U.S. District Court holds that language of policy endorsement trumps reason endorsement was written

In my last post I started discussing Whittaker Corp. v. Am. Nuclear Insurers, __ F.2d __, 2009 WL 4342512 (D. Mass.).

Whittaker and Textron were former owners and operators of property that was declared a superfund site because of nuclear waste. They sought coverage for associated costs from American Nuclear Insurers, or ANI. At issue was an endorsement called a Facility Form in which ANI promised to pay "all sums which the insured shall become legally obligated to pay as damages because of . . . property damage arsing from the nuclear energy hazard."

ANI argued that there was no coverage for the loss. It argued that the Facility Form must be viewed in the context in which it was drafted. It contended that the Facility Form is a "creature of statute," intended to carry out the legislative goals of the Price Anderson Act, which was conceived in response to "the risk of potentially vast liability in the event of a nuclear accident of sizable magnitude." The Act required nuclear power licensees to purchase primary insurance of $60 million. The government agreed to act as an excess insurer, providing licensees with $500 million of indemnity over the primary policy. Licensees were relieved of any additional liability regardless of fault or causation.

ANI claimed that it developed the Facility Form to meet the primary policy requirement of the Price Anderson Act. It argued that if the Facility Form is interpreted to provide coverage for the "conventional" environmental cleanup, its ability to provide coverage for third-party claims in the event of nuclear catastrophe would be severely and possible fatally jeopardized.

The court rejected that argument. It noted that the Price Anderson Act is not a "nanny" act, in that it does not prohibit insurers from undertaking to provide coverage to nuclear plant operators for "conventional" environmental harm should they choose to do so. It did not dictate the terms of the Facility Form.

The court held that coverage under the Facility Form is determined by its terms, and that pursuant to those terms coverage was initially triggered.

As I will discuss in my next post, however, there was no coverage because the loss came within an exclusion.

United States District Court holds that uncertainty over insurance policy terms does not create duty to defend

My next several posts will discuss Whittaker Corp. v. Am. Nuclear Insurers, __ F.2d __ (D. Mass. 2009), 2009 WL 4342512, in which historical owners of property sought insurance coverage for their costs associated with the property being declared a superfund site.

One of the issues was whether Endorsement 112, which would have excluded coverage, was properly added to the insurance policy. In a previous decision the court had held that pending the resolution of that factual question, the insurer, ANI, had a duty to defend. On a motion to reconsider, to his credit Judge Stearns reversed that ruling:

This ruling put the cart before the horse by conflating the duty to defend with the existence of coverage in the first place. Before a court can determine whether a policy imparts a duty to defend, an applicable policy must be identified.

Superior Court allows adjustment of premiums over insured's argument of mistake

In Nat'l Fire & Marine Ins. Co. v. AT Equipment, Inc., 2009 WL 3086233 (Mass. Super.), AT was insured by National. AT's insurance broker filled out and delivered to AT an insurance application when it was time to renew the policy. The broker had filled in gross sales figures from previous years despite a recent substantial increase in gross sales. AT's managers did not read the entire application, but signed it on behalf of AT.

National issued a new policy which gave National the right to audit AT's records and charge additional premiums if the audit determined that such payments were appropriate. An audit revealed that an additional $102,405 was due in premiums. It sued AT for those premiums and moved for summary judgment.

The Superior Court rejected AT's argument that the policy should be reformed (apparently by removing the clause allowing adjustment of premiums) or voided on the grounds of fraud or mistake. It rejected the fraud argument because no facts indicated actual or constructive knowledge of the falsity of the application on the part of National.

It held that the policy could not be reformed on the grounds of mutual mistake because the parties were not mistaken as to the same matters. AT was mistaken about the accuracy of the contents of its application, and National was mistaken about the appropriate premium.

The court held, finally, that the contract could not be reformed on the grounds of unilateral mistake because National had the right to conduct an audit and correct the premium. Therefore AT, the party seeking to void the contract, bore the risk of the mistake.

And now for something completely different . . .

An early 1970's pop-culture look at insurance fraud, with Farrah Fawcett and Colonel Potter thrown into the mix:

The Sound of Money

First Circuit holds that D and O policy does not provide coverage where directors and officers are not defendants

In Medical Mut. Ins. Co. v. Indian Harbor Ins. Co., 583 F.3d 57 (1st Cir. 2009) the United States Court of Appeals held that under Maine law a Director and Officer ("D & O") liability policy did not provide coverage where only a company, and not its officers and directors, was the defendant--even though the allegations included wrongful conduct on the part of the officers and directors.

Judge Selya held:

D & 0 polices exist to fund indemnification covenants that protect corporate directors and officers from personal liability, not to protect the corporation by which they are employed. The position advanced by the company in this case - extending coverage to situations in which the directors and officers are not themselves the actual targets of the claims made - would if accepted transmogrify D & 0 policies into comprehensive corporate general liability policies. Because such a tansmogrification is contrary to both the letter and the spirit of the D & O policy at issue here, we affirm the district court's entry of summary judgment in favor of the insurer.

Massachusetts Appellate Division overturns summary judgment to PIP insurer for failure to show decision-making process

In N.E. Physical Therapy Plus, Inc. v. Commerce Ins. Co., 2009 WL 3381750 (Mass. App. Div.), physical therapist NEPT sued Commerce pursuant to Mass. Gen. Laws ch. 90 § 34M (the PIP statute) and ch. 93A § 11 (the consumer protection statute) for failing to pay physical therapy bills on behalf of Commerce's insured, who was entitled to PIP benefits.

After suit was filed Commerce paid the disputed bill, which extinguished the ch. 90 § 34 M claim. Commerce then moved for summary judgement on the 93A claim. In support of its motion Commerce submitted only an affidavit of a Commerce employee.

The court denied Commerce's motion for summary judgment, holding:

The Affidavit is composed almost entirely of the affiant's facile and conclusory characterizations of Commerce's claims records. Even if the Affidavit were admissible in its entirety, a question we do not reach here, Commerce's summary judgment materials provide no insight into Commerce's strategy for handling NEPT's claims; into the particulars of Commerce's decision-making process with respect to those claims; into the results of any expert review of the claims; or, in fact, into any of the subjective questions on which G.L. c. 93A claims generally rise and fall.

Judge Fremont-Smith of the Superior Court holds that damages both did and may not have arisen out of use of a vehicle

In Leone v. Schwartz, 2009 WL 3416398, the plaintiff, Leone, was a police officer who responded to an accident in which Schwartz's car had crashed through a fence and some small trees. Leone alleged that as he approached the car on foot, he lost his balance and fell in an area that was covered with debris from the fence, broken tree limbs, and snow and ice.

Leone sued Schwartz's homeowner's insurer, Great Northern, and automobile insurer, Arbella. Judge Fremont-Smith held on summary judgment that there was no coverage under the homeowner's policy because the policy excludes "damages arising out of the . . . use . . . of any motorized land vehicle." He wrote:

The allegations are that Schwartz negligently drove his motor vehicle off a road and into a lawn, causing the plaintiff to investigate the accident scene and suffer a "slip and fall" injury. The only theory on which Schwartz could be held liable, then, is as a result of his allegedly negligent operation of a motor vehicle, for which the policy excludes coverage.

Judge Fremont-Smith then turned to the automobile policy, which provided coverage for "damage to people injured or killed in accidents if you or a household member is legally responsible for the accident." "Accident" is defined in the policy as "an unexpected, unintended event that caused bodily injury or property damages arising out of the ownership, maintenance or use of an auto."

Although two paragraphs earlier Judge Fremont Smith had held that as a matter of law the accident arose out of the use of the car, he now wrote:

The fact that Schwartz's operation of a motor vehicle provides the only possible basis for his liability, so that Great Northern's motion must be allowed, does not necessarily mean that Arbella's motor vehicle policy provides coverage. It is true that, but for Scwartz's vehicle having gone off the road and onto a lawn, Leone would not even have been there. But this does not necessarily mean that Leone's injury arose out of Schwartz's operation of a vehicle. The vehicle was stationary when Leone arrived at the scene, and he has admitted that the yard in which he fell was covered by debris, snow, and ice. Even if the undisputed facts were to indicate that Schwartz was negligent in his operation of his vehicle, it is a disputed question of fact whether Leone's injuries arose out of Schwartz's use of his motor vehicle.

Judge Fremont-Smith concluded that if Leone fell on pieces of broken fence or other debris caused by the accident there would be coverage under the policy, but that if he slipped only on snow and ice or other debris that was not caused by the accident there would be no coverage.

I'm all for splitting hairs in interpreting insurance policies. I make my living doing it. But I do not see how the same opinion can hold as a matter of law that the damages arose out of the use of a vehicle and also hold that whether the injury arose out of the ownership, maintenance or use of the auto is a question of fact. In my opinion the judge can't have it both ways.

Appellate Division holds that insurer does not need to show prejudice from violation of duty to cooperate

In Trinidad v. Pilgrim Insurance Company, 2009 WL 3844469 (Mass. App. Div.), the insured sought PIP coverage. He skipped two medical examinations scheduled by the insurer. The insurer denied coverage on the grounds that the insured failed to cooperate.

The insured argued that the insurer failed to prove that it had been prejudiced by his failure to cooperate. The Massachusetts Appellate Division held that a showing of prejudice is not required. It noted that both the PIP statue and the policy required the insured to submit to medical exams by physicians selected by the insurer. The court held:

Neither the policy, nor the statute, requires an insurer to show prejudice before invoking the defense of noncooperation by the claimant as a condition precedent to denying a claim.

Superior Court declines to interpret against insurer policy language that was not part of preprinted form

In Dulac v. Chicago Title Ins. Co., 2009 WL 3838999 (Mass. Super.), the owner of a two-family home sued his title insurer for declining coverage when a prospective buyer backed out of the sale because of a perceived defect in the title.

The policy included an exclusion with an exception that stated:

Exception for Notice of Land Court Petition recorded with the Worcester Registry of Deeds at Book 13029, Page 124. Note: This policy affirmatively insures against loss or damage as a result of the attempted assertion of paramount title due to any matter set forth in said petition.

The insured attached to the complaint an opinion by a land court examiner which identified a likely defect in the title. At issue was whether that opinion came within the exception.

Judge Kaplan held that the exclusion was ambiguous. However, he declined to interpret it against the insurer and held that a question of fact existed as to what the parties understood the exclusion to mean at the time the policy issued. He wrote:

Although an ambiguity is generally construed against an insurer, this exclusion is not part of a preprinted form and it is possible that Dulac [the insured] understood the exclusion in the manner that Chicago Title now explains it

Superior Court holds that Massachusetts Insurance Insolvency Fund must apply separate caps to loss of consortium claims

In Massachusetts Insurers Insolvency Fund v. Smith, 2009 WL 3199209 (Mass. Super.), Judge Fabricant of the Superior Court held that separate limits apply to a main claimant and claimants seeking coverage for loss of consortium from the Massachusetts Insurers Insolvency Fund.

The Fund is an entity created by statute that pays claims on behalf of insolvent insurance companies; but by statute it pays "only that amount of each covered claim which . . . is less than three hundred thousand dollars."

Mason was a medical provider who had malpractice insurance with an insurer that is now insolvent. His policy had a coverage limit of $1,000,000.

Mason was sued by a patient for physical injury and by the patient's family members for loss of consortium. The Fund argued that the aggregate amount it could pay to all of the claimants--the patient and the family members--was $300,000. The claimants argued that the $300,000 cap applied to each of their claims individually.

Judge Fabricant noted that no Massachusetts appellate decision has addressed this question and that the Superior Court and extra-jurisdictional decisions are split. She held, based on the language of the original policy and the statute enabling the fund, that the fund must pay up to $299,999 on each separate claim.

Superior Court holds that insurance on antique car is subject to provisions of another policy with respect to underinsured motorist benefits

In Boulette v. Safety Ins. Co., plaintiff Scott Boulette was involved in an accident while driving a car owned by his employer and insured by Safety Insurance Company. The other driver was insured by Premier Insurance Company. When the damages exceeded the Premier policy limits, Boulette applied for underinsurance benefits from Safety.

Boulette owned an antique Chevrolet Corvair on which he had insurance from Metropolitan. Boulette purchased the Metropolitan coverage solely so that the Corvair could be registered as an antique and towed to his new residence. He included in his coverage optional bodily injury and medpay benefits, but not optional underinsurance coverage.

Safety denied Boulette's claim for underinsurance benefits because of a policy provision stating, "We will not pay damages to or for anyone else who has a Massaschusetts auto policy of his or her own . . . "

Boulette contended that he could not reasonably be expected to look for underinsurance benefits from a policy covering an inoperable antique car, although he apparently did have the option of purchasing underinsurance benefits from that policy and chose not to do so.

Judge Lemire of the Superior Court agreed with Safety, holding that the plain language of its policy precluded Boulette from recovering underinsurance benefits from it.

A case only insurance coverage attorneys could love

In Mass. Care Self-Ins. Group, Inc. v. Mass. Insurers Insolvency Fund the Superior Court ruled on the interplay between Mass. Gen. Laws ch. 152 § 25A, which allows employers to form worker's compensation self-insurance groups, and Mass. Gen. Laws ch. 175D, which creates a fund which provides insurance benefits when an insurer that would otherwise provide coverage has become insolvent.

A worker's compensation self-insurance group provided coverage up to a self-insured retention limit to an injured employee of one of its members. The group had an excess carrier over the SIR that had become insolvent. When the damages paid to the injured employee exceeded the SIR, the group sought coverage from the fund.

At issue was whether the worker's compensation self-insurance group was an insurer, in which case pursuant to ch. 175D there would be no coverage from the fund because the fund does cover any claim due to an insurer.

After a thorough review of both statutes and relevant case law, the court concluded that the self-insurance group is an insurer, so that the fund did not provide coverage.

Massachusetts federal district court holds that physical damage is required for coverage for "direct physical loss"

In Tocci Bldg. Corp. v. Zurch Am. Ins. Co., 2009 WL 3182858 (D. Mass.), Tocci was the general contractor on a hotel construction job that included a large retaining wall. A small part of the retaining wall was damaged during a heavy rainstorm.

On June 9, 2000 the town in which the project was located issued a stop work order and declared the wall unsafe as a result of the damage from the storm. In early August the town gave Tocci permission to repair the damaged section of the wall. The repairs took less than a week.

In the meantime the town concluded that the wall had not been built in accordance with the approved plans and notified Tocci that the wall need to be demolished and reconstructed. Tocci disagreed. In November, 2000, the town agreed to permit the hotel to open if Tocci would grout the entire wall. Tocci agreed only in order to prevent further delays. Tocci then sought coverage from a builders risk policy for the cost of grouting.

The policy provided coverage for "RISKS OF DIRECT PHYSICAL 'LOSS'". "Loss" was defined as "accidental loss or damage."

The United States District Court for the District of Massachusetts held that the grouting was not a covered loss because the need for it did not stem from "direct physical loss or damage" to the wall.

The insureds argued that the storm was "covered cause of loss" because it created a "risk of direct physical loss," and that physical damage was not otherwise required by the policy. The court disagreed:

It is true that the only express reference to "physical" damage is found in the definition of "Covered Causes of Loss" which, as quoted above, "means RISK OF DIRECT PHYSICAL 'LOSS'. . ." However, it would make no sense to cover an event which creates a risk of physical damage if physical damage was not a triggering event for coverage. Moreover, "loss" is expressly defined as "accidental loss or damage." It is impossible to read the insurance policy as providing coverage for "risk" in the absence of a "damage." Since it is undisputed that the grouting was not required due to damage to the retaining wall, there was no loss and hence no coverage.

Massachusetts Appeals Court interprets insurance requirement in construction subcontract

In RCS Group, Inc. v. Lamonica Constr., Inc., 75 Mass. App. Ct. 613 (2009), the Massachusetts Appeals Court interpreted an insurance requirement in a construction contract between general contractor RCS and subcontractor Lamonica. The contract required that

[Lamonica] shall maintain, at its own cost, such insurance as will protect it and [RCS] from . . . any claim for bodily injury, including death, and whether such [w]ork or performance are by [Lamonica] or any of [its] subcontractors or any one directly or indirectly employed by [it] . . .

Lamonica obtained insurance but did not include RCS Group as an additional insured on its policy. When an employee of Lamonica's was injured and sued RCS, RCS sued Lamonica for breach of contract.

The court held that the insurance provision did not require that Lamonica name RCS as an additional insured on its insurance policy, on the grounds that the provision was ambiguous and must be interpreted against RCS as the drafter of the contract.

The court noted that the insurance clause followed an indemnity provision in the subcontract that the court had previously ruled unenforceable. The court stated:

Had the indemnification provision been valid, as the parties intended, then liability insurance purchased in Lamonica's own name would have "protected" RCS Group fully so long as it covered Lamonica's indemnification obligations (as the insurance contract purchased by Lamonica in fact did). When examined in this context, the parties easily could have viewed the insurance policy that Lamonica purchased as one that would "protect" RCS Group, even though the policy did not include RCS Group as an additional insured.

U.S. District Court dodges question of whether insured can cure breach of duty to cooperate

In Miles v. Great Northern Ins. Co., 2009 WL 2998529 (D. Mass.), the insureds sought first-person coverage for fire damage. The insurer denied the claim on the ground the insureds had breached their duty to cooperate.

In a motion for summary judgment the insureds argued that although they initially did breach that duty, they cured the breach by later providing the requested documents.

The United States District Court for the District of Massachusetts noted that there is no controlling Massachusetts caselaw on whether a breach of the duty to cooperate can be cured prior to a court ruling that the insureds breached the duty (when it is clearly to late to cure).

The court chose not to rule on that question of law, holding instead that whether the insurer had suffered prejudice as a result of the insureds' initial breach was a question of fact.

For anyone affected by the changes in the flood plain maps

Yesterday I posted on the changes to the flood plain maps in Massachusetts. Jenifer McKim, a reporter with The Boston Globe, is interested in speaking with people whose flood insurance has been or will be affected by the new maps. If you are interested in speaking with her you can reach her at jmckim@globe.com.

Changes to flood plain maps in effect or coming soon in Suffolk and other counties

Jenifer McKim of The Boston Globe alerted me to changes in flood plain maps being implemented in Massachusetts.

I have posted here and here about the National Flood Insurance Program. In that program FEMA subsidizes and at time issues flood insurance to homeowners.

Mortgage lenders require homeowners who live within flood plains to have flood insurance. FEMA is in the process of changing its flood plain maps county by county in Massachusetts.

I spoke with Chris Busch, the Executive Secretary of the Conservation Commission for the City of Boston. He informed me that the new maps for Suffolk County (which is Boston) went into effect on September 25, 2009. The changes to designated flood zones are based on better computer imaging of topography since the last time the maps were updated, between 1982 and 1990.

The City of Boston made an effort to contact homeowners whose houses are newly designated in flood plains, because if they purchased flood insurance before September 25 their old rates could be grandfathered in. There are some homeowners whose property was in a flood plain under the old maps but not under the new maps. They may not be required to carry flood insurance any more, but neither the city nor FEMA has made an effort to contact them. Dorchester is the most affected neighborhood in Boston, particularly Savin Hill and Port Norfolk.

Mortgage lenders can require homeowners to have flood insurance even if they are not in a flood plain, if they are in a "buffer zone"--an area outside by near a flood plain.

Appellate Division holds no right to PIP benefits where medical bills have been paid by Medicare and Medicaid

In Chery v. Metro. Prop. and Cas. Ins. Co., 2009 WL 3381597, an insured sought PIP payments for a medical bill of $360.63. The bill had been paid by Medicare and Medicaid prior to the insured submitting it to the PIP carrier.

The court held that the PIP carrier had no obligation to pay the bill because the PIP statute:

mandates only that PIP payments “shall be due and payable as loss accrues, upon receipt of reasonable proof of the fact and amount of expenses and loss incurred.” As the $360.63 Caritas bill had been paid in full in April, 2008, it was not even “due and payable” when submitted to Metropolitan in June 23, 2008 . . . . Further, Chery's concern about future action by Medicare or Medicaid to seek reimbursement out of any potential tort recovery by her against the tortfeasor in no way suggested any obligation by Metropolitan to provide PIP benefits for the paid bill. “The PIP ‘benefit’ to an injured person, in substance, is the right, inter alia, to be held harmless by the insurer from claims of providers who provided treatment to the injured person.” Ny v. Metropolitan Prop. & Cas. Ins. Co., 51 Mass.App.Ct. 471, 476 (2001). Chery was in no danger of any claim against her by Caritas, whose bill had been paid in full.

U.S. District court holds that there is no coverage to indemnify officers and directors where there is no coverage elsewhere in the policy

In my last few posts I've been discussing Genzyme Corp. v. Fed. Ins. Co., 2009 WL 3101025.

The court held that, because there was no coverage elsewhere in the policy, there was also no coverage under a clause covering all loss for which the insured granted indemnification to its officers and directors. The ruling was based on the public policy that allowing coverage in such circumstances would lead to fraud and chicanery:

[I]t makes little sense to allow a corporation to sidestep coverage limitations in its insurance policy through the simple expedient of claiming that a settlement payment was made to indemnify its directors and officers. Since a corporation can only act through its corporate agents, it will often be the case that when a shareholder can bring a claim against the corporation, she can also bring one against its directors and officers. As the court concluded in the New York case of Reliance Group Holdings, Inc. v. National Union Fire Insurance Co., 188 A.D.2d 47, 54, 594 N.Y.S.2d 20 (N.Y.App.Div.1993), the approach supported by Genzyme would encourage fraud by insured corporations:

Under the construction urged by [the insured corporation and its officer], if an officer or director was sued together with the corporation, the corporation could make full or partial restitution of the embezzled or fraudulently obtained funds purportedly on behalf of its officer, adopt a resolution indemnifying the officer, and then successfully make claim against its D & O insurer for the full amount of the settlement.

The Court refuses to construe the Executive Protection Policy in a manner that would encourage such chicanery.

U.S. District Court discusses meaning of "purchase"

In my last couple of posts I have been discussing Genzyme v. Fed. Ins. Co., 2009 WL 3101025 (D. Mass.).

The court held that a separate, sufficient ground to find no coverage for the stock-trade transaction was a "bump-up provision" of the policy, which stated that the insurer would not be liable for a loss "based upon, arising from, or in consequence of the actual or proposed payment by any Insured Organization of allegedly inadequate . . . consideration in connection with its purchased of securities issued by any Insured Organization." (Italics added.)

The insured admitted that it gave one class of shares, which are the equivalent of money, to holders of another class of shares in exchange for their relinquishment of those shares. The insured argued that it did not obtain anything in return. The court disagreed, holding that the insured "acquired an intangible right that it did not possess before - the right to cancel the outstanding Biosurgery Division tracking stock shares, which Genzyme wanted to do in order to reorganize its capital structure." The court held that the share exchange was "unambiguously a 'purchase' within the natural and ordinary meaning of the word."

Why thieves can't get insurance

In my last post I discussed Genzyme Corp. v. Fed. Ins. Co., 2009 WL 3101025 (D. Mass.).

In that decision Judge Gertner included an interesting discussion of a fundamental tenet of insurance law: a "loss" does not include restoration of an ill-gotten gain.

A thief should not be able to claim the return of stolen property as an insurable loss. Similarly, an individual who breaches her contract and then is forced to pay damages should not be able to seek indemnification under an insurance policy. [This is an overstatement; there are circumstances when insurance covers damages flowing from a breach of contract.] If I pay only $100 for an item for which I promised to pay $200, and I am later ordered by a court to pay the additional $100, I should not be able to claim the additional $100 as an insurable loss. Had I paid the full $200 due up front, then clearly no part of the $200 would constitute loss covered by insurance. The dilatory nature of my obligatory payment should not transform it into an insurable event.

U.S. District Court holds that settlement of shareholder claim for unfair stock redistribution is not an insured loss

In Genzyme v. Federal Ins. Co., 2009 WL 3101025 (D. Mass.) Judge Gertner held that a settlement of a claim of unfair stock redistribution is not an insurable loss pursuant to the commonly understood meaning of the word "loss" or under public policy.

The underlying plaintiffs alleged that Genzyme's directors and officers conspired to benefit holders of one type of Genzyme stock at the expense of holders of another type of Genzyme stock. Genzyme agreed to settle the claim by making a payment of $64 million to the plaintiff class, owners of the disadvantaged stock. Genzyme then sought reimbursement from a Directors and Officers ("D & O") insurance policy. Judge Gertner held that the payment was not a "loss" covered by the policy:

Genzyme may not have benefitted in the Share Exchange, but the existing General Division's shareholders surely did. And the Settlement Payment was meant to redress that imbalance. The question then is: When a corporation pays a settlement to resolve a claim that it benefitted one group of shareholders at the expense of another group of shareholders, is this settlement payment an insurable loss? The answer to this question must undoubtedly be "no."

Judge Gertner explained this answer with an analogy to dividing a milkshake between two sons, apparently a reference to the movie There Will Be Blood. While I'm sure her analogy would make sense if I pondered it, or perhaps watched the movie during my copious free time, luckily she also wrote plainly:

Genzyme should not be able to divide the benefits of equity ownership among its shareholders one way, redistribute those benefits, and then demand indemnification from its insurer for the redivision. If Genzyme's interpretation of the Settlement Payment as a "loss" were correct, one could imagine how insured companies could transform insurance policies into profit centers for their businesses. A corporation merely need issue several classes of shares, cancel one class of shares in an arguably unfair way, and then demand that its insurer pick up the tab for the resulting judgment or settlement. The shareholders whose shares were "cancelled" would be compensated through judgment or settlement, and the corporation's other shareholders would obtain the benefits flowing from the share cancellation while shifting a portion of its costs to the corporation's insurer. Everyone would win, except for the insurance company forced to bear the loss of paying off the disgruntled shareholders.

Moving violations and car insurance rates

I got my first moving violation ticket last week. Sadly it was well-deserved. Naturally my big concern was whether it would affect my car insurance rates. Happily it won't.

Massachusetts uses the Safe Driver Incentive Plan, or SDIP. Under SDIP insurance rates are affected by at-fault accidents or traffic violations. However, no points are assigned for the first minor traffic violation. Major violations include things like leaving the scene of the accident after injuring someone, and operating after your license is revoked. Minor violations include failure to stop at a signal and speeding.

When an insurer refuses to enter into a reasonable settlement agreement

In my last post I discussed the duty of an insurer to enter into a reasonable settlement agreement. What about when an insurer fails to do so?

“The insurer may also notify the insured of a reasonable settlement offer and give the insured an opportunity to accept the offer or assume its own defense.” Medical Malpractice Joint Underwriting Ass'n v. Goldberg, 425 Mass. 46, 59 (1997).

I am not aware of any Massachusetts case that discusses the exposure of the insurer if it notifies the insured of a settlement offer and gives it the opportunity to accept the offer or assume the defense. If the insured pays the settlement amount and the declaratory judgment action later results in a finding of coverage, the insurer is clearly liable to reimburse the insured for the judgment amount. If the insurer is found to have breached Mass. Gen. Laws ch. 93A in refusing to pay the settlement amount itself, it would be liable for 93A damages, which includes costs and attorney’s fees, and can include up to treble damages.

Where there is coverage under the policy, if the insurer fails to settle where no reasonable insurer would have refused to settle, and also fails to tender the defense to the insured, and an excess judgment is eventually entered, the insurer is liable for the amount of the actual judgment. DiMarzo v. Am. Mut. Ins. Co., 389 Mass. 85, 101-102 (1983). But see Bolden v. O’Connor Café of Worcester, Inc., 50 Mass. App. Ct. 56, 68 (2000) (questioning the analysis of DiMarzo in the context of a subsequent settlement protecting the insured from liability for an excess judgment).

An insurer's duty to settle when defending under a reservation of rights

As a general rule an insurer is liable to an insured for failing to settle a case within the policy limits “if no reasonable insurer would have failed to settle the case within the policy limits.” Hartford Casualty Ins. Co. v. New Hampshire Ins. Co., 417 Mass. 115, 121 (1994).

I am not aware of any Massachusetts case that discuss the duty of an insurer to settle where the insurer is defending under a reservation of rights. However, an insurer and an insured may agree that the insurer will settle a case within the policy limits and then seek indemnification from the insured on the grounds that there was no coverage under the policy. Medical Malpractice Joint Underwriting Ass’n v. Goldberg, 425 Mass. 46, 56 and fn 26 (1997). If the insured agrees to those terms, there is no reason why the general rule should not apply.

Appellate Division holds that established standards for expert witnesses apply to PIP claim

In Kaplan v. Hanover Ins. Co. a chiropractor, Kaplan, sued Hanover Insurance Company to recover pursuant to PIP payments for treatment provided to Hanover's insured.

A chiropractor employed by Kaplan had treated the insured. Kaplan sought to offer expert testimony about the necessity of the treatment provided and its causal relationship to the accident. For some inexplicable reason the trial judge refused to allow his testimony on the grounds that he had not treated the insured himself.

The Massachusetts Appellate Division held that the judge's ruling was an abuse of discretion. It pointed out that there is no requirement that an expert have personal knowledge of a case and may rely on materials prepared by others.

Determining what state's law applies to a coverage dispute

In a coverage dispute the first question is what state's law will determine the coverage issue. That, in turn, is decided by the choice of law rules in the state where the lawsuit is filed.

As described in Clarendon Nat'l Ins. Co. v. Arbella Mut. Ins. Co., 60 Mass. App. Ct. 492, 495 (2004), Massachusetts uses a "functional choice-of-law approach that responds to the interests of the parties, the states involved, and the interstate system as a whole." In this approach Massachusetts courts rely on the Restatement (Second) of Conflict of Laws, sections 193, 188, and 6.

As described by the court in Clarendon, Section 193 "provides that the rights created by a contract of casualty insurance are to be determined by the local law of the State that the parties to the insurance contract understood would be the principal location of the insured risk, unless some other State has a more significant relationship under the principles of § 6."

The principal location of a homeowners policy insuring one house is the state where the house is located and the insured resides. The principal location of an auto policy issued for a single car is the state where the car is garaged and usually driven.

The issue becomes more complicated when a policy insures risks in many states. For example, a general liability policy may insure a business that has factories in several states. A motor vehicle policy could be issued to a trucking company that transports products all over the country.

In such instances a Massachusetts court turns to Section 6 of the Restatement, which lists seven factors to consider:

a) The needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied.

My opinion is that taken as a whole those factors add up to gibberish. They give permission to a judge to apply the law of whatever state he or she feels like applying. The only caveat is that the location or locations of the underlying insured events is not a factor. See W.R. Grace & Co. v. Hartford Accident and Indem. Co., 407 Mass. 572 (1990); Michaud v. U.S. Fire Ins. Co., 2000 WL 16767.

Insurer for Pring-Wilson's mother argues no coverage for civil wrongful death suit

The sad, sordid tale of Alexander Pring-Wilson has made its way into the insurance coverage realm.

Pring-Wilson was a Harvard University graduate student who allegedly stabbed to death townie Michael Colono in an early morning fight in 2003. He was convicted of voluntary manslaughter; had the conviction overturned in an appeal that set new precedent regarding the admissibility of a history of violence by an alleged victim; had a second trial that resulted in a hung jury; and pleaded guilty to involuntary manslaughter.

Colono's estate then filed a civil action for wrongful death against Pring-Wilson.

In the latest chapter, last month Fire Insurance Company, which issued homeowners and umbrella policies to Pring-Wilson's mother, has filed a declaratory judgment action in the United States District Court for the District of Massachusetts seeking a declaration that Pring-Wilson is not covered under the policy. According to the complaint, Pring-Wilson's mother lives and the insured property is located in Colorado. Pring-Wilson was an emancipated adult attending school in Massachusetts.

Fire Insurance alleges that there is no coverage because Pring-Wilson is not a member of his mother's household and because the stabbing was not an "accident" within the meaning of the policy.

Under the Massachusetts choice of law doctrine, the federal court in Massachusetts will most likely apply the law of Colorado to determine the coverage dispute. (I'll discuss choice of law issues generally in a future post.) While I have never looked at the definition of "member of an insured's household" under Colorado law, I have looked at it under Massachusetts law. There are several cases that hold that an adult child not living with a parent is a member of the parent's household only if the absence from the household is intended to be temporary; financial dependence is also a factor.

Appellate Division holds that insured's fraudulent statements regarding lost income void all coverage for loss

In Lee v. Premier Ins. Co., 2009 WL 2438331 (Mass. App. Div.), the Massachusetts Appellate Division (a non-precedent setting court that hears appeals from the District Court)held that an insurer's fraudulent statements about his income voided his coverage not only for lost income but also for medical expenses.

The plaintiff, Lee, allegedly sustained injuries from a rear-end collision while operating a vehicle insured by Premier. Premier denied Lee's PIP claim, on the grounds of non-cooperation. Lee then sued Premier.

The evidence showed that in his PIP application and in an examination under oath Lee more than doubled the average weekly wage that he earned, and that he also exaggerated his annual income in 2003 in his examination under oath and at trial.

The Massachusetts Appellate Division held that in light of Lee's false statements with respect to his income Premier permissibly denied Lee's entire claim, including his claim for medical expenses. The court relied on Gechijian v. Richmond Ins. Co., 298 Mass. 487 (1937), which held:

when it is established . . . that the insured has knowingly made false statements, even in such a matter as value, for the purpose of influencing the adjustment of the loss, public policy demands that the contract be so construed as to discourage such conduct and to give full protection to the insurer.

Appellate Division all but states that judges are crazy to deny motion to sever and stay 93A claim against insurer

In my last post I discussed the decision of the Massachusetts Appellate Division in Rodriguez v. Alvelo, 2009 WL 2438328 (Mass. App. Div.) to uphold the trial judge's decision not to sever a 93A claim against an insurer from the underlying claim against the insured.

The court also addressed the insurer's request that discovery against it be stayed. The insurer argued that it was entitled to a stay until after the adjudication of the underlying action to protect it from the irreparably prejudicial disclosure of confidential, privileged information contained in its claims file.

The court stated that the insurer "has an undeniably legitimate, if not compelling, interest" in protecting its work product, privileged communications, and other information the disclosure of which would prevent or impair its full defense of the underlying claim.

The court noted that there are non-precedential decisions on both sides of the issue (which many plaintiffs' and insurance defense attorneys can easily recite, having copied the same briefs over and over).

The court held that trial judges have discretion to decide whether discovery against an insurer should be stayed until resolution of the underlying matter. It noted that discovery of privileged or otherwise protected material is not allowed. It held, however, that the insurer in this case made no showing that materials in its file were not discoverable. Rather, the insurer had filed a "general motion to sever and stay" simultaneously with its answer, at a point at which there had been no request for any discovery of any kind by the plaintiff. The trial court therefore did not abuse its discretion in denying the motion.

The court then all but begged the insurer to move the trial judge to reconsider the decision, and the trial judge to do so:

In so ruling, we caution that prejudicial error would almost certainly result from any order for complete or unbridled discovery in this case. Having rejected the simpler, arguably more expeditious alternative of immediately severing and staying Rodriguez's G.L. c. 93A case, the trial judge has shouldered the potentially more time-consuming, labor-intensive tasks of scrutinizing Rodriguez's anticipated discovery requests and Premier's expected motions for protective orders, of fairly balancing the parties' competing discovery rights and interests, and of ruling in careful compliance with governing discovery rules. Permissible, practical procedures, including in camera review . . . of specific documents under seal identified by Premier as qualifying for protection, are available and must be undertaken by the trial judge. Nor is the judge precluded from reconsidering the question of a severance and stay, at least early in the procedures.

Appellate Division holds that decision to sever and stay 93A/176D claim from underlying claim is in trial judge's discretion

In Rodgriguez v. Alvelo, 2009 WL 2438328 (Mass. App. Div.) the Massachusetts Appellate Division affirmed a trial judge's decision not to sever a 93A claim against an insurer from the underlying action.

Following an automobile accident Rodriguez sued the driver of the car he was in for negligence and the driver's insurer, Premier, for breach of Mass. Gen. Laws 93A and 176D for failing to effectuate a prompt settlement.

Premier moved to sever the claim against it from the underlying claim, and to stay all discovery against it until the final disposition of the underlying claim. Insurers make such a motion in almost every case in which a bad faith claim is brought against it in the same lawsuit as the claim against the insured.

The trial judge denied the motion. At Premier's request, the judge reported the interlocutory finding the the Appellate Division.

The Appellate Division held that the denial of the motion to sever was within the discretion of the trial judge. The decision contains a lengthy discussion of the limited case law on the issue.

Massachusetts Appellate Division rules in favor of insurer in 93A/176D claim because insured presented no evidence of inadequate investigation

In O'Sullivan v. Hingham Mut. Fire Ins. Co., 2009 WL 2438329 (Mass. App. Div.), the Massachusetts Appellate Division overturned a trial judge's ruling that an insurer violated Mass. Gen. Laws ch. 93A.

O'Sullivan owned a building with a package store in it. (For blog readers not familiar with Massachusetts vernacular, a package store is a liquor store.) The store had a walk-in beer cooler. O'Sullivan discovered in October, 2004 that the back of the cooler had fallen through the floor to the crawl space below. She sought coverage from her businessowner's policy with Hingham.

The policy covered "loss caused by direct physical loss involving collapse . . . ." According to the policy terms collapse "does not include cracking, shrinking, bulging, or expanding."

Hingham sent an adjuster to inspect the floor. He concluded that the floor had "settled," not "collapsed."

A jury returned a verdict for O'Sullivan, finding that a collapse had occurred within the coverage. The trial judge then ruled that Hingham had violated Mass. Gen. Laws chs. 93A and 176D because its adjuster had conducted only a "cursory" inspection.

On appeal the Massachusetts Appellate Division upheld the jury's finding that the cooler had collapsed. However, the Appellate Division reversed the trial judge's ruling on the 93A count:

To prevail in an action for unfair settlement practices under G.L. c. 176D, § 3(9)(d), the plaintiff must show that the defendant "refus[ed] to pay claims without conducting a reasonable investigation based upon all available information." O'Sullivan made no such showing. She presented no evidence, expert or otherwise, of what Popoli had failed to do, or what additional steps he should have taken, in other words, what a reasonable investigation would have entailed. To the contrary, evidence was presented that Popoli spend between 30 and 45 minutes inspecting the outside and inside of the store, inspecting and taking measurements of the cooler, viewing the rot and deterioration beneath the floor though gaps in the raised boards, taking a number of photographs, and collecting a history from O'Sullivan. Far from a "cursory" inspection, the trial judge noted in his findings that [the adjuster] had "much probity and experience" and merely erred in this case.

More on an exception to the eight corners test

I posted here about an exception to the eight corners test stated in Farm Family Mut. Ins. Co. v. Whelpley, 54 Mass. App. Ct. 743, 747 (2002).

Andrew Caplan, a partner at Burns & Levinson, sent me a comment that made me realize that my post was not as clear as it should have been. Andy wrote:

Massachusetts state and federal cases go both ways on the issue of whether information derived from outside the complaint may serve to negate the duty to defend.

Yes. Farm Family Mut. Ins. Co. v. Whepley, 767 N.E.2d 1101, 1104 (Mass. App. Ct. 2002)( finding “rare exception” to general rule); Gateway Group Advantage, Inc. v. McCarthy, 300 F. Supp. 2d 236, 246 (D. Mass. 2003) (following Farm Family); Dash v. Chicago Ins. Co., 2004 WL 1932760, *5 (D. Mass. Aug. 23, 2004) (dicta).

No. Millipore Corp. v. Travelers, 115 F.3d 21, 35-36 (1st Cir., 1997), citing Nashua Corp. v. Liberty Mut. Ins. Co., 1997 WL 89163 (Mass. Super. Ct. Feb. 18, 1997) ("Where a complaint is susceptible on its face of a reading that brings the claim within the policy, the insurer cannot rely on facts outside the complaint to justify a unilateral refusal to defend."); Sterilite Corp. v. Continental Casualty Co., 17 Mass. App. Ct. 316, 324 n. 17, 458 N.E.2d 338 (1983)("[I]t is the claim which determines the insurer's duty to defend; and it is irrelevant that the insurer may get information from the insured, or anyone else, which indicates, or even demonstrates, that the injury is not in fact covered."); Essex Ins. Co. v. Berkshire Envtl. Consultants, Inc., 2002 WL 226172, *2 (D. Mass. Feb. 7, 2002); Metallized Prods., Inc. v. Travelers Ins. Co., 2003 WL 22481398, *3 (Mass. Super. Ct. Sept. 17, 2003).

Andy is correct that in most cases an insurer may not use information outside the underlying complaint to deny defense to an insured (although such information can be used to compel a duty to defend). The exception stated in Whelpley is quite narrow: it applies to facts that are (1) undisputed and (2) will not be litigated at the underlying trial, because they are irrelevant to the underlying claim.

In my previous post I discussed an example where an insurance policy covers only blue cars. The color of the car is undisputed. It will not be litigated at trial because the color of the car is irrelevant to liability. That would fall into the Whelpley exception.

Superior Court discusses distinction between "leased worker" and "temporary worker"

In Central Mut. Ins. Co. v. True Plastics, Inc., 2009 WL 2603151, the Superior Court held that whether or not a worker was a leased worker, in which case there would be no insurance coverage pursuant to a general liability policy, or a temporary worker, in which case there would be coverage, was a disputed issue of fact.

Sanchez was injured while working on the premises of True Plastics, the insured. She was an employee of Dynamic Staffing, Inc., a company in the business of placing its employees at client companies.

True Plastics had a general liability policy which excluded coverage for a "leased worker" but provided coverage for a "temporary worker." Leased worker was defined in the policy as:

a person leased to you by a labor leasing firm under an agreement between you and the labor leasing firm, to perform duties related to the conduct of your business. "Leased worker" does not include "temporary worker."

Temporary worker was defined in the policy as:

a person who is furnished to you to substitute for a permanent "employee" on leave or to meet seasonal or short-term workload conditions.

The court denied summary judgment to both True Plastics and the insurer because whether Sanchez was a leased worker or a temporary worker was a disputed issue of fact. Evidence supporting the conclusion that Sanchez was a leased worker included an affidavit that Sanchez was assigned to True Plastics for an indefinite time, and the agreement between Dynamic Staffing and True Plastics suggesting a leasing arrangement.

Evidence tending to show that Sanchez was a temporary worker included testimony that Sanchez was hired to fill a large new order for products and was manufacturing that product at the time of her injury.

The court's decision denying summary judgment is in line with the United States Court of Appeals in the case of Scottsdale Ins. Co. v. Torres, 561 F.3d 74 (1st Cir. 2009), which I discussed here. In Torres the court also denied summary judgment to both sides. It held that a placement for an indefinite period of time is not necessarily incompatible with the possibility that the worker was furnished to address a short-term workload condition. The court remanded the case for resolution of the question of how the injured worker's placement fit within the insured's ordinary course of business and the nature of its work flow.

Superior Court holds that binder trumps subsequent amendments to insurance policy

In Kopin Corp. v. One Beacon Am. Ins. Co., 2009 WL 2449880 (Mass. Super.), the Massachusetts Superior Court held that an insurance company was bound by the terms of a binder, despite its subsequent efforts to change the policy.

Kopin had an ocean marine open cargo insurance policy. As the court explained, an open marine cargo policy insures goods in transport from point of origin to final destination.

In March, 2005, Kopin contacted its insurance agent, GHM, to request to amend the policy to cover used merchandise it would export. GHM eventually issued a quote for coverage from IMU that included a used machinery clause.

Kopin requested that GHM provide the quoted coverage. GHM responded with an email stating, "You are bound."

In May, 2005, IMU informed GHM that it was moving its "new and renewal business" to a different division of its parent company. It offered a renewal quote "effective 4/20/05" for Kopin's policy. The quoted policy included endorsements that limited coverage.

In June, 2005, Kopin learned that two pieces of equipment it had shipped to Hong Kong had suffered rust and corrosion damage. The insurer, IMU, denied coverage on the grounds that the endorsements included in the May, 2005 quote excluded coverage.

The Superior Court held that the original quote trumped the subsequent endorsements and the renewal quote. The court stated:

One reason the Court so concludes is that the Quote, once accepted by Kopin and acknowledged by [the insurer], constituted a temporary, binding contract, known in the industry as a "binder." . . . As is the case here, a "binder contract, a commercial document, is to be read in accordance with its terms and not in accordance with the unexpressed terms which a party later wishes had been written into it."

Superior Court discusses "arising out of"

My first foray into insurance coverage issues was when, as a young insurance defense associate, I argued the meaning of the phrase "arising out of" in an insurance policy to the First Circuit Court of Appeals. I convinced the court that the phrase denoted intermediate causation--more than causation-in-fact but less than proximate cause--such that a construction site accident injuring the employee of the insured subcontractor "arose out of" the subcontractor's work even though the subcontractor did not proximately cause the accident.

Mike Tracy of Rudolph Friedmann LLP has sent me over the latest foray into "arising out of."

In Massachusetts Property Ins. Underwriting Ass'n v. Gallagher, 2009 WL 2568547, 18 year old Stephen McMaster died in an apparent suicide after ingesting an overdose of propoxyphene. Gallagher's mother sued Scaduto, alleging that Scaduto had negligently left the drug in a place in his home accessible to McMaster, despite knowing of McMaster's fragile emotional state. At issue in the Massachusetts Superior Court was whether Scaduto was covered by his homeowner's policy.

The policy excluded bodily injury "arising out of the use, sale, manufacture, delivery, transfer or possession by any person of [] Controlled Substance(s). . . . However, this exclusion does not apply to the legitimate use of prescription drugs by a person following the orders of a licensed physician."

The court noted that the phrase "arising out of" suggests causation analogous to "but for" causation.

It rejected Gallagher's argument that McMaster's death came within the exception to the exclusion because it "arose out of" Scaduto's legitimate prescription use of the drug.

The court held that there was a "separate and independent" application of the exclusion to McMaster's own use of the drug. McMaster's use of the drug came within the exclusion and did not fall within the exception. There was therefore no coverage under the policy.

The answer to a nagging duty to defend issue

As I discussed here, the duty of an insurer to defend an insured is determined by the "eight corners test." Under that test, "if the allegations of the complaint are 'reasonably susceptible' of an interpretation that they state or adumbrate a claim covered by the policy terms, the insurer has a duty to defend." (The "eight corners" comes from comparing the four corners of the complaint to the four corners of the insurance policy.)

But what about when the allegations of the underlying complaint are silent as to an issue that is important for determining coverage? For example, what if the insurance policy provides coverage for all blue cars owned by Lucy Smith? Smith is sued following a motor vehicle accident. The underlying complaint will probably allege the make and model of the car Smith was driving, but it is unlikely to state the color of the car because the color is irrelevant to Smith's liability. Can the insurer refuse to defend because its investigation reveals that the car Smith was driving at the time of the accident was yellow, and so not covered by the "blue car policy"?

Yes. In Farm Family Mut. Ins. Co. v. Whelpley, 54 Mass. App. Ct. 743, 747 (2002), the court held that there is an exception to the eight corners test for "the existence of an undisputed extrinsic fact that takes the case outside the coverage and that will not be litigated at trial of the underlying action."

Massachusetts Appeals Court holds that misrepresentation on bond application that insured had internal auditor does not void coverage

In my last post I began discussing Hanover Ins. Co. v. Treasurer and Receiver General, 74 Mass. App. Ct. 725 (2009), in which the Massachusetts Appeals Court discussed when misrepresentations on a bond application can void coverage.

Hanover argued that coverage was voided because the Massachusetts Treasury Department stated on its application that an internal audit was conducted by the State Auditor, but that in fact there was no internal auditor.

The accounting firm of Deloitte & Touche conducted annual independent audits of the state government departments, and sent its reports to the State Auditor. The State Auditor also conducted reviews of the Department every three or four years. The Deloitte & Touche audits were "external" audits while the audits of the State Auditor were "internal" audits.

Hanover never inquired about the frequency of internal audits and never informed the department that they must be done annually.

The court held that the inaccurate representation that there was an internal auditor was not material.

Massachusetts Appeals Court holds that de minimis departure from representation on bond application does not void coverage

In Hanover Ins. Co. v. Treasurer and Receiver Gen., 74 Mass. App. Ct. 725 (2009) Hanover issued employee dishonesty bonds from 1993 to 1999 to the Massachusetts Treasurer's Department. The bonds covered losses caused by the dishonesty of any department employee.

In February, 1999, the Attorney General's office began an investigation that determined that a Treasury department employee, Trischitta, had stolen $6.5 million from the department's unpaid check fund ("UCF"). The department recovered the full amount of the stolen funds, plus interest.

With Trischitta's cooperation the department discovered that he was not the only department employee stealing money from the UCF. The department gave notice to Hanover of the claim on March 19, 1999. Hanover refused to make payment on the bonds, and filed a declaratory judgment action.

Hanover first argued that the department made misrepresentations in its bond applications that (1) there was independent reconciliation of bank accounts; (2) it had an internal auditor; and (3) there was a voucher system in place to prevent the unauthorized issuance of checks.

The court noted that pursuant to Mass. Gen. Laws ch. 175 § 186, an insurer may not refuse to pay a claim on the grounds of misrepresentation in a policy application unless the misrepresentation "is made with actual intent to deceive, or unless the matter misrepresented or made a warranty increased the risk of loss."

The court held that Hanover had the burden of proof on those issues.

In determining whether a misrepresentation increased a risk of loss, "a fact must be regarded as material, the knowledge or ignorance of which would naturally influence the judgment of the underwriter in making the contract at all, or in estimating the degree and character of the risk or in fixing the rate of the premium."

The department had stated on its application that bank accounts were reconciled monthly by someone not authorized to deposit or withdraw funds. The trial judge had found that the department's contract with a bank to provide bank reconciliations services satisfied the department's representation on the applications. Hanover argued that the reconciliation service did not include checks issued by the UCF, demonstrating lack of substantial compliance.

The Appeals Court disagreed with Hanover, noting that no one in the department with appropriate authority was aware that the UCF was not included in the bank's reconciliation services, and that the number of checks not reconciled was de minimis (one tenth of one percent) compared to the total number of checks. The court held that the representation was therefore substantially true and the department was in substantial compliance with its representation.

U.S. District Court explains difference between liability and indemnity policies

In my last couple of posts I have been writing about Mut. Ins. Co. v. Murphy, in which the United States District Court for the District of Massachusetts held that an insurer that did not exercise control over defense and settlement of a claim could not be liable for unfair claim settlement practices.

The decision contains an interesting discussion about the difference between liability policies and indemnity policies. A liability policy confers the right to settle and defend any claims on the insurer. An indemnity policy leaves the duty to settle and defend on the insured.

The court described the Mutual policy at issue, which I described in detail in my last post, as a "hybrid" because the insurer could associate with defense and settlement of claims but the insured was not excluded from participating in the defense and indemnity.

U.S. District Court holds that insurer that did not control defense could not be liable for unfair claims settlement practices

In my last post I discussed the decision of the United States District Court for the District of Massachusetts in Mut. Ins. Co. v. Murphy, in which the court dismissed Judge Murphy's claim against the Boston Herald's insurer for unfair claims settlement practices. The reason for that decision was that the insurer did not have control over defense or settlement of the claims.

The Herald was insured under a "media insurance policy" issued by Mutual Insurance Co. for damages arising out of libel. The policy had a $50,000 self-insured retention (similar to a deductible). After the first $50,000, the Herald would continue to pay twenty percent of defense expenses up to $500,000.

Under the policy the Herald had s duty to retain its own counsel for the defense or settlement of a claim, although choice of counsel was subject to the approval of Mutual. The Herald was also obligated to advise Mutual of the likelihood of success or failure, provide an initial estimate of legal costs, and advise it of offers of settlement and other information pertinent to a claim. The Herald was also required to notify Mutual when it became clear that a claim was like to exceed $50,000, and regularly to update it as to expenses.

As to Mutual's obligations, the policy stated, "The company shall not be called upon to assume charge of the settlement, or the defense of any claim made, or suit brought, or proceeding instituted against the insured."

Under the policy Mutual had the right to associate with the Herald in defense and control of any claim which appears likely to involve payment by Mutual, in which event the Herald and Mutual were required to cooperate in defense or settlement of the claim; or, if Mutual was dissatisfied with the Herald's choice of counsel, to suggest replacement with new counsel to be jointly approved by Mutual and the Herald. No settlement could be made without Mutual's consent, but Mutual could not unreasonably deny consent. If judgment entered against the Herald and the Herald chose not to appeal, Mutual could appeal the judgment.

The court held that those policy clauses did not give Mutual control over defense or settlement sufficient to make it liable for unfair claims settlement practices.

U.S. District Court rules on Judge Ernest Murphy's claim against Boston Herald's insurer

Another chapter in the long, sometimes strange story of former Massachusetts Superior Court Judge Ernest Murphy's libel suit against the Boston Herald:

The Boston Herald published a story claiming that Judge Murphy had told a 14year old rape victim to "get over it." Judge Murphy sued the Herald for libel and won. He then sent somewhat threatening letters directly to the Herald (rather than its attorneys) on trial court stationery demanding that it drop its appeal. (Contrary to what you might sometimes see on TV, parties in a lawsuit are forbidden from communicating directly with each other; they may communicate only through their attorneys. And judges are forbidden from communicating personal business on court stationery.)

The judge subsequently asserted that he suffered from post-traumatic stress syndrome as a result of the Herald's articles and entered into an agreement with the Superior Court by which he agreed that he is permanently disabled from performing his judicial duties.

The most recent chapter in this case is Judge Murphy's lawsuit against the Herald's insurer, in which he sought damages for the insurer's failure to promptly settle his libel claim. The United States District Court for the District of Massachusetts has dismissed his claim in Mut. Ins. Co. v. Murphy, on the grounds that the Herald rather than the insurer exercised control over the defense.

Court of Appeals holds that insurers who issued claims-made policies are not required to show prejudice as a result of late notice of claim

This is my last post on Gargano v. Liberty Int'l Underwriters, Inc., in which the United States Court of Appeals held that insurers could under claims-made policies claims that were not both made and reported during the policy period.

The plaintiff argued that the insurers must demonstrate prejudice from his untimely notice in order to escape their coverage obligations. Although with occurrence based policies it is the rule in Massachusetts that an insurer must show prejudice from late notice, the court held that the same is not true of claims-made policies. To do so "would defeat the fundamental concept on which claims-made polices are premised."

U.S. Court of Appeals imputes knowledge of insurance agent or broker to insured

I have been discussing the case of Gargano v. Liberty Int'l Underwriters, Inc., in which the court held that under a claims-made policy a claim must be both made and reported during the policy period.

In my last post I discussed the plaintiff's argument that he should not be bound by the terms of the policies because he never received copies of them. As I discussed in my last post, the court rejected that argument.

The court also rejected the argument because the policy was delivered to the plaintiff's insurance agent or broker. "Under Massachusetts law, the agent's knowledge of the policy's terms is imputed to the insured in this circumstance."

Court of Appeals holds that insured is bound by terms of the policy even if the policy was never delivered to him

In my last post I discussed Gargano v. Liberty Int'l Underwriters, Inc., in which the plaintiff sought coverage under claims-made policies even though the underlying claim was not both made and reported in any single policy period.

The plaintiff argued that the companies should not be allowed to rely on the requirement that a claim be made and reported during a policy period to deny the claim because the insurers had never delivered copies of the policies to him. The court held, "[a]s a general matter 'neither delivery nor actual possession by the insured is essential to the making of an insurance contract unless the contract expressly sets out a requirement of delivery.'"

Stop the presses! SJC adopts pro rata allocation!

As I discussed here nearly a year ago the United States Court of Appeals certified to the SJC questions regarding allocation. Today the SJC issued its decision in Boston Gas Co. v. Century Indem. Co. The decision is not yet available from the on-line SJC docket. The Westlaw citation is 2009 WL 2184647.

In a nutshell

The court adopted pro rata time-on-the-risk allocation, thereby overthrowing ten years of attorneys and litigants using their best guess that Massachusetts is a joint and several liability state based on a couple of not-very-clear Massachusetts Appeals Court decisions. The court also held that the insured must pay only a proportionate share of a self-insured retention for each triggered policy period.

What pro rata and joint and several allocation mean

In pro rata allocation a long-term loss, such as environmental contamination, is allocated among all insurers who provided insurance covering the time the loss was occurring (or "triggered"), and the loss is frequently allocated to the insured for periods where it had no or insufficient insurance.

In joint and several allocation, one insurer must pay the entire loss up to its policy limit even if there were several insurers on the risk or a period of uninsurance.

The basis for the pro rata decision

The court based its decision on both the policy language at issue and on public policy. In my opinion allocation issues should not be based on policy language because when more than one insurer, or even more than one policy form issued by the same insurer in different years, is involved they may have different policy language which would compel different results; but one loss cannot be allocated in more than one way. Had the court based its decision only on the policy language, it would not be clear that pro rata allocation would apply to other cases.

However, the court also adopted pro rata allocation based on public policy reasons. It stated that joint and several allocation does not "solve the Allocation problem; it merely postpones it." That is only partially correct. In many jurisdictions that have adopted joint and several allocation, an insurer who initially pays the loss may bring a suit for equitable contribution against other insurers to have them contribute their pro rata share to the loss. However, under joint and several allocation there is no contribution from the insured and no suit for equitable contribution can be brought against the insured.

Adoption of time-on-the-risk allocation

The court also adopted the time-on-the-risk method of pro rata allocation. Under that method each insurer pays up to its policy limits in proportion to the number of years it was on the risk. If a loss occurred over ten years and one insurer provided coverage for five years, it would be responsible for fifty percent of the loss up to its policy limits.

The insured will bear its proportionate share of the loss

The court held that the insured will be allocated losses for periods where it was self-insured, uninsured, or insufficiently insured. The court did not address a scenario where an insured had insurance but that insurance is no longer available due to bankruptcy of the insurer, but based on its discussion regarding periods where no insurance was available the court would almost certainly hold the insured responsible for loss during that period.

The insured must pay only a proportionate share of its self-insured retention for each policy period

The court held that the insured must satisfy only a prorated amount of its self-insured retention for each triggered policy period, to be prorated on the same basis as the insurer's liability. "Thus, if the pollution in this case had occurred over the course of a decade, then one-tenth of the total cleanup cost would be apportioned to each policy year and Boston Gas would be responsible for one-tenth of its applicable self-insured retention for each year."

More later

That's it in a nutshell. I'll be out of the office for a while, so you'll be reading some posts about some less earth-shattering decisions. But I will come back to this decision and provide more analysis of it.

As usual, thanks to Mike Tracy of Rudolph Friedmann LLP for bringing this decision to my attention within minutes of it being issued.

Court of Appeals holds that there is no coverage under claims-made policies unless claims are both made and reported during policy period

In In Gargano v. Liberty Int'l Underwriters, Inc., the United States Court of Appeals for the First Circuit made the obvious ruling that there is no coverage under policies requiring that claims be made and reported during the policy period for a claim that was not both made and reported during the policy period.

The plaintiff was an attorney who had three consecutive claims-made professional liability policies running from September 1, 2004 to September 1, 2007.

The plaintiff was sued in March 2005 for enforcement of an attorney's lien on a worker's compensation claim. (Attorney's liens are filed by attorneys who work on contingency fee cases that are taken over by another attorney. It protects their right to a reasonable fee for the work they did by placing a lien on the attorney's fees eventually received by successor counsel.) He did not report the claim to his insurers until after judgment entered against him in July 2007.

The court held that there was no coverage under the first policy because the claim was not reported during the policy period. It held that there was no coverage under the third policy because the claim was not made during the policy period.

Why PIP claims are rarely litigated

In my last post I discussed the Salem District Court case of Genest v. Commerce Ins. Co., in which an insurer was held not to have violated Mass. Gen. Laws ch. 93A when it based its denial of a PIP claim on an IME report.

In that case it is worth noting that although 93A damages were denied, the insured was probably awarded attorney's fees pursuant the PIP statute itself. The statute grants attorney's fees if judgment against the insurer enters on a PIP claim.

That is crucial. The maximum actual damages under a PIP claim are $8,000. Very few lawyers are willing to litigate a claim of that size. On a contingency fee claim they simply cannot make back their investment of time, and on an hourly basis the client would end up losing money. The only way such a claim is worthwhile is if an award of attorney's fees is available.

However, under the PIP statute, an insurer can pay a PIP claim at any time up until judgment enters, even after trial has begun, and not have to pay attorney's fees. As Genest illustrates, an insurer can incorrectly refuse to pay a PIP claim without being liable for attorney's fees under 93A.

That is why PIP claims are rarely litigated.

Insurer did not violate 93A when it relied on IME to deny PIP claim

Massachusetts Lawyers Weekly recently reported on the case of Genest v. Commerce Ins. Co., a Salem District Court case in which an insurer was held not to have violated Mass. Gen. Laws ch. 93A when it failed to pay PIP benefits.

I was unable to obtain a copy of the decision online, so I am relying on the Lawyer's Weekly summary.

The insurer initially denied the plaintiff's $250 claim for PIP benefits, in reliance on an independent medical evaluation report.

The court held that in so doing the insurer did not violate Mass. Gen. Laws ch. 93A, even though judgment eventually entered against the insurer.

The court said, "where an insurance carrier has grounded its denial of a claim upon a legitimate defense and thereafter simply determines to pay a claim (in this case a nominal claim) within thirty (30) days of when the benefits are due and payable (in this instance within thirty (30) days of entry of any judgment), the plaintiff shall not be entitled to G.L. Ch. 93A relief."

Service of out of state defendants in a motor vehicle accident

In my last post I discussed Huggins v. Santos, in which the Massachusetts Appellate Division ruled that service on the insurance company of an out of state defendant is not proper.

In a footnote the court did state how an out of state defendant in a motor vehicle accident claim can be served: pursuant to Mass. Gen. Laws ch. 90 § 3C, service may be made upon the Massachusetts Registrar of Motor Vehicles and mailing a copy of the process by registered mail, return receipt requested, to the defendant.

Service of process on defendant's insurance company held insufficient

The Massachusetts Appellate Division held last month that service of process on a defendant in a motor vehicle accident cannot be made by serving the defendant's insurance company. (The Massachusetts Appellate Division hears appeals from the Massachusetts District Court. The decisions of the Appellate Division do not set precedent, and may be appealed the the Massachusetts Appeals Court.)

In Huggins v. Santos, decided on June 17, 2009, Huggins alleged he was injured by Santos in a car accident in Massachusetts in 2004. Santos allegedly lived out of state. The trial court judge allowed Huggins' motion for leave to make service upon Santos by serving Santos's insurance carrier.

After service on the insurer Santos answered the complaint, including an affirmative defense that service was not properly effected and was untimely. Santos then moved to dismiss the case on the grounds of improper service. The court eventually dismissed the action.

On appeal the Massachusetts Appellate Division upheld the dismissal. Huggins argued that Massachusetts Rule of Civil Procedure 4(e)(5) permits a judge to order any means of service on an out-of-state defendant. The court held that there is no authority allowing a defendant to be served through his or her insurance company. The court said, "To argue that such service was proper because the rule permits the court to order service by any means on an out-of-state defendant is to beg both the general question of its propriety and the specific question of whether the method ordered satisfied the very purposes of service of process: to insure a defendant's due process rights by providing notice and an opportunity to be heard."

Division of Insurance reports that car insurance rates have fallen 8 percent

According to this article in The Boston Globe the Divison of Insurance reports that car insurance rates have fallen eight percent since deregulation began a little more than a year ago.

The article suggested that this statistic be taken with a grain of salt, noting that the report came out just before the July 4th weekend, suggesting that the Commission was hoping it would not be closely scrutinized.

United States District Court holds that "period of restoration" includes time waiting for insurance payment

In my last couple of posts I have written about Vermont Mut. Ins. Co. v. Petit, in which the United States District Court for the District of Massachusetts discussed issues relating to recovery of lost rental value of units after a fire.

The policy provided for lost rental income "for the duration of the reasonable period of time need for [the insured] to reenter business plus any delay attributable to [the insurer's] failure to perform its duties under the policy.

The insurer argued that the restoration period should include only the time "necessary and appropriate to complete the estimates prior to beginning construction." The insureds argued that the restoration period should also include "the entirety of this litigation if payment if not made beforehand" by the insurer, arguing that the typical insureds cannot begin reconstruction until they receive payment from the insurer. The court agreed with the insureds that the period of restoration includes the time up until they receive the settlement from the insurer.

United States District Court holds that depreciation is not a discontinuing expense

In my last post I discussed the United States District Court of the District of Massachusetts case of Vermont Mut. Ins. Co. v. Petit. The case concerns the fair rental value of units that have been destroyed by fire.

Under the terms of the insurance policy at issue the fair rental value awarded to the insureds following a fire is decreased by "any expenses that do not continue while that part of [the Property] rented or held for rental is not fit to live in." Such discontinuing expenses include cleaning and maintenance fees, since the owners do not have to pay such fees after the property has been destroyed by fire.

The court held that depreciation is not a discontinuing expense. In other words, the insurance award would not be lowered by the amount of depreciation the insureds report on their tax returns.

The insurer argued that depreciation is a discontinuing expense because depreciation is an expense that affects income, as demonstrated by the insureds' tax returns.

The court disagreed. It stated that depreciation "is not a cash expense, but 'an accounting function to spread the cost of an asset over its useful life.'" It noted that depreciation would not affect the insureds' cash flow on a month-to-month basis. "Moreover, because depreciation is an accounting factor for tax purposes, including it as a discontinuing expense would lead to 'inconsistent results . . . depending solely on whether the insured took depreciation in his tax return.'"

Finally, the court noted that depreciation was effectively accelerated because it was deducted from the insureds' property damages recovery. Also deducting it from their rental income would amount to double-counting.

United States District Court holds that "fair rental value" is determined by current leases

In Vermont Mut. Ins. Co. v. Petit the United States District Court for the District of Massachusetts decided how to determine fair rental value of units after a fire.

The insurer, Vermont Mutual, argued that the rental value should be based on the rent collected in the two calendar years before the fire. The insureds based their computaton on the rental contracts in effect at the time of the fire.

The court agreed with the insureds, stating that theirs is the best evidence of the "fair market value," which is "the highest price which a hypothetical willing buyer would pay to a hypothetical willing seller in an assumed free and open market."

Superior Court holds that insured not required to pay interest on recovered artwork

In two recent posts I have discussed Apthorp v. OneBeacon Ins. Co.

Another issue the court discussed with respect to damages was whether the insured was required to pay interest to the insurer. Judge Garsh held that no interest was required. The original agreement between the insurer and the insured stated that the insured would repay only the amount it received if the stolen picture was found. Judge Garsh wrote, "OneBeacon is not entitled unilaterally to rewrite the agreement that the insurer drafted to add a requirement that interest be paid to the insurer from the date of its payment for the loss."

Hudson crash survivors not receiving insurance

The New York Times has an interesting article on insurance issues facing the Hudson crash survivors. AIG, the airline's insurer, is refusing to pay the passengers' claims for medical expenses and lost property.

Although the article pulls on the heartstrings, from an insurance standpoint it makes sense that a liability insurer would not pay in the absence of negligence by the insured airline. The passengers claim that AIG is implying that they are to blame for their lost property and medical expenses; but in fact AIG is merely asserting that the airline is not at fault.

Superior Court rules that insurer is entitled to appraised value of returned painting despite uncertainty over whether it paid the insured that value

In my last post I discussed Apthorp v. OneBeacon Ins. Group, LLC.

Another issue in that case was how much the insurer should be reimbursed once the painting was found. When the painting was stolen other items owned by the insured were also stolen. The insured gave the insurer an appraisal valuing the painting at $25,000. The insured provided an estimated value of $65,000 for other stolen items, and did not provide any estimated or appraised value for other items. The insurer paid the coverage limit of $32,500.

Judge Garsh rejected the insured's argument that the insurer paid half of the value of all the items, and therefore it paid $12,500 for the painting and should be reimbursed only that amount. She wrote that the insured "ignore[s] that the schedule of items sent to the adjuster had numerous items with no estimated values, making the insured's loss greater than $65,000 if her estimates were accepted. The aggregate loss may actually have been less or more than $65,000." She held that it would be speculative to assign a dollar value to each one of the items stolen, so that an accurate percentage of the insurer's payment attributable to the painting could not be fixed. She therefore deemed that the insurer paid $25,000 for the loss of the painting.

Superior Court explains difference between "subrogate" and "assign"

Apthorp v. OneBeacon Ins. Group, LLC concerns a painting that was stolen in 1976. The owner was paid for the loss by her insurer, OneBeacon. The painting was recently found and is worth significantly more than its appraised value in 1976.

Both the insurer and the estate of the insured claimed ownership of the painting. Judge Garsh found that ownership had not been transferred to the insurer.

In the agreement between the insured and the insurer, the insured "subrogate[d] all right, title and interest" in the painting to the insurer. The insurer contended that by this language title to the painting was transferred to it.

Judge Garsh disagreed. She wrote that the insurer "erroneously equates 'subrogate' with 'assign.' Subrogation means substitution, not assignment or transfer. Conflating 'subrogation' and 'assignment' as if these words are interchangeable is inconsistent with the usual and ordinary meaning of the term 'subrogate.' The general rule is well established that upon the payment of a loss the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against a third person whose negligence or wrong caused the loss.' The Latin phrase 'pro tanto' means 'to that extent.' Subrogation refers to an insurer's succession to any right of action that the insured may have against the party or parties responsible for the loss after the insurer has paid the insured's claim."

Superior Court rules that businesses are not entitled to bring claim under Mass. Gen. Laws ch. 93A § 9 for violation of Mass. Gen. Laws ch. 176D

As I posted here, consumers can bring an action against an insurance company for violations of Mass. Gen. Laws ch. 93A § 9 if the insurer violated Mass. Gen. Laws ch. 176D. Businesses, however, cannot. They must show that the actions of the insurance company violated Mass. Gen. Laws ch. 93A § 11, and a violation of 176D is not an automatic violation of § 11.

The Massachusetts Superior Court recently reaffirmed that distinction. In Watt's Water Techs.,Inc. v. Fireman's Fund Ins. Co., the insured businesses argued that they were entitled to bring a suit against insurers pursuant to § 9 because § 9 states "any person whose rights are affected by another person violating the provisions of clause (9) of section three of chapter one hundred seventy six D may bring an action in the superior court."

Judge Hinckle held that that language does not permit a business plaintiff to sue under § 9 for a violation of 176D.

Credit card trip insurance

Trip insurance refunds the price of a plane ticket in the event of sickness or death of an immediate family member. You can generally purchase it at the same time that you buy your plane tickets.

It turns out that my credit card provides the same trip insurance automatically.

The moral: Look at your cardholder benefits guide that is mailed to you every year or so. You never know what you might find.

Credit card insurance coverage for rental cars

As usual, last time I rented a car, in Michigan, the rental car agent explained that I should purchase the exorbitantly priced property damage insurance because 1) Michigan is a fully no-fault state and 2) liability for damage to the car would include rental costs while the car was being repaired. Despite having posted on this very topic, I had no idea whether I would be fully covered by my insurance for property damage if I was in a collision.

Shortly after that I received a benefits guide from one of my credit cards and I took a close look at its rental insurance coverage. It covers vehicles rented for 31 days or less with a value of $50,000 or less. There is no coverage unless you decline the Collision/Damage waiver offered.

And, yes, it covers "reasonable loss-of-use charges imposed by the vehicle rental company for the period of time that the rental vehicle is out of service."

So next time I rent a car I'll refuse the property damage insurance with confidence--that is, if I can remember which credit card I should be using.

Save the date: Massachusetts Reinsurance Bar Association Symposium

I mentioned here the formation of the Massachusetts Reinsurance Bar Association. MReba has now scheduled its first symposium for October 1, 2009 at the Harvard Club Back Bay on Commonwealth Avenue in Boston.

Calculation of punitive damages under 176D/93A

I reported here on a Superior Court case that I stated correctly awarded unfair settlement practices damages based on the lost interest amount. A reader pointed out that the damages that are trebled pursuant to Mass. Gen. Laws ch. 93A are actually the entire trial verdict.

He is correct. Under the current law of Mass. Gen. Laws chs. 93A and 176D, when a case goes to trial and judgment and damages are trebled pursuant to 93A, then the damages that are trebled are the verdict amount. When the underlying case settles, however, and the claimant successfully sues for treble damages under 93A, the amount that is trebled is the interest that was lost because of the delay in settlement. Single damages under 93A are always the lost interest.

Court of Appeals gives good drafting tip

This is my last post on Essex Ins. Co. v. BloomSouth Flooring Corp.

In a comment near and dear to my heart as a brief-writer, the court took the insurer's counsel to task for failing to respond to an argument:

Essex, for its part, gives no good reason to affirm the [District] court's decision regarding exclusion (k). Specifically, Essex fails to offer a reasoned argument in support of the court's conclusion that the concrete floor became BloomSmith's product for purposes of the exclusion. Instead, Essex states that "The defective carpet is clearly BloomSouth's product. Just as clearly, it does not constitute real property." While we may agree with Essex on this point, BloomSouth's argument is that Suffolk's complaint may be reasonably construed as alleging that the carpet caused damage to a third party's real property-BFDS's concrete floor. Essex's statement is not responsive to that argument.