Friday, May 19, 2017

Bankruptcy court holds that bank can apply insurance proceeds to outstanding loan of borrower in default on loan

Nadler & Darwish, a company that was in bankruptcy proceedings, was in default on mortgages on property it owned.  After a fire its insurer issued a check for $165,000.  Following standard procedure, the insurer issued the check jointly to Nadler & Darwish, the insurance adjuster (probably a public adjuster, who advocates for an insured in property loss cases and is entitled to a percentage of the loss paid) and Mechanics Cooperative Bank, the bank that held the mortgages on the property.

The bank endorsed the check on Nadler & Darwish's behalf, deposited it, paid the adjuster's commission, and then used the rest to reduce Nadler & Darwish's outstanding loan obligations to the bank.

Nadler & Darwish moved that the bank be ordered to repay the amount of the check except the adjuster's commission.  In In re Nadler & Darwish, LLC, 2016 WL 5396652 (D. Mass.) (unpublished), the Bankruptcy Court ruled in favor of the bank.  It held that under Massachusetts statute and case law, when a mortgage is in default and  a fire destroys the property, the mortgage bank can assert its rights with respect to the proceeds of the insurance policy as the intended third-party beneficiary of the policy.  Although a check made out to more than one party can only be cashed if all the parties endorse it, under the mortgage documents the bank was given power of attorney that allowed it to sign on behalf of Nadler & Darwish. 

Friday, May 5, 2017

United States District Court for the District of Massachusetts holds that two year period for replacing property under replacement cost and ordinance and law coverage is not tolled by ACV payment delays caused by insured

Policies insuring property damage to buildings owned by the insured typically divide payment of loss into three coverages.  The insurer will initially pay the actual cash value (the "ACV") of the loss, which means the value of the damaged property at the time of the loss.  Then, once the property is actually repaired or replaced, insureds who have replacement cost coverage will receive the difference between the actual cash value and the reasonable amount they paid to repair or replace the property.

In a fire loss, for example, the insurer will first pay the actual cash value of the beat up, cat scratched armchairs (not that I'm projecting).  It will pay the difference between that and the cost of the new, not yet (but doubtless soon to be) scratched armchairs when the insured submits receipts that the new armchairs were purchased.  Insurance policies typically provide that replacement cost coverage will only be paid on repairs or replacements made within two years of the loss.

A third type of coverage, "Ordinance or Law" coverage, applies to the cost of bringing a building up to current codes.  Older buildings are often not compliant with current safety standards set forth in sanitary and health codes.  The buildings are "grandfathered in," meaning that the owners are usually not required to make changes that bring the buildings up to current standards. 

But once a certain amount of money is spent on a building, they are required to be brought up to current code.  (As a side note, that's why some buildings fall into worse and worse disrepair.  The owners may be able to afford to put a few thousand dollars into an electrical system, but once they do that they have to bring the entire building up to code.  That can cost many times as much as the original repairs.)

Ordinance or Law Coverage, like replacement cost coverage, is often limited to repairs made within two years of the loss.

When there is a dispute over the amount of loss in a property damage case, that amount will often be determined by a specialized type of arbitration called a reference proceeding.

One issue that often arises is whether the two year time limit to repair or replace property for replacement cost coverage and Ordinance or Law coverage to kick in is extended when an insurer's payment of the actual cash value is so untimely that the insured cannot afford to repair or replace the property within two years.

In Shri Gayatri, LLC v. Charter Oak Fire Ins. Co., 206 F. Supp.3d 684 (D. Mass. 2016) the United States District Court for the District of Massachusetts held that the time to repair or replace the damaged property was not tolled by a delay in payment of the actual cash value.  The reason for that holding was that the delay in payment was the a result of the insured's own delays and failures to communicate with the insurer. 

Tuesday, April 25, 2017

Massachusetts Superior Court holds that insurer cannot retroactively recoup defense costs but can refuse to pay costs that have been incurred

The April 17, 2017 issue of Massachusetts Lawyers Weekly quoted me (password required) in an article about a decision by the Massachusetts Superior Court, Holyoke Mutual Ins. Co. In Salem v. Vibram USA, 2017 WL 1336600 (Mass. Super.)  

That case holds that if an insurer agrees to defend its policyholder in a claim and then wins a separate declaratory judgment action determining that it has no duty to defend, the insurer is not entitled to recoup the defense costs it has already paid out.  That is an important holding on a question that has been unsettled in Massachusetts.

As I discussed in the Lawyers Weekly article, the case also holds, in my opinion contradictorily, that the insurer does not have to pay defense costs that have been incurred but not paid by the time of the ruling that there is no duty to defend.  There is no indication in the decision that the insurer had given notice to the policyholder before the bills were incurred that it did not intend to pay them.  The distinction between bills that had been submitted and paid by the insurer and bills that had been submitted and not yet paid by the insurer seems like a random one. 

In Vibram, the policyholder had exercised its right to control its own defense by hiring counsel of its choice, who would be paid by the insurer.  It was entitled to do so because the insurer was defending under a reservation of its right to later deny coverage. 

The court held that the fact that the policyholder was controlling its own defense meant that it was not harmed by the retroactive decision of the insurer not to pay bills that had already been incurred. 

The policyholder was Vibram USA, a large corporation with significant resources.  (I am a big fan of Vibram's  barefoot sneakers.)  But elsewhere in the decision the court appropriately pointed out that the resources of the policyholder should not be a factor in determining the duty of the insurer, because similar policies are issued to individuals and small businesses and the insurer has the same duty to all policyholders.  Yet the court did not take into account that an individual or a small business might make a different decision about what kind of defense costs to incur if it understands an insurer will pay those costs than if it has been told by the insurer that it will not pay those costs. 

The court explained its rationale in part by holding that “there is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind, even while a declaratory judgment action is still pending.” That is certainly a correct statement of law.  But, as the court pointed out earlier in the decision, “[i]n the first instance, it is for the insurer to determine whether any of the allegations of the complaint, if proved, could support a claim covered by the policy.  If it declines to provide a defense, it faces potential liabilities that will likely exceed the cost of defense.”  Those liabilities are ch. 93A damages that can be awarded for breach of a duty to defend, and fee shifting in a declaratory judgment action over the duty to defend if the policyholder prevails. 

The court cited Herbert A. Sullivan v. Utica Mut. Ins. Co.,439 Mass. 387, 395 (2003) for the proposition that an insured can change its mind about whether it has a duty to defend.  But in Herbert A. Sullivan  the insurer did not change its mind – the circumstances changed.  The initial complaint in that case alleged negligence, a claim that was covered under the policy.  The amended complaint eliminated the negligence claim, and none of the remaining allegations involved covered losses.   

The coverage question at issue in Vibram was whether a policy provision covering Advertising Injury included coverage for a claim based on the unauthorized use by the policyholder of a famous person’s name to sell the policyholder’s product.  The court does not indicate that any circumstances changed that would affect that analysis.  While an insurer is entitled to revisit its own legal analysis, I did not see in the decision any rationale for allowing it to do so retroactively.     

As I told Lawyers Weekly, the court’s holding that an insurer can retroactively refuse to pay defense costs that have already been incurred allows an insurer to have its cake and eat it too.  It can agree to defend under a reservation of rights, thereby avoiding potential ch. 93A damages for breaching a duty to defend, while also not paying  the defense costs it agreed to pay, perhaps ever. 

Tuesday, March 28, 2017

United States District Court holds insurer has duty to defend allegation of defective product

Michael Ladas alleged in a suit against IMS that it had manufactured non-compliant and defective components of a product made for the United States army, in violation of the federal False Claims Act.  (What that product was, as well as other facts, has been redacted from the publicly available version of the court's opinion.)  The underlying suit eventually settled, after IMS had spent more than $400,000 in legal fees. 

IMS had sought coverage from its insurer, All America.  All America denied a duty to defend or indemnify.  In Innovative Mold Solutions, Inc. v. All America Ins. Co., Inc., 2016 WL 3814774 (D. Mass. 2016), the United States District Court held that All America had violated its duty to defend.

Because of the redactions it is somewhat difficult to follow the court's analysis.  The first question before it was whether the damage alleged was covered property damage.  The issue was whether the damage was to property that belonged to someone other than IMS, since faulty workmanship to an insured's own product is not covered.  The court held that there was a duty to defend because the underlying complaint alleged that faulty epoxy potentially caused damage to components that were supplied by other entities.

The next issue was whether the underlying complaint alleged an occurrence within the meaning of the policy.  All America argued that IMS changed the composition and application of epoxy, which was an intentional act and not an occurrence.  IMS asserted that the injury was an occurrence because it had not intended the injury.  The court agreed with IMS.

Finally, the court held that the faulty workmanship exclusions did not apply.  Exclusion j(6) does not apply to property damage included in the products-completed operations hazards, which means that it does not apply to property damage that occurs away from premises owned or rented by the insured.  The other faulty workmanship exclusions do not apply to damage to property owned by someone other than IMS. 

Wednesday, March 15, 2017

Massachusetts Appeals Court holds that auto insurer does not have to pay sales tax for replacement vehicle if no such taxes have been incurred

The standard Massachusetts auto policy includes a provision that damages for a vehicle totalled by the insured "include any applicable sales tax."

In Ramirez v. Commerce Ins. Co., 91 Mass. App. Ct. 144 (2017), the Massachusetts Appeals Court held that that provision applies only if the claimant has actually purchased a replacement vehicle on which sales tax was assessed.  

Wrbasy Ramirez was involved in a collision with a car driven by Edith McGuinness, who was insured by Commerce. Ramirez's vehicle was declared a total loss.  Ramirez chose to retain ownership of it, so Commerce was liable to him for the actual cash value less the salvage value.

Ramirez accepted Commerce's calculation as far as it went, but objected to the omission of Massachusetts sales tax in the amount of his loss.  Commerce informed him that he would be reimbursed for sales tax upon proof that he purchased a replacement vehicle and incurred the tax.

The Massachusetts Appeals Court agreed that Commerce did not have to pay the sales tax.  It reasoned that such tax does not constitute an element of damages if Ramirez did not actually incur the tax by purchasing another vehicle.  

Thursday, March 9, 2017

Massachusetts Appeals Court distinguishes slander of title from slander

Wayne and Cynthia Robbins were sued for slander of title.  The underlying plaintiff alleged that they published false claims with respect to the ownership of land that was owned by him.

The Robbinses sought insurance coverage from their homeowner's insurer, Hingham Mutual Fire Insurance Company.  Hingham declined to defend or indemnify, asserting that the policy did not provide coverage for slander of title.

In Robbins v. Hingham Mutual Fire Ins. Co., 91 Mass. App. Ct. 1108, 2017 WL 729749 (unpublished), the Massachusetts Appeals Court agreed with Hingham.  It held that although the policy provides coverage for slander, slander of title is a different tort.  Slander encompasses "a publication of a false and defamatory statement by spoken words of and concerning the plaintiff."  Slander of title involves "disparagement of a person's title to real or personal property."

There's no good reason why slander of title shouldn't be a covered loss, as long as the standard exclusions apply.  Seems like its time to amend the personal injury coverage in homeowner's policies. 

Tuesday, February 28, 2017

I will be speaking at a panel discusion, "Your Lawyers Professional Liability Insurance and What Happens if You Get Sued"

I am excited to announce that John Torvi of Landy Insurance and I will be speaking at the Social Law Library in Boston on the topic, "Your Professional Liability Insurance and What Happens if You Get Sued."  The program is on Wednesday, March 22, 2017, from noon to 1:00 PM.

This will be an informative one hour discussion on developing and understanding a legal malpractice insurance plan. Learn about how your professional liability insurance will (and will not) protect your practice, and insurance defense and coverage issues that may arise if you find yourself the subject of a claim or lawsuit.

(Scroll down for more information.)

I am thrilled to co-present this discussion with John. With over 20 years experience in the insurance industry, John is an expert on what attorneys and other professionals need and don't need in their professional liability policies.  He's also a great guy.

The program costs $10 and is limited to 25 attendees.  Lunch will be provided.   You do not need to be a member of the Social Law Library to attend.

You can register here