cleaning," and $3,000 for "construction management fees." There was no award for replacement window costs, inspection costs, or design costs. RDI's attorney requested further written explanation of the award, but the arbitrator denied the request, stating that "the parties did not request an explanation of the Award in writing prior to the appointment of the arbitrator as required by [Construction Industry Arbitration Rule] R-43(b)."

Integrity denied coverage for the award. RDI paid the home owners, then filed a declaratory judgment action against Integrity, alleging breach of contract for its refusal to pay the award.

The district court found in favor of RDI, concluding that the vaguely worded arbitration award made it impossible to determine whether the policy covered any of the home owners' successful claims, that the vagueness of the award was caused by Integrity's attorney's inaction, and that Integrity therefore should pay the entire award. The court of appeals reversed the district court's decision, and RDI appealed to the Supreme Court of Minnesota.

On appeal, RDI argued (1) that the lower court erred in concluding that the claim was not covered under the Integrity policy, and (2) that Integrity was vicariously liable for the failure of its attorney to request a written explanation of the arbitration award that would have resolved the coverage dispute.

On the issue of coverage, the court concluded that the claims for failure to inform and negligent construction of the addition were not covered under the policy, but that the negligent construction claim related to the original house, if proved, would be covered. Therefore the arbitration award could be attributable, in whole or in part, to a covered claim.

The court then addressed the issue of whether Integrity was vicariously liable for its attorney's failure to request a written explanation. It found that the insurer was not vicariously liable, but could be directly liable, for the attorney's inaction. The court stated that when an insurer notifies its insured that it accepts the defense of an arbitration claim under a reservation of rights that includes both covered and noncovered claims, the insurer has a duty not only to defend the claim, but also to disclose to its insured the insured's interest in obtaining a written explanation of the award that identifies the claims or theories of recovery actually proved and the portions of the award attributable to each. This duty is conditioned upon the insured's showing that a written explanation is available, that the insurer had the opportunity to provide timely notice of the insured's interest in the written explanation, and that the insured suffered as a result of the insurer's failure to provide notice.

The court concluded that Integrity had a duty to notify RDI of RDI's interest in an explanation of the arbitration award. It remanded the case to the lower court to decide whether Integrity had fulfilled its duty.

Remodeling Dimensions, Inc., vs. Integrity Mutual Insurance Company-No. A10-1992-Supreme Court of Minnesota-August 22, 2012-2012 WL 3587825.

My left foot: Trucker's injury is covered

Peabody Energy Company, Peabody Coal Company, and Black Beauty Coal Company (Peabody) owned property in Indiana on which they conducted mining operations. On April 5, 2005, Beelman Truck Company entered into a contract with Peabody to provide transportation services. The contract provided that Beelman would indemnify Peabody against claims arising out of the performance of Beelman's work. It also required Beelman to obtain various kinds of insurance, including liability coverage.

On June 22, 2005, Richard Roark, a truck driver employed by Beelman, delivered a load of ash from a power plant to Peabody's mine. Roark backed the truck into a spot at the mine to dump the ash. He exited the truck to release the air brakes, which were controlled by switches located on the side of the trailer. As he walked toward the side of the truck, the ground gave way, and Roark went into the ground past his knee and sustained an injury to his left foot.

In May 2007, Roark filed a negligence complaint against Peabody. In March 2009, Peabody demanded coverage from North American Capacity Insurance Company (NAC), Beelman's commercial general liability insurer. NAC concluded that Roark's claim did not arise "from Beelman's work" and that it therefore had no duty to defend or indemnify Peabody.

Peabody filed a third-party complaint against Beelman requesting indemnification and alleging that Beelman had breached its contract. Peabody also sought a declaratory judgment regarding NAC's obligation to provide coverage. The trial court entered judgment in favor of Beelman and NAC, and against Peabody. Peabody appealed.

On appeal, Peabody argued that it was entitled to coverage under the NAC policy as an additional insured. The Court of Appeals of Indiana agreed. The relevant portion of the policy's additional insured endorsement stated: "WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule as an insured but only with respect to liability arising out of your operations or premises owned by or rented to you."

The court found that the connection between Roark's presence on Peabody's land as part of his employment as a truck driver and his injury was not "incidental or isolated" and that the injury arose out of Beelman's operations on Peabody's property. Therefore Peabody was an additional insured under Beelman's policy. In addition, because Peabody was an additional insured, Beelman did not breach its contractual agreement to provide coverage.

The decision of the lower court was affirmed in part, reversed in part, and remanded.

Peabody Energy Corporation vs. Roark-No. 14A01-1112-CT-555-Court of Appeals of Indiana-August 30, 2012-2012 WL 3756272 (Ind. App.).

Sand on my land: Insurer denies coverage

In May 1999, FLM, LLC, leased property in Indianapolis to International Recycling, Inc. (IRI). IRI planned to use the property for the storing, mixing, and removal of sand, gravel, and similar materials. Under the lease, IRI was obligated to "comply fully with all federal, state, and local environmental, health, or safety statutes, rules, regulations, or ordinances." The lease also required IRI to indemnify FLM for any damages caused by violation of the lease provisions and any claims resulting from contamination of the property caused by IRI's negligence or failure to perform its obligations under the lease.

Daimler Chrysler Corporation owned and operated a foundry that generated large amounts of foundry sand. It entered into an agreement with IRI to process the sand. Under the agreement, IRI would transport the sand to FLM's property, and Chrysler would pay IRI for the removal. The sand would only temporarily be located on FLM's property. After processing, it would be used as backfill for building and roadway projects.

Chrysler was IRI's only customer and only source of revenue. In the fall of 2002, Chrysler stopped paying IRI, and IRI stopped removing the foundry sand from FLM's property because IRI lacked the funds to do so. In March 2003, IRI stopped paying rent to FLM and abandoned more than 100,000 tons of sand on the leased premises. CSX Transportation, Inc., which owned property adjacent to the FLM property, complained that sand was migrating onto its property and causing water accumulation and drain blockage that interfered with its railroad right-of-way operations.

The Indiana Department of Environmental Management (IDEM)investigated these complaints and inspected FLM's property, where it observed surface and wind erosion. In May 2004, it issued a notice of violation to IRI, FLM, and Chrysler and ordered them to remove the sand. In January 2004, the City of Indianapolis also issued a notice to FLM, citing a violation of the sediment control ordinance, ordering sediment controls to be installed, and ordering removal of the sand unless a drainage permit was obtained. FLM sought indemnity under the lease from IRI.

IRI was insured under a commercial general liability policy issued by Cincinnati Insurance Company. The policy provided coverage for bodily injury and property damage liability and personal and advertising injury liability. Cincinnati also insured IRI under a commercial umbrella liability policy.

In January 2005, FLM filed a complaint against Cincinnati seeking a declaration that FLM had coverage under the two policies for the environmental liabilities cited by the Indiana Department of Environmental Management and the City of Indianapolis as well as for FLM's action against it. Cincinnati claimed there was no coverage under the policy. It also filed a motion to include Chrysler, IRI, the Indiana Department of Environmental Management, and the City of Indianapolis in the action. CSX filed an action against IRI and FLM seeking damages related to the migration of the sand onto its property.

The trial court found in favor of Cincinnati with regard to "any insurance coverage obligation, duty of defense, indemnification, or payment owed to or on behalf of IRI . . . relating to the claims made by IDEM, the City . . . FLM and/or [Chrysler]" but not with regard to claims made by CSX. The court denied FLM's and Chrysler's cross-motions for summary judgment; Chrysler and FLM appealed.

Under the policies, Cincinnati was required to pay "those sums that the insured becomes legally obligated to pay as damages because of 'personal injury.'"

Personal injury was defined as "injury other than 'bodily injury' arising out of one or more of the following offenses: . . . The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling, or premises that a person occupies by or on the behalf of its owner, landlord, or lessor . . ." Personal injury coverage did not require an "occurrence" or "property damage," but instead required that injury arise from an enumerated "offense," which could be either a "wrongful entry" or an "invasion of the right of private occupancy."

On appeal, FLM argued that Cincinnati's personal injury coverage applied to its claims against IRI. According to FLM, IRI wrongfully entered FLM's property when it did not remove the foundry sand after it stopped paying rent, and when it violated environmental compliance obligations. FLM also argued that IRI's failure to remove the foundry sand was an "invasion" of FLM's "right to private occupancy" because the "right to private occupancy" includes the right to property that is free of tons of foundry sand belonging to another entity and left on your property.

In response, Cincinnati argued that even if the abandonment of the sand constituted a wrongful entry or invasion of the right of private occupancy, the coverage was limited. Citing the policy language, Cincinnati claimed that the phrase "by or on the behalf of" modified the phrase "wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy," and that because the abandonment of the sand was not committed by or on behalf of FLM, there was no coverage.

The Court of Appeals rejected this argument. It found that the phrase "by or on the behalf of" could modify the phrase immediately preceding it: "that a person occupies." The court concluded that the phrase was subject to more than one interpretation and therefore was ambiguous, and that the language therefore should be construed against Cincinnati and in favor of coverage.

The decision of the trial court was reversed, and the case was remanded with instructions to enter summary judgment in favor of FLM.

Daimler Chrysler Corporation vs. Cincinnati Insurance Company-No. 49A02-0902-CV-127-Court of Appeals of Indiana-August 28, 2012-2012 WL 3685976 (Ind. App.).