National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

On May 21, 2008, in Wormuth v. State Farm, 2008 U.S. Dist. LEXIS 40668, the U.S. District Court for the Northern District of Oklahoma awarded a plaintiff insured attorney’s fees incurred in responding to State Farm’s notice of removal based on fraudulent joinder. Wormuth sued State Farm and two State Farm investigators in Oklahoma state court. State Farm filed a notice of removal claiming the two investigators were fraudulently joined to defeat diversity jurisdiction. The trial court disagreed, found no fraudulent joinder and so no diversity jurisdiction and remanded the case to state court.

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The duty to defend, in the context of a contribution lawsuit between insurers, and the right to pursue appeal after an unfavorable summary adjudication ruling, were the subjects of a decision from California’s Court of Appeal, Second Appellate District (Los Angeles).

In Monticello Insurance Company v. Essex Insurance Company (2008) __ Cal.App.4^th __ (2008 WL 1851316), the court of appeal affirmed the trial court’s ruling that Monticello failed to prove on motion for summary adjudication/judgment that Essex had a duty to contribute to the defense of a general contractor (“GC”) in a construction defect case.  Monticello was the direct insurer of the GC and Essex insured the GC as an additional insured under a policy issued to a drywall subcontractor. While the legal principles of equitable contribution may not be new, the case is an example of what evidence was found to be inadequate to substantiate the right to contribution. Both the trial and appellate courts (even though reviewing by different standards) found Monticello failed to show there was a potential that the drywaller’s work caused damage to other property.

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Oregon courts have consistently held that an insurance company may only be liable for tortuous bad faith in situations where it is defending its insured.  In Ivanov v. Farmers Insurance Company of Oregon, the Oregon Supreme Court addressed an insurer’s obligations under personal injury protection (PIP) coverage.  The decision itself addresses an insurer’s obligation to pay medical payments under Oregon’s PIP coverage statutes.  Ivanov sought certification of a class and summary judgment regarding denial of PIP benefits “solely on the basis of generalized criteria not specific to claimants’ injuries” and that PIP benefits may not be denied “unless [the] determination is based on a contemporaneous physical examination of the insured by a physician selected by Farmers.”  The trial court granted summary judgment in favor of Farmers on Farmers’ corresponding motion for summary judgment on the ground that the PIP statute does not require an IME prior to denial of the claim and that the insured bears the burden of proving that medical expenses were reasonable and necessary.  The Court of Appeals affirmed the trial court decision, but held that plaintiff had failed to produce evidence from which a trier of fact could infer that the claimed expenses were necessary.
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Water’s Edge Homeowners Association v. Water’s Edge Associates, et al., Superior Court of the State of Washington for Clark County, Case No. 05-2-03446-1 (2008) is a good example of how, when allowed adequate discovery, an insurer was able to reveal to the court the true collusive nature of a covenant judgment between the insured and the injured party. The case is on appeal to the Washington Court of Appeals, Division II, Case No. 374153.

In Water’s Edge, a construction defect case, plaintiff Homeowners Association entered into a settlement agreement with the defendants, wherein defendants stipulated to entry of judgment in the amount of $8,750,000, which included a cash payment by defendants of $215,000. Plaintiff covenanted not to execute the judgment against defendants and defendants assigned to plaintiff the defendants’ rights under a bad faith suit against defendants’ insurers, and defendants’ rights under a malpractice suit against defense counsel. Defendants also retained the right to recoup from their insurers the $215,000 payment. The settling parties then sought a ruling on the reasonableness of the settlement in order to establish the presumptive damages in the bad faith suit against defendants’ insurers.

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Pennsylvania has become the latest state to weigh in on the controversial question of whether an insurer that is later held not to owe coverage for a case may recoup its defense costs in a subsequent coverage suit against its policyholder.

In the decade since the California Supreme Court recognized such a right, courts around the country have come to widely different conclusions about whether or when to allow recoupment.  Some have focused on the necessity of the insurer having expressly asserted such a right when it agreed to provide a defense.  If so, some courts have found that am implied contract was created and that the insured, having obtained the benefit of the insurer's defense, must also fulfill its duty to reimburse if coverage was held not to exist.  Other courts, notably the Supreme Courts of Illinois and Texas, have rejected any argument that the insurer can unilaterally impose such a duty or has an implied right pursuant to theories of quantum meruit.

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Q:  When is a claim for damage to property not "property damage"?

A.  When it doesn't involve physical injury to or loss of use of tangible property?

So says the Vermont Supreme Court in a recent coverage dispute arising out of a building contractor's failure to use cedar shingles of the right color and quality in the construction of the plaintiff's home.  The court ruled in Down Under Masonry, Inc. v. Peerless Insurance Company that the contractor's liability insurer had no duty to defend inasmuch as the use of white cedar shingles instead of red cedar shingles as contracted for (as all fans of shingles know, red cedar is much the superior product) had not caused any physical injury to the plaintiff's home or caused him to lose the use of it.  The court concluded that it would not "find coverage for aesthetic damage under a CGL policy that does not explicitly provide for it."

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Last Friday, a U.S. District Court in the Northern District of Texas resolved a question of first impression in Texas when it determined that the standard Texas Auto Policy’s “reasonable belief” exclusion, which is inherently a subjective test of what the driver thought about his or her permission to operate the vehicle,  requires an objective test of the reasonability of the subjective belief held by the driver.  The dispute in Empire Indem. Ins. Co. v. Allstate County Mut. Ins. Co., Slip Copy, 2008 WL 1989452 , N.D.Tex. May 08, 2008), pitted two insurers against each other over which policy – a commercial liability policy or standard Texas auto - was responsible for defense and indemnify costs incurred when a repossession company employee caused a car wreck while street racing a repossessed car.  Empire insured the repossession company; Allstate insured the car through the former owner.  Allstate contended that the “reasonable belief” exclusion applied.  The reasonable belief exclusion applies when any person uses “a vehicle without a reasonable belief that that person is entitled to do so.”  Continue Reading...

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Spoliation issues have been a perennial concern to insurers. Not only do they present problems in cases that insurers are defending, whether due to the fact that the insured itself has lot a key bit of the plaintiff’s evidence or such evidence has gone missing after being forwarded to the insurer or its consultants for examination, such claims have recently become the subject of direct claims for coverage by policyholders. The recent opinion of the Illinois Appellate Court in United Fire & Casualty Co. v. Keeley & Sons, Inc., No. 5-06-0307 (Ill. App. May 2, 2005) has clearly explained, however, why general liability insurers should not afford coverage for such claims. Continue Reading...

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