Appeals Court holds that advance payments from insurer to insured must be returned if there is no coverage

In my last post I discussed French King Realty Inc. v. Interstate Fire & Cas. Co., 79 Mass. App. Ct. 653 (2011), in which the Massachusetts Appeals Court held that coverage for a fire loss was excluded because the insured knew that its fire suppression system was suspended or impaired and because the system was not maintained in complete working order.

Interstate, the insurer, had made an advance payment to the insured, French King. French King argued that it was not required to return the advance payment because Interstate did not reserve it rights and defenses in connection with the payment.

The court disagreed. It followed other jurisdictions that have reasoned that an insurer is entitled to reimbursement for an erroneous payment when coverage does not exist under the policy and the insured was unjustly enriched and did not change position to its detriment in reliance on the payment.

Appeals Court holds that word maintain in coverage means keep in place, not keep in working order

French King Restaurant, insured by Interstate, had in place had a dry chemical fire suppression system.

The insurance policy contained a "protective safeguards endorsement," or PSE, which required French King "to maintain" the fire suppression system. The policy excluded coverage for loss or damage caused by by or resulting from fire if French King "knew of any suspension or impairment" in the system or failed to maintain the system "in complete working order."

In 2002 Kidde, the manufacturer of the fire suppression system, issued a bulletin advising that it would no longer support dry chemical systems. Kidde had previously recommended that dry chemical systems be upgraded to wet chemical systems. As of 2002, the dry system could no longer be inspected, serviced, recharged, or repaired.

In 2003, the company French King hired to inspect its fire protection system warned it that the system was not in accordance with current requirements.

In 2004 the Executive Office for Public Safety announced that dry systems needed to be upgraded to wet systems.

After the subject insurance policy was issued in 2005, the private fire inspector again informed French King that to be in compliance with current standards a wet fire suppression system was required. That same month, the city's building inspector informed French King that he could not issue a certificate of inspection until the system had been fixed.

In October, 2005 there was a fire at the restaurant. The fire suppression system failed to function. Interstate declined to pay the loss on the grounds that French King had failed to "maintain" the fire suppression system and that exclusions relating to the fire suppression system applied.

In French King Realty Inc. v. Interstate Fire & Cas. Co., 79 Mass. App. Ct. 653 (2011), the Massachusetts Appeals Court held that the word "maintain" was ambiguous and must be interpreted in a manner favorable to French King as meaning merely having a fire suppression system in place.

The court ruled that coverage was excluded by the exclusion for loss or damage if the insured knew of any suspension or impairment in the fire protection system. It held that the record showed clearly that French King knew that the fire suppression system was impaired. It ruled that coverage was also excluded because French King failed to maintain the system "in complete working order."

First the birth certificate thing and now this . . .

Tred Eyerly discusses a new statute in Hawaii on his blog Insurance Law Hawaii.

According to Eyerley, the statute provides that an "occurrence" in a liability policy "shall be construed in accordance with the law as it existed at the time that the insurance policy was issued."

The statute was apparently passed in response to a court decision holding that construction defects are not occurrences.

I don't have any additional information on the new statute, but if it's as broad as Eyerly describes there could be some insurance coverage attorneys in Hawaii who will make a great (if unexciting) living off of it. Let's say there's an environmental coverage case in which a pollutant seeped into the ground from 1935 to 1975. When the insurance coverage aspect comes up, as it inevitably will, the parties will be arguing the definition of occurrence in each policy year. Maybe -- and I have no idea -- there was a decision by the highest state court in Hawaii in 1934 giving a clear definition of occurrence. (It's not very likely, but it could be.) If one of the policies was issued outside of Hawaii, assuming that Hawaii follows the usual choice of law rules, the history of occurrence litigation in that state will come into play.

And let's not forget that the definitions of occurrence given in standard policy forms have evolved over the years.

And finally, as a philosophical matter, what does it mean to "construe" a concept "in accordance with the law as it existed at the time that the insurance policy was issued." For example, if a court of a particular state makes a ruling on triggers of coverage for the first time in 1972, and holds that the manifestation trigger applies, does that mean that the manifestation trigger does not apply to policies issued before 1972? Or would the manifestation trigger apply all the way back because if the word occurrence was construed that way in 1972 then logically it always had to be construed that way?

Everything you ever wanted to know about IDL coverage but were afraid to ask

Here's an article on a type of coverage I had never heard of: independent director liability, or IDL coverage.

This supplements directors and officers (D&O) coverage. My first thought was why such supplemental coverage would be necessary; why not just purchase higher policy limits on D&O coverage. The reason is given at the end of the article: IDL coverage provides peace of mind for outside directors. If a D&O policy is depleted by an Enron-type meltdown, the directors will still have coverage.

If I were an insurance agent or a risk manager I would need to take a hard look at both the D&O coverages and the proposed IDL coverage before I would make a recommendation about whether a corporation should buy the IDL coverage. But, as the article points out, if I were an outside director (who wasn't paying for the policy from my own funds), of course I'd want it because, hey, why not.

California Federal District Court sharply curtails Cumis doctrine

The widely-accepted doctrine that an insured has a right to independent counsel of its choosing if an insurer is defending it under a reservation of rights is frequently called the Cumis counsel doctrine, after a case from California, San Diego Fed. Credit Union v. Cumis Ins. Society, Inc., 162 Cal. App. 3rd 358 (1984).

A federal district court in California has now sharply curtailed the application of that doctrine under California law, essentially holding that because insurance defense counsel has an obligation to the insured, any potential conflict of interest between the insurer and the insured cannot affect the defense.

Centex Home is a general contractor against whom several homeowners filed lawsuits alleging construction defects. Centex sought coverage for some of the claims as an additional insured on policies Travelers Property had issued to Centex's subcontractors. Travelers agreed to defend subject to a full reservation of rights. It agreed that the attorneys already retained by Centex could continue to represent it.

Nine months later Travelers informed Centex that it would hire new counsel of its own choosing, and retained two law firms to defend Centex. Centex refused to accept those firms unless Travelers showed that they could provide a conflict-free defense. It also claimed a right to independent counsel due to Travelers' reservation of rights.

Travelers stopped paying defense costs and filed a suit for declaratory judgment on the grounds that Centex breached its duty to cooperate.

In Travelers Property v. Centex Homes, The United States District Court for the Northern District of California noted that under California statute and case law:

[a] conflict exists "when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel . . . retained by the insurer for the defense of the claim." . . . However, if the coverage issue is "independent of, or extrinsic to, the issues in the underlying case," then independent counsel is not required. . . . Where the interest of the insured and insurer are aligned in defending against the underlying action, a conflict does not exist."

The court held that Travelers' reservation of rights did not give rise to a conflict of interest. One of the rights that Travelers reserved was the right to deny coverage if the damages alleged occurred outside the policy periods. Centex had asserted a statue of limitations defense in the underlying cases. It argued that Travelers would attempt to focus liability outside the policy periods, which would harm the statute of limitations defense.

The court rejected that argument because the conflict is a "merely potential" one.

[Centex] provides no evidence that [Travelers'] appointed counsel could shift the focus of liability outside of [Travelers'] policy periods. More importantly, whether damages occurred before, during, or after the policy period is a factual issue outside of counsel's control. . . . [Centex] and [Travelers] have the same interest in minimizing liability by establishing that any damages occurred at a time early enough for the statute of limitations defense to apply.

Furthermore, any counsel [Travelers] appoints also has legal and ethical obligations and a fiduciary duty to [Centex]. . . . Although [Travelers] might have an interest in continuing an investigation into its potential for coverage, this is irrelevant to the ability of [Travelers'] appointed counsel to control the issue of when any covered liability occurs.

Massachusetts Attorney General alleges nearly $1 billion overcharge on commercial auto insurance

Massachusetts Attorney General Martha Coakley has issued a press release alleging that businesses in the state have been overcharged by nearly $1 billion on commercial auto insurance in the past seven years.

Coakley cited data showing that insurers' underwriting profits were significantly higher in Massachusetts than the national average. She has requested that the Commissioner of Insurance reduce insurance rates so that they comply with a statute forbidding rates that are "excessive" or "unreasonably high."

Summer, and the rantin' is easy

A while back I posted about my annoyance with a day camp that required parents to sign a release acknowledging that the camp did not carry liability insurance.

New summer, new camp, new rant.

This camp requires parents to sign a release of the camp and every affiliated person or entity from all negligence claims. (In oversimplified terms, negligence means you made a mistake that caused someone else to get hurt.)

First, I want to acknowledge that this particular camp is priced and has additional financial aid to allow participation by kids from families of all income levels. It is possible the release lowers the price of its liability insurance, or that the camp administration believes (wrongly) that the release eliminates the need for such insurance. I do not in any way intend to minimize the effect of the cost of insurance, and the effect it might have on the camp's ability to serve all populations.

But . . . I am sending my elementary-school aged child to you. As I have written many times before, accidents happen. If an accident happened because you made a mistake -- and I'm not going to list all of the possible mistakes you can make while caring for a bunch of little kids -- and as a result a kid is permanently disabled, unable to work, unable to care for himself -- you have a moral obligation to defray the expenses for care that will follow the kid for the rest of his life. The good news is, you don't have to pay it yourself, you can get insurance. That's what it's there for.

Having adequate insurance is simply the responsible thing to do.

Take a look at the new Cavalcade of Risk

You can find it here.

For newbies, the Cavalcade of Risk rotates among insurance and other risk blogs, and provides links to blog posts on those topics.