McDonald's case demonstrates tension between insurers and insureds

An article on Huffingtonpost.com highlights the tension that can arise between insurers and insureds, especially in high-profile claims.

According to the original article (which begins about halfway down), a McDonald's employee was shot and seriously injured when he intervened after a male customer hit a female customer in the Arkansas restaurant. The worker's compensation carrier denied his claim on the grounds that he was not acting within the scope of his employment when he was injured. (Okay, I'm no expert on Arkansas worker's compensation law, but I just don't see how a restaurant employee breaking up a fight in the restaurant is outside the scope of employment.)

It is obvious to me from reading the article that the decision to contest the claim was made by the insurer, not by McDonalds. However, even the author of the article did not make that distinction, blaming McDonalds and accusing it of just acting ugly.

In the article update the franchise owner plays nice, stating that if the worker's compensation board agrees with the insurer, he will personally pay the medical bills. At the same time, he is no doubt telling his insurance agent to find a new worker's comp carrier.

Let's say that the insurer's denial of the claim has a sound legal basis under Arkansas law. Then the insurer has a responsibility to its stockholders to deny the claim. But in doing so, it has created a predictable swirl of horrible publicity for the restaurant, which its owner has now scrambled to undo.

And if there is no sound legal basis for denying the claim? Then the insurer is using the claim to send a message that it plays hardball and pays no claims easily, in order to discourage others from filing claims. Not only the claimant but the insured suffers--and that's why we have bad faith laws.

A primer on public adjusters

An insured who has a property damage claim--such as basement flooding--may hire a public adjuster to advocate on his or her behalf with the insurer.

As defined by Massachusetts statute public adjusters may represent an insured in connection with the assessment of damages, negotiation, settlement, appraisal or reference proceedings for property damage insurance of any sort.

Public adjusters are generally not attorneys and, like other non-attorneys, may not advise or represent clients on questions of law.

Public adjusters must be licensed by the state. The contents of a contract between a public adjuster and an insured are regulated by statute.

New Legislation for residential fuel oil releases

According to this Massachusetts Lawyers Weekly article, a new Massachusetts statute requires all homeowners' insurers in Massachusetts to make coverage available to pay for fuel oil cleanups. The article was written by Susan Crane, an environmental lawyer in Sudbury who represents insured homeowners. Attorney Crane is a member of 21E Homeowner Funding Work Group, the group that put together the legislation.

Congratulations to Attorney Crane, the 21E Homeowner Funding Work Group, and to the Massachusetts legislature for passing a sensible bill.

SJC rules that drunk driving accident arose out of use of limo earlier in the evening

In Commerce Ins. Co. v. Ultimate Livery Serv., Inc., 452 Mass. 639 (2008), the Supreme Judicial Court of Massachusetts held that an insurer providing commercial automobile coverage to a limousine service must indemnify the limousine service for its negligence in allowing an intoxicated passenger to drive a car after using the insured's services.

As usual, Mike Tracy, of Rudolph Friedmann LLP, sent me the decision on the day it came down in November, 2008.

William Powers and a group of his friends hired the insured, Ultimate Livery Service, to drive them from a sports bar in South Boston to a strip club in Rhode Island and back again. Powers drank heavily throughout the evening. After the van driver left for the night, Powers drove his girlfriend's car and was involved in a collision which seriously injured passengers of another car, killing one of them.

Commerce insured Ultimate Livery under a commercial automobile policy which provided coverage for bodily injury "caused by an accident and resulting from the ownership, maintenance or use of a covered auto."

The court analyzed whether the accident "arose out of" the use of Ultimate Livery's van, stating that there is no meaningful difference between "resulting from" and "arising out of." (The meaning of the term "arising out of" has been frequently litigated, including by me.)

The court found that there was coverage. It noted that the van was used consistently with Ultimate's business objectives. It stated that it was of no consequence that Ultimate Livery did not provide any alcohol because it and its driver knew that Powers was consuming alcohol in the van and getting drunk. The court concluded, "The risk of harm is not too far removed to lack the required nexus under the broad causation standard [under the terms "arose out of" or "resulting from"] that applies. It is a reasonable incident that was contemplated in the first instance when the parties originally entered a contract for transportation service."

Reference proceedings in fire insurance policy claims

In Massachusetts, as in many states, provisions of fire insurance policies are set by statute. The long-ago author of the legislation was one heck of a micromanager.

The fire insurance statute provides for a “reference procedure,” in which a panel of three arbitrators, or “referees,” determines the amount of loss or damage. Mass. Gen. Laws ch. 175 § 99 (Eleventh).

The reference proceeding determines only the amount of the loss sustained or the sound value of the property, unless both parties agree that the proceeding will determine other issues as well. The reference proceeding ordinarily does not affect any defenses to the claim itself.

Pursuant to the statutory scheme the insurer must, within ten days after receiving the written demand for reference from the insured, submit to the insured in writing the names and addresses of three potential referees. The insured must, within ten days, notify the insurer in writing of his or her choice of one of those people to act as referee.

The insured also submits to the insurer the names and addresses of three potential referees. The insurer must notify the insured in writing within ten days of its choice of one of those persons to act as referee.

The two referees chosen have ten days to agree upon and select a third referee. If they fail to do so, then either of them or the parties may make written application to the commissioner of insurance to appoint a third referee.

The referees must reduce their award to writing. The third referee must deliver the award to the insured and to the insurer.

If an award is rendered by the referees in favor of the insured, the insurer and the insured are each liable to the third referee for one half of his or her charges for compensation and expenses. However, the third referee’s charges are paid by the insurer, who deducts from any award the insured’s share of such charges. If the award is rendered in favor of the insurer or if no award is rendered, the insurer is liable to the third referee for his or her charges, but may deduct one half of the charges from any payment it makes to the insured.

National Flood Insurance Program set to expire in less than a month

The National Flood Insurance Program, or "NFIP," is a program of the Federal Emergency Management Agency ("FEMA") that issues standard flood insurance policies, mostly through private insurers.

Originally set to expire last fall, on October 1, 2008 President Bush signed legislation that extended the program until March 6, 2009. That was a compromise bill as the House and Senate were unable to agree on certain provisions. The House version included windstorm coverage, and President Bush had said he would veto the bill for that reason. The Senate version would have forgiven $17.5 billion that NFIP borrowed in recent years as a result of increased damages from hurricanes.

I called FEMA to find out whether we can expect Congress to further extend the program and, if so, with what changes. Ed Pasterick, a Senior Policy Advisor at FEMA, stated that thus far Congress is not actively considering the issue. He expects that the program as it currently stands will be again extended until the end of September, 2009. He stated that FEMA itself is not interested in including windstorm coverage in the program.

In a future post, assuming that NFIP is extended, I'll discuss how NFIP insurance differs from other types of insurance.

Shout out to the Insurance Library

Boston has a wonderful resource for anyone researching insurance issues: the Insurance Library at 156 State Street. I have occasionally used the Insurance Library for many years but recently, during a spate of intense research, I finally became a member. It was a great investment that gives me access not only to the library's excellent books, but also to its librarians, who are unfailingly helpful.

How to read an insurance policy: the known loss doctrine, part 3

In previous posts I have discussed the known loss doctrine here and here. The insuring agreement typically defines when a loss is deemed to have been known to have occurred as the earliest of when:


--An insured reports a loss to any insurer; or


--An insured receives a written or verbal demand or claim; or

--An insured becomes aware by any other means that a loss has occurred or has begun to occur.


Those definitions are important not only for the known loss doctrine, but also because insureds are required to report losses to their insurers immediately ("as soon as practicable") and their failure to do so could result in denial of coverage for the loss. (I will discuss in a future post when an insurer can get away with denying coverage as a reult of late notice).


Insureds often fear to report claims because the mere reporting of a claim may result in their premiums going up. Although I am not an expert in this subject (and any of you who are should feel free to chime in here), my understanding is that reporting a single potential claim that never materializes into an actual claim typically does not affect premiums. On the other hand, failing to report a potential claim that does materialize could substantially affect your right to insurance coverage for that claim.


The lesson: Report to your insurer any claim as soon as you learn of it.