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March 2019

 

Please be sure to sign up for the FDCC Winter Meeting. I was told that the hotel is filling up. https://thefederation.site-ym.com/events/EventDetails.aspx?id=1079023

Our programs are set for both Austin and Sun Valley.  In fact, at Austin, we will be part of the plenary.


Our recruitment is lagging. Some on the call suggested that recruitment would proceed better if the review process went faster. Even allowing for FDCC’s high standards and strict scrutiny, it was suggested that we should be quicker. That said, if you have someone, please send an email to both our recruitment vice chair (Kim Jackson) and me:
KJackson@boviskyle.com Alan.Rutkin@rivkin.com

Our expert guide lives on, but its roll-out awaits FDCC’s roll-out of a new website. The current version is at this link.
https://rivkin.sharefile.com/d-s02230915e164d598

 

Finally, we have an insurance law year-in-review, California-focused, from Bob Olson (Greines, Martin, Stein & Richland LLP).  Thank you Bob!

 

 

 

I.             INSURANCE

A.           Coverage

1.            Scope of Coverage

1.        Liberty Surplus Ins. Corp. v. Ledesma & Meyers Construction Co. (2018) 5 Cal.5th 216.

Claimant sued a contractor constructing school premises alleging that she was molested by one of its employees and claiming negligent hiring and supervision against the contractor. The policy defines a covered “occurrence” as an “accident.” The California Supreme Court held that as to the insured employer, a claim based on the negligent hiring, retention, and supervision of the employee who intentionally injures a third party is an “accident” within the meaning of coverage. Although the employer intended to hire the employee, it did not intend the act that caused injury. For the purposes of insurance coverage the necessary causation triggering coverage for the insured is the substantial factor tort standard.  If hiring and supervision are alleged to have been a substantial factor, they are sufficient to trigger coverage for injury caused by an accident.

 

2.        Heckart v. A-1 Self Storage, Inc. (2018) 4 Cal.5th 749, California Supreme Court.

Plaintiff rented a storage unit. The rental agreement required the renter to insure the stored property with the facility disavowing any liability or, for $10 per month, the facility would assume the risk for the first $2,500 in damage. The California Supreme Court held that the $10 per month alternative did not meet the statutory definition of insurance which does not reach indemnification agreements between parties to a transaction if the indemnification agreement is incidental to the principal object and purpose of the parties' transaction. In this case, the indemnification agreement was incidental to the principal object and purpose of renting storage space.

 

3.        Doyle v. Fireman’s Fund Ins. Co. (2018) 21 Cal.App.5th 33, Fourth District, Division Three.

Insured bought policy that covered property damage. Insured bought $18 million of supposedly rare vintage wine. Seller turned out to be a con man who was filling old bottles with cheap wine and putting expensive labels on them. The Court of Appeal held that the fraud loss, lost expected value, was not property damage. Property damage means physical injury, not economic loss from fraudulent misrepresentation.

 

4.        Thee Sombrero, Inc. v. Scottsdale Ins. Co. (2018) 28 Cal.App.5th 729, Fourth District, Division Two.

After a fatal shooting, a nightclub’s conditional use permit was revoked allowing it only to be operated as a banquet hall. It sued the insured security company claiming that the security company’s negligence had allowed the shooting which caused the loss of its conditional use permit. The Court of Appeal held that the loss of the conditional use permit constituted “property damage,” not mere economic loss, within the meaning of the security company’s liability policy which defined “property damage” to include loss of use of tangible property. Loss of any significant use of the premises constitutes “loss of use of tangible property”; the loss of all uses is not required.

 

5.        Albert v. Truck Ins. Exchange (2018) 23 Cal.App.5th 367, Second District, Division Seven.

Claimant asserted that the insured, on the insured’s own property, blocked (i.e., put a fence across) an easement for ingress and egress of the claimant’s adjoining property. No claim was made that the insured in any way physically occupied the claimant’s land. The Court of Appeal, disagreeing with Sterling Builders, Inc. v. United Nat. Ins. Co. (2000) 79 Cal.App.4th 105, held that the carrier owed a duty to defend under the policy’s “personal injury” coverage for “wrongful eviction, wrongful entry or invasion of the right of private occupancy.” It found the phrase “invasion of the right of private occupancy” to be ambiguous and susceptible to including non-physical invasions of rights in real property.

 

6.        Lat v. Farmers New World Life Ins. Co. (2018) 28 Cal.App.5th 212, Second District, Division One.

A rider to a universal life insurance policy waived premium payments if the insured established total disability, but the insured had to pay premiums until that determination was made and the rider ended with the policy itself. The carrier notified the insured that policy would be canceled for nonpayment of premiums. The policy lapsed. Within a month after the cancelation the insured notified the carrier that for the last year she had had terminal cancer. She died a month later. The carrier denied coverage on the ground that the rider had by its own terms ended before the insured provided notice of her disability. The Court of Appeal held the policy and rider to be “analogous to” an occurrence liability insurance policy (as distinct from a claims-made-and-reported policy) such that the notice-prejudice rule applied to revive the canceled policy and deem the unpaid premiums to have been waived. (See Pitzer College v. Indian Harbor Insurance Company, pending California Supreme Court case no. S239510 [insurance policy contains New York choice of law and provision requiring carrier consent before the insured incurs any expense; the California Supreme Court will decide whether the notice-prejudice rule is a fundamental California public policy for choice-of-law purposes and, if so, whether it applies to such an expense consent provision].)

 

7.        Jones v. IDS Property Casualty Ins. Co. (2018) 27 Cal.App.5th 625, Third District.

After an auto accident, plaintiffs obtained a stipulated judgment for $1.35 million in favor of the injured husband and $150,000 in loss of consortium for his wife. The carrier paid plaintiffs its $250,000 per person limit. Plaintiffs sued claiming that there was a separate policy limit available for each plaintiff. The policy specified that “[t]he bodily injury liability limits for each person is the maximum we will pay as damages for bodily injury, including damages for care and loss of service, to one person per occurrence.” The Court of Appeal held that the language adequately provided that a spouse’s claim for loss of consortium is subject to the same “per person” limit as the injuries suffered by the other spouse in an auto accident even though the policy did not expressly refer to the aggregation of consortium claims as such. “[B]odily injury … to one person per occurrence” includes derivative loss of consortium claims.

 

2.            Exclusions

8.        All Green Electric, Inc. v. Security National Ins. Co. (2018) 22 Cal.App.5th 407, Second District, Division Eight.

The insured was sued because a loose bolt in a cabinet it installed caused medical equipment to malfunction. The medical equipment was not damaged, it just did not operate correctly. The Court of Appeal held that the claim fell within the “impaired property” exclusion—property of which the insured’s work is a component or property that has not been physically injured, that is not working properly because of some defect in the insured’s work.

 

3.            Excess And Other Insurance

9.        Montrose Chemical Corp. v. Superior Court, California Supreme Court pending case no. S244737.

Insured is subject to continuous property damage claims spanning several years arising from its production of DDT. It purchased multiple layers of insurance over the years. The insured wants to “selectively stack” the insurance so as to select particular years’ excess policies to respond after those years’ primary policies had exhausted even though other years’ primary policies may not have exhausted. At issue is whether “horizontal exhaustion” is required, that is, whether the insured has to exhaust excess insurance at lower levels for all periods before obtaining coverage from higher level excess insurance in any or, instead, whether the insured can selectively require just vertical exhaustion, that is, exhaustion of underlying policy limits in one policy year triggering the excess policies in that policy year.

 

B.           Bad Faith, Cumis, Contribution & Reimbursement

10.     PacifiCare Life & Health Ins. Co. v. Jones (2018) 27 Cal.App.5th 391, Fourth District, Division Three.

The Insurance Commissioner charged a health insurer with 900,000 violations of Insurance Code section 790.03. The Court of Appeal held valid the Commissioner’s regulations that (1) deem a single unfair act as a potential violation, (2) define the word “‘[k]nowingly’ “to include implied and constructive knowledge, and (3) define the word “‘[w]illful’” without requiring any specific intent to cause harm or violate the law. Any language in Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, that an “unfair claims settlement practice” must “refer to an insurer’s pattern of conduct, rather than to any individual act,” is dicta. A “prohibited ‘practice’ is an activity that occurs within the insurance industry generally. An insurer engages in such a prohibited ‘practice’ by committing the described act once or more than once.”

 

11.     Case v. State Farm Mutual Automobile Insurance Co., Inc. (2018) 30 Cal.App.5th 397, Second District, Division Four.

Plaintiff was involved in a vehicle accident. She sought both workers compensation benefits (she had been driving back from a work event) and uninsured motorist benefits from her personal auto carrier. Plaintiff informed the auto carrier of the amount that workers compensation had paid. The carrier declined to provide uninsured motorists payments until it received notice that all workers compensation claims had been fully resolved. The policy excluded coverage for bodily injury “to the extent [such coverage would] benefit[ ] [¶] ... any workers’ compensation ... insurance company.” The Court of Appeal held that until the carrier received confirmation that no further workers compensation benefits could be paid, a genuine dispute existed as to its obligation, defeating bad faith, regulations requiring prompt resolution of claims notwithstanding.

 

12.     Centex Homes v. St. Paul Fire & Marine Ins. Co. (2018) 19 Cal.App.5th 789, Third District.

In construction-defect litigation, a subcontractor’s carrier agreed to defend a developer as an additional insured under a reservation of rights. The carrier reserved the right to deny coverage for damage to the subcontractor’s own work or damage caused by other subcontractors not insured by the carrier. The carrier also reserved the right to reimbursement of costs incurred defending uncovered claims. The Court of Appeal held that the reserved rights did not trigger a Civil Code section 2860/Cumis right by the developer to select independent counsel. For a right to independent California counsel to arise, there has to be an actual conflict, not just a potential conflict. Rules of Professional Conduct, rule 3-310 does not require otherwise. The developer presented no evidence as to how the appointed counsel could adversely affect a coverage outcome.

 

13.     Strawn v. Morris, Polich & Purdy, LLP (2019) ___ Cal.App.5th __, First District, Division Two.

Defendant law firm represented a carrier in adjusting a suspicious fire claim. In doing so, the firm requested the insured’s tax returns. The insured properly objected on privilege grounds. Nonetheless, the insured’s accountant inadvertently disclosed the tax returns with other documents. The law firm sent the returns on to the carrier and a forensic accounting firm without letting the insured know of the inadvertent disclosure. At the time, a criminal arson prosecution had been dismissed but the insured had not yet sued for bad faith. The insured sued the law firm (along with suing the carrier for bad faith) alleging claims of invasion of privacy and financial elder abuse. The Court of Appeal held that the law firm’s communication of the tax returns to its client (and client’s expert) could fall within the litigation privilege but, as pleaded, an issue remained as to whether litigation was in fact contemplated, rather than just possible, in the period between arson prosecution dismissal and the insured’s bad faith suit. The invasion of privacy claim, thus, survived. The financial elder abuse claim, however, was effectively the same as a bad faith claim and therefore barred by the rule that an insured cannot sue an agent (the attorneys) for the carrier’s bad faith.

 

December 2018

 

The ADR section has been busy preparing for the upcoming Austin meeting where we will join with the INSURANCE COVERAGE section to present on the topic of arbitration disputes returning to Court.   

 

The moderator will be: Marie Chafe, Cornell & Gollub, Boston, MA

 

The speakers will be:

                Stephen Carter, Carter Perry Bailey, London, United Kingdom

                Sean Griffin, Dykema Gossett, Washington, DC

                Vicki Smith, Bodyfelt Mount, Portland, OR

                Paul Van Osselaer , VAN OSSELAER DISPUTE RESOLUTION PLLC, Austin, TX

 

                Arbitration clauses have been common place in many consumer transactions and  when they reach disputes that sound in traditional negligence, such as Nursing Home care, the Courts are  examining these provisions and the reaching a range of results.        The paper and the panelist will address these issues with practical insight supported by up to date legal research. 

 

                Please join us for this session.

 

The Sun Valley program is being designed to be more interactive.   John Trimble, of Lewis Wagner has agreed to sit in the mediator hot seat to talk about what he sees work from the cases he mediates.

  

The working title of this program is “ Thoughts  from the End of the Table.”   This is to interactive and  practical.    I am suggesting everyone read:   Getting to Yes: Negotiating  Agreement Without Giving In.   Available on Amazon  and in most everyone’s local public library.    This book from 1991 will help us  focus our time together.     I am putting together about 5-6 scenarios just in case the discussion is slow and please email me with your suggestions.    kay@basjlaw.com 

 

 

September 2018

 

Margulis Wins for Zurich


On September 5, Andy Margulis (Ropers, Majeski, Kohn & Bentley PC) got a nice win for Zurich.


Investigation began before policy started.  So, claim was first made before the policy period.  Coverage was not triggered.


Interestingly and somewhat geekily, the court also rejected policyholder’s request to enforce a “rational” broader view.  Court noted that policyholder had not shown the policy to be ambiguous.


Case is attached.  Jalbert v. Zurich, No. 17-12227 (D. Mass. Sept. 5, 2018).



O’Donnell Leads Austin Program


Barbara O’Donnell is leading our program for the winter meeting.  Panel will discuss legislative efforts to restrict ADR enforceability and other related topics.



DRI in December


Would you be interested in dining with Section Members during the December DRI meeting in NYC?  If so, please email me: Alan.Rutkin@Rivkin.com



Johnsen on Stormy Weather


Hurricane Florence may lead us to look back at the claim statistics from Harvey and Irma.  To that end, Jen Johnsen suggested a few links.


Here is an article about Harvey in the online Insurance Journal from 2/13/18:

 https://www.insurancejournal.com/news/southcentral/2018/02/13/480405.htm

Here is information from the FL Office of Insurance Regulation on Irma claims:
https://www.floir.com/Office/HurricaneSeason/HurricaneIrmaClaimsData.aspx

 

 

July 2018

 

Being in the lazy days of summer, the biggest section news is the upcoming annual meeting.  Maui should be great, and our section will contribute with a CLE led by David Zizik.

 

Beyond that, I did not receive any news for our monthly blog.  So, I’ll offer a thought of my own.

 

Cyber coverage cases, like other areas of law, are starting to evolve around a few recurring issues.  One of the issues is causation.  When does a loss result from computers directly?  In May, the 11th Circuit Court of Appeals, weighed in on this issue, and it sided with the insurance industry.  If you’re working in this area, you might spend a few minutes considering this case, Interactive Communications International v. Great American Insurance Co., 2018 U.S. App. LEXIS 12410.

 

The policy covered “loss of, and loss from damage to, money, securities and other property resulting directly from the use of any computer to fraudulently cause a transfer….”  The issue quickly became: what does “directly” mean.  And both policyholder and insurer were able to cite supporting cases, because two different approaches have evolved on this issue.

 

Policyholder argued for a “proximate cause” approach.  Under this view, if the use of the computer set in motion a chain of events that caused the loss, then the computer caused the loss “directly.”

 

Insurer argued for a literal approach.  To result “directly,” there must be immediacy between conduct and result.

 

The 11th Circuit adopted a methodology that insurers often endorse:  “[W]e look to the plain language of InComm’s policy.  It is a fundamental principle of Georgia law—and law more generally—that words in contracts ‘generally bear their usual and common signification.”  To that end, the court turned to dictionaries, and found that their theme is unmistakable: “one thing results ‘directly’ from another if it follows straightaway, immediately, and without any intervention or interruption.”

 

Key point is “resulting directly” has become a recurring important issue in this area.  Courts have gone both ways on this issue.  But Interactive is a big win for the good guys (insurers).

 


 

April 2018

Submitted by: Alan Rutkin

 

The Insurance Coverage Section is active!

 

Thank you Wystan Ackerman!  Our expert directory may be added to the FDCC’s website.  If you have not already done so, please add your thoughts through this link: https://www.surveymonkey.com/r/HGH9BZC

 

Maui Meeting Memo

 

Hawaii FDCC Members Wes Ching and Peter Olson are working feverishly to prepare our Section’s presentation at the Annual Meeting this summer in Maui, “Cyber Insurance: Reading Between the Lines of the ISO Forms Before the Attack Happens.”  David Zizik is moderating the panel, on which Peter and Wes will be joined by insurance guru Craig Uradomo of The Island Insurance Companies.  If any of you have information about real life examples of cyber attacks on law firms or corporations that you have been involved with, or local cases which provide examples of such incidents, or information/cases about coverage disputes arising from such incidents, please contact David at (401) 421-1238, or via email at dzizik@sulloway.com. Such information will be greatly appreciated!

 

 

Bad faith and CPA claims permissible against insurance claims adjusters in Washington

By: Vicki M. Smith, Bodyfelt Mount, Portland, OR

 

It’s not news that Washington has tough laws and regulations for insurers and claims handling practices.  A recent case from Washington’s Court of Appeals gives insureds another tool to use against insurers and its employees.

 

The Washington Court of Appeals, Division One, held that employee insurance adjusters can be held liable for bad faith.  Keodalah v. Allstate Ins. Co. and Tracey Smith, 2018 Wash App LEXIS 685 (Div 1, March 26, 2018). The court reasoned that the bad faith statutes provide that “all persons” involved in insurance owe a duty of good faith. That duty of good faith applied to insurance claims adjusters as well as the companies; therefore, bad faith claims are viable against claims adjusters.

 

This court disagreed with the previous decisions that distinguished between bad faith claims involved third-party claims companies and those involving claims adjusters directly employed by the insurer. This court found any distinction was not significant, as both are representatives of the insurer. Here, the named adjuster was an employee of the insured. 

 

The court also held that claims adjusters can be held liable for violations of the Consumer Protection Act (“CPA”).  The court rejected the adjuster’s argument that there must be a contractual relationship between her and the insured to establish such a claim.  Instead, the court held the CPA is intended to deter unfair or deceptive practices, is to be liberally construed, and applies to insurance adjusters.

 

One consequence of this case is that insureds may name in-state claims adjusters to defeat diversity and keep their cases out of federal court.  This case also serves as a reminder that insurers and claims adjusters must know and strictly adhere to Washington’s claims handling regulations and laws. And, unfortunately, despite all efforts, insurers and claims adjusters should not be surprised to be included in future Washington lawsuits.

 


 

March 2018

Submitted by: Alan Rutkin

 

The Insurance Coverage Section again asks for your support on our expert project.  Under Wystan Ackerman’s leadership, the Section is preparing a directory of experts. If you have already submitted information, thank you! If you have not yet submitted info, please click here to do so today.

 

Once we have enough material, we will ask FDCC to make our guide available through FDCC’s website.

 

At the FDCC Winter Meeting on Amelia Island, Jay Sever’s panel (pictured below) was truly a rousing success.  The seats were filled, and people stood in the back.  Also, Jay was a moderator who was really able to engage the audience as well as the panelists.  Congratulations!

 

 

At the Annual Meeting this summer in Maui, the Insurance Coverage Section will hold a panel presentation entitled: “Cyber Insurance: Reading Between the Lines of the ISO Forms Before the Attack Happens.”  The presentation will be moderated by David Zizik, and the panel will include FDCC members Wes Ching and Peter Olson, as well as Craig Uradomo of The Island Insurance Companies. The panel will take a practical look at what “cyber insurance” is and why law firms and businesses need it; the evolution of ISO and manuscript forms that cover such risks (and those that don’t) over the past 20 years; and some basic considerations for law firms and corporate legal departments to be thinking about when deciding about the specific coverage they need.  Audience participation will be encouraged!

 

 


 

 

February 2018

Submitted by: Alan Rutkin

 

 

Section Project on Experts

 

We again ask for your support on our expert project.  Under Wystan Ackerman’s leadership, the Section is preparing a directory of experts. If you have already submitted information, thank you! If you have not yet submitted info, please do so today through this link: https://www.surveymonkey.com/r/HGH9BZC

 

Stephen Carter on the Move

 

Stephen Carter has been accredited as an ARIAS arbitrator.  He already qualified as a Member of the Chartered Institute of arbitrators.  Last year he was also again listed in Chambers Guide as a Leading Individual in Reinsurance and in Legal 500 as a Leading Individual in Insurance and Reinsurance Litigation.  Congrats!

 

 

Traub Lieberman Wins Big for Insurer

 

Traub Lieberman Straus & Shrewsberry LLP partners Brandt W. Allen and Michael S. Knippen recently obtained dismissal for an excess liability insurer in Illinois state court. The case involved the availability of coverage for an underlying malicious prosecution claim filed against the insured. The coverage dispute arose from the alleged malicious prosecution of an individual for a 1993 shooting, which resulted in the individual’s 1994 conviction for murder, attempted murder and robbery. After nearly two decades of incarceration, the individual’s initial conviction was vacated based on an ineffective assistance of counsel argument. The individual was re-tried in August 2013, which resulted in a hung jury, and again re-tried in July 2014, which resulted in an acquittal. The individual subsequently brought suit against the City and various police officers involved with the individual’s 1994 trial and conviction. The City and the various officers sought insurance coverage for the malicious prosecution claim from its liability insurer from 1994 (when the individual was initially convicted), as well as its general and excess liability insurers from 2010 to 2014 (the years encompassing the individual’s re-trials and eventual exoneration). After the general and excess liability insurers denied coverage for the claim under the 2010-2014 policies, the City brought suit against those insurers seeking a declaration that their policies provided coverage for the individual’s claims.

 

While the coverage litigation was pending, the City and the individual agreed to a consent judgment against the City, which resolved the underlying malicious prosecution claim. The City and its insurer from 1994 agreed to pay a part of the agreed judgment amount and assigned collection of the remainder of the judgment to the individual to be collected solely from the general and excess liability insurers from 2010 to 2014. After the individual was added as an additional party plaintiff in the coverage action, the insurers moved to dismiss the coverage case arguing, in part, that the allegation of malicious prosecution against the City did not trigger coverage under the 2010-2014 policies. Specifically, the insurers argued that coverage is triggered for malicious prosecution claims when the initial prosecution is initiated and not when the individual is eventually exonerated. Thus, the insurers argued that the City was only entitled to coverage from its 1994 insurer, as that insurer provided coverage to the City when the individual was initially prosecuted. The City and the individual argued that the language in the policies defined personal injury to encompass the offense of malicious prosecution, which they equated with a completed tort or accrual of a cause of action. The City and the individual argued that the offense of malicious prosecution happened upon exoneration and thus, the insurers’ policies in effect when the individual was exonerated were triggered for the underlying malicious prosecution case.

 

The Court disagreed with the City and the individual and held that their argument was not supported by Illinois law or the terms of the insurers’ policies. The Court held that there was no ambiguity in the policy language nor a legal or factual basis to hold that coverage was triggered upon the individual’s exoneration. Following Illinois precedent and the majority opinion nationwide, the Court concluded that the coverage trigger for a malicious prosecution claim is the initial filing of the malicious action against the accused and not the action’s termination or the accused’s exoneration. The Court observed that while exoneration is a required element and a necessary condition precedent before the malicious prosecution claim accrues, it is not an occurrence that causes injury or ham within the meaning of the policy. According to the Court, to hold otherwise would impermissibly convert the insurers’ occurrence-based policies into claims-made policies. The City and the individual have appealed the ruling.

 

 

Marshall, Conway & Bradley Deliver a Win on Rarely Used Policy Provision

 

The following case upheld an insurer’s right to disclaim based on the insured’s failure to cooperate.

 

In Diego Fernandez v. Philadelphia Indemnity Insurance Company, 16-cv-2533, United States District Court, Southern District of New York (Magistrate Judge Judith C. McCarthy), the insured purchased a Collector Vehicle policy for a 1962 Chevrolet Impala with an Agreed Value of $165,000.  The vehicle was reportedly stolen and the insured demanded full policy limits based on the Agreed Value endorsement. 

 

Ordinarily, under an Agreed Value policy, the insured has no real defenses and must pay the “agreed value” in the event of a covered loss, such as a theft.

 

However, an insurer is still entitled to investigate the claim and the insured must corporate in this regard, and an insurer may still disclaim if fraud is established. 

 

During the post-loss investigation, Philadelphia demanded routine documentation i.e., Bill of Sale; proof of upgrades to the vehicle etc.  The insured responded with production of a Bill of Sale and multiple invoices documenting upgrades to the vehicle that exceeded $200,000.  The insured refused to produce tax returns or proof of actual payment of the upgrade invoices.  Philadelphia ultimately determined that the documentation produced was phony and created after the fact.  Philadelphia disclaimed coverage based upon the fraud provision and breach of the corporation clause. 

 

The insured filed suit contending that under an agreed value policy, once his ownership of the vehicle and theft were established (which they were) the policy requires payment.  The District Court disagreed. 

 

In a well reason the decision, the District Court, applying New York law, recognized that “an insurance company bears a heavy burden” in disclaiming based on the failure to cooperate.  To establish lack of cooperation, the insurer must prove: (1) it acted diligently in seeking to bring about the insured’s cooperation; (2) its efforts were reasonably calculated to obtain the insured’s cooperation; and (3) the attitude of the insured was one of “willful and avowed obstruction.” Thrasher v. U.S. Liability Ins. Co., 278 N.Y.S.2d 793 (1967).

 

The District Court concluded that Philadelphia satisfied all three prongs.  It acted diligently in sending numerous letters and continued to follow-up even after the insured failed to respond.  Philadelphia also expressly warned that a failure to comply would jeopardize coverage.

 

With respect to third prong – “willful and avowed obstruction”, the Court was particularly expansive.  It should be noted that the insured was also quite aggressive in pressing this claim.  In fact, plaintiff’s own counsel, concerned that his client had or was perpetrating a fraud, retained his own personal ethics counsel – a fact that he disclosed to the Court. 

 

The District Court ultimately ruled, as a matter law, that the insured’s conduct constituted “willful and avowed obstruction.”  The District Court found that the insured had breached the cooperation clause by providing Philadelphia with false documents – a back dated bill of sale and invoices he “prepared” himself.  The District Court noted that a failure to provide “fair and truthful disclosures” constitutes a breach of the cooperation clause, as a matter of law. Nationwide Mut. Ins. Co. v. Graham, 713 N.Y.S.2d 602 (2000).

 

Despite the fact that plaintiff’s own counsel had advised the Court that the insured had “made-up” the invoices, he nonetheless was undeterred and pressed his case.  The insured contended that while the invoices themselves may not be genuine the actual work described on the invoices to upgrade the car was done.  The insured further contended that any potential misrepresentation was not material.  The insured also challenged Philadelphia’s right to even investigate this claim because it was an Agreed Value policy. The District Court rejected all of plaintiff’s arguments finding that plaintiff’s conduct did not amount to a “honest mistake” and the legitimacy of the bill of sale and invoices were “relevant and germane” to Philadelphia’s investigation.  The Court also determined that it was “too late” for the plaintiff to now attempt to cooperate by acknowledging the documentation was phony and, in effect, requesting an opportunity to prove his case in front of a jury.  The Court noted that cooperation was a “condition precedent” and is an absolute defense to an insurance claim. Blakeslee v. Royal Ins. Co. of Am., 1995 WL 122724 (March 22, 1995). The Court further stated that while the policy at issue required the insurer to demonstrate prejudice, New York is otherwise a “no prejudice” state in this regard. New York City Hous. Auth. V. Hous. Auth. Risk Retention Grp., Inc., 203 F.3d 145 (2000).

 

Fernandez is instructive for how a relatively benign policy condition can become a potent coverage defense.  The cooperation clause is infrequently asserted and even more rarely upheld by a Court.  Nonetheless, it should not be overlooked, especially when an insured is not being forthcoming in responding to routine and legitimate documents requests during the claim investigation phase.

 

 


 


January 2018

Submitted by: Alan Rutkin & Jay R. Sever

 

 

The following two recent cases involve interesting applications of business risk exclusions:



West Side Salvage, Inc. v. RSUI Indemnity Co., No. 16-3928, 2017 WL 6422107, at *1 (7th Cir. Dec. 18, 2017)

 

In West Side Salvage, the Seventh Circuit addressed the scope of the damage to property exclusion.  In the underlying tort action, the owner of a grain bin noticed that the

more Calendar

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2019 FDCC Winter Meeting - Austin, Texas

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FedTech U

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FDCC in London: Use of Visual Technologies in U.S. Courtrooms

7/29/2019 » 8/4/2019
2019 Annual Meeting

9/22/2019 » 9/24/2019
2019 Corporate Counsel Symposium (CCS)

11/6/2019 » 11/8/2019
2019 Insurance Industry Institute (I-3)

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