Monday, October 5, 2015

First Circuit holds that pro rata allocation does not apply to attorney's fees in long tail loss

In a case with odd facts, the United States Court of Appeals for the First Circuit has held that under Massachusetts law, in long tail losses attorney's fees are not subject to pro rata allocation. 

I'm not going to go into great detail of the facts of the case.  Suffice it to say that the First Circuit's recitation of those facts and the procedural history fairly drip with disdain for the insurer's actions and litigation strategy.  Rather than stating a straightforward prediction that the SJC would not apply pro rata allocation to defense costs (a subject of debate among insurance coverage attorneys), it chided the insurer for removing the case to federal court where new state law cannot be made. 

The reasoning of the First Circuit that the duty to defend is a broad duty that should not be subject to pro rata allocation is sound.  But in the context of the case the court has left room for insurers to argue that bad facts make bad law and that Massachusetts state courts should ignore the decision for that reason.

A substantial oil spill occurred on property owned by the Peabody-Essex Museum, and eventually migrated off-property to land owned by Heritage Plaza.  Heritage Plaza discovered the oil in 2003 and made a claim against the Museum.  The Massachusetts of Department of Environmental Protection issued a Notice of Responsibility to the museum.

The museum sought coverage from U.S. Fire Insurance Company, its insurer from December, 1983 to December, 1985.  U.S. Fire denied a duty to defend the private demand from Heritage Plaza, but accepted defense of the DEP claim with a reservation of rights.

The museum retained legal counsel and an environmental consultant and tendered the bills to U.S. Fire.  It received no payment for the defense of the public claim even though U.S. Fire had agreed to defend that claim.  It finally sent a payment totaling $611.41, which it calculated by unilaterally reducing the hourly rate of counsel to $200 per hour and unilaterally reducing the bills to what it considered to be the percent spent on the public claim.  It made no payment for the environmental consultant,

The museum sued U.S. Fire and, in 2013, was awarded judgment of over $1.5 million in the United States District Court for the District of Massachusetts. 

In Peabody Essex Museum,Inc. v. U.S. Fire Ins. Co., __ F.3d__, 2015 WL 5172841 (1st Cir. 2015), the United States Court of Appeals for the First Circuit held that US Fire's persistent failure to make any payment towards defense costs "despite having nominally accepted that duty may be treated as a wrongful refusal to defend upon receipt of notice of a claim." 

The court then turned to the issue of how the costs and fees should be divided between the insurer and insured. 

The court first held that the US District Court did not abuse its discretion in finding that the beginning of the 1983-1985 policy period was the start date for the allocation period even though that date "has a make believe quality." 

The District Court had applied a fact-based allocation rather than the default time on the risk method set forth in Boston Gas Co. v. Century Indem. Co., 454 Mass. 337 (2009).  In a fact based allocation, costs are attributed to a policy period based on the percentage of damage that occurred during that period.  Courts generally agree that a fact-based allocation is best, but it is often impossible to produce facts indicating how much damage occurred in one 12-month period versus another of a 30 year long undiscovered contamination.  Some courts have applied it in sexual abuse cases, where an institution allowed sexual abuse of many minors over a period of time, because in that instance it is possible to determine how many allegations of abuse occurred in one year over another.

The time on the risk method, as set forth in Boston Gas, allocates damages based on the percentage of time a particular insurer provided coverage out of the entire period of the loss.

The District Court apparently allocated loss based on a finding that 9,000 square feet of oil damage occurred during the two year policy period.  (The total square feet damaged is not clear from the opinion.)

The First Circuit affirmed the holding of the District Court that time on the risk proration of Boston Gas Co. v. Century Indem. Co., 454 Mass. 337 (2009) does not apply to defense costs.  It held that the arguments of U.S. Fire "appear diminutive next to the long-standing state precedent on the broad and formidable contractual duty to defend that heavily favors insureds and hat stands apart from indemnity obligations."    It tempered its holding by adding, "we have warned, time and again, that litigants who reject a state forum in favor of federal court under diversity jurisdiction cannot expect that new state-law trails will be blazed" by the federal court.

Thanks to Mike Tracy for bringing this case to my attention. 

Wednesday, September 16, 2015

U.S. District Court holds arbitration clause allowing arbitrator to rule on claim based on equitable theory allows her to rule on equitable grounds

Ace American Insurance Company insured a boat owned by John Puccio.  The boat sank in severe weather.  Ace American denied coverage. 

The dispute was submitted to arbitration as required by the terms of the policy.  The arbitrator awarded Puccio damages under the policy, plus attorney's fees and costs as 93A damages.

Ace American filed a complaint in court seeking to vacate or modify the arbitration award.  It argued that the arbitrator exceeded her authority by failing to apply a wear and tear provision of the insurance policy.  The provision excluded "any loss or resulting damage from . . . wear and tear, gradual deterioration, weathering, neglect, lack of reasonable care or due diligence in the maintenance of the insured Vessel." 

The arbitrator concluded that even if wear and tear contributed to the boat's sinking, the insurer "could not possibly have assumed that a 1998 boat was in new condition when it insured the [boat] . . . for 2012."  She reasoned that if the provision were enforceable in this case, the insurer could "comfortably insure boats beyond a certain age without any expectation of ever having to pay."  She concluded that this would "border on fraud," and that therefore the provision could not exclude coverage for Puccio's claim.  She found that Ace American's reliance on the provision was an unfair and deceptive practice under ch. 93A. 

Ace American argued in the United States District Court for the District of Massachusetts that the arbitrator exceeded her authority by resolving the dispute on equitable grounds never submitted to her.

In Ace Am. Ins. Co. v. Puccio, 2015 WL 3540838 (D. Mass.), the court disagreed.  The arbitration clause of the policy gave the arbitrator the authority to resolve "any controversy or claim . . . based in [any] . . . legal or equitable theory . . . arising out of or related to this policy, the interpretation, enforcement, or breach thereof, or the handling of any claim involving this policy."  It did not limit the arbitrator's power to consider equitable grounds in interpreting the policy. 

The court also noted that the arbitrator's decision not to apply the wear-and-tear provision was, at least arguably, an act of interpreting the contract. 

I take no position on whether the arbitrator's decision was good law.  But I do note that this decision highlights why I dislike arbitration generally.  Decisions of arbitrators can be overturned by a court only in very limited circumstances.  If an arbitrator has a bad day and issues a bad decision, you generally can't appeal it.  If a judge has a bad day and issues a bad decision, you can appeal it. 

Monday, September 14, 2015

Massachusetts Appellate Division holds that third party property damage coverage in auto policy does not cover cost to tow insured's vehicle

David Raposa was operating an SUV that was involved in a single-car collision.  Big Wheel Truck Sales, Inc. towed the SUV. 

Raposa was insured by Safety but did not have coverage for towing.  He did have coverage for "damage to someone else's property."  That coverage provided:
Under this Part, we will pay damages to someone else whose auto or other property is damaged in an accident.  The damages we will pay are the amounts that person is legally entitled to collect for property damage through a court judgment or settlement.  . . .  Damages include any applicable sales tax and the costs resulting from loss of use of the property.
Big Wheel made a demand to Safety for payment of its invoice under Raposa's property damage coverage. 

Safety refused payment, asserting that Big Wheel itself did not sustain any damage as a result of the accident. 

The trial court granted summary judgment to Big Wheel on breach of contract and 93A claims.

In Big Wheel Truck Sales, Inc. v. David Raposa, 2015 WL 5098500 (Mass. App. Div.), the Massachusetts Appellate Division reversed, holding that the property damage coverage was unambiguously inapplicable to Big Wheel.  Its claim was for the cost of its services, not for damage to its own property. 

Congratulations to Pete Bosse and Tanya Austin of my old firm, Boyle, Shaughnessy & Campo, who represented Safety. 

Thursday, September 10, 2015

First Circuit holds that under Maine law perfection of security interest in insurance proceeds requires fair notice to all other creditors

Wheeling extended to MMA, a railroad company, a $6,000,000 line of credit.  To secure the loan MMA granted Wheeling a security interest in, among other assets, all insurance proceeds. 

Wheeling sought to perfect its security interest by filing a UCC-1 financing statement with the Delaware Department of State.  The financing statement described the collateral as "all of MMA's inventory, accounts, and payment intangibles (as those terms are defined in the Uniform Commercial Code)." 

Travelers issued a commercial property insurance policy to MMA.  The policy had $7,500,000 of total coverage.

An MMA freight train derailed on Quebec, sparking massive explosions, destroying part of a town, and killing 47 people. 

MMA filed a claim with Travelers for lost business income.  Travelers denied the claim, asserting that the policy did not cover business interruption. 

MMA filed a petition for Chapter 11 bankruptcy and a trustee was appointed.

Wheeling was by then owed the entire $6,000,000 under the line of credit.  It instituted an adversary proceeding against MMA, Travelers, and the trustee in which it sought  a declaration regarding the nature, extent, validity, and priority of its asserted security interest in any payments due under the Travelers policy. 

MMA and the trustee entered into negotiations with Travelers that culminated in a settlement agreement requiring Travelers to pay $3,800,000 to MMA in satisfaction of all claims  under the policy.

Wheeling objected to the settlement, arguing that it held a perfected security interest in all payment rights belonging to MMA.

The United States Bankruptcy Court held that MMA was entitled to the settlement proceeds free and clear of Wheeling's asserted interest because under Maine common law Wheeling had failed to perfect its interest.

In In re Montreal, Maine & Atlantic Railway, LTD, __ F.3d __, 2015 WL 4934212 (1st Cir.), the United States Court of Appeals for the First Circuit interpreted the controversy under Maine law. 

Article 9 of the Uniform Commercial Code, as enacted in Maine, applies to the creation of security interests in rights to payment, but the court noted that it excludes certain transactions from its scope; the validity of such transactions is determined by reference to other statutes or to common law.

One subset of excluded transactions is the transfer of an interest in or assignment of a claim under a policy of insurance.  The court held that the exclusion included payment rights under insurance policies. 

The court held that Maine law has not yet determined how an interest in insurance proceeds may be perfected.  The court predicted that the Maine Supreme Judicial Court would adopt a perfection rule requiring more than what Wheeling did; it would require a step that would furnish fair notice to all other creditors. 

Because Wheeling did not perfect its security interest in the insurance proceeds, MMA was entitled to the settlement payment free and clear of Wheeling's security interest. 

Monday, September 7, 2015

Massachusetts Appeal Court holds that excess insurer is not required to pay until primary insurer becomes legally obligated to pay primary limit

In 2005 Ridgewood purchased a $15 million primary insurance policy from The Hartford and a $10 million excess insurance policy from Liberty Mutual.

The plaintiffs filed suit against Ridgewood, alleging breach of contractual and fiduciary duties.  The plaintiffs and Ridgewood settled the case for a stipulated judgment of $20.5 million.  The settlement agreement provided that The Hartford and Ridgewood would pay jointly to the plaintiffs $11 million in exchange for the plaintiffs' promise not to sue Ridgewood for the remaining amount.  The Hartford paid $7 million to the settlement and $2.5 million in attorney's fees; Ridgewood paid $4 million to the settlement.

Ridgewood assigned all of its rights, claims and interest in the Liberty Mutual policy to the plaintiffs. 

Liberty Mutual refused to pay any part of the claim, asserting that its policy provides coverage only when the primary insurer has paid the full amount of the underlying limit of liability as loss, and that that condition had not been met. 

Under the Liberty Mutual policy there was coverage "when the underlying limit of liability is exhausted by reason of the insurers of the underlying policies paying or being held liable to pay in legal currency the full amount of the underlying limit of liability as loss."  "Loss" was defined as "sums which the insured parties are legally obligated to pay solely as a result of any claim insured by this policy, including claims expenses, compensatory damages, settlement amounts, and legal fees and costs awarded  pursuant to judgments." 

In Anile v. Liberty Mutual Insurance Company, 2015 WL 4937671 (Mass. App. Ct.) (unpublished), the Massachusetts Appeals Court held that under New Jersey law the language of the Liberty Mutual policy unambiguously provided that excess coverage will be allowed only in the event that The Hartford had actually paid, or was legally obligated to pay, the entirely of the $15 million primary coverage limit. 

Thursday, September 3, 2015

Massachusetts Appeals Court holds that attorney who conducted negligent title search may be liable to title insurer for breach of contract but not malpractice

Fidelity National Title Insurance Company of New York appointed George Crowley as its agent to issue title insurance.  The agreement provided that if Crowley were grossly negligent by issuing policies for properties with existing liens and encumbrances he would indemnify Fidelity for its loss, including attorney's fees. 

Fidelity alleged that in five instances Crowley issued title insurance in its name despite the existence of title defects, causing Fidelity to incur a loss. 

In Fidelity Nat'l Title Ins. Co. of N.Y. v. Crowley, 2015 WL 4887598 (Mass. App. Ct.) (unpublished), the Massachusetts Appeals Court  held that the contract statute of limitations of six years applied, rather than the legal malpractice/tort statute of limitations of three years.  Although the mortgage lenders would have malpractice claims against Crowley, there was no attorney-client relationship between Fidelity and Crowley.  The agency agreement did not required the issuing party to be an attorney.  (I need to think this one through.  I'm not a real estate attorney so I'm probably missing some subtleties in the difference between Crowley doing a title search for Fidelity and Crowley doing a title search for a mortgage lender.) 

In this case the word "grossly" was typed above the word "negligent," so that unlike other title insurance agency contracts I have seen Crowley can only be liable if he was grossly negligent.  The effect of the contracts without the word "grossly" inserted is that the cost of indemnifying losses from clouds on a titles is effectively transferred from the title insurer to the real estate attorney's malpractice insurer.  (Although here, where the court has held that the suit is not one for malpractice, perhaps there is no coverage under the malpractice policy.  I  have no idea.) 

Tuesday, September 1, 2015

SJC seeks amicus briefs on whether innocent coinsured doctrine should be revisited and on definition of insured allowed by Mass. Gen. Laws ch. 175 s. 99

In May, the Massachusetts Superior Court granted summary judgment to Jonathan and Tammy Hall in a declaratory judgment action against Preferred Mutual Insurance Company.  Hall v. Preferred Mut. Ins. Co., 2015 WL 4511760 (Mass. Super.). 

The Halls owned residential property insured by Preferred Mutual.  Their son Bryan intentionally started a fire that caused significant damage to the real and personal property of the residents in the home.  The Halls did not know initially that Bryan had started the fire.

When it learned that Bryan had started the fire Preferred Mutual denied the claim of Jonathan and Tammy. 

The policy defined the term "insured" to include "your relatives if residents of your household."  It was undisputed that Bryan fell within this definition of insured. 

The policy excluded coverage for fire damage where the "loss results from any act committed by or at the direction of any insured."  The plain language of the policy therefore excluded the loss.

However, insurers may not limit coverage for fire damage beyond what is permitted by statute to make up a standard fire insurance policy.  Mass. Gen. Laws ch. 175 §99.    Mass Gen. Laws ch. 175 §99 (Twelfth) allows policies to exclude coverage if the insured neglects to use all reasonable means to save and preserve the property at and after a loss, or if the hazard is increased by any means within the control or knowledge of the insured.  Under the statute a policy shall be void if before or after a loss the insured has willfully concealed or misrepresented any material fact or circumstance concerning the insurance or the subject thereof or the interest of the insured therein, or in a case of any fraud or false swearing by the insured resulting thereto. 

The statutory language thus precluded coverage if Bryan fell within the definition of insured.  The statute does not provide a definition of insured. 

Preferred Mutual argued that under the statute "the insured" refers to all people entitled to coverage.  Its argument relied on its assertion that insurers may deny coverage to an innocent co-insured in cases where the intentional misconduct of an insured causes damage to property covered by an insurance policy. 

The Superior Court held that the innocent coinsured doctrine may not apply unless the guilty coinsured holds a joint, non-severable and co-extensive interest in the insured property.  It also held that the legislature did not intend in Mass. Gen. Laws ch. 175 §99 that Bryan come within the definition of the insured in the relevant policy provisions. 

The SJC has accepted the case for direct appellate review.  It now requests amicus briefs on the issues of whether the policy defined insured beyond what is permitted by the statute, and whether the innocent coinsured doctrine should be revisited.