In This Issue:

• Texas Appeals Court Upholds $8.7M Verdict for Policyholder Against Broker
• Payment of Policy Maximum Doesn’t Preclude Breach of Contract Recovery
• Eighth Circuit Sends Issue Over “Accidental Product Contamination” to Jury
• Request for Injunctive Relief, Not Damages, Dooms Defense Claim

Texas Appeals Court Upholds $8.7M Verdict for Policyholder Against Broker

Why it matters
An appeals court in Texas upheld an $8.7 million jury verdict against a broker that procured coverage with significant restrictions, contrary to what the broker had recommended and agreed to procure. The policyholder had hired the broker to perform a risk assessment of its marina property. The broker recommended blanket insurance coverage with no coinsurance penalties or sublimits. When a 2007 flood caused significant damage and the insured submitted a claim, however, it was told the $15 million blanket coverage was subject to several sublimits and penalties. The policyholder sued the broker. After a three-week trial, a jury awarded roughly $8.7 million to the insured. The broker appealed. A panel of the Texas Court of Appeals found that the insured presented sufficient evidence to support the award.

Among other facts the court found significant, the insured never received a final, signed copy of the Lloyd’s policy until years after it filed suit. In effect, the court ruled that when an insured is promised particular insurance, pays for it and is provided proof of insurance, but not the policy, it is entitled to the benefit of the coverage sought.

Detailed Discussion
Lake Texoma Highport (“Highport”) maintained a large marina consisting of multiple boat docks, a service center, a fuel station, an administration building, and several restaurants and bars. In 2005, Highport hired Insurance Alliance to conduct a risk assessment of the property. Following Insurance Alliance’s recommendations, Highport instructed Insurance Alliance to obtain the recommended coverage—a $15 million blanket policy with no coinsurance penalties or sublimits and with replacement cost coverage.

Insurance Alliance acted as the broker for the policy; the carrier was Lloyd’s of London.

A flood damaged the marina in 2007, completely submerging some of the buildings and causing significant damage to Highport’s property. But when Highport filed a claim with Lloyd’s, it learned that the $15 million policy had sublimits and coinsurance penalties.

Highport sued Insurance Alliance, Lloyd’s, and an intermediary broker, Bowood. Lloyd’s settled the suit for $6.7 million and Highport proceeded to trial against Insurance Alliance and Bowood. During the three-week trial, the two brokers pointed the finger at each other: Insurance Alliance told the jury that Bowood made unauthorized changes to the terms of the policy, while Bowood said the forms submitted to it were incomplete and inaccurate.

The jury returned a verdict against all the defendants for $8.3 million, representing the amount of coverage that would have been available under the policy sought to repair and/or replace property damaged in the flood (less the amount of coverage provided by the policy obtained) and $438,598 in business interruption damages, plus court costs, pre- and postjudgment interest, and attorneys’ fees. After posttrial motions, the trial court entered judgment for Highport in the amount of $8,738,598, plus court costs, interest, and attorneys’ fees.

Insurance Alliance appealed. The broker argued that Highport failed to present sufficient evidence to support the jury’s award.

The Texas appellate panel disagreed, upholding the award in its entirety as supported by the evidence. Among the evidence was that insureds rarely receive full, final versions of Lloyd’s policies, and that “the first time a Lloyd’s signed policy was issued in this case was in June 2011,” over four years after the policy term commenced.

“In summary, there was evidence that Highport’s property damages, excluding overwater electrical, were as high as $14.6 million and that it could have received that amount under the $15 million blanket policy it sought,” the court wrote. “There was also evidence that Highport was entitled to a maximum of $2,915,000 under the policy it actually had; $14.6 million less $2,915,000 is $11,685,000.”

Turning to damages for business interruption, the court again found sufficient evidence to support the verdict. Testimony for Highport showed the total business interruption damages were $1,438,598 and that the policy requested would have provided $1 million for business interruption over the dry property at issue. The amount found by the jury – $438,598 – was the difference between the two, the court noted.

The panel also affirmed the award of $2.7 million in attorneys’ fees.

To read the opinion in Insurance Alliance v. Lake Texoma Highport LLC, click here.

Payment of Policy Maximum Doesn’t Preclude Breach of Contract Recovery

Why it matters
An insured may be able to recover under a breach of contract theory even though the insurer paid out the policy maximum to cover a settlement in the underlying litigation, a federal court judge in Louisiana has determined. The dispute involved a product liability complaint filed against the insured that settled for $24 million. More than 14 months went by without the insurer taking part in the defense, although it ultimately chipped in $4 million, the policy maximum, to the settlement. In the insured’s subsequent breach of contract suit, the insurer contended that it was not liable for any additional damages because it had already paid its full policy limits. But the court – applying Washington law, which was silent on the issue – noted several decisions that have found damages are available to an insured if the insurer ultimately fulfills its obligation, but does so in an untimely manner. The time value of money was sufficient to constitute damages should the insured win the case, the judge wrote, denying the insurer’s motion for summary judgment.

Detailed Discussion
In 2009, REC Solar Grade Silicon filed suit against The Shaw Group alleging that faulty pipes sold by Shaw resulted in damages to REC. Shaw sent the complaint to a third-party adjustor, F.A. Richard and Associations (FARA), that managed Shaw’s policy with Zurich American Insurance Company.

The policy provided a $2 million “per occurrence” limit and a $4 million aggregate cap; Shaw was responsible for a deductible of $750,000 per occurrence.

FARA concluded Shaw was likely liable for the claims in REC’s suit and informed Zurich. More than a year later, the insurer informed Shaw that it would defend the company under a full reservation of rights. Until that point, Shaw had retained and paid its own counsel.

The REC case settled for more than $24 million: $20,750,000 in damages and Shaw’s agreement not to pursue an uncontested counterclaim valued at $3,804,520.50. Zurich chipped in $4 million and Shaw paid at least one $750,000 deductible.

Shaw then filed suit against Zurich, alleging a breach of the duty to promptly pay defense costs and failure to make good faith attempts to settle the REC suit (by not participating in settlement conferences), as well as violations of Washington state law.

Zurich moved for summary judgment on all of the claims, and the court denied each in turn.

The insurer argued that the delay was due to the policy’s complex “unbundled” nature, where one entity was responsible for paying claims and another for administering claims. The insurer also argued that Shaw was required first to pay its deductible.

As to Zurich’s argument that its liability was exhausted by payment of the $4 million policy limits, U.S. District Court Judge James J. Brady found that Shaw could be entitled to an additional payment for the “time value of money” damages.

“[T]he Court finds Zurich’s argument – that an insurer could fail to defend for fourteen months and then not be liable for any damages because the insurer paid costs later – illogical,” he wrote. “The Court finds that ‘time value of money’ is sufficient to constitute damages should Shaw prove its case.”

Judge Brady, applying Washington law, found no direct precedent but cited support from “several federal district courts interpreting general contract principles [that] have found that damages are available even if the insurer ultimately fulfills its obligation in an untimely manner.”

And, despite Zurich’s argument that Shaw would obtain double recovery for the same harm, the court refused to allow a setoff for the $4 million payment. Shaw’s bad faith claims are based in tort, not contract, the court said.

The judge also denied summary judgment to Zurich on Shaw’s claim that Zurich refused to settle in bad faith and deferred ruling on the issue of whether Shaw needed to pay a second $750,000 deductible.

To read the opinion in The Shaw Group Inc. v. Zurich American Insurance Co., click here.

Eighth Circuit Sends Issue Over “Accidental Product Contamination” to Jury

Why it matters
The question of coverage for costs relating to a voluntary recall of breakfast sandwiches should be decided by a jury, the Eighth U.S. Circuit Court of Appeals has ruled. When a federally regulated flavor enhancer was inadvertently added to the sausage of an insured’s breakfast sandwiches and sold without the required label disclosure, the company was forced to undertake a recall. The company then sought coverage for its recall costs. The insurer balked, arguing that the voluntary recall of roughly 200,000 cases of sandwiches did not trigger coverage because it did not constitute “accidental product contamination.” Reversing summary judgment for the insured, the federal appellate panel said the government reports, scientific studies, and contrary expert opinions presented by the parties needed to be considered by a jury. The Eighth Circuit remanded the case for a jury to determine whether the consumption of the sandwich with between 0.06 and 0.13 grams of monosodium glutamate would likely result in bodily injury, sickness, or disease in customers.

Detailed Discussion
A manufacturer and seller of consumer food products, Hot Stuff Foods sells two types of sausage. For breakfast sandwiches, Hot Stuff uses a sausage that does not contain monosodium glutamate (MSG); for sausage distributed separately, the company uses a product that contains MSG.

Federal law requires that MSG be disclosed on a food product label when it is an added ingredient. When Hot Stuff realized that MSG-containing sausage was inadvertently used in its breakfast sandwiches, the company immediately contacted the Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA).

After discussing the problem with both agencies, Hot Stuff conducted a voluntary recall of the mislabeled sandwiches that were in violation of federal law because they did not disclose the added MSG. More than 193,000 cases of breakfast sandwiches were recalled.

To cover the losses sustained due to the recall, Hot Stuff sought indemnification from Houston Casualty Company pursuant to a Malicious Product Tampering/Accidental Product Contamination policy. Houston denied the claim on the grounds that it did not involve an “Accidental Product Contamination” as defined in the policy.

The policy defined the term as “(1) any accidental or unintentional contamination, impairment or mislabeling … during the manufacture … labeling … production or processing … of the Named Insured’s PRODUCTS (including their ingredients or components), or PUBLICITY implying such, or (2) fault in design specification or performance … provided always that the consumption or use of the Named Insured’s CONTAMINATED PRODUCT(S) has, within 120 days of such consumption or use, either resulted, or may likely result, in (1) physical symptoms of bodily injury, sickness or disease or death of any person(s) and/or (2) physical damage to (or destruction of) tangible property ….”

Hot Stuff sued Houston, and a federal court in South Dakota granted the insured summary judgment on the coverage issue. After a four-day trial on damages, a jury awarded Hot Stuff $200,000 for lost gross profit and $755,268.07 for recall and crisis response expenses.

On appeal, the Eighth U.S. Circuit Court of Appeals reversed the summary judgment determination.

Hot Stuff contended that it only needed to show a possibility that consumption of one or more breakfast sandwiches containing the amount of MSG would cause physical injury or illness, while Houston told the court that Hot Stuff had to show a probability that such harm would result.

The real question was somewhere in between, according to the appellate panel.

“[T]he parties to this insurance contract fixed where in the range of product contamination risks coverage should end by choosing a term requiring more than a possibility of physical injury (“may”), but less than a probability (“likely”),” the court said. “The issue is whether the presence of 0.06 to 0.13 grams of undisclosed MSG in the Sausage Breakfast Sandwiches that Hot Stuff distributed and then recalled ‘resulted, or may likely result in’ physical symptoms of injury or illness in any of the persons who consumed those products.”

Both sides presented reports by immunology experts, government reports, and scientific studies. Hot Stuff’s expert stated that certain sensitive individuals have been shown to experience reactions from levels of MSG as low as 0.5 grams; Houston’s expert concluded that the sandwiches were unlikely to result in illness to any person.

A jury must resolve the dispute, the court ruled.

“In our view, whether consumption of the mislabeled Sausage Breakfast Sandwiches ‘may likely result’ in physical symptoms of sickness or disease is a genuine dispute of material fact that cannot be answered by a summary judgment record that consist of inconclusive government reports and scientific studies and the dueling opinions of experts far removed from the relevant marketplace,” the panel wrote.

The court reversed summary judgment for Hot Stuff on the coverage question but upheld the jury award on damages, finding the issue distinct and separable.

To read the opinion in Hot Stuff Foods, LLC v. Houston Casualty Company, click here.

Request for Injunctive Relief, Not Damages, Dooms Defense Claim

Why it matters
Be mindful of what relief the plaintiff seeks. Here, the relief sought in the underlying litigation was limited to an injunction; the plaintiff did not include a request for damages. The defendant’s insurer therefore was not obligated to defend the claim. The insurer had declined the demand to defendant, taking the position that the complaint alleged harm that could not be “readily compensated for in damages,” and requested only temporary and permanent injunctive relief. The Wisconsin federal court judge sided with the insurer, adding that a claim for attorneys’ fees did not change the plaintiff’s request from injunctive relief into damages.

Detailed Discussion
Habush Habush & Rottier and Cannon & Dunphy are rival personal injury law firms in Wisconsin. Habush sued Cannon for violations of the state’s privacy law for allegedly bidding upon the keywords “habush” and “rottier” so that an online search would turn up results for the Cannon firm and not the Habush site.

The Habush complaint claimed that the harm caused to the firm could not be “readily compensated for in damages” and requested both a temporary and permanent injunction against Cannon to remove their advertisements from all Internet sites in response to searches using the contested keywords (or a combination of the words).

Although the Habush complaint did not seek damages, the firm did ask the court to award attorneys’ fees. A trial court granted summary judgment for Cannon & Dunphy, a decision affirmed on appeal.

Travelers Property Casualty Company of America, Cannon’s insurer, refused to defend the law firm under a commercial general liability policy. The policy provided that Travelers would insure for “ ‘those sums that [Cannon & Dunphy] becomes legally obligated to pay as damages because of “personal injury” or “advertising injury” to which this insurance applies,’ and that Travelers has the ‘right and duty to defend [Cannon & Dunphy] against any “suit” seeking those damages.’ ”

The insurer argued that the term “damages” was limited to legal damages and did not extend the duty to defend to actions seeking injunctive relief.

Cannon pointed to Habush’s claim for attorneys’ fees, arguing that the litigation was transformed by the request into a suit seeking damages.

U.S. District Court Judge Rudolph T. Randa disagreed.

Attorneys’ fees are not damages, the court wrote, citing to a Wisconsin Supreme Court case that held “damages … unambiguously means legal damages” or “legal compensation for past wrongs or injuries,” but “does not encompass the cost of complying with an injunctive decree.” An action seeking injunctive relief, therefore, did not trigger coverage under the policy at issue.

The court noted that if the requested injunctive relief is intended to compensate for past wrongs – such as a request for payments pursuant to a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) action – then related costs may be considered damages.

A typical injunctive relief request is not akin to damages, Judge Randa wrote, because it is not considered remedial, but forward-looking. Cannon & Dunphy did not argue that the injunction pursued by the Habush plaintiffs was distinguishable from a “typical injunction,” he said.

For similar reasons, the requested attorneys’ fees could not be considered damages, the court said. Federal statutes – like the Fair Housing Act – consider attorneys’ fees and costs as separate from a plaintiff’s right to damages. And while attorneys’ fees might be understood as monetary compensation when imposed for an already sustained injury, that was not the case in the underlying dispute.

“The Habush plaintiffs incurred legal fees, but only in an effort to stop Cannon & Dunphy from doing what it was doing,” Judge Randa wrote. “Thus, the claim for fees must be considered part of the costs of ‘conforming [Cannon & Dunphy’s] future conduct,’ not ‘legal recompense for injuries sustained.’ ”

Even if the underlying complaint did meet the definition of a suit for damages, the court found that a “Knowing Violation” policy exception applied to preclude coverage. The exclusion eliminated coverage for an advertising injury “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal injury’ or ‘advertising injury,’ ” the court explained. As the Habush complaint alleged Cannon’s actions were intentional, “the exclusion applies because Cannon & Dunphy was attempting to lure potential customers from Habush Habush and Rottier.”

Judge Randa granted summary judgment for the insurer.

To read the decision in Travelers Property Casualty Co. v. Cannon & Dunphy, click here.