In This Issue:
Policyholder Can Keep Selected Counsel, Court Rules; Insurers’ Objection Too Late
Why it matters: A policyholder was able to maintain its selected defense counsel after a federal court judge ruled that the insurers’ objection was too late. After being sued over allegedly defective windows, the policyholder requested defense coverage from its insurer but selected its own counsel. Although the insured maintained an open line of communication with the insurer about the progress of the case, the insurer waited more than four months before trying to install its own counsel in the underlying litigation and over ten months before intervening in the suit and filing a motion with the court. The policyholder objected and a federal court in Wisconsin determined the insurer was equitably estopped from making the change. The insurers’ “own inaction” after the policyholder’s selected firm had worked on the case for such a length of time would be prejudicial, the court said. “The insurers’ insouciance regarding the developments in a pending lawsuit in a fast-paced court is simply not justified,” the judge wrote.
Detailed discussion: Kolbe & Kolbe Millwork Co. purchased general liability insurance policies from Fireman’s Fund Insurance Company and United States Fire Insurance Company. Both policies included language that the insurers have the “right and duty to defend the insured against suit seeking … damages” that are covered by the policies.
In February 2014, a group of plaintiffs sued Kolbe & Kolbe, claiming the company sold them defective windows. The next day, the company tendered defense to the insurers. One week later, the insured notified its insurers that it had selected outside counsel and reached out to coordinate a discussion of the case.
The insurers, the policyholder, and its selected counsel all took part in a conference call to discuss the firm’s rates, credentials, and fees. The insurers did not make any objections, but did note they were still investigating coverage.
The policyholder retained counsel in early March and informed the insurers, which did not object or otherwise respond to the notice. By the end of the month, Kolbe & Kolbe had received its first invoice from the law firm and wrote to the insurers again, asking for their coverage positions. Again, the policyholder received no response.
In June, the insurers informed Kolbe & Kolbe that they would “agree to the appointment” of one of two law firms, neither of which were the policyholder’s selected firm. By that time, the selected firm had already answered the original complaint, prepared initial disclosures and a Rule 26(f) report, filed a motion for a protective order, conducted internal interviews, issued discovery requests to the plaintiffs and reviewed their responses, and retained an expert and begun inspections of the plaintiffs’ homes.
Based on the extent of the attorneys’ work, Kolbe & Kolbe told the insurers that they had forfeited their right to choose counsel and that the company intended to move forward with its selected law firm. The parties continued to exchange letters until November, when the insurers filed a motion to intervene in the underlying litigation. The court allowed the motion on the issue of Kolbe & Kolbe’s choice of counsel, but the insurers requested multiple extensions of time before finally filing their brief.
While U.S. District Court Judge Barbara B. Crabb acknowledged the general principle that the insurer gets to control the defense when it agrees to defend and indemnify an insured in a lawsuit, she found that Fireman’s Fund and United States Fire Insurance Company “lost whatever right they had through their own inaction.”
Over the course of four months – during which time the insured remained in constant contact with its insureds through the process of selecting counsel, retaining counsel, filing initial motions in the underlying litigation, and receiving its first legal bill – the insurers maintained their silence. Not until four months after defendant tendered its defense did the insurers inform Kolbe & Kolbe that they did not want to use the company’s selected counsel and provided the names of two other firms.
“Even then, the insurers provided no information to defendant about those firms except for their names,” the court said. “Although the insurers referred to the firms as ‘independent,’ the insurers did not provide any foundation for that statement.”
Although the insurers argued that Kolbe & Kolbe could not have reasonably relied on anything the insurers did or did not do, the court said they failed “to cite any evidence that they gave defendant any indication that they wanted to select different counsel until April 22, 2014, when Fireman’s Fund wrote that it ‘is in contact with [the] other carriers to coordinate the defense and discuss the retention of independent counsel.’ ”
Further, even if that letter constituted notice that the policyholder’s selected firm might be replaced, the court said it did not defeat an argument of reliance by Kolbe & Kolbe.
“Regardless of when the insurers told defendant that they may be selecting their own counsel, there was little that defendant could do to ready itself until the insurers actually provided counsel,” Judge Crabb wrote. “In other words, the prejudice to defendant was not simply a matter of not knowing that the insurers might choose another firm, but rather that the insurers failed to make a selection until defendant’s counsel had already invested significant time and resources into the case.”
If the court adopted the insurers’ position, they “would be free to take as much time as they wished to make a decision regarding counsel, up until the day of trial, regardless of the disruption that it would cause to the defense.”
Forcing the insured to switch in June “could have jeopardized the work that defendant’s counsel had done up to that point or at least caused significant delays as new counsel attempted to get up to speed,” the court added. “Particularly because defendant would have no way of knowing whether the court would grant extensions of time while new counsel attempted to catch up, it is not surprising that defendant resisted the insurers’ efforts to make the switch. Further, because the insurers did not provide defendant any information about the law firms it chose, defendant was not in a position to accept the insurers’ offer.”
The insurers should have known that a decision on counsel could not wait four months, Judge Crabb said, and although they claimed to have been diligently investigating the merits of coverage, they provided the court with few details about what they were actually doing.
Compounding the problem, the insurers also delayed in seeking relief from the court when the policyholder rejected their efforts to switch counsel. They waited three weeks to even respond to Kolbe & Kolbe’s refusal and spent months exchanging letters “at a leisurely pace” before intervening in the case.
“By the time that the insurers filed their motion for summary judgment on the selection of counsel issue, the case had been proceeding for more than ten months,” Judge Crabb wrote, and the defendant had already filed a 70-page motion for partial summary judgment.
“[A]t this point, it would be impossible to grant the insurers’ motion without causing substantial prejudice to defendant or completely resetting the schedule in this case, which is already on a slower track than the vast majority of cases in this court,” she said. “Under these circumstances, it would not be fair to defendant (or plaintiffs) to allow the insurers to stall the proceedings by substituting new counsel. The insurers’ insouciance regarding the developments in a pending lawsuit in a fast-paced court is simply not justified.”
The court deferred the issue of the reasonableness of the selected counsel’s fees for another day and denied the insurers’ motion to dismiss Kolbe & Kolbe’s claims for bad faith and breach of the duty to defend as premature.
To read the opinion in Haley v. Kolbe & Kolbe Millwork Co., click here.
Coverage Not Limited to Locations Listed in Policy
Why it matters: The Hawaii Supreme Court handed a policyholder victory when it ruled that the locations delineated in a commercial general liability (CGL) policy did not preclude coverage for the insured at other locations. The dispute involved coverage for property damage and personal injury caused by the collapse of a dam on the island of Kauai. Facing litigation, the insured filed suit against its insurers seeking judgment on the scope of coverage. The only insurer with a policy in effect at the time of the collapse denied coverage, pointing to a Designated Premises Endorsement (DPE) that it argued limited coverage to the specific premises listed. But the state’s highest court ruled that the list was “not sufficiently ‘clear and unequivocal’ to limit coverage to injuries occurring on the designated premises,” and to hold otherwise would unlawfully convert the CGL policy into a premises liability policy. Instead, the court relied upon a Fifth Circuit Court of Appeals decision to find that the policy covered injury or damage “arising out of” the ownership, maintenance, or use of a designated premises. Because decisions about the dam were made at a location listed on the DPE, coverage was appropriate, the court concluded.
Detailed discussion: On March 16, 2006, a large portion of the Kaloko Dam on the island of Kauai collapsed, releasing more than 3 million gallons of water, causing significant property damage, and killing seven people. James Pflueger owned the dam at the time and filed a state court lawsuit against C. Brewer and Company, the company he purchased the property from.
Pflueger contended that C. Brewer sold the dam aware that it had questionable structural integrity, requesting damages and indemnification for the company’s negligent acts or omissions and failure to warn about the dam’s unsafe conditions.
C. Brewer (a subsidiary of the company that constructed the dam in the late 1800s) in turn filed suit against 17 different insurers, requesting rulings regarding their obligations pursuant to various policies.
James River Insurance Company issued the only policy—a commercial general liability (CGL) policy—in effect at the time the dam breached. The insurer moved for summary judgment, relying upon a Designated Premises Endorsement (DPE) that stated: “This insurance applies only to ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury’ arising out of the ownership, maintenance or use of the premises shown” in a schedule of locations.
The list of locations included C. Brewer’s corporate headquarters but not the dam site. James River asserted that the DPE unambiguously precluded coverage for the dam.
A trial court granted the motion and an appellate court reversed. The Hawaii Supreme Court upheld the reversal.
“We hold that the James River DPE provides coverage for injury and damage that occur on premises not listed in the schedule if the injury or damage arises out of the ownership, maintenance or use of a designated premises,” the court concluded.
The court adopted the reasoning from a Fifth Circuit Court of Appeals decision, American Guarantee and Liability Insurance Co. v. 1906 Co., 129 F.3d 802 (5th Cir. 1997), where the panel explained that the phrase “arising out of” is “ordinarily understood to mean ‘originating from,’ ‘having its origin in,’ ‘growing out of,’ or ‘flowing from.’ In the insurance context, this phrase is often interpreted to require a causal connection between the injuries alleged and the objects made subject to the phrase.”
“[I]n this case, the [dam] was owned and operated by KIC, a C. Brewer subsidiary, KIC’s employees were considered employees of C. Brewer, and all major business decisions concerning the [dam], including the alleged failure to capitalize KIC, the entrance into various agreements to maintain the [dam], and the eventual sale of the land underlying the Reservoir, were apparently made at C. Brewer’s corporate headquarters,” the court wrote. “Therefore, a causal connection could possibly be found between C. Brewer and its entrustment of the [dam] to KIC, the operation of the designated premises, and the injuries that resulted from C. Brewer’s allegedly negligent corporate decisions.”
Adopting the insurer’s position that “arising out of” should be limited to liability for injury and damage occurring on designated premises would effectively convert the CGL policy to a premises liability policy, the Hawaii Supreme Court added.
Relying on a federal court decision from Florida, American Empire Surplus Lines Insurance Co. v. Chabad House of North Dade, Inc., 771 F. Supp. 2d 1336 (S.D. Fla. 2011), the court held that “a DPE ‘must be clear and unequivocal’ to convert a CGL policy to a premises liability policy in order to effectively limit coverage to injury or damage that occurs on undesignated premises.”
“In this case, the James River DPE does not clearly convert the policy into a premises liability policy,” the Hawaii Supreme Court explained.
Additional considerations supported this conclusion, such as the inclusion of “personal and advertising injury” in the DPE, which suggested that the parties intended to include coverage for negligent decisions made at a designated premises that resulted in injury and damages elsewhere. And the policy featured broad coverage territory encompassing the United States, Canada, Puerto Rico, and other parts of the world.
Finding that the policy provided coverage for negligence claims arising out of the use of C. Brewer’s corporate headquarters, the court remanded the case for consideration of other exclusions or endorsements asserted by James River.
To read the opinion in C. Brewer and Company v. Marine Indemnity Insurance Company of America, click here.
Violated Vacancy Clause Doesn’t Preclude Recovery for Mortgagee Bank
Why it matters: A violated vacancy clause did not stand in the way of recovery for a bank holding a mortgage on an empty building that was damaged by vandals. A policyholder’s plan to use a mortgaged property fell through and the 35,000-square-foot building remained empty for several years. Vandals broke in and caused significant damage. But the insurer balked at paying for the losses, pointing to a clause in the policy that required a certain percentage of the building to be occupied. Although the insured was not entitled to payment for the losses, the mortgagee bank filed suit, arguing that a mortgage clause in the policy created a “separate and distinct” contract between the insurer and the bank. Affirming a trial court, an Illinois appellate panel agreed. The mortgage clause protected the bank from the property owner’s noncompliance or any acts or omissions under the policy, such as the failure to maintain the minimal level of occupancy, the court explained, allowing the bank to recover for its losses.
Detailed discussion: Brothers Future Holding purchased a 35,000-square-foot building in Askum, Illinois, intending to use it for a new custom contract cooking venture. One of the partners died unexpectedly and business operations never began at the location, which sat empty from the time it was purchased in 2007.
Brothers was issued a policy by Peerless Indemnity Insurance Company that provided coverage for the building. When the policy was renewed in 2009, mortgagee Old Second National Bank was added to the policy as a mortgage holder.
The policy provided coverage for a physical loss of, or damage to, the property with various conditions including one pertaining to vacancy. The building would be deemed “vacant” under the policy unless at least 31 percent of its total square footage was rented or used by the building owner. If loss or damage occurred at the building and it was vacant for more than 60 days prior thereto, coverage was not available.
A mortgage clause was also included in the policy, which stated: “If we deny your claim because of your acts or because you have failed to comply with the terms of this policy, the mortgageholder will still have the right to receive loss payment” pursuant to certain conditions.
In 2009, vandals broke into the building. Equipment such as copper pipes, wiring, and fixtures was stolen and the structure of the building was damaged, with losses totaling about $2.27 million. Both Brothers and Old Second notified the insurer, but Peerless denied coverage based upon the vacancy provision.
Old Second filed a declaratory relief action arguing that it was entitled to coverage under the mortgage clause, notwithstanding the vacancy provision.
Peerless responded that protection under the mortgage clause was never triggered because Old Second had failed to establish a covered loss. No coverage existed for vandalism or theft when the property has been vacant, the insurer told the court, so the mortgage clause never took effect. The fact that the building was allowed to remain vacant for 60 days was not an “act” or default of the insured, but simply an unacceptable condition of risk.
A trial court sided with the bank and the Illinois Appellate Court affirmed.
The mortgage clause at issue was a standard mortgage clause, which formed a separate and distinct contract between the insurer and the mortgagee, effectively shielding the bank from being denied coverage based upon the acts or omissions of the insured or the insured’s noncompliance with the terms of the policy, the court explained.
“There is no dispute, nor can there be, that the claimed loss in this case was for damage resulting from vandalism to, and theft from, the building, and that both of these are covered losses under the terms of Peerless’ policy,” the court wrote. “Although the policy articulates specific ‘exclusions,’ ‘limitations,’ and ‘property not covered,’ none of these sections contain any reference to vacant property.”
Considering the interplay between the mortgage clause and the vacancy provision, the panel looked outside of Illinois for guidance, lacking any case law in the state. Citing decisions from New York and Pennsylvania, the court said the majority view holds that a vacancy clause does not relieve the insurer of responsibility to cover the mortgagee, as long as the mortgagee met its responsibilities under the policy.
“[V]acancy of the building for a period in excess of 60 days prior to the loss gave rise to a ‘state of noncoverage’ based upon a condition of the building independent of any acts of the insured,” the court explained. “However, harmonizing the vacancy provision with the mortgage clause, as we must, we find Peerless’ interpretation unreasonable, as it would place a mortgagee in the untenable position of having to guarantee the regular occupation of the premises, effectively placing it ‘at the whim’ of the insured.”
It was the act of Brothers in failing to occupy 31 percent of the building that triggered the vacancy provisions, the panel added. “By its very terms, however, the mortgage clause provides that Peerless was nonetheless obligated to pay the mortgage holder, Old Second, as Brothers’ claim was denied because of its own act,” the court said.
Old Second met all of the requirements in the mortgage clause by paying any premiums due at Peerless’ request, submitting a sworn proof of loss, and notifying Peerless of any change in ownership, occupancy, or substantial change in risk. Brothers was the owner at all times, the court said, and the risk never changed because the building was vacant the entire term of the policy.
The panel affirmed summary judgment in favor of Old Second as well as an order that Peerless must pay the bank $816,833 plus prejudgment interest.
To read the opinion in Old Second National Bank v. Indiana Insurance Company, click here.
TCPA Exclusion Applies Despite Attempts to Amend Complaint With State Law Claims
Why it matters: Creative pleading didn’t bring a Telephone Consumer Protection Act (TCPA) lawsuit within the scope of coverage, even where the underlying plaintiffs amended their complaint to allege state law conversion claims in the face of a TCPA policy exclusion, a federal court in Illinois determined. Asserting violations of state consumer protection law and the federal statute, the recipient of an unsolicited fax ad sued Domino Plastics. The parties reached a $17.75 million deal that included Domino signing over its rights under two insurance policies to the underlying plaintiff. Prior to the agreement, the underlying plaintiff had amended the complaint to add an additional state law count for conversion. When the plaintiff tried to enforce the settlement agreement, the insurers refused based on policy exclusions for TCPA actions. While the Illinois federal court noted the “great élan” employed by the plaintiff to avoid the TCPA exclusions, it nevertheless held that they applied because the conversion claim arose under the TCPA.
Detailed discussion: Addison Automatics received an unsolicited faxed advertisement from Domino Plastics Co. and filed a putative class action in Illinois state court in 2010. The complaint alleged violations of the Telephone Consumer Protection Act (TCPA) and the state’s Consumer Fraud and Deceptive Business Practices Act. The plaintiff amended the complaint to add a claim for conversion under Illinois state law.
In 2012, the parties settled the suit, with a state court judge entering judgment for $17.75 million. As part of the agreement, Domino assigned its rights in two insurance policies to the plaintiff class: a commercial general liability (CGL) policy issued by Twin City Fire Insurance Co. and an umbrella policy provided by Hartford Casualty Insurance Co.
Addison sought to enforce the judgment against the insurers, who refused to indemnify the class based on nearly identical exclusionary provisions in the two policies.
In an exclusion for “Violation of statutes that govern e-mails, fax, phone calls or other methods of sending material or information,” the Twin City policy included “ ‘Bodily injury’ or ‘property damage’ arising directly or indirectly out of any act or omission that violates or is alleged to violate[ ]” the TCPA as well as corollary state laws. Hartford’s exclusion was almost identical.
Addison told the court that the state law conversion claim added to the underlying complaint triggered coverage under the policy because it was not covered by the TCPA exclusions.
But U.S. District Court Judge John Z. Lee disagreed, siding with the insurers. He relied heavily on a 2014 decision from the Illinois Appellate Court in G.M. Sign v. State Farm Fire & Cas. Co., where the court confronted similar facts and determined that a TCPA exclusion negated any potential for coverage despite an attempt to plead around the exclusion with an amended complaint featuring claims for conversion.
“As in G.M. Sign, Addison filed an amended complaint to try to circumvent the exclusionary provisions and now contends that the conversion claim in the Domino lawsuit requires different elements of proof than a TCPA claim,” the court said. “Addison also argues that the conversion claim that is alleged in the amended complaint is based, not only on unsolicited faxes that contained advertisements, but unsolicited faxes that did not contain advertisements, thus asserting a claim that falls outside of the exclusions’ scope. Although these arguments may have superficial appeal, an examination of the amended complaint and the policy language reveal their flaws.”
Judge Lee focused on the language of the policies themselves. “A close reading of the exclusionary provisions reveals that their focus is not on the legal elements of a particular claim asserted by the underlying plaintiff, but the factual cause of the ‘bodily injury’ and ‘property damage’ that is alleged in the underlying complaint,” he wrote. “So long as the injury and damage alleged in the operative complaint ‘arise directly or indirectly out of any action or omission that violates or is alleged to violate’ the TCPA, the claims asserting the injury (whatever the particular legal theory may be) fall within the purview of the exclusions. That is what the language of the exclusionary provisions requires.”
Addison’s efforts to argue that some of the faxes covered by the deal included some that didn’t violate the TCPA but amounted to conversion failed. The conversion claim in Addison’s amended complaint incorporated the same allegations that formed the basis for the TCPA claim, the court said, and “[t]he injury and damage alleged in the conversion claim thus fall within the plain language of the exclusionary provisions.”
The titles of the TCPA exclusions also failed to sway Judge Lee, who said the title alone did not dictate the core of the contractual inquiry. While Addison argued that the insurers could have chosen broader language for their TCPA exclusions, the court was not persuaded.
“Addison attempts, with great élan, to avoid the clear operation of the TCPA exclusions and diminish the persuasiveness of G.M. Sign,” the judge said. “But its attempts fall short. A plain reading of the TCPA exclusions reveals that they encompass claims for injury or damage that arise directly or indirectly out of any actions that are alleged to have violated the TCPA. The underlying complaints in the Domino lawsuit concerned unsolicited facsimiles that allegedly violated the TCPA. Therefore, the TCPA exclusions precluded any coverage for defense of the underlying lawsuit and foreclosed any duty to indemnify.”
The court also adopted the insurer’s position that the policies further foreclosed indemnification because they only provided coverage for accidental property damage. A recipient’s use of paper and ink when Domino sent a fax was an expected, not unplanned, result, Judge Lee wrote, preventing coverage.
To read the opinion in Addison Automatics, Inc. v. Hartford Casualty Insurance Co., click here.