My first boss in this business, the late Gene Anderson, used to collect briefs filed by insurance companies in cases around the country.  Then, when a carrier attempted to take an inconsistent position in a case that he was handling, he would present the court with a brief filed by the carrier somewhere else, in which it had taken the exact opposite position.  I’m not actually sure that this technique ever had a real impact on the outcome of a case, but it used to make the carrier lawyers apoplectic, and so was definitely worth the entertainment value. 

Gene would have loved the recent tiff in Federal Insurance Company v. Ardell, a case in federal court here in New Jersey in which two carriers have been fighting over responsibility for environmental cleanup costs at an old razor blade factory.  One of the carriers – Federal – had insured the manufacturer under various pre-absolute-pollution-exclusion general liability policies.  When the manufacturer made claims for coverage under the policies, Federal and the manufacturer settled, and Federal took over responsibility for the cleanup.  Federal hired a company called Cherokee to assist with the remediation, and Cherokee bought a cost cap policy from AISLIC, naming Federal as an additional insured.  The cost cap policy had a period of June 11, 1998 through June 11, 2008, with a $2M limit and a retention of $766,015.

(A few words about “cost cap” coverage.  This sort of policy has been marketed aggressively by Chartis.  It’s basically “cost overrun” insurance.  For example, if a remedial action plan estimates that a site can be remediated for $500,000, a cost cap policy might include a deductible of $100,000, and anticipated exposure of $600,000. So, if total remediation costs exceed $600,000, insurance will make up the difference, up to the policy limits. A policy of this kind can make real estate buyers slightly less wary about taking on environmental risks.)

Federal and Cherokee sought payout under the AISLIC policy for $928,103.99 in expenses incurred as part of the environmental remediation project between June 11, 2008 and June 3, 2009.  But AISLIC argued that it was not required to pay any cleanup costs post-dating the policy’s termination date of June 11, 2008.  The relevant policy provision reads as follows: 

“[AISLIC] will indemnify the Insured for Loss which the Insured sustained for Cleanup Costs the Insured first incurs on or after the Inception Date [June 11, 1998] and before the termination date [June 11, 2008].  This Coverage applies only if the following conditions are satisfied:…2.  The Insured reports Cleanup Costs to the Company prior to the Termination Date.” 

How to get around the sticky issue of the termination date?  Federal (like any good policyholder!) argued that the AISLIC policy was ambiguous, and that AISLIC had a “continuing duty” to indemnify for costs that were “first incurred” before the termination date, even if the costs were expended and paid after that date. 

But Judge Freda Wolfson disagreed, writing:  “A plain reading of the Cost Cap Policy and its ten-year period of coverage shows that the parties agreed that the policy would cover only those expenses which Federal and Cherokee incurred within that coverage period, i.e. expended paid and reported.  It is apparent that Federal and/or Cherokee failed to complete the remediation project within the ten-year period and thus incurred various costs after the Termination  Date in order to fulfill their contractual obligations…It is not for the Court to draft a better insurance contract that would indemnify Federal and Cherokee for their expenses after the termination date.”

Observation:  It’s much harder for an insurance company to claim “ambiguity” than it is for a bona fide policyholder. 

Second observation:  Always be aware of, and comply with, policy deadlines.  Otherwise, you’re in for a fight.

I’m just back from Orlando where I had the opportunity to speak at an ABA conference on business interruption insurance.  During the talk, I referred to a case I often cite, Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 1986 Ariz. LEXIS 253 (1986).  For me, the key quote from the case is:

“In delineating the benefits which flow from an insurance contract relationship we must recognize that in buying insurance an insured usually does not seek to realize a commercial advantage but, instead, seeks protection and security from economic catastrophe…Thus, the insurance contract and the relationship it creates contain more than the company’s bare promise to pay certain claims when forced to do so; implicit in the contract and the relationship is the insurer’s obligation to play fairly with its insured.”

That quote crystallizes the insurance relationship, doesn’t it?  When the policyholder overreaches and tries to realize a commercial advantage through insurance, the policyholder gets into trouble.  Conversely, when the carrier forgets the purpose of insurance and starts viewing the claims department as a profit center, the insurance company gets into trouble.

New York’s highest court just handed down an interesting decision in Fieldston Property Owners Ass’n v. Hermitage Ins. Co.  The case involved an underlying suit for “injurious falsehood,” and the question of who was obligated to provide a defense – the CGL carrier, the D&O carrier, or both?  The CGL policy stated that its coverage was primary “unless any of the [policyholder’s] other coverage is also primary,” in which case it would share costs.  The D&O policy included a provision stating that if the policyholder had “any other valid polic[ies]” that applied, then the D&O policy would serve as excess only, covering the policyholder beyond what the other primary policies supplied.  The Court held that the D&O policy language trumped the CGL coverage, and that the CGL carrier had the sole duty to defend under the “plain language” of the policies.

David Siegel, who writes the New York State Law Digest, had something funny to say about all this:  “Why wasn’t the commercial policy phrased in like terms?  We’ve seen similar insurance collisions in the Digest over the years, prompting us to visualize what the drafting section of an insurance company looks like.  (What comes to mind is a windowless room with an elderly man at a small table, dipping a quill into an inkwell.)”

    

In the last post, we took a look at the Dictiomatic case, in which the policyholder took a beating for overreaching on a business interruption claim.  Turnabout being fair play, let’s now have a look at a recent case in which the insurance company got thumped in the business interruption arena.  The case is Amerigraphics v. Mercury Casualty Co., 2010 Cal. App. LEXIS 377 (Cal. Ct. App. Mar. 23, 2010). 

(By the way, the Amerigraphics decision has the first-party claim community more than a bit worried, judging from a recent article in Claims magazine.)  

The essential issue was as follows.  Amerigraphics was a three-person graphics company.  A flood seriously damaged its business premises, knocking out its operating equipment.  The property carrier (Mercury Casualty) determined that, but for the flood, Amerigraphics’ operating expenses would have exceeded revenues, resulting in a projected operating loss of about $159,000.  After stalling on the business interruption claim for an extended period of time (and causing Amerigraphics to go out of business), Mercury came to a “no pay” conclusion.  Mercury reasoned that, absent the flood, Amerigraphics would have been in the red.  Therefore, Mercury argued, how could Amerigraphics legitimately claim that it had lost any income?

Unfortunately for Mercury, the appeals court saw things differently.  The business income coverage – in this case, ISO Form 0030 – provides for two components: 

(1) Net income (net profit or loss before expenses) that would have been earned or incurred absent the event that caused damage.

(2) Continued normal operating expenses paid or incurred, including payroll.

Generally and not surprisingly, insurance companies take the position that if (in their view) the policyholder would have operated at a net loss, there is no business income coverage.  The Amerigraphics court disagreed with that position, finding that items (1) and (2) were separate and distinct.  Specifically, the Court ruled as follows:

“If a catastrophic event damages an insured’s business premises and prevents the insured from being able to operate, any business in that situation would face two distinct problems: (1) a loss of money coming into the business (loss of income), and (2) payment of ongoing fixed expenses, even though no money is coming in. A reasonable insured would see that the definition of ‘Business Income’ has two distinct components: (i) net income, and (ii) continuing normal expenses. Because the definition provides that ‘Business Income’ includes both items, a reasonable insured relying on the plain language of the clause would reasonably conclude that the policy covers both items. Indeed, we note that the ‘Business Income’ provision appears in the policy under the preceding heading of ‘Additional Coverages.’ Given its placement in the policy and the plain language of the provision, it would be objectively reasonable for an insured purchasing the policy to construe it as protecting both its lost income stream and as defraying the costs of ongoing expenses until operations were restored.”

The case had been tried to a jury, and, in addition to awarding $170,000 in compensatory damages, the jury found Mercury liable for $3 million in punitive damages for dragging its feet on the claim, and for telling Amerigraphics that certain coverages did not exist under the policy, when in fact they did.  As in:  “Volper [the policyholder’s principal] called Brown [the insurance claims person] and told him he wanted to make a claim for normal operating expenses. Brown responded that there was no such coverage. Volper then sent Brown a letter enclosing a copy  of the relevant policy page with the relevant provision circled. Brown then requested that Volper provide him with a list of the normal operating expenses Amerigraphics had incurred.” 

The appeals court described Mercury’s conduct as “despicable” (never a good thing for a claims department), and said:  “Amerigraphics, which thought it had insured itself against catastrophic loss, and faithfully paid its premium to Mercury, ultimately became a particularly vulnerable victim. Put simply, Mercury’s egregious conduct put Amerigraphics out of business.”  The trial court had reduced the jury’s $3 million punitive damages award to $1.7 million, a 10-to-1 ratio with compensatory damages.  The appeals court, however, further reduced the punitive damages award to $500,000, finding that a 10-to-1 ratio was excessive under United States Supreme Court precedent. 

I’m getting ready to speak at an ABA-TIPS conference on the topic of business interruption insurance.  Given the number of horrible tragedies we’ve been through in the past decade (prayers for all those affected by the earthquake in Japan), it’s certainly a timely subject. 

To cut to the chase:  Business interruption insurance is designed to protect the earnings that the policyholder would have made, had the event or occurrence insured against not happened.  Many courts have noted that business interruption insurance is not designed to put the policyholder in a better position than it would have been in had no business interruption occurred. 

The elements of proof for a business interruption claim are pretty simple.  Basically, the policyholder must generally establish the following: 

  1. That damage covered by the policy has taken place. 
  2. That there was an interruption to the business (“suspension of operations”) caused by the property damage. 
  3. That there was an actual loss of business income during the period of time necessary to restore the business, and that the loss of income was caused by the interruption of the business and not by some other factor or factors (like, for example, lousy products or services).  See, e.g., Dictiomatic v. United States Fidelity & Guaranty Co., 958 F. Supp. 594, 602 (S.D. Fl. 1997). 

As with most claims, BI claims can easily go off the rails when the policyholder takes extreme positions, damaging its credibility.  The poster child for that situation is the Dictiomatic case. (It’s never good when the court uses the word “speculative” to refer to your claim in seven different places in its opinion.)  I recommend that anyone involved with this area of the law read that decision very carefully. 

Basically, the case involved a company that made hand-held electronic gizmos that translated certain languages into English (including the immensely popular Hungarian and Icelandic).  The latest generation of the gizmos didn’t work very well.  In fact, in an “OJ with the gloves” moment, the policyholder apparently demonstrated how “well” they worked during the trial, prompting the court to remark tartly:  “The in-court demonstration of the product revealed that the sound quality of the speaker was poor and that the pronunciation was not clearly discernible.” 

Dictiomatic was taking on water like the Andrea Doria – over $1 million in debt and no discernible market for its poorly-made products in sight.  (The court remarked:  “[Due to inconsistencies in Plaintiff’s proof and sloppy record keeping, the court is unable to determine the exact amount of debt. The evidence is clear and consistent, however, that at the time of the Hurricane the Plaintiff’s debt was substantial and was in an amount in excess of $1,000,000.”)  Then Hurricane Andrew came, which damaged the company’s Florida administrative offices, but not its subcontractor’s manufacturing facility in Singapore, where tens of thousands of the gizmos sat collecting dust.  Undeterred, Dictiomatic put in an initial BI claim of $1.3 million (later supplemented to include more), claiming that, despite its woeful financial records, the company would have turned huge profits if not for the bad weather. 

The Court made numerous snarky remarks about the credibility of Dictiomatic’s position, and ultimately dismissed the case at the close of plaintiff’s proofs, stating in part as follows: 

“[T]he evidence shows that the summaries of past profits the Plaintiff provided to the Defendant in support of its claims of past sales were not accurate inasmuch as bookkeeping journals and ledgers to support the summaries were not diligently kept current on a regular basis. In sum, during processing of the claim, Dictiomatic never provided USF&G with consistent, reliable information which might have supported its claim for loss of business income.” 

Ouch. 

“Consistent and reliable” documentation. If you want to win on a BI claim, that’s the key. 

By the way, if you want to know anything and everything there is to know about business interruption insurance, check out some of Michelle Claverol’s wonderful posts on the subject.   Michelle has gone above and beyond the call of duty in explaining this area of insurance and the law.

 

This weekend, my family is taking me to see “Spider-Man:  Turn off the Dark” to celebrate the 12th anniversary of my 39th birthday.  (The show is still in interminable previews.)  Given how things have gone so far for Spidey, I’m hoping that one of the actors doesn’t land on my head.  Anyway, over at Property Casualty 360, there’s an interesting piece about event cancellation insurance and how it might work with respect to the many well-publicized problems that have plagued the show.  The article quotes Roger A. Sandau of Doodson Insurance Brokerage, LLC, which specializes in large events internationally, as saying that contingency insurance—also known as non-appearance or event cancellation insurance—was designed for shows where there is a central talent that is part of the performance. In the case of Spider-Man, the delays caused by injuries to key performers “is the type of risk for which this insurance is designed.”

Sandau added, “If the show is shut down for violations of regulations or the law, that is not insurable. Cancellation insurance is not designed to respond.”

There’s a disturbing article over at Bloomberg about the (pretty horrendous) games insurance companies play with respect to policies governed by ERISA.  The ironic thing is that the ERISA statute was designed to protect workers.  But the so-called “arbitrary and capricious” standard of review sets such a low bar that claims often get denied for reasons invented out of whole cloth.  (I’ve handled a few of those myself.) Shame on any claims person who does this.  Shame on any company spokesperson who defends the practice.  Shame on any judge who lets the carrier get away with it.  And let’s all remember that when the government eventually steps in to regulate this area more strictly, the industry has only itself to blame.

A couple of weeks ago, we got a nice result ($13 million verdict) following a three-month trial in BASF Catalysts, LLC v. Allstate Insurance Company, one of the last great complex environmental coverage beasts.  We had the pleasure of co-counseling the matter with Dave Oberdick and his team from the Pittsburgh, PA firm of Meyer, Unkovic & Scott, LLP  – a wonderful group of professionals. 

One of the issues in the case involved the statute of limitations relating to insurance claims.  The carrier – OneBeacon – argued that it had sent a denial letter in 1993 and that we hadn’t brought suit until 2005.  The statute of limitations in New Jersey for contract matters is six years.

OneBeacon’s problem was that its denial letter included “CYA” language.   Specifically, while the letter denied coverage for the claim, it also stated:  “This correspondence is based upon presently known information.  [OneBeacon] will review any additional information which [the policyholder] believes should be considered in evaluating these matters.  Neither this letter nor any investigation of these matters undertaken by or on behalf of [OneBeacon] is intended to waive any rights or obligations of [OneBeacon] under the … policies issued to [the policyholder].”

OneBeacon’s claims handler testified at trial that, following this letter, he had never closed the claim file, and had in fact received supplemental information from BASF Catalysts (then known as Engelhard).

We argued that the “waffle” language inserted by the carrier, and the fact that the claim file had never been closed, meant that there was no unequivocal denial of coverage, and that the limitations period was therefore never triggered.  The Court agreed, writing in part:

“Toto v. Princeton Township, 404 N.J. Super. 604, 617, 962 A.2d 1150, 1157 (App. Div. 2009); Azze v. Hanover Insurance Co., 336 N.J. Super. 630, 641-43 (App. Div. 2001) require that a denial of coverage is required to be clear and unequivocal and cannot be ambiguous or open to multiple interpretations.  Nothing was presented at trial to change my earlier conclusion that [the so-called denial letter] is not unequivocal.”

The Court also found that the carrier had actively participated in the coverage case for five years before raising the issue, and therefore was estopped from doing so, holding:

“[OneBeacon] was an active participant in the lengthy fact discovery process as well as in the trial, and did not attempt to make its motion until all discovery was concluded and then again at the close of [the policyholder’s] evidence.  The timing of the motion was procedurally deficient because it was addressed to a ‘defense’ as to which [the policyholder] did not have the burden of proof.  In [Zaccardi v. Becker, 88 N.J. 245, 256-58, 440 A.2d 1329 (1982)], the Supreme Court determined that defendants were equitably estopped from asserting the limitations-period defense where they delayed for seventeen (17) months in informing the trial court and the plaintiffs that they were going to rely upon the defense.”   

By the way, there’s a pretty good – if a little dated – discussion of the statute of limitations with respect to insurance over at Marc Mayerson’s  Insurance Scrawl blog.  

Lessons: 

  1. If you’re a carrier and you intend to deny a claim, you’d better be clear and final in your language.
  2. If you’re a policyholder and you intend to prosecute a claim, don’t sit on your rights.  We won this one, but others may be lost because of inertia.
  3. Statute of limitations defenses are not like fine wine.  They don’t get better with age.  Neither do insurance claims.

The views expressed in this post are purely mine, and are not necessarily the views of BASF Catalysts, LLC.