Insurance insolvency and allocation-of-loss

A few years back, we wrote about the New Jersey Supreme Court’s decision in Farmers Mutual Ins. Co. v. New Jersey Property-Liability Guarantee Assn.  In Farmers, the Court held that, in the context of long-tail claims, any damages or defense costs allocated to insolvent policies could not be assigned to the policyholder.

When dealing with disputed claims in the long-tail area (and aren’t they all still disputed?), I always get a chuckle at the late (and great) Justice O’Hern’s pronouncement in the seminal New Jersey Supreme Court case on allocating loss among insurance policies in long-tail claims, Owens-Illinois v. United Ins. Co., 138 N.J. 437 (1994): “We can…narrow the range of disputes and provide procedures better to resolve the disputes that remain. If we can accomplish that much, we can better channel the available resources into remediation of environmental harms.”

Justice O’Hern was the consummate gentleman, and we could use more judges like him, but his hope that the disputes in allocation cases could be “narrowed” and resolved consensually hasn’t quite come true.  There are still too many unanswered questions.  Last week (as I write this), the Appellate Division issued an unreported decision in which it held that costs allocated to insolvent policies could be allocated to the policyholder, under certain circumstances.  The case is Ward Sand and Materials Co. v. Transamerica.

Ward Sand involved a garden-variety long-tail environmental case.  The policyholder operated a landfill at which it accepted Pennsauken Township’s municipal waste. In 1978 it sold the property to the Township. Later, the Township and the Pennsauken Solid Waste Management Authority, having entered into an Administrative Consent Order with NJDEP relating to remediation, sued numerous parties, including Ward, for contribution under the Spill Act. Ward notified its primary and excess carriers. Unfortunately, Ward had hit the jackpot when it came to carriers with shaky finances. Five of its carriers – Reliance, Home, Mission National, Integrity, and Western Employers – had become insolvent. Important factor in the Court’s decision: all of the carriers had gone belly up before December 2004.

The Court noted that the Farmers decision had been based upon the PLIGA Act, N.J.S.A. 17:30A-1, et seq., which established and governs the New Jersey Property-Liability Insurance Guaranty Association.  PLIGA provides protection to policyholders in the event of carrier insolvency, generally up to $300,000 “per claimant.”  The Act requires exhaustion of all solvent triggered coverage before PLIGA has to contribute anything, though.  In December 2004, the Legislature amended the PLIGA Act to provide that “in any case in which continuous indivisible injury or property damage occurs over a period of years… exhaustion shall be deemed to have occurred only after a credit for the maximum limits under all other coverages, primary and excess…issued in all other years has been applied.”  Ward Sand argued, quite reasonably, that given the protective purposes of the PLIGA Act, and the public policy relating to the 2004 Amendment, the policyholder should not have to bear any losses assigned to insolvent policies in long-tail claims.

But the Ward Sand Court held that, unless the triggered carrier’s insolvency happened after December 2004 (when the Act was amended), the policyholder gets tagged with any allocation to the insolvent carrier’s policy (to the extent that PLIGA doesn’t pay).  That’s because the Amendment specifically stated that it applied “to covered claims resulting from insolvencies occurring on or after [December 22, 2004].”   The Court also engaged in a bit of “moral equivalency,” writing: “We are not insensitive to the unfairness that results when a responsible business has purchased insurance to cover its business risks and the insurer becomes insolvent. Yet, insolvent insurers might argue it is equally unfair to require them to pay claims on risks they have not insured.”

That last bit is where, from the policyholder perspective, the analysis breaks down. First, the analysis assumes that we’re dealing with an “equal” playing field between carriers and policyholders. In reality, that’s seldom the case. Most insurance is sold on preprinted forms that are subject to only limited negotiation, and the insurance companies have access to gigabytes of data to help them rate their risks.  Many older policies were sold during a period of time when “pick-and-choose” was still the law in New Jersey, meaning that a policyholder was free to decide which triggered policies should apply to a loss (leaving the chosen carrier a right over against other triggered carriers). Presumably, each carrier, when setting its rates, took into consideration the possibility that it could be primarily responsible for a long-tail claim. Second, the legislature established PLIGA to resolve the very “unfairness” noted by the Court. Why should the policyholder get “whacked” as the result of the Court’s interpretation of a statute designed to help policyholders? Third, the suggestion that policyholders seek to require carriers “to pay claims on risks they have not insured” is a straw man. If a carrier is in the triggered coverage period, it has, by definition, insured the risk.

The Court also left a key question unanswered:  What if a carrier with, say, a $1 million limit goes bankrupt, and PLIGA contributes only the $300,000 statutory limit?  Does the “gap” get assessed to the policyholder for purposes of an Owens-Illinois allocation?  Given the statutory scheme and purpose of the PLIGA Act, shouldn’t the limit be deemed “collapsed” to $300,000 for purposes of the allocation? The Court only noted, without analysis, that the trial court had decided the issue against the policyholder. Too bad, since we could use some appellate-level clarity on that question.

One last important point about this decision. I wonder whether brokers will face increased liability for recommending carriers that later go bankrupt. If you’re a broker and you’re recommending that coverage be placed with a carrier that isn’t top-rated by Best, you probably want to make sure that you’ve disclosed the publicly known relevant facts about the insurance company’s financial picture to the client, in writing, before the coverage gets placed.

Can an insurance company depreciate labor costs in determining actual cash value?

Years ago, there was a comedy ensemble variously called “The Dead End Kids,” “The East Side Kids,” and, finally, “The Bowery Boys.”  (They were made famous in the 1938 Cagney/Bogart film, “Angels With Dirty Faces.”)  The protagonist of the group was a character named “Slip” Mahoney, played by the actor Leo Gorcey. Slip would routinely butcher the English language, by saying things like, “Here’s a token of my depreciation.”

Depreciation often isn’t a “token” in property insurance claims, though. It can result in substantial reductions from the amount of a claim. Insurance companies can be fairly aggressive in calculating depreciation, and, in a recent case in Arkansas, an interesting question came up: Can the insurance company depreciate not only the value of the property, but also the value of the labor involved in restoring the property?

The case, Shelter Mut Ins. Co. v. Goodner, involved damage to a mobile home, and while the case didn’t involve big money in the scheme of things, it involved an important issue. The carrier estimated the total restoration cost to be about $10,000, but deducted $3397.24 for depreciation. The deduction for depreciation included depreciation of both materials and labor. The carrier’s in-house counsel, in an affidavit submitted to the Court, explained: “The same amount of depreciation (expressed as a percentage of its full repair or replacement cost) is applied to both the labor and materials required to repair or replace that damaged component.” In other words, there was no separate formula for labor depreciation.

The Arkansas Supreme Court, quoting prior authority, refused to allow the carrier to depreciate labor costs, writing as follows: “Labor…is not logically depreciable. Does labor lose value due to wear and tear? Does labor lose value over time? What is the typical depreciable life of labor? Is there a statistical table that delineates how labor loses value over time? I think the logical answers are no, no, it is not depreciable, and no. The very idea of depreciating the value of labor is illogical.”

In ruling against the carrier, the Court also emphasized the need to fulfill the basic purpose of insurance: “It is important to keep in mind that indemnity is the basis and foundation of all insurance law. The objective of indemnity is to put the insured in as good a condition, as far as practicable, as he would have been in if the loss had not occurred, that is to reimburse the insured for the loss sustained, no more, no less. To properly indemnify [the policyholder], [the carrier] should pay him the actual cash value of the [damaged property], depreciated for wear and tear, plus the cost of [its] installation.… Allowing the insurer to depreciate the cost of labor would leave the insured with a significant out-of-pocket loss, a result that is inconsistent with the principle of indemnity.”

In short, even though the policy specifically stated that labor would be depreciated in calculating actual cash value, the Court held that depreciating labor violated public policy, and would not be allowed.

One of the justices on the panel filed a sharp dissent, on the ground that policyholders and insurance companies are free to contract as they see fit, and that policies should therefore be enforced as written.  (This, of course, is a fiction.  Most insurance policies are preprinted forms containing an impenetrable thicket of insurance jargon, and few policyholders – individual or corporate – are in a position to analyze the language and to anticipate every coverage situation that may arise.)   The dissenting justice wrote in part:  “This is not an area of paramount public concern where the court should offend traditions of separation of powers and create public policy.  The majority rewards [the policyholders] by giving them the benefits of an insurance policy that they declined to purchase…[The parties] were free to contract as to policy terms…Today there is a vast marketplace of insurance providers and policies.  Some providers and some policies provide greater restrictions and exclusions than others.”

Here are some takeaways from this case.   First, just because the carrier prints a number on a piece of paper doesn’t mean you have to accept it. I’m not necessarily advocating filing coverage litigation (which is expensive and energy-draining), but I am advocating questioning all calculations and assumptions with objective data. (Note the Court’s pointed questions:  what objective data exists justifying the depreciation of labor costs?)  Second, replacement cost coverage is better for you and your company than actual cash value coverage, because ACV coverage takes into account depreciation, while replacement cost coverage does not.  So always try to get replacement cost coverage.  And finally, this case illustrates why litigation is always a last resort.  You have two written opinions in the same case in which two different judges looked at the same fact pattern and policy language and reached diametrically opposed conclusions. Lesson:  Whenever you go to court, you’re gambling.

(By the way, it’s a bit difficult for me to understand why the carrier would have spent the time and resources to appeal a $10,000 case. The cost of the appeal surely dwarfed the amount claimed. I guess the carrier’s representatives felt that in a smaller case, they’d be dealing with less experienced counsel, and might be able to create good law for themselves.  Oops.)

You can read the full decision here.

Beware the differences between indemnity agreements and insurance policies

I used to know a guy who worked for a major, nationally known public adjustment company.  In years where there were no major hurricanes or tornado incidents, he would literally walk around looking like he had the weight of the world on his shoulders. He never overtly wished death or destruction on anyone (as far as I can remember), but hey, a guy has to eat, right?  I thought of him when I read a recent coverage decision from the Fifth Circuit arising from the Deepwater Horizon disaster in 2010.  The explosion and resulting oil spill into the Gulf generated tons of work for lawyers, and maybe some of them were thinking: “We don’t want tragedies to happen, but somebody has to do the legal work when they do, and it might as well be me.”  Ghoulish, perhaps, but it’s the life we’ve chosen.

This particular coverage litigation involved Cameron International Corporation, which had manufactured the “blowout preventer” used on Deepwater Horizon.  Cameron had an extensive insurance program, which included Liberty International Underwriters.  Liberty had sold Cameron a $50 million liability policy, excess of $100 million, as part of a $500 million tower of coverage.

In addition to the insurance program, a web of indemnification agreements existed.  Basically, BP contracted with a company called Transocean to drill the well, and Cameron manufactured and sold the blowout preventer connecting the rig to the well.  Under the various contracts, BP agreed to indemnify Transocean, which in turn agreed to indemnify Cameron.

After the terrible accident, thousands of lawsuits were filed against BP, Transocean, Cameron, and others.  The indemnity agreements might as well have been on the Deepwater Horizon when the blast happened, because BP refused to indemnify Transocean, and Transocean refused to indemnify Cameron.

After a major legal bloodletting, BP and Cameron started to discuss settlement, and they developed a framework as follows:  BP would indemnify Cameron in exchange for $250 million, but only if Cameron’s carriers agreed to waive subrogation rights, and only if Cameron agreed to drop its indemnification claim against Transocean. (If the settlement agreement went through, BP didn’t want Transocean to step into Cameron’s shoes and try to reclaim the $250 million that BP just got paid.)

As magicians and comedians will tell you, there’s always one guy in the room who tries to mess up your show.  Cameron’s carriers all agreed to the arrangement…except for Liberty, which also refused to contribute its $50 million in limits.  Not wanting to lose the deal, Cameron went ahead and settled anyway, contributing out of its own pocket the $50 million that would have been paid by Liberty, and then going after Liberty in Court.

Liberty defended against the claim by arguing, among other things, that its “other insurance” clause meant that its payment obligations had never been triggered.  The clause provided that “if other insurance applies to a ‘loss’ that is also covered by this policy, this policy will apply excess of such other insurance.”  The policy defined “other insurance” to include “any type of self-insurance, indemnification or other mechanism by which an Insured arranges for funding of legal liabilities.”  (Emphasis added.)

Bottom line:  Liberty argued that, because of the “other insurance” clause, all indemnification agreements had to be exhausted before Liberty had to pay anything.  Given the amount of money involved, Liberty’s position isn’t surprising.  I have a case right now in which a carrier is arguing that indemnification agreements have to be included in an allocation-of-coverage analysis for multiple long-tail asbestos claims.  (Hey, who needs precedent?)

Cameron countered by contending that the “other insurance” clause only governed situations where such other insurance actually and presently applies.  After all, relevant case law holds that the purpose of an “other insurance” clause is to “avoid an insured’s temptation or fraud of over-insuring…property or inflicting self-injury” – certainly not the situation here.

Liberty lost. The Court ruled that “Cameron’s interpretation is reasonable and Liberty’s is not.”  According to the Court: “Liberty’s policy is excess only if other insurance ‘applies,’ present tense.  Liberty’s interpretation requires the court to read the word ‘potentially’ into the contract.  Moreover, the clause provides that Liberty’s policy being excess of other insurance is conditional on other insurance applying. Liberty reads this to mean that the policy is excess of other insurance until Cameron affirmatively shows that no other insurance exists. That reading would transform the Other Insurance Clause from a protection against double-insuring into a clause that makes Liberty’s policy a policy of last resort.”

Liberty also unsuccessfully argued that, under Cameron’s interpretation of the “other insurance” clause, Cameron had no incentive to enforce its indemnification agreements (presumably resulting in unfair prejudice to Liberty).  The Court made quick work of that contention, writing: “That…ignores Liberty’s subrogation rights. If Cameron refuses to seek indemnification, Liberty can pay the policy and then itself sue Transocean for indemnification.”

So what can we learn from this mess? I think there are three main lessons.  First, Cameron was smart to get the deal done instead of allowing it to blow up because of Liberty’s recalcitrance.  If you have the funds to cap your liability, never let the insurance tail wag the dog.  Second, when things start to get real, the truth is that you may not be able to count on insurance or indemnity agreements.  Commercial insurance policies are often an impenetrable thicket of conditions and exclusions, and if a carrier thinks it has an escape route, it’s generally going to go that way if the claim is big enough.  So effective risk management means managing risks before they blossom into liabilities.  Third, it’s critically important to have your insurance professional review your supposed safety net – including indemnification agreements, insurance policies, and “other insurance” clauses – before a problem happens.  You can’t predict everything, but you may be able to identify gaps that need to be plugged.

You can read the full Deepwater Horizon decision by clicking here.

Insurance Coverage for Premises Liability

I admit it, I admit it –  I’m addicted to the TV show “Bar Rescue.” (When my daughter was about 12 years old, and my wife was out shopping for the day, we once binge-watched about six hours straight, which probably could get me into trouble with the child welfare authorities.)   The idea of the show is pretty simple. The host (Jon Tapper) is a consultant in the proper and profitable operation of bars and taverns. He finds establishments that aren’t being run particularly well, and helps fix them through tough love. It’s a very interesting show for people who run their own businesses, because we can see many mistakes that all business owners make (and hopefully avoid them). (And it’s also convinced me that I would never own a bar or restaurant.  Too much trouble and stress.  Running a law firm is difficult enough.)

One thing that all businesses (not just bars) have to worry about is premises liability. We recently handled the insurance coverage aspects of a very tragic case in which a waitress was shot by an ex-boyfriend in the parking lot of her restaurant-employer. The insurance coverage questions were complex, and involved the interplay of general liability, workers compensation and EPLI coverage. And another New Jersey trial court has just dealt with similar issues in a written decision. The case is Webster v. Palladium Associates, LLC (Superior Court of New Jersey, Law Division, Essex County).

In the Webster case, during a concert at a nightclub, a customer was shot and killed, and another was injured, by an unknown assailant. The plaintiffs (including the estate of the man who was killed) brought suit alleging that the owner of the property, and the tenant who ran the nightclub, were negligent in failing to provide adequate security.  Two insurance policies were involved. First, the general liability policy for the property owner (48 Branford). Second, the general liability policy for the tenant (Palladium). The carriers for both entities disclaimed coverage based upon “assault and battery” exclusions. The decision shows pretty clearly how minor variations in policy language can lead to very different results.

USLI sold the general liability coverage to Palladium.  The “assault and battery” exclusion in the USLI policy applied to, among other things, “assault” or “battery” arising out of “hiring, placement, employment, training, supervision or retention of a person for whom any insured is or ever was legally responsible.”

The Court had no problem finding that USLI’s exclusion negated coverage “because the operative facts of the complaints constitute an assault and battery [and] the plain language of USLI’s policy excludes coverage for the claims brought against the Third-Party Plaintiffs.”

Executive Risk sold the general liability coverage to the landlord, 48 Branford. Unlike the USLI exclusion, Executive Risk’s “assault and battery” exclusion did not expressly exclude claims for “hiring, placement, employment, training, supervision or retention of a person for whom any insured is or ever was legally responsible.” The Court therefore found that the exclusion was ambiguous and inapplicable, writing: “There is no clear indication to the average reader that claims of negligent hiring, supervision, retention or inadequate crowd control would be excluded under the assault and battery exclusion.…The court finds that allegations of negligence in the complaint allege a risk that is covered under the policy, giving rise to a duty to defend.” (Emphasis added.)

I know that rulings like this one drive my friends in the insurance industry (to the extent I have any friends in the insurance industry) nuts. And yes, in deference to them, it’s possible that the judge simply didn’t want to leave the injured parties with no recourse. But it’s important to remember that policyholders are supposed to get the benefit of the doubt. If there’s more than one version of a particular type of exclusion, and the wording in one version is “looser” than the wording in other versions, it’s not that hard for a Court to find that ambiguity exists.

But an ounce of prevention is worth a pound of cure.  It’s important to assess your major risks and consider them in connection with the policy form before a claim happens.

You can read the full Webster decision here.

Limitations Periods in Insurance Policies

Here are a few universal truths. If politicians can raise taxes, they will.  If lawyers can bill, they will. And if judges can find a way to help clear their docket, they will.  That last truth can create a serious problem for the unwary dealing with insurance claims.

Many business property policies and homeowners’ policies contain a specific limitations period, meaning a deadline by which the policyholder must commence suit against the carrier. Typically, the policyholder is required to sue within one or two years of the date of loss. This can shorten the applicable statute of limitations considerably. In New Jersey, for example, the general statute of limitations for breach of contract is six years, and Courts generally construe that to mean six years from the date of wrongful denial of the claim. 

 [By the way, you also need to be very careful with proof of loss requirements in policies. Many policies contain time periods within which a proof of loss is required. Many Courts interpret the requirements strictly, which can lead to unfair results for the policyholder.]

Recently, in Boisvert v. State Farm (D.N.J.),  an unfortunate policyholder learned these lessons the hard way.  The Boisverts owned property that was damaged by Superstorm Sandy on October 29, 2012.  They filed a claim with their homeowners’ carrier, State Farm. On July 26, 2013, State Farm denied the claim, claiming that all the damage was pre-existing, and was caused by poor workmanship. State Farm’s letter also cited policy language requiring that any suit be commenced against State Farm within one year of the date of loss (meaning, by October 29, 2013).

The Boiverts waited to sue State Farm until September 16, 2014. According to the Boiverts,  because of ambiguous language  in State Farm’s coverage position letter,  they were unsure whether State Farm was continuing to investigate the claim. The State Farm letter had suggested that the Boisverts could submit additional information to State Farm, which State Farm would consider. The letter had also advised the Boiverts that they could file an appeal with the New Jersey Department of Banking and Insurance (otherwise known as the legal equivalent of closing your head in a car door repeatedly).

The Boisverts were right about the legal standard to be applied. Under New Jersey law, the contractual limitations periods in insurance policies are in fact tolled during the period that the insurance company investigates the claim, until the time that liability is formally declined. A main case standing for that proposition is Peloso v. Hartford, 56 N.J. 514, 521 (1970). But here, the Court rejected the idea that the limitations period had been tolled, writing:  “Although the [denial] letter in this case stated that Defendant would accept ‘additional information,’ it clearly stated that there was a ‘denial’ of the claim, that the damage for which Plaintiffs sought payment was not ‘covered by the [the] policy,’ and that any ‘action must be started within one year after the date of the loss or damage.’ Faced with nearly identical language, courts have found an unequivocal denial.”  And so did this Court.

The Boiverts also argued that the contractual limitations period needed to be equitably tolled because they had gone to nonbinding mediation with State Farm, which caused a 30 day delay. But the Court rejected this argument as well, writing: “Plaintiffs have submitted no authority indicating that a non-binding mediation program – that was initiated by Plaintiffs – tolls the statute of limitations. Mediation is not a prerequisite for bringing a suit. Plaintiff’s exercise of their right to present their claim before a mediator does not constitute conduct by Defendant that was ‘calculated to mislead [Plaintiff] into believing that it was unnecessary to seek civil redress’ within the limitations period.”

In any event, the argument over whether mediation tolls the limitations period was moot, because even if the statute of limitations were tolled 30 days during mediation, the Boiverts’ claims were still untimely.

Here are some takeaways.  First, when dealing with an insurance claim, always check the policy for the limitations period and make sure you file suit within that period if need be, because otherwise you may lose your rights.  You might have some awesome arguments about why the limitations period should be tolled because you were negotiating with the insurance company, or because the insurance company requested more information. Many judges won’t care, because they’re overworked and are looking for any way to lighten their load. And, of course, don’t expect any help from the insurance company if you try to argue that negotiations were ongoing.   Second, if you’re in discussions with the carrier and the suit deadline is approaching, try to obtain a tolling agreement extending the time to sue. Many claims representatives will be only too happy to agree to such an extension, to avoid litigation if possible.

In other words, as the referee says to the boxers before the fight begins:  Protect yourself at all times. 

You can read the full State Farm v. Boisvert decision here.

Limitations Periods in Insurance Policies

Here are a few universal truths. If politicians can raise taxes, they will.  If lawyers can bill, they will. And if judges can find a way to help clear their docket, they will.  That last truth can create a serious problem for the unwary dealing with insurance claims.

Many business property policies and homeowners’ policies contain a specific limitations period, meaning a deadline by which the policyholder must commence suit against the carrier. Typically, the policyholder is required to sue within one or two years of the date of loss. This can shorten the applicable statute of limitations considerably. In New Jersey, for example, the general statute of limitations for breach of contract is six years, and Courts generally construe that to mean six years from the date of wrongful denial of the claim. 

 [By the way, you also need to be very careful with proof of loss requirements in policies. Many policies contain time periods within which a proof of loss is required. Many Courts interpret the requirements strictly, which can lead to unfair results for the policyholder.]

Recently, in Boisvert v. State Farm (D.N.J.),  an unfortunate policyholder learned these lessons the hard way.  The Boisverts owned property that was damaged by Superstorm Sandy on October 29, 2012.  They filed a claim with their homeowners’ carrier, State Farm. On July 26, 2013, State Farm denied the claim, claiming that all the damage was pre-existing, and was caused by poor workmanship. State Farm’s letter also cited policy language requiring that any suit be commenced against State Farm within one year of the date of loss (meaning, by October 29, 2013).

The Boiverts waited to sue State Farm until September 16, 2014. According to the Boiverts,  because of ambiguous language  in State Farm’s coverage position letter,  they were unsure whether State Farm was continuing to investigate the claim. The State Farm letter had suggested that the Boisverts could submit additional information to State Farm, which State Farm would consider. The letter had also advised the Boiverts that they could file an appeal with the New Jersey Department of Banking and Insurance (otherwise known as the legal equivalent of closing your head in a car door repeatedly).

The Boisverts were right about the legal standard to be applied. Under New Jersey law, the contractual limitations periods in insurance policies are in fact tolled during the period that the insurance company investigates the claim, until the time that liability is formally declined. A main case standing for that proposition is Peloso v. Hartford, 56 N.J. 514, 521 (1970). But here, the Court rejected the idea that the limitations period had been tolled, writing:  “Although the [denial] letter in this case stated that Defendant would accept ‘additional information,’ it clearly stated that there was a ‘denial’ of the claim, that the damage for which Plaintiffs sought payment was not ‘covered by the [the] policy,’ and that any ‘action must be started within one year after the date of the loss or damage.’ Faced with nearly identical language, courts have found an unequivocal denial.”  And so did this Court.

The Boiverts also argued that the contractual limitations period needed to be equitably tolled because they had gone to nonbinding mediation with State Farm, which caused a 30 day delay. But the Court rejected this argument as well, writing: “Plaintiffs have submitted no authority indicating that a non-binding mediation program – that was initiated by Plaintiffs – tolls the statute of limitations. Mediation is not a prerequisite for bringing a suit. Plaintiff’s exercise of their right to present their claim before a mediator does not constitute conduct by Defendant that was ‘calculated to mislead [Plaintiff] into believing that it was unnecessary to seek civil redress’ within the limitations period.”

In any event, the argument over whether mediation tolls the limitations period was moot, because even if the statute of limitations were tolled 30 days during mediation, the Boiverts’ claims were still untimely.

Here are some takeaways.  First, when dealing with an insurance claim, always check the policy for the limitations period and make sure you file suit within that period if need be, because otherwise you may lose your rights.  You might have some awesome arguments about why the limitations period should be tolled because you were negotiating with the insurance company, or because the insurance company requested more information. Many judges won’t care, because they’re overworked and are looking for any way to lighten their load. And, of course, don’t expect any help from the insurance company if you try to argue that negotiations were ongoing.   Second, if you’re in discussions with the carrier and the suit deadline is approaching, try to obtain a tolling agreement extending the time to sue. Many claims representatives will be only too happy to agree to such an extension, to avoid litigation if possible.

In other words, as the referee says to the boxers before the fight begins:  Protect yourself at all times. 

You can read the full State Farm v. Boisvert decision here.

The Illegal Acts Exclusion and “Entrustment” of Property

There’s an excellent, but sad and haunting, nonfiction book written by Jeff Hobbs called  “The Short and Tragic Life of Robert Peace.”  It’s about a kid who grew up among poverty, gangs and tough guys in a rough section of Newark, but who was naturally gifted and ended up at Yale. Unfortunately, he couldn’t outrun his upbringing. He returned to Newark with a degree in science and ended up using his education to build an illegal pot growing facility in a friend’s basement. Some gang members didn’t appreciate the competition, and things ended badly for him.

I thought about that book when reading a recent decision from the Southern District of New York, United Specialty Ins. Co. v. Barry Inn Realty, which similarly involved an illegal pot-growing operation.  Barry leased part of a building to Castelliano, who said he would be opening a sports bar and restaurant there. Months went by and the restaurant never opened. Nor did Barry exercise its right under the lease to inspect the premises. It turns out that Castelliano had basically gutted part of the building, and installed a sprinkler system and illegal wiring. He was growing and selling pot. The NYPD executed a search warrant, and busted Castelliano.

There was no evidence that Barry had any idea that the pot-growing operation existed.  In fact, Barry had run a background check on Castelliano that came up clean before leasing the space to him. Unfortunately for Barry, though, the extreme humidity needed to grow pot caused significant damage throughout the building, and required major demolition and replacement costs. Barry filed an insurance claim for the damage.

The policy contained an “illegal acts” exclusion, reading as follows:  “[The carrier] will not pay for loss or damage caused directly or indirectly by…[d]ishonest or criminal acts by…anyone to whom [the policyholder] entrusts the property for any purpose.”  (Emphasis added.)  The carrier, United Specialty, denied the claim based on the exclusion, and coverage litigation resulted.

In an effort to get around the exclusion, Barry Inn focused on the “entrustment”   requirement. Barry argued that it hadn’t really “entrusted” the property to Castelliano, because Castelliano had lied had about his intentions.  This was a tough argument to make, because the dictionary definition of “entrust” doesn’t focus on the recipient’s intent.  Webster’s defines “entrust,” for example, as “to deliver something in trust to.”

The Court upheld the coverage denial, writing: “In arguing that Barry did not entrust the Premises to Castelliano, Barry cites a number of cases in which a recipient of property lied about his or her in identity and no entrustment was found. In each of those cases, however, the recipient’s identity was ‘solely self-generated,’ and the insured never investigated the recipient’s identity…[The] course of dealing [here] establishes that Barry and Castelliano had a ‘consensual relationship’ and that Castelliano’s status was accepted by Barry…[I]t is immaterial that Castelliano abused Barry’s confidence and had an undisclosed intent to use the Premises to grow marijuana…[I]t is clear from the record that Barry intended to surrender, deliver, or transfer possession of the Premises to Castelliano.”

This decision may seem unfair, because Barry got duped. A couple of points to consider, though. First, insurance is always a poor substitute for proper controls.  In business, trust but verify. Barry may have believed that proper procedures had been followed, because Barry had run a background check on Castelliano.  But that wasn’t enough. Had Barry monitored the situation properly after signing the lease, Barry might have been able to avoid or minimize the damage. Second, despite all the wonderful ads you see on TV with cute little lizards and guys named “Mayhem” who have your best interests at heart, you can’t rely on insurance.  Insurance companies are in business for profit, and if they can figure out a way to deny large claims, they will.  When you buy insurance, you’re really buying a right to sue an insurance company.  Which is why the first point in this paragraph is so important.   

Direct Actions against Insurance Companies

Labor Day has just passed as I write this, and this summer (that went by too quickly) was a busy one for the New Jersey appellate courts, insurance-wise.  The New Jersey Supremes, for example,  dealt with a question often posed by our clients in construction defect cases: Namely, can a claimant proceed directly against a defendant’s insurance company?  (That is, sue the defendant’s insurance company directly instead of, or in addition to, suing the defendant?) In fact, as I was working over the holiday (ugh) I got a call from a potential client whose general contractor messed up her house pretty badly, and whose homeowners’ carrier is giving her a hard time about paying for the damage, which includes water infiltration and mold as the result of the GC’s shoddy work. (Why was I talking to a prospective client on Labor Day? Because, when you own your own firm, every day is “Labor Day”.) She asked whether she could sue the GC’s insurance carrier directly, since she didn’t think the GC had any money.

The answer, at least in New Jersey, is generally no.  The new Supreme Court decision is Ross v. Lowitz.  The facts: Home heating oil leaked from a neighbor’s underground storage tank onto the property of John and Pamela Ross. In addition to suing the current and former owners of the neighboring property, the Rosses also sued the insurance companies who provided homeowners’ coverage to the former owners of the neighboring property, for bad faith in not resolving the loss fully. The Rosses argued that they were third-party beneficiaries under the neighbors’ policies, and therefore were entitled to bring a direct claim.

But the Court disagreed, writing: “It is a fundamental premise of contract law that a third party is deemed to be a beneficiary of a contract only if the contracting parties so intended when they entered into their agreement. Here, there is no suggestion in the record that the parties to the insurance contract at issue had any intention to make plaintiffs, then the neighbors of the insured, a third-party beneficiary of their agreements. Nor does migration of oil from [the neighbors’] property to plaintiffs’ residence retroactively confer third-party beneficiary status on plaintiffs. The insurer’s duty of good faith and fair dealing in this case extended to their insured, not to plaintiffs.”

To the extent that the neighbors’ liability coverage (as opposed to first-party coverage) is implicated, though, this doesn’t make sense. Of course the purpose of liability insurance is to confer a benefit upon an injured third-party. I guess with the Court really meant to say was, unless there is specific intent to confer a benefit on a specific claimant, then third-party beneficiary status does not exist.

The coverage aspect of the Ross case only dealt with the question of whether a third party could sue for bad faith.   It remains to be seen how the case will be applied in other contexts.  Generally, until now, a claimant would have to take a judgment against a defendant in a specified amount, prove that the defendant is insolvent and cannot pay the judgment, and then request permission from the trial court to pursue the defendant’s liability carrier directly.

You can read the Ross case here.

Another case that came down this summer is 213-15 76th Street Condo Assn. v. Scottsdale Ins. Co. , a federal court decision that stemmed from a Superstorm Sandy related first-party wind damage claim. The case involved the question of whether recovery of attorneys’ fees is permitted in first-party cases in New Jersey. The policyholder argued that discovery “might” show that the insurance company acted in bad faith in handling the claim, and that attorney’s fees should be allowed as damages in bad faith cases. The (quirky) rule in New Jersey (R.4:42-9)  is that attorneys’ fees are recoverable by a successful claimant in a third-party (liability) coverage lawsuit, but not specifically in a first-party case. 

The Court basically punted, writing:  “Under New Jersey law, counsel fees may be awarded when an insurer refuses to indemnify or defend its insured’s third-party liability to another, but an insured who brings direct suit against his insurer for coverage is not entitled to a fee award… Plaintiff asserts that a bad faith claim would support its request for attorneys’ fees, [but] the complaint does not contain any allegations that defendant acted in bad faith… There is no basis for plaintiffs request for attorneys’ fees at this time.”  (Emphasis added.)

I’m not sure why defense counsel would waste time filing a motion to strike a claim for attorneys’ fees before an application for attorneys’ fees is actually made, but I guess nothing succeeds like success.  Presumably the carrier felt that striking the claim for attorneys’ fees would reduce the settlement value of the case from the plaintiff’s perspective.

You can read the 213-15 76th Street case here.

The Policyholder’s Right to Independent Counsel

Earlier this year, I posted about whether a policyholder has a right to independent counsel when a possible conflict of interest appears between the carrier and the policyholder.  (You can read that post here.)  We’re frequently asked that question, because when insurance companies agree to defend a claim, they often send a reservation of rights letter that contains dozens of exclusions and limitations that the carrier says may lead to no coverage later. Such letters understandably cause angst to policyholders, who paid for, and depend upon, protection from liability. Related issue: Policyholders are sometimes unhappy with the defense lawyers that the carriers appoint. I have one claim right now involving a major personal injury claim, for example, in which appointed defense counsel didn’t bother to speak with the policyholder until the morning of a mediation. Not good. And though most defense lawyers are sensitive to their duty of loyalty to the policyholder, it’s just human nature to remember who butters your bread.

An interesting case recently came down in California involving the independent counsel issue. The case, Travelers v. Kaufman & Broad, involved a construction defect lawsuit, in which a general contractor (Kaufman) was named as additional insured under a subcontractor’s (Norcraft) policies.  Travelers appointed defense counsel for Kaufman, but Kaufman was unhappy because the law firm had represented parties adverse to Kaufman in other construction defect cases.  Kaufman argued that Travelers had failed to provide it with an “immediate, full, complete and conflict-free defense.”  (To me, the conflict claim doesn’t make much sense, because the fact that a law firm has represented parties against you in the past isn’t a conflict. If the law firm worked for you, and then represented parties against you, a conflict might exist.)

On the question of whether Travelers had provided an “immediate” defense, Kaufman argued that Travelers had improperly waited four months from the initial tender of claim to appoint defense counsel.  Travelers, however, had sent a letter of acknowledgment only two weeks after receiving the claim, requesting a copy of the subcontract between Norcraft and Kaufman.  Kaufman didn’t respond until three months later, and only after Travelers had sent a follow-up letter. After receiving the subcontract and confirming additional insured coverage, Travelers appointed defense counsel.  The Court wrote: “Since [Travelers] notified [Kaufman] that it had accepted the tender approximately one week after receiving a copy of the subcontract, [Kaufman] cannot demonstrate that [Travelers] failed to provide an immediate defense.”

The Court also rejected Kaufman’s argument as to whether Travelers had provided a “complete” defense. With respect to the reservation of rights, Travelers basically stated that it reserved the right to seek contribution from Kaufman for uncovered claims in connection with settlements or judgments. The Court wrote: “Kaufman does not explain…how these provisions violate Travelers’ duty to provide a complete defense, and the court does not find that they violate the duty on their face.”

Finally, Kaufman argued that Travelers had entered into a secretly negotiated settlement agreement with underlying plaintiffs’ counsel, to resolve the claims covered by the Norcraft subcontract, and then withdrew from the underlying case once those claims were settled. The Court disagreed that the settlement was a problem, writing: “It is undisputed that Travelers had the duty to defend [and] Travelers had the right to control settlement negotiations of the covered claims without Kaufman’s participation. That Travelers settled only the claims that arose out of the work of Norcraft does not make the settlement improper, nor does it indicate that Travelers furthered its own interests, and Kaufman has not shown that it experienced increased defense fees and costs – outside of what it would otherwise have incurred – due to Travelers’ withdrawal from the [underlying] action.”

Although the Court resolved some of the coverage issues, the case went to the jury last month on the question of whether Kaufman had breached the duty to cooperate.  (Not sure why the parties or the Court bothered, at this point.)   The jury found that Kaufman had failed to cooperate with Travelers, but that Travelers had suffered no damages as a result.  (What a waste of legal fees.)

Some takeaways:  While reservation of rights letters can be frustrating and unnerving to policyholders, they do not, in and of themselves, prove that the carrier is offering less than a proper defense. Of course, I’m not sure why carriers can’t simply cover themselves by writing: “This defense is provided subject to the limitation that, if facts are later developed showing that a policy exclusion applies, the defense may be withdrawn in whole or in part.” I think it’s the 35 numbered paragraphs of exclusions and limitations that create unease for the policyholder. I have a little more difficult time accepting the Court’s conclusion that the insurance company should be allowed to conclude settlements without at least keeping the policyholder in the loop; here, however, since Kaufman couldn’t show that the settlement of the covered claims unfairly increased its expenses, it was a matter of “no blood, no foul.”

In any event, if you’re a policyholder, I think that it’s in your best interest to keep in contact with the carrier from time to time (in writing) requesting status updates on your file.  And when the insurance company asks for information in the claims process, try to provide it without delay.

More developments in insurance coverage for construction defects

Back in the days of the environmental insurance coverage wars, we on the policyholder side argued (eventually successfully in New Jersey) that the word “sudden”, as used in the 1973 version of the pollution exclusion, meant “unexpected” and did not have a temporal connotation. My friends in the defense bar often criticized us for trying to twist the clear meaning of words. The current battle over construction defect coverage has perhaps made me better understand their professed annoyance, because, for example, carriers have been arguing that the “subcontractor exception” to the “your work” exclusion isn’t actually an exception for damage caused by the work of subcontractors, and that damage to property isn’t really “property damage.”

Last week, in Cypress Point Condominium Ass’n v. Adria Towers, LLC, the New Jersey Appellate Division torched the carriers’ arguments as to the essential nonexistence of liability insurance coverage for construction defects, at least for now.  Cypress is a garden-variety construction defect case, involving a general contractor whose subcontractors performed defective work on parts of a condominium complex, such as the roof. The defective work resulted in consequential damage to other areas of the building.  The carriers naturally denied coverage for subsequent third-party liabilities under the general contractor’s policies, on the ground that the damage was simply a “business risk” (a term not used in the policies themselves), and did not constitute the required “property damage caused by an occurrence.”

The Court quickly disposed of the carriers’ arguments as to the lack of “property damage” and an “occurrence,” writing: “As to whether there exists ‘property damage,’ the consequential damages clearly constitute ‘physical injury to tangible property.’ The faulty workmanship damaged ‘the common areas and unit owners’ property.’ The interior structures, including the drywall, insulation, wall finishes, and wood flooring, were damaged by water infiltration from the faulty workmanship. As a result, the consequential damages constitute ‘property damage’ as defined under the policy.… The insurers do not contend, and we cannot reasonably believe, that the contractors either expected or intended for their faulty workmanship to cause ‘physical injury to tangible property.’ Thus, the consequential damages constitute an ‘occurrence’ as defined in the policy.”

The Court also discussed the “your work” exclusion, which, as the name indicates, precludes coverage for damage to “your work.” The 1986 ISO form of that exclusion contains an exception reading: “This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” Some Courts simply read that exclusion out of the policy. But the Appellate Division ruled that the exception must be given effect, writing: “As a practical matter, it is very difficult for a general contractor to control the quality of a subcontractor’s work. If the parties to the insurance contract did not intend a subcontractor’s faulty workmanship causing consequential damages to constitute ‘property damage’ and an ‘occurrence’…then it begs the question as to why there is a subcontractor’s exception.”  The Court noted: “The exception treats consequential damages caused from faulty workmanship by subcontractors differently than damage caused by the work of general contractors.”

Obviously, this is a great ruling for policyholders.  It remains to be seen whether the New Jersey Supreme Court will take it up.

You can read the full Appellate Division decision here.

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