Insurance Recovery Law -- Sep 12, 2013

by Manatt, Phelps & Phillips, LLP

In This Issue:

Summer Ends on a High Note for Policyholders

Summer may be winding down, but the courts are still smiling on policyholders. The three cases discussed in this week’s newsletter present some big wins for insureds.

Continuing the trend of finding coverage for insureds who have been sued for violating the Telephone Consumer Protection Act, the Missouri Supreme Court determined that the $500-per-occurrence damages under the act are not “fines.” The unanimous decision provides further support for insureds to argue that damages and settlements pursuant to the TCPA are not punitive in nature and are therefore insurable.

A D&O policyholder scored a victory when a New York federal court determined not only that allegations of physical and sexual abuse by a Jewish Community Center executive were covered by the policy but also that the insurer waived its right to deny coverage. New York insurance law requires that insurers must disclaim coverage “as soon as reasonably possible.” The JCC’s insurer waited 105 days – after having two years’ prior notice of the criminal allegations against the executive – and therefore lost its right to deny coverage, the court said.

Finally, in Texas, the state’s highest court ruled strongly in favor of policyholders by determining that a construction company should be indemnified for the costs of a voluntary remediation program – even though the insurer did not consent. The four-year project involved more than 450 houses and cost about $6 million, all of which the court held the insurer must pay, as it failed to prove that it was prejudiced by the company’s efforts.

Insurer Must Pay Cost of TCPA Settlement; Damages Not “Fines”

The Missouri Supreme Court ruled that an insurer was obligated to defend a policyholder’s Telephone Consumer Protection Act suit because damages under the act are not a “fine” and are therefore insurable.

Columbia Casualty Company refused to defend a TCPA suit filed against HIAR Holding LLC that resulted in a $5 million settlement plus interest (estimated at a total of $8.4 million). HIAR allegedly sent 12,500 unsolicited fax advertisements during the period under which it was insured by a commercial general liability policy from Columbia. One of the recipients filed a class action suit under the act.

Although HIAR tendered the suit to Columbia, the insurer refused to defend. When HIAR and the class reached a settlement agreement, Columbia rejected the deal and refused to participate in the negotiations. After a federal judge approved the settlement without any objections, the class filed a garnishment suit against Columbia. The insurer responded with a declaratory action seeking a clarification of its duties.

Fighting coverage on every possible ground, Columbia argued that HIAR’s TCPA violations were intentional and resulted in statutory damages akin to fines and penalties, making them uninsurable under the policy.

Joining an increasing majority of courts to address the issue, the Missouri Supreme Court disagreed.

“TCPA statutory damages of $500 per occurrence are not damages in the nature of fines and penalties,” the court said, relying on an opinion from the Eighth Circuit Court of Appeals in Universal Underwriters Ins. Co. v. Lou Fusz Automotive Network, Inc. (401 F.3d 876 (2005)) and reversing prior case law from an appellate court in the state.

The $500-per-occurrence statutory damages award serves more than purely punitive or deterrent goals, the court wrote, and the fact that treble damages are available separately from the fixed damages shows the $500 statutory damage awards, by themselves, are not a penalty.

The court rejected an argument by the insurer that HIAR intentionally sent the faxes, meaning an “occurrence” – defined as “an accident” in the policy did not occur. “The circuit court determined that HIAR’s actions in violating the TCPA reflected negligent conduct, as it found that HIAR did not intend to violate the TCPA and did not intend injury to the class,” the court said. “The circuit court accepted HIAR’s assertions that it believed that its marketing company had the consent of fax recipients to receive HIAR’s advertising faxes.” Thus the property damage coverage was invoked by the TCPA action.

Further, because HIAR’s policy included coverage for advertising injury – including offenses committed in the course of advertising materials that violate a person’s privacy rights – the claims fell under the policy’s coverage, the court said.

Although Columbia contended that “advertising injury” damages covered by the policy must be compensatory damages, the court noted that nothing in the policy expressly defined the term “damages.”

The unanimous court also took Columbia to task for attempting to challenge the settlement deal after wrongfully refusing to defend its insured. “Where the trial court has entered judgment after a hearing on liability and damages, then…the insurer is not entitled to a second hearing on reasonableness in any garnishment or declaratory judgment action based on the policy,” the court said. “The ‘insurer cannot have its cake and eat it too by both refusing coverage and at the same time continuing to control the terms of settlement in defense of an action it had refused to defend.””

To read the decision in Columbia Casualty Co. v. HIAR Holding LLC, click here.

Why it matters: The Missouri Supreme Court’s decision is significant because it not only reversed a lower appellate court ruling adverse to insureds, but also further supports opinions from the Eighth and Eleventh Circuits, federal courts in Massachusetts and Ohio, and the Illinois Supreme Court concluding that TCPA damages are not punitive in nature and are therefore insurable. Thus policyholders facing a suit under the act have a growing body of case law upon which to rely which holds that coverage is available and that the statutory damages are not punitive in nature, and will not preclude coverage.

Insurer’s Denial Waived Based on Untimely Notice Under New York State Law

A New York federal judge ruled that an insurer waived its right to deny coverage because it failed to send a timely coverage letter to the insured as required under state law.

The case began when a 13-year-old was hired for after school work at the Staten Island Jewish Community Center (the JCC). The boy reported to his mother that an assistant executive director physically and sexually abused the young employees. The executive was arrested, pleaded guilty to three counts of forcible touching, and was sentenced to six years’ probation.

When the executive was arrested and charged in 2006, the JCC notified Trumbull Insurance Company, from which it had purchased a Non Profit Directors and Officers Liability Insurance Policy. However, Trumbull did not acknowledge receipt of the faxed notification for 190 days. Nevertheless, when the boy’s mother filed suit against the JCC two years later, the organization again notified Trumbull and sought coverage under its policy.

This time, Trumbull waited 105 days to reply, and when doing so, denied coverage. The JCC responded to Trumbull’s denial by filing its own suit, seeking a declaration that Trumbull was obligated to defend and indemnify it in the underlying lawsuit.

The policy’s core clause read: “The Company shall pay on behalf of an Insured all Claims, Expenses and Damages that the Insured becomes legally obligated to pay for any Claim(s) first made against the Insured for a Wrongful Act(s) which arise solely out of the discharge of an Individual Insured’s duties on behalf of the Entity.”

U.S. District Court Judge Eric N. Vitaliano found that the language was unambiguous and could only be interpreted so that the underlying lawsuit fell within the scope of coverage. Despite the parties’ debate over whether the executive’s actions occurred in the “discharge of [his] duties,” the court said they clearly did. “[T]he wrongful act does not define the duty: it merely must occur in the course of the insured’s performance of whatever his employment duties are.”

The executive’s wrongful acts “arose solely out of” the discharge of his duties for the JCC, as they occurred during an employment break activity that the abuser required the boys to play during their work day, under his supervision and control, the court explained. The executive “had the ability to force these children to play the game and to suffer the cruel punishment he meted out solely because he held a position of authority over them as their JCC employment supervisor,” the court said.

Once the court determined the underlying suit fell within the parameters of the policy, it turned to New York Insurance Law section 3420(d), which requires that “an insurer shall disclaim liability or deny coverage for…bodily injury arising out of…any other type of accident…it shall give written notice as soon as reasonably possible.”

From the point of view of the JCC, the executive’s actions were an accident, the judge determined. Nothing in the record indicated that the organization knew about or had any reason “to expect or foresee” the abuse until after it happened, making it “unexpected, unusual and unforeseen” from the JCC’s standpoint. Further, the suit involved claims of “bodily injury,” including physical abuse and the emotional distress alleged by the victim.

Therefore, the insurer’s 105-day delay to respond to the JCC after being notified of the underlying suit was unreasonable as a matter of law, the judge concluded. “Trumbull provides no excuse or explanation for this delay,” the court wrote. “The JCC had notified Trumbull of the charges against [the executive] nearly two years before it finally submitted what the insurer had advised would be a ripe claim. The insurer cannot now honestly argue that it needed an additional three and a half months after receiving notification” of the lawsuit to disclaim coverage.

To read the decision in Jewish Community Center of Staten Island v. Trumbull Ins. Co., click here.

Why it matters: Policyholders should be pleased with the decision, which puts insurers in the state of New York on notice that disclaimer of coverage must be timely or it will be waived. Citing other courts that found a 41-day delay in response to an insured was unreasonable, the court found that Trumbull’s 105-day delay – on the heels of more than two years’ advance notice of the executive’s criminal acts – was unreasonable as a matter of law.

Insurer Must Indemnify Preventative Voluntary Acts Undertaken by Policyholder

Voluntary acts undertaken by an insured without the consent of the insurer are nevertheless covered under the policy, the Texas Supreme Court has ruled.

After learning that homes built with exterior insulation and finish systems (“EIFS”), commonly used in home construction, had caused rot and structural damage, as well as mildew, mold, and termite infestations, homebuilder Lennar Corporation offered a remediation program to all of its customers.

During the four years it took to remove the EIFS and replace it with conventional stucco, Lennar’s insurers refused to cooperate with the remediation program. Twelve years of litigation followed until only Markel American Insurance Company – which had provided a $25 million commercial umbrella policy from June 1999 to October 2000 – remained. A jury found for Lennar on its indemnification claims, awarding almost $6 million, and Markel appealed.

The insurer argued that the proactive replacement of EIFS did not constitute costs incurred “because of…property damage” under the policy. It also pointed to Condition E of the policy, which stated that “it is a requirement of this policy that…no insured, except at their own cost, voluntarily make any payment, assume any obligation, or incur any expense…without [Markel’s] consent.”

But reversing an appellate court, Texas’ highest court said Markel was responsible for indemnifying Lennar.

Condition E did not excuse liability under the policy unless the insurer was prejudiced by the settlements, Markel conceded. But the insurer argued that it had been prejudiced because Lennar sought out homeowners for the remediation program – including those who would not have sought redress otherwise. “Markel’s argument boils down to this – had Lennar stonewalled the homeowners, fewer repairs would have been made,” the court wrote. But that issue was one of fact, not law, and had been resolved by the jury in Lennar’s favor.

“Markel failed to prove that it was prejudiced in any way by Lennar’s settlements,” the court said. “The jury’s failure to find prejudice leaves but one conclusion: that Lennar’s loss as shown by the settlements is the amount Markel is obligated to pay under the policy.”

In addition, the court found that Markel was obligated to pay the amount of damages awarded by the jury, despite the insurer’s argument that Lennar should have delineated the cost of repairing home damage from the cost of locating damage. But Lennar could not have located the damage – which was hidden from sight – without removing all of the EIFS, the court emphasized, and “[u]nder no reasonable construction of the phrase can the cost of finding EIFS property damage in order to repair it not be considered to be ‘because of’ the damage.”

The court also addressed coverage for property damage Markel claimed occurred outside of the policy period. Coverage for water damage from EIFS begins within 6 to 12 months after home construction is completed and continues until it is repaired. Lennar stopped using EIFS in 1998; Markel’s policy ran from 1999 to 2000. “A fair inference from the record is that most of the damage to the homes began before or during Markel’s policy period and continued afterward,” the court determined.

The policy expressly included damage from a continuous exposure to the same harmful conditions and “all 465 houses at issue suffered property damage during the policy period,” the court said. “Thus, the policy covered Lennar’s total remediation costs.”

To read the decision in Lennar Corp. v. Markel American Ins. Co., click here.

Why it matters: The decision is a significant victory for the policyholder, with the unanimous court finding coverage for the costs of both locating and remediating the property damage, which were undertaken without the insurer’s consent. “Lennar’s responsible efforts to correct defects in its home construction did not absolve Markel of responsibility for the costs under its liability policy,” the court concluded.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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