The late, great comedian Alan King used to tell a story that went like this:   “The other day, my house caught fire.  My lawyer said, ‘Shouldn’t be a problem.  What kind of coverage do you have?’  I said, ‘Fire and theft.’  The lawyer frowned.  ‘Uh oh.  Wrong kind.  Should be fire OR theft.’” 

Recently, a lot of builders and manufacturers have been experiencing similar unhappiness with their coverage for so-called “faulty workmanship” claims.  Carriers have been arguing that faulty workmanship can never constitute a covered “occurrence” that triggers insurance, and also that, even if an “occurrence” happened, liability coverage is precluded by the “your work” exclusion (one of the so-called “business risk” exclusions).

The typical “your work” exclusion in a commercial general liability policy precludes coverage for the following:

“’Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’  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.”

Later versions of the language eliminate the subcontractor exception.

So, what’s the purpose of the exclusion?  Some time ago, a pretty good article in Claims Magazine gave the following example:  A policyholder builds a retaining wall for a customer.  The wall falls down.  Under the exclusion, there’s no coverage for damage to the wall itself.  If the falling wall crushes a claimant’s patio furniture, though, coverage exists.  In other words, there’s no coverage for fixing defective work, but there IS coverage for consequential losses caused by the defective work.  

A few courts don’t quite seem to grasp this concept.    And now, let me distribute some sour grapes:  I lost the issue at the trial court level not long ago in Bob Meyer Communities Inc. v. James R. Slim Plastering Inc. The case involved the allegedly faulty installation of window flashing by a subcontractor, and resultant water damage to luxury homes.  The judge decided that the entire homes were the general contractor’s “work,” and that the general contractor therefore could not recover from liability insurance for allegations of faulty workmanship limited to the window flashing made by the homeowners.  The court wrote: 

“If the completed residence is viewed as [the policyholder’s] work product, under its CGL policies, [the policyholder] bears the risk of faulty workmanship causing damage to any part of the residence.”

The problem with this analysis is that the whole residence was not defective – only the window flashing installed by the subcontractor.  The consequential damages resulting from the defect (as opposed to replacement of the flashing itself) should therefore be covered, under the logic in the Claims article.  

But, there is hope. In Port Imperial Condominium Association v. K. Hovnanian, my good friend Lynda Bennett of Lowenstein Sandler (an excellent coverage lawyer) recently successfully navigated her client around the exclusion.  The case involved water damage to condominiums in a waterfront development due to allegedly improper framing, installation and flashing of balcony doors.  

In response to the carriers’ “no pay” argument, and as a result of Lynda’s great work, Judge Sarkisian (Hudson County) wrote:  “It is clear…that general liability coverage is available for consequential property damage that flows from an insured’s faulty workmanship, and that other courts have recognized that faulty workmanship can result in accidental, unexpected, and unintended damage to third party property which satisfies the definition of ‘occurrence’ of the standard general liability policy.” 

In an analogous context, the Fifth Circuit recently tried a Solomonic approach, guaranteed to make everyone unhappy.  American Home Assurance v. Cat Tech LLC involved damage to a “hydrotreating reactor,” allegedly caused by a repair contractor.  There were three categories of property damage involved:

 (1)  Damage to the specific parts of the reactor upon which Cat Tech (the policyholder) performed defective work.

(2)  Damage to the parts of the reactor upon which Cat Tech performed non-defective work, but which were damaged because of later mechanical problems in the reactor.

(3)  Damage to property upon which Cat Tech did not work, but which was nevertheless harmed, apparently because of the later mechanical problems.

The Court held that items (1) and (2) should be excluded, but not (3), writing:

“The ‘your work’ exclusion precludes coverage for damage to that part of [the reactor owner’s] property upon which Cat Tech performed repair services, defective or otherwise.  It does not preclude coverage for any damage to [the reactor owner’s] property that Cat Tech did not repair or service.”

Question:  If policy language can be this elaborate and confusing, shouldn’t the policyholder get the benefit of the doubt?

 

 

 

   

Lots of times, businesspeople who buy insurance make (reasonable) assumptions.  For example:  “If I have employment practices liability insurance, I must be covered for claims arising out of employment practices…right?” 

Mmmmm…not so fast.  Most EPLI policies contain a hidden gap that’s wide enough to drive an eighteen-wheeler through. 

EPLI coverage came on the market a few years back when employers started to try to make claims for workplace harassment suits under Part Two of their workers’ compensation policies (the “employers’ liability” coverage).  Of course, what the claims department views as “no pay,” the marketing department views as an opportunity.  (Remember environmental impairment liability insurance?) 

Basically. EPLI is supposed to provide protection from employment law claims made by employees, former employees, or potential employees.  This includes claims of discrimination, wrongful termination of employment, and sexual harassment.  The policy provides coverage to the business, its directors and officers. 

EPLI is less standardized than other forms of coverage, which makes it scary as a matter of principle.  Sometimes it’s bundled in a business owner’s policy, or as a part of other liability insurance. 

Now, let’s consider how some employment claims actually work.   In certain circumstances (federal Title VII claims), the employee has to file a charge with the EEOC first.  The EEOC investigates the matter and tries to resolve it.  In some circumstances, though, the EEOC will file suit on behalf of the employee.  Obviously, when the EEOC files such a suit, it does so on behalf of the employee.  (The basic process can be found at the EEOC website here.) 

All of which brings us to the recent federal case of Cracker Barrel v. Cincinnati Insurance Company, a federal case from the great state of Tennessee.  (I’m writing about a Tennessee case because we have plenty of “strict constructionist” judges here in New Jersey, too.)  Between December 1999 and March 2001, ten Cracker Barrel employees filed charges with the State of Illinois and with the EEOC, alleging sexual or racial discrimination.  In 2004, the EEOC brought suit against Cracker Barrel on behalf of the charging parties (the employees).  Cracker Barrel duly filed an insurance claim under its EPLI policy.  

The policy covered “a civil, administrative or arbitration proceeding commenced by the service of a complaint or charge, which is brought by any past, present or prospective employee.” 

The carrier’s claims department and its lawyers took the position that the underlying lawsuit had been brought solely by the EEOC, which was not an employee of Cracker Barrel, and that, therefore, the EEOC lawsuit was not even arguably covered under the definition.  (Maybe I’m jaded  by 26 years of representing policyholders, but to me, that argument didn’t even get past the “red face” test.  Shows what I know.) In response, Cracker Barrel argued that the policy language meant that the underlying complaint or charge must be brought by an employee, not the proceeding; in other words, the proceeding must merely be commenced by a complaint or charge brought by an employee. 

Remarkably (given the generally accepted principle that the policyholder gets the benefit of the doubt when it comes to policy language), the Court bought the carrier’s argument.  The Court wrote:  “The EEOC Lawsuit was not ‘commenced by the service of’ a charge, according to the plain meaning of that language, even though it may have arisen because previous administrative charges brought potentially illegal activity to the EEOC’s attention…The complaint that  commenced the EEOC Lawsuit was not brought  by an employee, and, therefore, even under [Cracker Barrel’s] interpretation of the definition, the lawsuit is not a ‘claim’ under the policies.” 

The judge who wrote the opinion, Senior Judge John T. Nixon of the Middle District of Tennessee, recently awarded $1 million to an employee of Whirlpool for alleged race and sex discrimination.  I have to wonder whether he takes a dim view of management generally, and feels that management needs to be punished for discrimination, without access to insurance.  (Sometimes we forget that judges are people too, and bring their own worldview to the bench, just as jurors bring their life experience to the deliberation room.  In other words, settle whenever you can.) 

In any event, the Cracker Barrel decision seems to miss a major point: the purpose of the policy was to provide protection (in exchange for substantial premiums) against discrimination claims.  If the EEOC brings suit on behalf of an employee, it is the functional equivalent of the employee bringing suit himself.  Judge Nixon elevated form over substance.  You can almost hear the claim department twittering (small “T”).   

Takeaway:  if you have EPLI coverage, go over it with your broker to see what is and isn’t covered.  If claims brought by administrative agencies are not covered, see whether you can plug that gap (and how much it would cost to do so).  More importantly, make sure your organization is engaged in good management practices, to minimize the chances of such claims ever happening.     

 

 

 

 

Awhile back on this blog, we were discussing developments in insurance bad faith law, and I hypothesized that Courts were generally more apt to find bad faith in cases involving a carrier’s delay of benefits, rather than outright denial.  But what if the outright denial contains a bald-faced lie, or a deliberate omission?  In that case, the complexion of the matter may change substantially. 

Along these lines, Bob Chesler at Lowenstein Sandler, one of the preeminent policyholder-side coverage lawyers in the country, recently sent around a copy of an interesting unreported federal court decision in Dawn Restaurant Inc. v. Penn Millers Insurance Co.

The case involves a warped roof at a restaurant.  The carrier hired an engineer (Sharick)  to inspect the premises and determine the cause of the warping. Sharick concluded that the damage could not be positively attributed to a single cause.  He cited a variety of factors contributing to the damage, including excessive humidity in the attic, the long-term load on the rooftop, HVAC equipment, and repeated instances of normal rainfall and snowfall during the life of the building. 

The carrier denied the claim, citing all of the factors noted by Sharick….except for precipitation.  That’s because, unlike the other factors, damage by precipitation would have resulted in a covered loss under the Business Owners Coverage section of the policy.

After the carrier’s denial, Dawn Restaurant sued the carrier for breach of contract.  Later, having obtained a copy of Sharick’s report, Dawn moved to amend its complaint to include a count for bad faith based upon the carrier’s selective recitation of causes of loss in the denial letter.  The carrier opposed the amendment, in part because (according to the carrier) such amendment would be “futile.” The carrier argued that the omission of “precipitation” as a cause was at most negligence, as opposed to bad faith.

The Court, however, found that the restaurant had more than enough ammo to proceed with a bad faith claim, writing:

“In the proposed amended complaint Plaintiff alleges that Defendant intentionally withheld selected reasoning of its expert so that the insurance policy would not trigger…Both parties agree that certain forms of rainfall damage do trigger clauses in the insurance policy that would cover the cost of repairs…Accepting all of the facts in the Proposed Amended Complaint as true, the Court is able to draw a reasonable inference that Defendant is liable for the misconduct alleged.”

Of course, this all leads to the ultimate question:  Should a policyholder include a bad faith claim in its complaint against a carrier, when the policyholder believes that the carrier has behaved unfairly?  Well…in my view, not always.  Bad faith claims often degenerate into expensive and time-consuming sideshows, and punitive damages against a carrier are relatively rare.  (Why are there expensive and time-consuming sideshows?  Could it be that insurance defense lawyers, who are getting lowballed on fees by their carrier clients, convince the carriers that it’s absolutely necessary to leave no stone unturned?  Nah, that couldn’t be it.)  If you have substantial consequential  damages, though – such as increased costs due to the carrier’s delay or denial – then a bad faith claim may well be worth thinking about.  You may be able to recover the additional damages in addition to the principal amount of the claim.

Back in the 1980s, when we were all fighting over the meaning of the “sudden and accidental” pollution exclusion, it became fashionable for coverage lawyers to quote “Alice in Wonderland.”  If memory serves, there was even a battle of law review articles (sponsored by the insurance industry on one side and corporate policyholders on the other) in which the dueling parties tried to out-Lewis-Carroll one another.  

The most favored quotation was the following exchange: 

“When I use a word,” Humpty Dumpty said in a rather scornful tone, “it means just what I choose it to mean – neither more nor less.”  

“The question is,” said Alice, “whether you can make words mean so many different things.”  

“The question is,” said Humpty Dumpty, “which is to be master – – that’s all.”  

I thought of that quote for the first time in a long time when I read the recent Third Circuit decision in Illinois National Insurance Co. v. Wyndham Worldwide Operations, Inc. 

First, the facts: Illinois National sold aircraft fleet management insurance coverage to an aircraft maintenance company called Jet Aviation for successive one-year periods from 2004 through 2008.  The policies provided coverage for Jet Aviation and some of Jet Aviation’s clients, so long as Jet Aviation managed the particular client’s aircraft and aircraft usage.  Wyndham was one of Jet Aviation’s clients (and a named insured under the policy).

In the 2008 renewal, the requirement that Jet Aviation manage the client’s aircraft was deleted and replaced by language stating that the aircraft simply had to be operated or used by a named insured  – not necessarily by Jet Aviation.

You can guess what’s coming next.  Plane crash, five dead, plane rented by Wyndham (a named insured under the policy) – but not managed by Jet Aviation.  Naturally, Humpty Dumpty – er, Illinois National – denied the resulting claim, on the ground that “a word means just what I choose it to mean – neither more nor less.”  Specifically, Illinois National contended that the reason for the wording change was “to make it more clear that entities affiliated with Jet Aviation were covered,” and not to delete the requirement that Jet Aviation manage the aircraft.

The trial court, able to read English, disagreed, holding that there could be no reformation of the contract based on “mutual mistake,” since Wyndham had not even been involved in the contract negotiations. 

Unfortunately, in a 2-1 decision, the appeals court reversed, and bought the Humpty Dumpty argument, writing:  “Jet Aviation and Illinois National agree that their intent, at the time the contract was drafted, was to limit coverage for non-owned aircraft to aircraft used by or at the direction of Jet Aviation.” 

Who cares what Jet Aviation (out to protect its policy limits and not wanting a premium increase) or Illinois National (out to protect its profits) “agreed”? To operate its business, Wyndham – a named insured – was relying on the coverage that Illinois National sold.  If it had known that the coverage was worthless in some circumstances, it might have gone out and bought other, supplemental coverage.  At least Wyndham should have had that opportunity.  But unless and until courts make insurance companies answer to a higher standard (and also make them behave like the fiduciaries they’re supposed to be), insurance companies will continue to make spurious arguments and get away with it.

On the positive side (such as it is), Justice Nygaard (also able to read English) dissented rather vociferously, writing that there “is simply no support in state law for the conclusion that the insurer’s failure to read the plain language of its own policy before issuing it to the insured justifies [disregarding the plain meaning of a contract].”  Sounds like he was inviting a petition for en banc review.

As for the logic of the majority decision, I guess the best thing to do is to quote from the Mock Turtle:  “Well, I never heard it before, but it sounds uncommon nonsense.”     

To many policyholders, ERISA is a government program that simply backfired (sort of like Prohibition). That’s because ERISA considers an insurance company to be a “fiduciary.” Back in 1974, when ERISA was passed by Congress, the lawmakers figured that since the insurance company is a “fiduciary,” it must have the best interests of the injured policyholder in mind, right? Therefore, an insurance company’s claims decision under ERISA is to be upheld unless it’s “arbitrary and capricious.”  

The “arbitrary and capricious” standard is, I’m sad to say, the source of much abuse.  To justify claim denials, insurance companies retain doctors whose focus is most definitely not on the best interests of the patient, but rather on the best economic interests of the carrier.  

Fortunately, not all courts tolerate such abuse.  One such instance was our recent win in Simon v. Prudential.   

The facts of the case were pretty simple.  Our client, John Simon, was a very successful environmental trial attorney at a major New Jersey firm, with a national practice.  He was tragically involved in a horrific traffic accident, when a drunk crossed the center line and hit him head-on.  After a lengthy and arduous rehabilitation, he tried to return to work, and did so for a few years, until the byproducts of the accident (primarily debilitating pain and post-traumatic stress disorder) made working as a lawyer impossible. 

John had disability coverage through a Prudential policy provided by his firm (and thus governed by ERISA). Prudential paid disability benefits for a year, and then abruptly stopped.  Pru’s main basis for the termination of benefits was that John’s pain was “subjective,” and therefore couldn’t be verified.  (By the way, Pru has used that argument in a number of cases around the country, without a whole lot of success, at least in the reported decisions I’ve found.)

But Pru’s big problem was that one of its own doctors had stated in writing that more testing was necessary before benefits could legitimately be withdrawn.

Given the doctor’s opinion, the Court held as follows:  “On this record, no reasonable person could conclude that, when Prudential ignored the opinion and recommendation of its pain medicine expert, it acted solely in the interest of the beneficiary, Plaintiff.  To the contrary, it is clear that Prudential breached its fiduciary duty of loyalty to the beneficiary.  Prudential’s decision to ignore Dr. Kaplan’s opinion and recommendation certainly was not a decision made solely in the interest of Plaintiff – it was a decision against the interest of Plaintiff.  This Court finds that Prudential’s decision to terminate Plaintiff’s benefits was arbitrary and capricious.”

Naturally, Pru is appealing.  Why pay out a legitimate claim when you can try to stall things further through the appeal process?  I’m not much for politics, but when insurance industry representatives complain about ObamaCare, they seem to forget that in many ways they brought it on themselves.          

Every now and then, a business owner asks me to review his company’s coverage program to make sure that adequate protection exists.  I always say the same thing. “You’re looking at this all wrong.  Buying insurance isn’t about buying protection.  Buying insurance is about buying a right to sue an insurance company.  Once you accept that, the world becomes much clearer.”

That’s because insurance is such a word game.  One word out of place – one comma out of place – and poof, the insurance company says “no soup for you.” 

With that in mind, let’s revisit the case of Abouzaid v. Mansard Gardens, which I first wrote about earlier this year.  The facts are horrific.  Three kids are in an apartment kitchen. The pilot light on the stove ignites some paint thinner that earlier had been applied to the floor by the landlord’s worker.  The kids’ mothers see them engulfed in a fireball and badly burned.

In count three of their ensuing complaint against the landlord, the plaintiffs alleged that the kids’ parents were “forced to endure emotional distress and suffering resulting from watching . . . their sons becoming engulfed by flames.”

The landlord’s carrier denied coverage for count three (naturally), arguing that its policy provided coverage only for “bodily injury,” which under New Jersey insurance law does not include emotional distress without physical manifestations. 

Later, apparently realizing the error of their ways insurance-wise, plaintiffs’ counsel amended count three to state that the adult plaintiffs “had to incur the cost of medical treatment for the physical impact caused by their emotional distress and suffering.”

The Appellate Division held that there was no duty to defend count three in the original complaint, but that there WAS a duty to defend once the complaint was amended to allege “physical impact.”

The New Jersey Supreme Court, apparently beset by a bout of common sense, has now reversed and held that the duty to defend existed from the beginning.  After a lengthy recap of New Jersey law regarding the duty to defend (which as some of you know, contains some frightening pitfalls for the uninitiated), Justice Long wrote:  “Although [the third] count was silent regarding the existence of physical manifestations, it did not exclude the possibility that such manifestations would be proved during the course of the litigation.  Accordingly, it was indefinite whether the claim was within the scope of coverage.  In those circumstances, a potential for plaintiffs to prove a covered claim existed and doubts regarding the duty to defend should have been ‘resolved in favor of the insured.’” (Emphasis mine.) 

This is a good decision, consistent with well-settled principles of insurance policy interpretation, and I’m hoping that all courts in New Jersey will now, finally, understand how liability insurance works.  If there’s any possibility of coverage, however remote, the duty to defend exists.

Counsel for the policyholder in the Abouzaid case were Alan Bernstein and David Klein from Brach Eichler.  Nice work, fellas. 

 

 

 

I’ve been reading Jay Feinman’s excellent book, Delay Deny Defend:  Why Insurance Companies Don’t Pay Claims and What You Can Do About It. The book deals with the games insurance companies play in claims handling, especially in the personal lines arena.  At one point, Feinman quotes from a great movie I haven’t seen in a long time, the 1944 film Double Indemnity starring Fred MacMurray (later the father figure in My Three Sons) and Edward G. Robinson (“Mother of Mercy, is this the end of Rico?”).  Robinson’s character, insurance man Barton Keyes, describes the work of a claims adjuster as follows: 

“The job I’m talking about takes brains and integrity.  It takes more guts than there is in 50 salesmen.  It’s the hottest job in the business…To me, a claims man is a surgeon, that desk is an operating table, and those pencils are scalpels and bone chisels, and those papers are not just forms and statistics and claims for compensation.  They’re alive, they’re packed with twisted hopes and crooked dreams…A claims man is a doctor, and a bloodhound, and a cop, and a judge, and a jury, and a father, and a confessor all in one.”

How funny.  (I bet a lot of you can think of some other names for claims people.)

Got into a discussion recently with some of my policyholder counsel friends. They were lamenting the death of bad faith law in New Jersey.  When a carrier unreasonably denies or delays paying a claim, the key case is supposed to be Pickett v. Lloyd’s, 131 N.J. 457 (1993), which was written by the late Justice Daniel O’Hern, a true gentleman and scholar.  Pickett holds that carriers that fail to pay valid claims will be subject to extracontractual damages.  The problem is that many New Jersey judges (and all insurance company counsel) read Pickett so restrictively that unless you can win a summary judgment motion on the coverage issues (which is usually pretty difficult), there’s no bad faith.   This means that as long as the carrier performs a perfunctory “investigation,” it’s generally off the hook. 

But not always, and especially not in cases involving wrongful delay instead of outright denial.  (Pickett itself was a case of wrongful delay.)  Recently, down in Burlington County, Merrimack Insurance Company got stung for a $624,000 verdict, all of which was beyond the policy limits, in a case involving damage to a 108-year-old, 210-foot stone retaining wall.  (Merrimack paid in its policy limits before trial.) The facts were as follows:

Policyholder Bello’s home, which included two rental units, was damaged in a windstorm.  The storm knocked down part of the wall, which served as a barrier between the property and the Delaware River.  Merrimack initially rejected the wall-damage claim.  Months later, Merrimack’s appeals panel reversed the denial of coverage and paid Bello the policy limit of $100,750.  The problem is that, while Merrimack was “evaluating” the claim, the wall suffered further deterioration.  Bello argued that his true loss exceeded the policy limits.  He contended that Merrimack had acted in bad faith because its claim representatives knew early on that the claim should have been covered, and the payment delay allowed additional damage.  Merrimack, meanwhile, argued that the wall had been compromised before the storm due to lack of maintenance. 

Now, here’s the exact New Jersey bad faith standard as set forth in Pickett at page 481:  “[A]n insurance company may be held liable to a policyholder for bad faith in the context of paying benefits under a policy.  The scope of that duty is not to be equated with simple negligence.  In the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits.  In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.  In either case (denial or delay), liability may be imposed  for consequential economic damages that are fairly within the contemplation of the insurance company.” 

The Bello trial took ten days.  Bello’s counsel showed how, during the lengthy claims process, deterioration in the wall caused the repair cost to go from $85,000 to $625,000, of which $425,000 was for replacement and $200,000 was to correct erosion. Meanwhile, the insurance company presented evidence from a lawyer-expert on how it had not committed bad faith in its claim-handling.  So, what the jury saw was a local resident whose property had been destroyed, pitted against the gray flannel suits from the insurance company.  Not good for Merrimack. 

The jury took two hours to come back with a 6-0 verdict against the carrier.  The trial court also awarded attorneys’ fees and costs, in excess of $230,000, as additional extra-contractual damages.  The carrier has appealed.

The Bello matter shows that, in the appropriate case – especially one involving delay rather than denial – bad faith lives in the Garden State.

Joel Garber of Voorhees, N.J. handled the case for the policyholder. 

The SEC has been getting more and more aggressive with investigations into alleged securities fraud, as well as with filing civil securities fraud actions.  In fact, we just got an SEC securities fraud action dismissed against one of our clients a couple of weeks ago…but it was an expensive fight.  Over at Property Casualty 360, they’ve posted an excellent article on insurance coverage for SEC investigations.  If you’re with a public company, or if you advise public companies, it’s worth a read.