Great article on ALI's Principles of Liability Insurance

 Randy Maniloff's Coverage Opinions newsletter continues to be the most entertaining read on insurance coverage issues each month, as well as highly informative.  This month's newsletter has a particularly interesting article on the American Law Institute's work on Principles of Liability Insurance, which is likely to have a large impact on insurance coverage law in the coming years. 

US District Court holds that failure of temporary patches does not prove faulty workmanship

I have been writing about General Casualty Co. of Wisconsin v. Five Star Building Corp., 2013 WL 5297095 (D. Mass.), in which rainwater penetrated temporary roof patches placed there by Five Star during HVAC work it was doing for UMass. 

Five Star's insurer argued that coverage was excluded by an exclusion for property damage "to that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it."  The insurer argued that the fact that the temporary patches failed to keep out rainwater shows that Five Star's work was incorrectly performed.  The court rejected that argument because it assumes either a strict liability or breach of contract theory of faulty workmanship. 

US District Court construes construction exclusion narrowly

In my last post I wrote about General Casualty Co. of Wisconsin v. Five Star Building Corp., 2013 WL 5297095 (D. Mass.), in which rain infiltrated a building when temporary patches put up by Five Star during HVAC work for UMass failed.

Five Star's insurer argued that coverage was excluded by an exclusion for property damage "to that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the 'property damage' arises out of those operations."

The insurer argued that the entire roof was the "particular part" on which Five Star was working and that therefore all damage to the roof was excluded. 

The court held that the exclusion does not extend beyond "the essence" of the insured's work.  It held that Five Star's work extended only to the replacement of the ventilation system, not to repair or replacement of  the roof.  Although as part of its work Five Star was required to punch holes in the roof, that roof work was merely incidental to the replacement of the HVAC system.  Therefore the exclusion does not apply. 

US District Court holds that damages from faulty workmanship are not an occurrence

UMass hired Five Star to upgrade the HVAC system in the Morill Science Center.  As part of its work Five Star sometimes penetrated the building roof and installed temporary patches to protect the building until permanent patches and flashing could be installed.

During a severe rainstorm several temporary patches failed and rainwater penetrated the roof, causing damage to insulation and to the interior of the building and its contents. 

Five Star sought coverage from its general liability insurer, General Casualty.  General Casualty agreed to cover most of the loss, but denied coverage for damage to the roofing system. 

The first issue before the court was  whether faulty workmanship is an "occurrence," an issue over which there is much disagreement around the country.  In General Casualty Co. of Wisconsin v. Five Star Building Corp., 2013 WL 5297095 (D. Mass.), the United States District Court for the District of Massachusetts held, not in so many words, that the question was irrelevant, because the rain damage itself was an occurrence whether or not faulty workmanship was an occurrence. 

Assuming that Five Star engaged in faulty workmanship, its workmanship extended only as far as the installation of temporary patches and not to the roof itself.  Thus, Five Star does not seek coverage for faulty workmanship itself, but rather coverage of the damage resulting from the rainstorm even if such allegedly faulty workmanship contributed to the leaking.  The rain damage to the roofing system, therefore, is an "occurrence" under the policy.

SJC seeks amicus briefs on attorney's fees for PIP cases

The Supreme Judicial Court of Massachusetts is seeking amicus briefs in the following case:

SJC-11561     
Barron Chiropractic & Rehabilitation vs. Norfolk & Dedham Group

Whether an insurer can be liable for costs and attorney's fees in an action pursuant to G. L. c. 90, � 34M, on a claim that it failed to pay PIP benefits in accordance with the statute, if the insurer, allegedly for business reasons unrelated to the merits of the litigation, tenders payment of the full amount of the disputed benefits after the commencement of the action but before a judgment has entered against it.

Scheduled for March argument.

Still fighting to get releases of liability removed from Boston Public Schools permission slips

I have posted here, here, here, and here on my efforts to have releases of liability removed from field trip permission slips Boston Public School parents are required to sign.

This past Wednesday I returned to the Boston School Committee.  I spoke during the public comment period and pointed out that last February the BSC had requested that the BPS legal department report back to it on whether other school systems in Massachusetts require similar releases of liability.  That report has not happened yet.  I again requested that the releases of liability be removed from permission slips. 

The following is the handout I gave to the School Committee members (slightly redacted to protect the privacy of my children): 

 FOLLOW UP ON RELEASES OF LIABILITY IN FIELD TRIP PERMISSION SLIPS

 

THE ISSUE:  Boston public school permission slips require parents to sign a release of all rights if their child is injured on a field trip. 

 

The release includes “any acts of negligence or otherwise from the moment that my student is under BPS supervision and throughout the duration of the trip.” 

 

In the release, parents agree “to indemnify and hold harmless BPS and any of the individuals and other organizations associated with the BPS in this field trip from any claim or liability arising out of my child’s participation in this field trip.” 

 

PREVIOUS COMMENT BEFORE THE SCHOOL COMMITTEE, AND LACK OF PROMISED FOLLOW UP

 

I spoke during the public comment period on this issue at the School Committee meeting of February 27, 2013.

 

My written comments are attached. 

 

Schoolcommittee member Mary Tamer requested a report back from the legal department on what other school systems in Massachusetts are doing.

 

I sent a follow up email in the spring and was told by Chairperson O’Neill that the School Committee would reach the issue but not before the conclusion of the current (2012-2013) school year.

 

I sent another email a few weeks ago to which I received no reply.

 

I am therefore here to again request that releases of liability be removed from field trip permission slips.

 

WHAT DO OTHER SCHOOL DISTRICTS DO?

 

First, this is not the right question to be asking.  Boston is the largest and the best school district in Massachusetts, and has among the most resources to determine what is right.  We should lead other school districts, not follow them.

 

Second, there is a great deal of variation; however, I am not aware of any school district that has a release as comprehensive as Boston’s.  I have attached permission slips from Brockton and from Chicago, which contain no waiver of liability.  I have also attached a permission slip from New York City, which releases liability “except if due to the negligence of school officials.” 

 

MASSACHUSETTS LAWYERS WEEKLY ARTICLE

 

I have attached an article in Massachusetts Lawyers Weekly which covered the issue on April 18, 2013.

 

BPS spokesperson Lee McGuire was quoted in the article.  He made two statements with which I disagree.

 

First, he stated that Massachusetts courts have upheld school releases of liability.  That is incorrect.  The case he cites, Sharon v. City of Newton, 437 Mass. 99 (2002), upheld releases in voluntary afterschool activities -- in that case, cheerleading.  It specifically reserved the question of whether a release of liability would be upheld in the context of a required school activity.

 

More importantly, McGuire asserted that the waivers of liability allow the schools to continue to offer field trips.  That is simply the wrong approach.  The BPS and its students are best protected by insurance, which is a cost of doing business, not by a waiver which allows entities to avoid responsibility for their own negligence.  If a child is seriously injured on a field trip and liability has been released, then ultimately that child will be taken care of by taxpayers through public programs that assist people with disabilities.  In the meantime the child’s family has not only suffered as a result of the child’s injury but has possibly been bankrupted by the cost of care.  It is much fairer and better for everyone -- the BPS, the students, the parents, the taxpayers -- to simply require insurance. 

 

 

CONCLUSION

 

The release of liability should be removed from field trip permission slips.  Instead, the BPS should require that its partners have adequate insurance to protect students in the event that they are injured as a result of negligence.

 

REQUEST FOR RESPONSE

 

I request that the school committee get back to me with a response by December 1, 2013.

 

ABOUT ME

 

I am a lawyer who specializes in liability insurance issues (“insurance coverage”).  As such, I spend a lot of time thinking about the purposes served by insurance,  about how risk should be reasonably delegated, and about the devastating impact on individuals and families when risk is not delegated reasonably.      

Settlement mills and insurers

Tina Willis Law Blog has an article discussing a 2009 law review article called Run-of-the-Mill Justice, about so-called settlement mills, large-volume plaintiffs' personal injury firms that acquire most of their clients by advertising.

Towards the end of the law review article the author discusses the advantages to insurers of dealing with those types of firms.  The article posits that the insurers end up paying a lot of low-value cases for more than they are worth, but in exchange they are able to settle high -value cases at a steep discount.

I began my career as an insurance-defense attorney and I still do quite a bit of insurance defense work, most of it indirectly on a subcontract basis.  In the hundreds of cases I have defended or participated in defending over the years, only a small handful have been brought by the types of firms discussed in the article, although they certainly exist in this state.  My experience was that the attorneys that handled them were average:  certainly no standouts in their representation of their clients, but they knew what they were doing. 

Insurance defense attorneys tend to only see the more interesting cases:  cases that go into suit rather than settling pre-suit because there is a question over liability or the case won't settle for its reasonable value as perceived by the adjuster.

Nevertheless, the idea that insurance companies have a symbiotic relationship with plaintiffs' mills does not ring true to me.  I have worked with many adjusters and their supervisors, both on the side of the insurer/insured and on the side of the claimant.  I simply can't imagine any department settling low value cases for more than they're worth in the expectation of an easy settlement in a high value case.  That's the sort of allegation that I would expect the state attorney general to look into, as it would be a large volume unfair settlement practice.

1st Circuit holds that reasonable expectations doctrine does not trump unambiguous policy language

I posted here about the United States District Court case of Clark School for Creative Learning, Inc. v. Philadelphia Indem. Ins. Co., 2012 WL 6771835 (D. Mass.).  In that decision the court held that an exclusion for known circumstances revealed in a financial statement applied to a claim that a school had misused a donation.  The exclusion excluded claims "arising out of, directly or indirectly resulting from or in consequence of, or in any way involving" any circumstances disclosed in a financial statement that was attached to the policy.  The financial statement referenced the gift at issue.

 In Clark School for Creative Learning, Inc. v. Philadelphia Indem. Ins. Co., __ F.3d __, 2013 WL 57337339 (1st Cir.) the United States Court of Appeals has affirmed the ruling. 

The court held that the plain language of the exclusion excluded coverage because the loss "involved" the gift disclosed in the financial statement. 

The court rejected the school's argument that the reasonable expectations of the parties were that the exclusion would not apply to a lawsuit over the gift, but only to lawsuits over the school's financial difficulties discussed in the financial statement.  The court held that even if the school could have reasonably expected coverage, the reasonable expectations doctrine does not apply when policy language is unambiguous. 

New Cavalcade of Risk is up

See it here.

More on flood insurance

Following up on my article of the other day which discussed, in part, changes to flood insurance rates, Salon has a comprehensive article on the issue from a national perspective.  (Ignore the click-bait title, which does not reflect the content of the article.)

Waxing philosophical

Talking with my daughter about a school assignment today (writing fortunes for fortune cookies, if you must know) led me to this John Donne poem.  I knew the beginning and the end.  The middle expresses how I feel about property loss from natural disasters.  Whether or not there's ultimately insurance coverage for a building that has been damaged or destroyed by a hurricane, a family losing its home has repercussions throughout  the fabric of our society. 

No man is an island,
Entire of itself,
Every man is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less.
As well as if a promontory were.
As well as if a manor of thy friend's
Or of thine own were:
Any man's death diminishes me,
Because I am involved in mankind,
And therefore never send to know for whom the bell tolls;
It tolls for thee.       

Along the same lines, the Boston Herald has this article about the effect of FEMA's new flood zone maps on flood insurance in Boston.  I've posted before about the intersection of liability insurance and taxes.  Given that higher flood risks are likely related to climate change, a result of the workings of our society as a whole (see above)  and out of the individual control of longtime homeowners of property near major bodies of water, it seems only right that moderate-income families who can't afford higher insurance rates should receive subsidies.  Assuming that the new maps accurately show the risk, as someone who is adamantly pro-insurance, I do support requiring homeowners in flood zones to have flood insurance; moreover, as I discussed here, I support flood insurance on the value of the entire property, not merely to the extent of the mortgagee's interest as the current regulations require.  It's a fair way to spread the risk and will prevent the even worse economic devastation that would occur if entire neighborhoods are damaged by a hurricane and the homeowners are uninsured.  It can be the difference between a few awful weeks or months and long-term homelessness. 

First circuit holds that injury from portable fire pit does not arise out of premises; in dicta asserts the issue is interesting

Judge Selya introduced his decision in Vermont Mut. Ins. Co. v. Zamsky, __ F.3d __, 2013 WL 5543915 (1st Cir. 2013) by proclaiming that the decision addresses "what some might regard as an oxymoron: an interesting insurance coverage question." 

Andrew Zamsky was an insured under three homeowners' policies issued to his parents by Vermont Mutual.  Each of the policies covered a separate parcel of residential real estate they owned. 

The policies provided coverage for claims of bodily injury caused by an occurrence.  They also contained a "UL exclusion," which excluded coverage for injuries "arising out of a premises" owned by an insured but not itself an insured location. 

On November 27, 2008, Zamsky, claimant Renata Ivnitskaya, and several friends drove to a house which was owned by Zamsky's parents but which was not an insured location under any of the policies. 

Zamsky retrieved from a shed on the property a portable fire pit he had purchased earlier that year.  The group tried to start a fire in it.  When the wood would not burn readily, one of the group retrieved a container of gasoline from the garage or the shed and poured its contents on the fire.

In the subsequent conflagration three people were burned.  Ivnitskaya suffered especially severe burns.

Ivnitskaya sued Zamsky.  As Judge Selya wrote, she alleged a "golconda" (presumably meaning a source of great wealth, and not a mystical state of enlightenment where a vampire is no longer subject to the beast [thank you, Google]) of negligent acts and omissions.

Vermont Mutual agreed to defend the claim under a reservation of rights, and then filed a declaratory judgment action. 

In rendering its decision the court relied on Massachusetts Appeals Court cases that interpreted the UL exclusion.  One held that a UL exclusion did not exclude coverage for a dogbite case because, while the bite happened at the uninsured premises, the dog was not a condition of the premises. 

In  a second Appeals Court case the claimant was on uninsured premises "in order to minister to  a dying tree" (perhaps so that it would no longer be subject to the beast?).  He fell from a ladder and was injured.  The Appeals Court held the UL exclusion applied because "where . . . a third person is on the property to repair a condition of the property . . . there is a sufficiently close relationship between the injury and the premises" such that the injury should be understood to have arisen out of the premises.

Taken together, the courts change the UL exclusion to claims "arising out of a condition of premises" owned by the insured that are not an insured location.  Judge Selya held that a portable fire pit stored at the premises was not a condition of the premises, so the exclusion did not apply. 

Vermont Mutual tried to change the debate by focusing not on "the premises" but on "arising out of," a phrase that is construed broadly.  Judge Selya held that the "arising out of" language only comes into play if there is some causal link between the covered occurrence and a condition of the premises.  "Here, there is no such linkage." 

Judge Selya also rejected Vermont Mutual's argument that if the group went to the premises with the intention of lighting a fire, the occurrence arose out of the premises.  "The group's reason for going to Falmouth was not material because that purpose was not related to a condition of the premises." 

Judge Selya added that if Vermont Mutual had wanted to exclude from coverage all injuries occurring at an owned location it did not insure, "it would have been child's play to say so."

I think Judge Selya's decision is correct as a matter of a federal court interpreting Massachusetts law.   He properly relied on Massachusetts Appeals Court cases because there are no SJC cases on point.  Although Judge Selya asserted that he was predicting how the SJC would rule, I'm not so sure it would follow the Appeals Court cases.  The exclusion does not exclude injuries "arising out of conditions of premises" that are not insured locations; it excluded injuries "arising out of premises" that are not insured locations.  I don't see a basis for reading "condition of" into the exclusion.

Moreover, it makes sense to me that an insured buying three separate homeowner's policies for three discrete houses would not expect that an injury occurring at another house he owns to be covered by those policies.  (The Zamsky family most likely had coverage from a different carrier for the house where the fire occurred.  My guess is that this is a fight between carriers concerned about which one of them will pay if Ivnitskaya prevails on liability in her underlying action, not a fight about whether an insurer or the Zamsky family will pay.  Not that that should make any difference in the contract interpretation issues, but it gives the fight a different flavor, right?) 

In this I find myself at surprising odds with Barry Zalma, an insurance fraud specialist whose posts tend to be in favor of limited coverage.  But here he claims that "the stupidity [of Vermont Mutual] arguing no coverage even outweighed the stupidity of throwing gasoline on a fire."

First Circuit overturns itself on flood insurance requirement

I posted here about  Kolbe v. BAC Home Loans Servicing, LP, 695 F.3d 111 (1st Cir. 2012), a case in which the First Circuit Court of Appeals overturned the dismissal of the complaint of a homeowner alleging that a mortgage lender did not have authority under the loan documents to demand that the homeowner purchase flood insurance in excess of the outstanding loan amount.  The court held that the loan documents were ambiguous and that therefore the court could not determine the issue as a question of law. 

The First Circuit has now revisited the case in Kolbe v. BAC Home Loans Service, LP, __ F.3d __, 2013 WL 5394192 (1st Cir.) and overruled its prior decision.

Kolbe, the homeowner, contended that the mortgage lender cannot require more than the federally mandated minimum flood insurance, which is the lesser of the balance of the loan or $250,000 in flood zones and $0 in non-flood zones. 

Kolbe's mortgage loan was guaranteed by the Federal Housing Administration.  The mortgage agreement contained uniform covenants that are required by HUD regulations to be in every FHA-insured mortgage.  One of those covenants provided:

4.  Fire, Flood and Other Hazard Insurance.  Borrower shall insure all improvements on the property, whether now in existence of subsequently erected, against any hazards, casualties, and contingencies, including fire, for which Lender requires insurance.  This insurance shall be maintained in the amounts and for the periods that Lender requires.  Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary [of HUD]. 

Kolbe filed a class action suit contending that under the contract the bank could not require him to purchase insurance in excess of the balance of the loan.  The District Court granted the lender's motion to dismiss.  Kolbe appealed, and in the panel decision discussed in my previous post the First Circuit vacated the dismissal.  The First Circuit then granted rehearing en banc.

In its en banc decision the court held, first, that the contract provision was a uniform provision used in many contracts, and therefore it must be interpreted uniformly regardless of what an individual contracting party may have understood the clause to mean. 

It held, second, that because the uniform contract language was imposed by the government of the United States, the government's meaning with respect to the language controls.  That meaning is determined in light of the purposes for which the government imposed the language and the context of the relevant regulatory scheme.

The court held that the bank's interpretation was the correct one.  The language of the clause by itself and in combination with other clauses in the contract makes clear that the bank can impose a requirement of additional flood insurance. 

The court also held that under a broader context the bank's interpretation must prevail.  As one example given by the court, if the borrower defaulted on an FHA-guaranteed loan, HUD ultimately would take possession of and sell the property, reimbursing the mortgage insurance fund with the proceeds of the sale.  But if the house had been destroyed by flood then "there is nothing" (a slight exaggeration, but still) for HUD to sell. 

Finally, the United States submitted an amicus brief supporting the bank's interpretation.  The court held that it was required to defer to the interpretation offered by the United States unless that interpretation was clearly erroneous.   

Book Review of Insurance Regulation Answer Book 2014, with discount code

The last time I was asked to review a book was when I was a college student freelancing for Seventeen Magazine.  I remember being sort of embarrassed for giving a rave review of The Adrian Mole Diaries; but I couldn't help it -- I loved the book.  In the same way I feel sort of silly to say that Practising Law Institute's Insurance Regulation Answer Book 2014 is a fantastic book, but I really think it is.  Well-written, informative, easy to understand, and interesting (at least to insurance coverage junkies like me). 

In the spirit of full disclosure I was asked by PLI itself to review the book, and received a free copy in exchange.  It's not quite a junket but a perk is a perk.

To clear up some confusion:  despite the British spelling of "practising," PLI is located in New York and the book addresses American law. 

I had planned to skip to the parts of the book that discuss the subject I know -- liability insurance.   But I immediately realized that this book is written and formatted so clearly that just by skimming it I was learning.  For example, I did not know that life insurers are often prohibited from offering property and casualty insurance. 

The first chapter provides succinct definitions of the different types of insurance.  Ever wondered about the difference between casualty and liability insurance?  (I have.)  Turns out they are mostly but not completely interchangeable, and the book explains the subtle difference in definitions. 

Chapter 2 gets into the heart of the book -- and territory more or less unknown to me.  It discusses why states regulate insurance and the limited but changing role that the federal government plays in such regulation. 

The rest of the book  provides technical information, such as on the different forms of insurance companies, licensing issues, etc.  There's also a healthy bit of discussion on reinsurance, which I have always considered a whole different world (sort of like a Superior Court litigator trying to navigate Probate Court). 

I doubt that I'll have much use in my practice for the details the book provides -- my cases don't tend to involve international agreements among insurers, for example.  But in light of recent developments in insurance law, having an overview is helpful.  While I knew that the Federal Insurance Office somehow came into existence within the last few years, I didn't understand why.  Now I know its relationship to the Dodd-Frank Act, and how that Act, which was created to regulate banks, also affects insurance.

Overall, I don't recommend this book for the casual insurance coverage practitioner.  But for anyone who makes a habit of insurance coverage cases, this book provides valuable background. 

Special to my blog-readers:  Here's a link with a fifteen percent discount off the book. 

Comprehensive article on terrorism insurance

I posted here my thoughts on how the Terrorism Risk Insurance Act (TRIA) should be amended rather than simply readopted as is next year. 

The Insurance Information Institute has a comprehensive article on the past, present, and proposed future of TRIA here. 

US District Court holds that bond coverage does not increase policy limit

Katie Graf won a lawsuit against a restaurant called Torcia.  Graf had alleged that she was injured at the restaurant.  The judgment was for $500,000 plus prejudgment interest of $111,124.26.

Graf attached the restaurant's liquor license in the amount of $115,000 to secure payment of the prejudgment interest.

Torcia requested that its insurer, Hospitality Mutual Insurance Company, pay the cost of the bond to discharge the attachment.  The Hospitality policy had a per person limit of $500,000, and defined "damages" as including prejudgment interest.  Hospitality asserted that the prejudgment interest was therefore outside the policy limit and declined to pay the bond. 

Under the policy Hospitality agreed to pay the cost of bonds to release attachments, "but only for bond amounts within the applicable limit of insurance." 

In Graf v. Hospitality Mutual Ins. Co., 2013 WL 3878691 (D. Mass.), the court held that the policy was susceptible to only one reasonable interpretation -- "that it did not require [Hospitality] to pay prejudgment interest directly or the cost of the bond." 

Torcia had assigned its rights against Hospitality to Graf in exchange for discharge of the attachment.  Graf argued that Hospitality should pay the cost of the bond because the amount of the bond itself was within the policy limit.  The court disagreed, holding that the bond was over the policy limit because Hospitality had already paid the policy limit.

Graf next argued that there was a separate $500,000 limit for bonds.  Reading the policy as a whole, the court disagreed. 

I dislike limits that includes prejudgment interest, just as I dislike limits that include attorney's fees.  Depending on the case, insurers and insurance defense counsel have anywhere between some and a  great deal of control over how long a case will take before resolution, just as they have between some and a great deal of control over attorney's fees.  The limits are, however, a reality.

The takeaway:  When choosing your policy limits, whether or not the limits include prejudgment interest is a factor you should consider.  It is not unusual for a case to take several years to get to trial.  At the prejudgment interest rate of 12 percent in Massachusetts, the verdict of a case that takes five years will be increased by 60 percent because of prejudgment interest. 

US District Court discusses New York law on policy cancellation by premium finance agency

Troy Sutler was injured when he was hit by a forklift.  The forklift was driven by an employee of NYCP.  Sutler sued NYCP and obtained a judgment against it.  He then sued Redland Insurance for payment.

A few months before the accident NYCP had purchased a general liability policy from Redland.  It paid for the policy with a loan from BIC.  The loan agreement specified that as long as NYCP owed BIC any money, BIC would have a power of attorney to cancel the Redland insurance policy on NYCP's behalf, and thereby obtain a partial refund. 

Two months after the companies entered into the loan agreement, and before the forklift accident, NYCP failed to make its monthly payment to BIC.  BIC cancelled the policy.

Redland sent NYCP a notice that its insurance had been cancelled, and that it could avoid the cancellation by paying the total premium due within fifteen days.  NYCP did not do so. 

After the accident, BIC informed Redland that it had received payment from NYCP and asked Redland to retroactively reinstate NYCP's policy. Redland did not do so.

Sutler sued Redland on the ground that it is liable as NYCP's insurer for the judgment he obtained.

In Sutler v. Redland Ins. Co., 2013 WL 3732873 (D. Mass. 2013), Sutler argued that the cancellation of the policy was invalid because NYCP did not receive notice at least ten days (or fifteen; the decision is inconsistent) before its policy was cancelled as required by the terms of the policy.

The court rejected the argument, because Redland did not cancel the policy; BIC cancelled the policy under its power of attorney from NYCP.  The insurance policy allows NYCP to cancel upon advance written notice. 

The court also held that the cancellation complied with governing New York statute.  That statute allows a premium finance agency such as BIC to cancel an insurance contract if it first gives the insured party ten days' written notice. 

Sutler argued that BIC's cancellation was ineffective because BIC sent the notice of cancellation on May 22, 2007, with an effective date of May 29, 2007, only seven days.  But, the court held, Sutler was confusing a notice of intent to cancel with the notice of cancellation.  BIC sent its notice of intent to cancel on May 8, 2007, fourteen days before it sent the notice of cancellation.  That fourteen-day period was sufficient under New York statute. 

First Circuit holds that flooding from roof is covered because roof is a dry land area

I've been discussing Fidelity Co-operative Bank v. Nova Casualty Co., __ F.3d __, 2013 WL 4016361 (1st. Cir. 2013), in which the United States Court of Appeals for the First Circuit held that property damage from a flooded roof was proximately caused by the inadequate roof drainage system, a covered loss, not by rainwater, an excluded loss. 

Nova, the insurer, argued that there was no coverage because the water that flooded the building was surface water excluded by the policy.  The court agreed that the water was surface water. It held, however, that the surface water exclusion did not apply.  Although the policy excluded damage from surface water, an amendatory endorsement provided coverage for flooding caused by the unusual or rapid accumulation or runoff of surface waters from any source.  The flood coverage provision defined "flood" as a "general or temporary condition of partial or complete inundation of normally dry land areas."  The court held that the roof is a "dry land area" under the standard technical definition of land, which includes buildings, fixtures and fences. 

First Circuit holds faulty workmanship exclusion does not apply to work done before insureds owned building

In my last post I discussed Fidelity Co-operative Bank v. Nova Casualty Co., __ F.3d __, 2013 WL 4016361 (1st. Cir. 2013), in which the court held that there was coverage for a flooded roof because the proximate efficient cause of the loss was the failure of a roof drain, a covered loss, not the rainwater that accumulated on the roof, an excluded loss.

The insurer, Nova, also denied coverage of the basis of a faulty workmanship exclusion, asserting that the inadequacy of the roof's drainage system was faulty workmanship.

The United State Court of Appeals for the First Circuit held that the faulty workmanship exclusion did not apply.  It held that the exclusion was "intended to prevent the expansion of coverage under the policy to insuring the quality of a contractual undertaking by the insured or someone authorized by him."  The record showed that the roof was repaired prior to the insureds' ownership and that the insureds did not repair, renovate or replace the roof or its drain.

1st Circuit holds that efficient proximate cause of water damage from leaky roof is failure of drain, not rain

Matthew and Sondra Knowles owned a five story rental property building.  Nova insured the building.

The Nova policy contained an exclusion for water damage, but an amendatory endorsement deleted the exclusion.  (This is why I can't give advice about coverage under a policy unless I have the complete policy.)  An additional endorsement added flood coverage for loss attributable to "flood, meaning a general and temporary condition of partial or complete inundation of normally dry land due to the unusual or rapid accumulation or runoff of surface waters from any source."

The policy also contained a "rain limitation" which excluded coverage if a loss suffered to the interior of the building was caused by or resulted from rain, whether driven by wind or not, unless the building first sustains damage by a covered cause of loss to its roof or walls through which the rain enters.

A tropical storm caused a significant amount of water to accumulate of the roof of the building.  The water overwhelmed the rooftop drain and pooled on the roof, eventually leaking through the building's two skylights, resulting in property damage.

Nova denied the claim in part on the basis of the rain limitation. 

Due to the financial losses, the Knowles defaulted on their mortgage and Fidelity took title to the property.  Fidelity then brought an action against Nova. 

In Fidelity Co-operative Bank v. Nova Casualty Co., __ F.3d __, 2013 WL 4016361 (1st. Cir. 2013), the United States Court of Appeals for the First Circuit found that the rain limitation did not exclude coverage. 

The court applied the "efficient proximate cause test" or the "train of events test" set forth in Jussim v. Mass. Bay Ins. Co., 415 Mass. 24 (1993).  Under that test, if the efficient proximate cause of a loss is an insured risk then the policy provides coverage even if the final form of the property damage, produced by a series of related events, appears to take the loss outside the terms of the policy.  The court noted that the efficient proximate cause test applies to any policy that does not have an anti-concurrent causation clause. 

Nova's experts had determined that the blocked or inadequate roof drain caused water to accumulate of the roof, flooding it.  Thus, the blocked or inadequate drain set in motion a train of events that caused the interior water damage.  "The failure of the drain must properly be determined the efficient proximate cause of the damage, not the rain."  The court found that the blocked or inadequate roof drain was a covered loss under the  policy, so that the policy provided coverage for the damages. 

When worker's compensation collides with freedom of religion

Worker's Comp Insider has a fascinating article about a lawsuit in which a religious sect called the Hutterites, with similar roots to Mennonites, have been forced to purchase worker's compensation insurance for its communal work crews who receive no wages as such and have sworn not to ever sue anyone on pains of being banned from the sect. 

U.S. District Court rules no 93A violation where damages were not clear

Lynne Ingalls hired a lawyer, Michael Goldstein, to file a bankruptcy petition.  Ingalls told him and signed an affidavit affirming that she had filed a homestead declaration on real estate she owned with her sister.  (A homestead declaration protects certain equity in a home from creditors; until recently the exemption was not effective unless a document was filed with the Registry of Deeds.)  She testified on the issue in bankruptcy court.  Goldstein did not independently confirm the homestead declaration.  Eventually it was discovered that there was no homestead declaration of record.  As a result, the real estate was exposed to the claims of creditors.

Ingalls sued Goldstein for malpractice.  He asserted a defense of comparative negligence.  If successful, that defense would reduce or negate his liability.

Ingalls sent a 93A demand letter to Goldstein's Insurer, Minnesota Lawyers Mutual Company, demanding $100,000.  Minnesota offered $10,000, which Ingalls rejected.  Ingalls won at trial against Goldstein and, after post-trial motions, Minnesota paid the judgment of $98,018.95 including interest. 

In the 93A suit, Minnesota argued on summary judgment that liability was never reasonably clear prior to the jury verdict. 

In Ingalls v. Minn. Lawyers Mut. Ins. Co., 2013 WL 3943537 (D. Mass.), the United States District Court for the District of Massachusetts noted under Mass. Gen. Laws ch. 176D liability encompasses both fault and damages.  If damages are contested in good faith, then liability is not reasonably clear.  "This is especially true in cases involving comparative negligence.  In such circumstances, even if fault has been determined, if the percentage of potential damages attributable to the defendant is the subject of a good faith disagreement, then liability is not clear." 

The court held that although Goldstein's negligence was clear, the damages in the malpractice action were never reasonably clear prior to trial.  Ingalls' 93A demand letter did not lay out damages of $100,000, and her discussions of damages during discovery in the malpractice action continually evolved and involved future damages.  There was no evidence of actual out of pocket damages.  Moreover, there was always the possibility that her damages would be reduced by a comparative negligence finding. 

The court granted summary judgment to Minnesota, holding that it was impossible to conclude from the record that no reasonable insurer would have failed to settle the case.  

Interesting article on captive insurers

Forbes has an interesting article on captive insurers.  The main point is that captive insurers should actually insure actual risk, or else they are simply a fraudulent tax shelter. 

Massachusetts Appeals Court holds that short-term can be of indefinite duration

My last post discussed Central Mut. Ins. Co. v. True Plastics, Inc., 84 Mass. App. Ct. 17 (2013), in which the Massachusetts Appeals Court addressed whether Sanchez, an employee of a staffing agency, was a temporary employee or a leased worker of the company to which she was assigned, True Plastics, Inc.  If she was a leased worker then, as discussed in my last post, the liability policy issued to True Plastics by Central Mutual would not provide coverage.  If she was a temporary worker, however, the policy would provide coverage.  

The policy defined "temporary worker" as a person furnished to meet "short-term workload conditions."  The policy did not define short-term workload conditions. 

In a decision that invites insurance fraud, the court held that the only consideration in determining whether a person was furnished to meet short-term workload conditions is what the employer intended at the time the worker was hired.  "Even if a worker's assignment ends up being lengthy, he or she will still be a 'temporary worker' within the meaning of the policy, provided the insured held an objectively reasonable expectation at the time that the worker was furnished [that the worker was hired] to meet a short-term workload condition. 

Central Mutual argued that "short-term" workload conditions cannot be indefinite.  The court disagreed, and held that a short-term workload condition need not be of finite duration. 

The court held that True Plastics had met its burden of proving that Sanchez was furnished to meet a short-term increase in its workload. 

Massachusetts Appeals Court provides guidance on burdens of proof

I posted here about the Massachusetts Superior Court decision in Central Mut. Ins. Co. v. True Plastics, Inc., 2009 WL 2603151.  In that case 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.  It denied summary judgment to both sides. 

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.

After that decision the case went to trial as a "case stated," which essentially means that stipulations and agreed-upon evidence was submitted to the judge for a decision.  The judge ruled in favor of True Plastics.  Central Mutual appealed.  In Central Mut. Ins. Co. v. True Plastics, Inc., 84 Mass. App. Ct. 17 (2013), because of the procedural posture the Massachusetts Appeals Court gave no deference to the trial judge's findings.

The court noted that the definition of "employee" that was referenced in the employer's liability exclusion had two parts.  The definition stated that leased workers are employees (and therefore excluded from coverage under the employer liability exclusion).  "Because this provision expands the universe of persons excluded from coverage, the insurer has the burden of proving that a person falls within its scope." 

The definition of "employee" excluded from its definition temporary workers.  Read in the context of the employer liability exclusion, temporary workers were an exception to the exclusion.  True Plastics therefore had the burden of proof that Sanchez was a temporary worker. 

The court thereby touched on a thorny problem. While it is axiomatic that an insured has the burden of proving that coverage is triggered, the insurer has the burden of proving that an exclusion applies, and the insured has the burden of proving that an exception to an exclusion applies, frequently the policy clause that determines coverage is not found in an exclusion or an exception, but a clause that may be "exclusion-like" or "exception-like" (my terms).  Or sometimes a coverage clause is phrased in such a way that certain occurrences are not exactly "excluded" from coverage, but are left out of the definition of coverage.

Although the issue the court was dealing with here was more straightforward, its analysis is phrased in such a way as to help with the harder issues:  An insured has the burden of proof on a policy clause that expands coverage, whether that clause is in an insuring clause,  an exception to an exclusion, or elsewhere the policy.   An insurer has the burden of proof on a policy clause that contracts coverage, whether that clause is in an exclusion or elsewhere. 

Welcome to the 188th Cavalcade of Risk

 I am honored to be once again hosting the Cavalcade of Risk, a round up of risk-related posts of all sorts from around the blogosphere.

In reviewing the submissions for this cavalcade, I was struck by their technical and detailed nature.  I learned from the posts about the history of health insurance in China, how the MTA in New York City is planning for the next storm surge, and who serves on the Massachusetts Board of Registration in Pharmacy. Thank you to all participants for sharing your wealth of knowledge. 

The mechanics of insurance fraud, and of fighting insurance fraud 

At the blog "From Bob's Cluttered Desk" Robert Wilson describes in his post "An Engaged Carrier Can Improve Care While Lowering Pharmacy Costs"  how a worker's compensation carrier worked together with physicians and state government to reduce prescription drug abuse and save money.

In Employer Fraud is the Wrong Way to Reduce Workers Comp Costs, Michael Stack at the Workers Comp Resource Center states many ways that employers try to cheat the workers compensation system, and what the consequences are of such fraud. 

The mechanics of Obamacare . . .

In Delaying the employer mandate has little effect on the ACA, the Colorado Health Insurer Insider discusses the details of the employer mandate under the Affordable Care Act (ie, Obamacare).  The post points out that very few employers will be affected by the mandate. 

. . .  And of health insurance in China

Jason Shafrin of Health Care Economist describes the history of Health Reform in China.

The mechanics of providing funding for storm surge losses

Clare Wilkinson writes in the Terms + Conditions blog  about New York MTA in Storm Surge Catastrophe Bond First.   The captive insurer of the New York Mass Transit Authority (MTA) has turned to the catastrophe bond market to strengthen its reinsurance protection. The $125 million catastrophe bond will provide MTA with cover solely for storm surge – a first in the history of the catastrophe bond market.

The mechanics of scams, and the mechanics of helping someone who has been scammed

In Scamster Tricks, Hank Stern, the fearless leader of the Cavalcade of Risk, writes at Insureblog about how he (hopefully) saved a woman from being scammed by a fake health insurance agent.

The mechanics of obtaining life insurance despite a preexisting condition

In Life Insurance with Pre-existing Conditions. Jeff Rose at Life Insurance by Jeff states options for you if you have a preexisting condition and want life insurance. 

The mechanics of regulating pharmacists

At Health Business Blog David Williams argues in Pharmacy Board Needs a Non-Pharmacist Majority that in light of tainted steroid injections originating in Massachusetts that caused many fatalities, the composition of the  Massachusetts Board of Registration in Pharmacy should be changed to include more non-pharmacists. 

The mechanics of insurance coverage for flat tires

In Does Car Insurance Cover Tire Damage, Financial Ramblings posts on when auto insurance does and does not cover flat tires. 

The host of the next Cavalcade of Risk is R. J. Weiss of Weiss Insurance Agencies.

SJC further limits title insurer's duty to defend

Accredited Home Lenders issued a loan, secured by a mortgage, to Karla Brown for her purchase  of a house, and bought a title insurance policy from First American which provided coverage to it and its successors and assigns.  The mortgage was subsequently assigned to Morgan Stanley, of which Deutsche Bank is the trustee. 

Three years after taking out the mortgage loan Brown filed suit seeking to rescind the mortgage and void her debt.  She alleged that she was the victim of a predatory lending scheme, that the defendants unilaterally misrepresented her income to justify higher interest rates and higher monthly payments, and that they coerced her into accepting loans that she could not afford. 

Deutsche Bank requested that First American defend its mortgage interest.  First American denied the claim.

In Deutsche Bank Nat'l Ass'n v. First Am. Title Ins. Co., 465 Mass. 741 (2013), the court examined First American's duty to defend.  It turned to the very problematic decision in  GMAC Mortgage, LLC v. First Am. Title Ins. Co., 464 Mass. 733 (2013), which I discussed (and strongly criticized) here.  That case held that a title insurer, unlike a liability insurer, does not have duty to defend all claims in a complaint against an insured if less than all the claims are covered by the policy.  

In Deutsche Bank the court further ate away at a title insurer's duty to defend.  It held that unlike a liability insurer a title insurer does not have a duty to defend simply because the allegations in the underlying complaint are reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the policy terms.  "Application of this standard threatens to sweep a whole host of uncontemplated risks into the ambit of title insurance.  . . .  To avoid such an aberration, we conclude that a title insurer's duty to defend is triggered only where the policy specifically envisions the type of loss alleged." 

The supposedly new standard stated by the court for title insurers is not new; it is the standard for liability insurance.  There is no duty to defend where a complaint does not allege a covered loss.  That is the meaning of the "state or adumbrate" standard.  It's odd and disturbing that the court does not understand this.

What the court really meant was that even if a complaint states or adumbrates a covered loss, a title insurer does not have a duty to defend if the covered loss is not the main thrust of the complaint.  That was made clear when the court turned to the allegations asserted by Brown. 

The court noted that the policy covers loss or damage sustained or incurred by the insured by reason of the "invalidity or unenforceability of the lien of the insured mortgage upon the title."  The policy provided that First American would defend the insured "in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against." 

The court held that Brown's allegations did not assert invalidity or unenforceability of the lien.  She alleged the debt should be voided because she was the victim of a predatory lending scheme, and that she was entitled to rescind the security interest and void the loan indebtedness. 

The court held, "Where the substance of Brown's complaint is concerned with the validity of the underlying loan and whether it was procured by a 'predatory lending scheme,' not whether the mortgage was improperly executed, improperly recorded, or otherwise procured by fraud, we conclude that its claims were not specifically envisioned by the terms of the title insurance policy.  Consequently, the allegations of the complaint fall outside the scope of the policy."

In a footnote, the court stated, "We do not construe the complaint to allege that the mortgage instrument itself was forged or that its execution was the product of fraud.  Assuming such a claim had been made in the present dispute, it might have been specifically excluded by Exclusion 3(a), which denies coverage to defects created by the insured."

The court noted that Brown's attempt to rescind the security interest was only a "collateral consequence" of the main relief sought, voiding the loan indebtedness.  "We are aware that, if Brown prevails and her underlying debt is extinguished, this would have the practical effect of dissolving Deustche Bank's mortgage interest, insofar as there would be no debt to secure.  However, given that Deutsche Bank and its predecessors in interest, rather than First American, were in the best position to ensure that the underlying debt was valid, it is for them to bear the burden of any loss."

As a matter of public policy I like the result of this decision.  Predatory lending is a scourge on society, and mortgagees are complicit in its widespread use.  There should not be insurance coverage for claims alleging it.

But the lack of insurance coverage should come from an exclusion, perhaps Exclusion 3(a), referenced by the court, or an intentional acts exclusion or the like.  There is no need to eat away at the duty to defend or to make distinctions without a difference. 
 

U.S. District Court applies continuous trigger, holds that under Boston Gas insured is responsible for proportionate share of defense costs

D.N. Lukens, Inc. was a a defendant in several suits alleging harm from exposure to toxic substances owned, supplied, sold or controlled by Lukens.  

While one of the suits, Mastrogiacomo, was pending, the Boston Gas decision was handed down.  In that decision, the Supreme Judicial Court of Massachusetts surprised everyone by holding that long-tail losses would be allocated on a pro rata time-on-the-risk method, instead of by a joint and several liability method.  The SJC also held that the insured will bear a proportionate share of the loss for any time period during the long-tail loss that no coverage is available. 

Utica Mutual Insurance Company, Lukens' insurer, informed Lukens that under Boston Gas Lukens was responsible for its pro rata share of any settlement or judgment because there were periods of time during the risk exposure that Lukens was uninsured.  Utica informed Lukens that it was conveying settlement authority to counsel in an effort to resolve the case prior to trial.

Lukens informed Utica that it believed it was insured for all relevant periods and asked for time to search for additional insurance coverage.  (Such a situation is not unusual in long-tail losses.  That's why everyone should keep copies of every liability policy ever issued to them, forever, in a place where they can be found.  Otherwise, after staff turnover and changes of location and changes of insurance agents and changes of insurers, how will they know what policy they had fifty years ago?)

Utica nevertheless settled the Mastrogiacomo lawsuit for $145,000, and calculated that $14,964 of that amount was attributable to Lukens.  That amount remains unpaid.

Lukens also sought coverage from Utica for asbestos claims filed against it.  Utica agreed to indemnify Lukens for its time on the risk and reserved the right to seek contribution from Lukens for uninsured periods.  Based on that reservation, Lukens sought to take control over the defense in the asbestos cases. 

In Graphic Arts Mut. Ins. Co. v. D.N. Lukens, Inc., 2013 WL 2384333 (D. Mass.), Utica sought summary judgment. 

The court held, first, unsurprisingly, that the injuries alleged were long-tail losses that came within the Boston Gas analysis. 

The court noted that Boston Gas did not resolve the issue of triggers of coverage.  Triggers of coverage determine which policy periods are triggered by a long-tail loss.  There are four basic theories of triggers of coverage: manifestation, injury-in-fact, exposure, and continuous.  Massachusetts courts have declined to adopt a single theory, holding that which trigger applies depends on the circumstances. 

The court held that the continuous trigger method most accurately reflects the reasonable expectations of the insured.  Under that method a loss occurs from the time of exposure to a hazardous substance to the time when physical harm from such exposure becomes manifest.  It also noted that in the case before it the continuous trigger would provide Lukens with the greatest amount of insurance coverage, and implied that that was one reason to apply  that trigger. 

The court then turned to whether Lukens must contribute its proportionate share to the settlement in the Mastrogiacomo suit.  "What is troublesome .. . is the fact that a settlement was reached without  the input or acceptance from Lukens."  The court held that in such circumstances Lukens was not required to contribute to the settlement.  It noted that Boston Gas contemplates the written consent of all parties to the settlement.  It declined to grant summary judgment to Utica on a 93A count arising its actions with respect to the settlement. 

Lukens argued that in the asbestos cases Utica was barred from disclaiming its duty to indemnify because it refused to relinquish to Lukens control over the litigation even though Lukens would be assigned over 60 percent of the indemnity allocation. The court's analysis of the issue was somewhat murky, but it appears to have held that Lukens was not entitled to control the defense but that it was responsible for its proportionate share of the costs of defense. 

The court denied summary judgment on the issue of the actual allocation of loss, on the ground that there was a material dispute of fact over the underlying claimants' exposure to asbestos. 

Mass. Appeals Court holds that GL policy effectively excludes coverage for negligent supervision of driver

Kimberly Pereira, an employee of R. Squared, provided support services to Dennis Pinto, who had been diagnosed with dementia.  Pereira drove Pinto to a restaurant in a car owned by Pinto's wife.  At the restaurant Pereira consumed alcohol and became intoxicated.  She subsequently crashed the vehicle, and Pinto was seriously injured.

Pinto's family sued Pereira, R. Squared, and R. Squared's principals.  The claims included liability under respondeat superior against R. Squared and its principals, and negligent hiring, training, supervision or retention. 

FSIC provided general liability coverage to R. Squared.  It disclaimed coverage on the basis of an automobile exclusion.   That exclusion provided, "This exclusion applies even if the claims against any insured allege negligence or other wrongdoing in the supervision, training or monitoring of others by that insured, if the 'occurrence' which caused the 'bodily injury' or 'property damage' involved the ownership, maintenance, use or entrustment to others of any . . . 'auto"  . . . that is owned or operated by or rented or loaned to any insured." 

The FSIC policy also contained a severability clause, under which the policy applied "separately to each insured against who claim is made or suit is brought." 

Pilgrim provided auto coverage to R. Squared.  It settled the suit.  FSIC filed a declaratory judgment action, seeking a declaration that Pilgrim had no right to contribution or subrogation from it. 

In First Specialty Ins. Co. v. Pilgrim Ins. Co., 83 Mass. App. Ct. 812 (2013), the court distinguished the FSIC policy from  policies interpreted in earlier cases.  The earlier cases had similar facts.  The court found coverage in those cases because of the severability clauses of the policies. 

In First Specialty the court distinguished the policies in those earlier cases, because the FSIC policy stated that the auto exclusion applied even if the claims against any insured allege negligence in the supervision or hiring of others by that insured.  That language was sufficient to make the severability clause ineffective with respect to the exclusion.  The court speculated that the clause was added to address the earlier cases which had found coverage. 

U.S. District Court interprets arbitration clause, family member exclusion

A 13 year old died while on a fishing boat owned by his grandparents.  Shortly after the accident the grandparents filed a statement of loss with their yacht insurer, Northern Assurance. 

Northern denied the claim on the basis of an exclusion "for any liability between or among 'family members.'"  The policy defined family members as "persons  related by blood, marriage or adoption (including a ward or foster child)." 

Almost three years after the child's death, his father, who  was the previous husband of the insureds' daughter and executor of the child's estate, filed a wrongful death suit against the insureds.  The insurer filed a complaint for declaratory judgment seeking a declaration that the family member exclusion excluded coverage.

The policy contained an arbitration clause which (supposedly) required the insureds to make a demand for arbitration over "whether the claim is payable or about the amount due under the policy" within one year of the loss or damage.

My first reaction when I read the arbitration clause was:  What????  Without going into the ethics of arbitration clauses in insurance contracts, the tort statute of limitations is three years.  Often insureds will not even be aware that the insurer will dispute coverage until after suit is filed and a claim for coverage subsequently made.  If suit is filed more than a year after accident, the insureds would lose the right to dispute the insurer's coverage position.  Here, although the insureds knew shortly after the accident that the insurer intended to deny coverage, no suit was filed against them until almost three years after the loss.  It would make no sense for them to seek arbitration over policy interpretation when no suit has been filed against them. 

You would typically see such an arbitration clause with respect to first party-claims, such as if the insured's boat was damaged.  They would presumably know immediately of the loss and would be in a position to make a claim.

Indeed, there is indication in the decision that the clause applies only to first party claims.  The decision quotes the arbitration clause as "[I]f [Mr. and Mrs. Wells make a claim under this policy, and [Northern Assurance] disagree[s] about whether the claim is payable or about the amount due to [Mr. and Mrs. Wells] under the policy, the disagreement must be resolved by binding arbitration."

Unless the policy is a rare indemnity policy (in which the insurer reimburses the insureds after they have paid a loss out of pocket), in a third party claim no amount will ever be due to the insureds.  The amount due is to the claimant, in this case the grandson's estate. 

The fact that the insurer filed the declaratory judgment action indicates that it believed the arbitration provision applied only to first party claims.  Otherwise, it would have simply informed the insureds that they had waived their right to dispute its denial of coverage, and forced them to file suit if they wanted to pursue the issue.  Or they would have at least made the waiver argument in their declaratory judgment complaint. 

In Northern Assurance Co. of Am. v. Wells, 2013 WL 2250985 (D. Mass.), the insureds moved to dismiss the insurer's declaratory judgment action, arguing that the insurer was required to bring the coverage issue to arbitration.

The court held that the insureds waived their right to arbitration by failing to file a demand for arbitration within one year.  

The court then turned to the family member exclusion.  The question before it was which individual's family member status is relevant in a wrongful death case, that of the decedent or the estate's representative.  If it is the decedent's status that matters, then the family member exclusion would exclude coverage because the decedent was the grandson of the insureds.  If it is the estate's representative, then the exclusion would not apply because the representative was the insureds' former son-in-law and therefore not within the definition of the exclusion.

The court held that it is the decedent's status that matters for purpose's of the exclusion, not the estate's representative.  While I agree with the court as a matter of common sense, the definition of family member for the exclusion is sorely lacking in specificity.   Pretty much all of us are related by blood or marriage if you go back far enough.  What if the child killed had been a grand-nephew?  A second cousin?  How far does it go? 

The new Federal Insurance Office has issued its first annual report

As an attorney practicing on the ground in insurance coverage issues, I didn't find much of interest.  It is a combination of too specific (wind speed of Hurricane Sandy) and too general ("insurers and reinsurers may try to modify business models to reduce exposure to certain catastrophic risks," but no discussion of what those modifications may be  or if the government should take any position with respect to such modifications) to be of much help.

You can see the report here. 

US District Court stays bad faith claim until after reference proceeding

As I wrote about here, as required by statute Massachusetts homeowners policies require that a dispute about the value of first-party property damages go to an arbitration called a reference procedure.

In Santos v. Preferred Mut. Ins. Co., __ F. Supp. 2d __, 2013 WL 1633107 (D. Mass.), the plaintiff insured filed suit over damages as well as bad faith practices prior to a reference procedure. 

The insurer argued that summary judgment should enter for it on all counts due to the failure to begin with a reference procedure even though the reference procedure would not determine the bad faith counts.  The court took a much more reasonable approach, holding that the case should be stayed until after a reference proceeding. 

Jeff Rose hosts the most recent Cavalcade of Risk

Thanks for featuring my post on the Terrorism Risk Insurance Act. 

Massachusetts Appeals Court admirably untangles interstate PIP web

One of the most annoying issues in insurance coverage is how PIP statutes in various states interact with one another.  If a Massachusetts driver is injured by a Virginia driver in Florida, does PIP apply?  Does the PIP tort limit apply?  Does the PIP offset apply?  Does the intercompany reimbursement scheme apply?  What if a driver from Toronto injures a pedestrian in Massachusetts? (I mention the latter example because I represented a Toronto driver in just such a circumstance.  We won on liability.  The plaintiff's attorney later told me that if he had understood that the PIP offset would apply he would not have taken the case to trial because it would have lowered the potential damages by too much.) 

I frequently receive calls from adjusters wondering if I can answer off the top of my head a question about the application of PIP to an interstate situation.  I never can, because all the details matter and a change in details -- the home state of the other driver, for example -- can change the answer.  It often requires extrajurisdictional research, and even then there is often no clear answer.  If there is an answer, it will take a long time to figure out what it is, because PIP statutes are crazy hard to decipher and typically do not have a lot of case law interpreting their application to interstate accidents.  And with very limited exceptions the most money that could ever be at stake, under the Massachusetts PIP statute, is $8000.00.

The Massachusetts Appeals Court recently applied notable common sense to an interstate PIP dispute.

David Allen was driving a car insured by Commerce under a Massachusetts policy when he was involved in a collision in Holyoke.  Julio and Maria Alvarado were in the other car, which was insured under a New York policy by Peerless.

The Alvarados were injured and received no-fault benefits under the New York PIP scheme, which has a limit of up to $50,000 covering medical bills and lost wages.

Commerce sought a declaratory judgment that the PIP offset would cover the entire amount of PIP coverage the Alvarados received.  The Alvarados argued that the Massachusetts PIP statute creates an exemption only for PIP benefits received from a Massachusetts insurance policy, not a New York insurance policy.

In Commerce Ins. Co. v. Alvarado, 83 Mass. App. Ct. 604 (2013), the court held that the objective of the Massachusetts PIP scheme is to avoid duplicative recovery.  Very sensibly, the court held that Commerce is entitled to an offset for the benefits the Alvarados received from the New York policy.  Even more sensibly, the court ruled apparently sua sponte that Commerce must reimburse Peerless for the PIP benefits the Alvarados received from Peerless. 

The Terrorism Risk Insurance Act should be amended

Since the Boston Marathon bombings, the hot topic in insurance coverage circles has been terrorism insurance.  I was interviewed by Massachusetts Lawyers Weekly here on the subject. 

After the events of September 11, 2001, insurers started excluding terrorism risks from their policies.  In response, the federal government passed the Terrorism Risk Insurance Act ("TRIA"), under which the federal government acts as a "reinsurer" (basically an insurer's insurer that steps in if losses become too high).  As I noted to Lawyer's Weekly, for the coverage to kick in, the Secretary of the Treasury must certify that an incident was an act of terrorism.  If that happens, then businesses who purchased terrorism coverage will be covered, and those who did not purchase it will not be covered.  If the event is not declared terrorism then -- presumably but not definitely -- neither the terrorism endorsement nor the terrorism exclusion would apply, and coverage would be determined under other policy terms.

So far, the Secretary of the Treasury has not made a determination one way or another, and there is no deadline by which he must do so.  The Boston Globe has an article on the issue here. 

To be clear, terrorism insurance is unlikely to affect third-party claimants -- the people who were injured or relatives of those who were killed in the bombings.  Third-party insurance only applies if the insured was negligent.  While some lawyers would no doubt be willing to explore a theory that the Boston Athletic Association -- the organization in charge of the marathon -- provided insufficient security, most of the injured will probably seek compensation from OneFundBoston, a nonprofit organization that has been set up to compensate the injured in a similar manner to the September 11 Victim Compensation Fund.  (You can donate to OneFundBoston here.)

Terrorism insurance will cover first-party claims by businesses who purchased the endorsement  whose property was damaged in the bombings and who lost income because of closures after the bombings. 

The events in Boston are the first time that terrorism insurance has become an issue since TRIA was passed, and they have brought to light flaws in the legislation.  Businesses who did not purchase the insurance -- most of those affected by the marathon bombings -- are advocating that the government not declare the bombings to be an act or terrorism, because such a declaration will mean that they don't have coverage for their losses. 

TRIA is set to expire in 2014, and the debate over whether it should be renewed is underway.    According to this article in Property Casualty 360, the Insurance Information Institute favors renewal of the act because insurers will simply exclude terrorism coverage if the act is not renewed.  The Consumer Federation of America opposes renewal because it allows insurers to charge premiums without taking on risk (since losses are paid by the federal government).

The events in Boston have shown us that TRIA needs to be amended.  Its unintended consequence is that the federal government has been put in the untenable policy position where if it declares an act to be terrorism, many businesses will lose out on insurance coverage. 

The way to avoid that is to amend the Act.  The terrorism endorsement should be made an expected, even mandatory, part of general liability policies and no additional premium should be charged for it.  If claims are made, the government would pay insurers a fee to administer them. 

The solution makes sense because it would acknowledge that terrorism is an attack on our country as a whole.  It is not right that only certain, random businesses -- those that happen to be on a particular block of a particular street -- should bear the financial loss of such attacks.  The businesses would have their losses paid by the government, which is funded by the entire country. 

Moreover, the solution would address the concerns of both the Insurance Information Institute and the Consumer Federation of America.  Insurers would continue to provide terrorism insurance as part of their policies.  They would be paid for their actual work of administering claims.  The government would be freed to make a determination of whether an act was terrorism based on whether or not it actually was terrorism, not on whether such a determination will cause businesses to close. 

SJC issues problematic decision on title insurers' duty to defend

The Supreme Judicial Court of Massachusetts has held that a title insurer does not have a duty to defend an insured against all counts of a complaint, and that a title insurer engaging in litigation to cure a title defect covered by the policy does not have a duty to defend the insured against reasonably foreseeable counterclaims.

Elizabeth Moore lived with her husband Thomas Moore.  The title to the house was in Thomas's name.  In 2001, as part of refinancing, Thomas executed a note and mortgage to a predecessor of GMAC, which obtained a First American title insurance policy. At that time he conveyed the property to himself and Elizabeth. 

Due to an error in how the paperwork was filed, when Thomas died in 2007 the property vested in Elizabeth, to the exclusion of GMAC. 

First American could have resolved this title defect through negotiation or by initiating litigation.  It chose to initiate litigation on behalf of GMAC against Elizabeth.  Elizabeth brought counterclaims against GMAC, alleging intentional infliction of emotional distress, violation of Mass. Gen. Laws ch. 93A, and money had and received for mortgage payments alleged to have been made to GMAC in error.

GMAC sought from First American costs incurred in defending the counterclaims. 

In GMAC Mortgage, LLC v. First Am. Title Ins. Co., 464 Mass. 733 (2013), the Supreme Judicial Court of Massachusetts assumed that the counterclaims were not causes of action that were covered by the insurance policy.  It addressed whether First American was nevertheless obligated to defend. It noted that the situation was analogous to a complaint that alleges some causes of action that are covered by an insurance policy and other causes of action that are not covered.  In those situations, liability insurers have a duty to defend the whole action.  (The court called this the "in for one, in for all" rule; I generally refer to it simply as the duty to defend.) 

The court held that the in for one, in for all rule of general liability insurance defense does not apply to title insurance, because title insurance is fundamentally different from general liability insurance.  Title insurance does not insure against future risks; it insures against risks (clouds on a title) that were in existence (but unknown) when the policy was issued. 

The court's analysis is incorrect.  Liability insurance often covers risks that are in existence but unknown when the policy was issued.  Long-tail losses come to mind.  Those are claims for environmental contamination or asbestosis, for example, where the loss occurred but was undiscovered over a long period of time.

The court continued, "in light of the limited purpose and scope of title as compared to general liability insurance, title insurers should not be obliged to defend against non-covered claims just because they may be asserted in litigation that also implicates title-related issues to a limited extent.  Moreover, because title issues are discrete, they can be bifurcated fairly easily from related claims, . . . thus, the central policy behind that 'in for one, in for all' -- that parsing multiple claims is not feasible -- is not implicated to the same extent in the title insurance context as in the general liability insurance context."

The court also held that a title insurer has no duty to defend counterclaims that were a reasonably foreseeable response to a choice by the title insurer to institute litigation. 

Somewhat offensively, in my view, the court noted that "because the issues covered by a title policy are relatively discrete, an attorney for a title insurance company (who typically specializes in real property issues) feasibly can defend only the title-related issues."  While I am sure there are some attorneys for title insurance companies whose practices are limited to real estate litigation, title insurance companies are perfectly capable of hiring attorneys who have knowledge of both real estate litigation and tort litigation deriving from real estate disputes.  But because the court thought that would be asking too much of title insurance companies, it declined to impose a complete defense obligation on them. 

It also declined to impose that obligation because a "reasonably foreseeable" rule of title litigation "would quickly become a work-around to our conclusion that 'in for one, in for all' does not apply to title insurance."  (Perhaps; but so what?) 

In what reads to me as doublespeak, the court wrote, "we disagree with GMAC that it is the litigation initiated by a title insurance company that exposes the risk of third party claims.  Instead the exposure to risk comes from the title defect itself, not its method of cure." 

The court softens its position somewhat when it notes that in this case the counterclaims were a result of the fact that GMAC continued to pursue foreclosure when it knew of the title defect.  "Moore may very well have sued GMAC for such intentional conduct even if First American had attempted to cure the title defect through negotiation s opposed to litigation.  For this reason, we are unwilling to go so far as to say that First American invited the liability of Moore's action."  That's a fine statement -- but it contradicts the court's holding that a title insurer has no duty to defend counterclaims that are a reasonably foreseeable response to litigation the insurer chose to litigate.  The court is now saying that in this case the counterclaims were not a reasonably foreseeable result of the insurer's litigation -- they were a result of the insured's, not the insurer's, actions.

The court further softened its position by stating that a title insurer may have a duty to defend an insured against compulsory counterclaims. 

Thanks to Mike Tracy at Rudolph Friedmann for bringing this case to my attention when it was first issued.