Jun 12, 2013
Reading, understanding and interpreting an insurance policy can get pretty complicated. Coverage, exclusions, definitions, notice requirements, time limits – every provision of a policy can be subject to dispute between a policyholder and its insurer.
But as demonstrated by the decisions in this edition of the newsletter, courts interpret these insurance contracts with a focus on basic contract interpretation principles – reading the policy as a whole, examining whether the language is ambiguous, and asking whether the outcome was reasonably intended by the parties. When the courts do this, application of these basic contract interpretation principles results in favor of coverage for the policyholders.
The cases thus reiterate that when pursuing claims against an insurer, policyholders should not forget the importance of relying upon these fundamental principles.
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Reversing summary judgment for an insurer, the Illinois Supreme Court ruled that a general liability policy applied to a $1.7 million class settlement of claims under the Telephone Consumer Protection Act.
The court rejected Standard Mutual Insurance Co.’s argument that the statute was punitive in nature and therefore the damages were uninsurable.
Ted Lay Real Estate Agency hired a “blast fax” service that represented it had a list of people and entities that had consented to receive information via fax (a requirement under the TCPA). In June 2006 the company sent a fax ad with Lay’s contact info advertising the sale of a car wash to roughly 5,000 fax numbers.
Unfortunately for Lay, the recipients had not in fact consented to receive fax ads and one of them, Locklear Electric, filed a class action alleging violations of the TCPA. Lay sought coverage under a general liability insurance policy issued by Standard Mutual. The insurer agreed to defend Lay subject to a reservation of its rights, noting reasons including policy exclusions and that the TCPA “may constitute a penal statute.”
Lay settled the suit for $1,737,500 plus costs, based on the $500 TCPA-prescribed damages for 3,478 class members. Standard then filed an action in Illinois state court seeking a declaration that it had no duty to defend or indemnify. The insurer raised eight different arguments, but both the trial and appellate courts agreed that the $50-per-violation damages awarded under the TCPA constituted punitive damages and were therefore not insurable as a matter of Illinois law and public policy.
The state’s highest court disagreed.
The TCPA was enacted to protect the privacy interests of residential telephone customers by restricting unsolicited automated telephone calls as well as facilitating the interests of commerce by restricting certain uses of fax machines and automatic dialers. Therefore, the “manifest purpose of the TCPA is remedial and not penal,” the unanimous court concluded.
Addressing the $500 liquidated damages prescribed in the statute, the court said that Congress identified specific harms to consumers, like the loss of paper and ink, annoyance and inconvenience. While small, such harms “are nevertheless compensable.”
Further, the statutory award serves an encouraging purpose for potential plaintiffs to enforce the statute. “This added incentive is necessary because the actual losses associated with individual violations of the TCPA are small,” the court said. “Whether we view the $500 statutory award as a liquidated sum for actual harm, or as an incentive for aggrieved parties to enforce the statute, or both, the $500 fixed amount clearly serves more than purely punitive or deterrent goals.”
The court also noted that treble damages are available under the TCPA separate from the $500 liquidated damages, which “indicates that the liquidated damages serve additional goals than deterrence and punishment and were not designed to be punitive damages.”
Reversing summary judgment for Standard Mutual, the court remanded the case to the appellate court to consider the insurer’s other arguments to avoid coverage, including a contention that Lay failed to cooperate and entered into the settlement agreement without Standard’s consent.
To read the decision in Standard Mutual Insurance Co. v. Lay, click here.
Why it matters: The court’s decision was a victory not only for Lay but for other insureds seeking coverage in TCPA-related litigation. Standard Mutual’s argument that the statutory damages are punitive in nature is a common defense to avoid coverage but is now unavailable to insurers, at least in Illinois. The decision reflects a growing split in jurisdictions that have addressed the issue of whether TCPA-prescribed damages of $500 per violation constitute penal or punitive damages. Courts in Colorado and New York as well as the 10th U.S. Circuit Court of Appeals have reached the opposite conclusion of the Illinois Supreme Court. Thus insureds seeking coverage for a TCPA suit should check their policy to determine the governing law.
In an underlying false advertising suit involving Kim Kardashian, a California federal court held that the disparagement policy language at issue covered implied disparagement claims based on statements made by the policyholder about its own products in its advertisements.
Tria Beauty is a manufacturer and seller of beauty products, including a laser hair-removal device and a light-based acne treatment product. Tria filed suit against a competitor, Radiancy, Inc., alleging false advertising, unfair competition and trademark infringement. Radiancy responded with counter-claims against both Tria and its spokesperson Kim Kardashian, specifically that false and misleading statements were made by Tria about its own products that damaged Radiancy. Tria only made statements that its own products were superior.
Tria sought coverage from National Fire Insurance Co. and Travelers Property Casualty Co., but both insurers objected. The two insurers had identical language regarding advertising falsehoods that triggered coverage: material “that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”
But whether the language applied to implied disparagement was a tricky question that has split the federal district courts in California, U.S. District Court Judge William Alsup noted. He chose to follow a decision from the state appellate court, Travelers Prop. Cas. Co. v. Charlotte Russe Holding, Inc., 207 Cal. App. 4th 969 (2012), where the court found coverage was triggered by an underlying complaint alleging disparagement by implication – even when the claims of superiority were made by an insured about its own product.
“The question raised by the conflicting authority is whether the policy language included coverage for claims that sounded in disparagement in the broader sense of injurious falsehoods, as opposed to a narrower category of claims that met the pleading requirements for trade libel,” the court said. “This turns on an ambiguity in the policy term ‘disparages,’ which must be resolved by construing the language in a way that is consistent with Tria’s objectively reasonable expectations, and in case of doubt, against the insurers.”
Judge Alsup also found it significant that the policy language at issue was disjunctive (“slanders or libels . . . or disparages”) and did not delineate specific causes of action to which “disparagement” applied. Given this structure, done in the exclusions section, “reading the policy broadly to cover implied, ‘own-product’ disparagement would be consistent with a reasonable insured’s objective expectations,” he wrote. And the fact that the case settled was also not an issue, as “a non-meritorious underlying action does not preclude coverage.”
Radiancy’s counter-claims therefore triggered coverage for Tria under both policies, Judge Alsup concluded.
However, the court ultimately granted the insurers’ motions for summary judgment based upon an applicable intellectual property exclusion and because none of the advertising statements at issue occurred during the term of the policy.
To read the decision in Tria Beauty, Inc. v. National Fire Insurance Co. of Hartford, click here.
Why it matters: Although the court ultimately granted summary judgment for both insurers on other grounds, the decision in Tria strengthens a policyholder’s argument that coverage is available for implied disparagement claims and further supports the holding in Charlotte Russe that a policyholder’s statements about its own products could trigger coverage for disparagement claims.
If a tree falls and injures someone on a golf course, does an insurer have to provide coverage? The Illinois Court of Appeals said yes, ordering Indiana Insurance Co. to help cover a $4.5 million verdict won by a property management employee hit by a falling tree at a golf course managed by her employer, Royce Realty & Management Co., the policyholder.
Royce Realty sought coverage for its business, which involved managing various commercial properties, including two golf courses. It bought a commercial general liability policy that included coverage for bodily injury and property damage caused by an accident “because of your operations.” However, the policy also contained an Endorsement, labeled “Limitation of Coverage to Designated Premises or Project.” The Endorsement schedule listed only a single location for coverage: Royce Realty’s main office.
A Royce Realty employee was subsequently seriously injured when a tree on one of the golf courses managed by the company fell on her. Indiana initially agreed to defend Royce Realty in the personal injury suit brought by the employee but later withdrew. A $4.5 million verdict was returned in the employee’s favor, and Royce Realty assigned its rights to her under the Indiana policy.
Denying coverage, Indiana pointed to the Endorsement, the plain language of which limited coverage to claims arising out of “the ownership, maintenance or use” of Royce Realty’s office. Because the accident took place off-premises, coverage was not available, the insurer argued.
In light of other policy provisions within the policy, the Endorsement is ambiguous, the employee responded, which must be resolved in her favor.
To resolve the dispute, the court first looked to the type of policy at issue. A CGL policy typically protects against claims for injuries or losses arising from the insured’s business operations. Royce Realty’s policy “was in fact labeled as a CGL policy and contained language insuring against liability arising from Royce Realty’s operations,” the court said.
The court frowned upon Indiana’s attempts to transform the underlying CGL policy into a premises liability policy insuring only risks related to use of Royce Realty’s offices. Although Royce’s president signed off on the package of insurance policies including the Endorsement, the court looked at “what a reasonable person in the shoes of the insured would understand the policy to mean.”
“We do not believe that a reasonable person, having intended to protect against risks associated with his business operations and having bought a policy labeled as a CGL policy that purported to insure such risks, would read the Endorsement as nullifying most of that coverage,” the court concluded.
Reading the Endorsement together with the rest of the CGL policy to which it applied, the court found it ambiguous. Although the Endorsement limited coverage, the rest of the policy encompassed business operations involving off-premises activities, including coverage for medical expenses for bodily injury caused by an accident either (a) on or adjacent to premises Royce Realty owned or rented, or (b) because of Royce Realty’s operations.
“This provision plainly indicated that off-premises accidents would be covered if they arose because of Royce Realty’s business operations,” the court said. Other contradictory provisions included the definition of “coverage territory” that included Canada and a policy statement that Royce Realty employees were insured “for any acts performed within the scope of their employment.”
Finally, the court looked to the nature of the insured’s business – property management – and the fact that the insurer knew it would involve substantial off-premises risks when it wrote the policy. “The potential for accidents that could give rise to lawsuits against such a property manager is obvious,” the court said. “Indeed, the very type of accident experienced by [the employee] was ‘a risk likely to be inherent in the insured’s business.’”
Indiana’s attempt to “quietly convert” the CGL policy into a premises liability policy failed, the court said, affirming summary judgment for the policyholder and the employee.
To read the decision in Indiana Insurance Co. v. Royce Realty and Management, Inc. click here.
Why it matters: In the Indiana decision the court focused on the type of insurance for which the parties contracted, the risks undertaken, the subject matter insured and the purposes of the contract. Based on all of these factors, the court found coverage for the employee’s injury – despite the Endorsement that attempted to limit coverage to only a designated area.
Market value should be used to determine property coverage under an industry standard policy – not replacement cost – according to a recent decision from the 8th U.S. Circuit Court of Appeals.
The case involved the theft of electrical wiring from Buddy Bean Lumber Co. lumberyard in Hot Springs, Arkansas. Buddy Bean filed a claim seeking the actual cash value of the wire, about $725,000.
But Buddy Bean’s insurer, Axis Surplus Insurance Co., refused coverage. Axis pointed to the coinsurance provision in Buddy Bean’s policy that required the lumberyard to take out coverage equivalent to 90% of the value of its mills. If the policy limit fell below that percentage of value, Buddy Bean would be penalized on its claims in proportion to the shortfall.
Axis valued Buddy Bean’s property using replacement cost for a total of $21,024,000. Because the policy limit was $3,837,500, it fell far below the required 90%, Axis argued. The coinsurance penalty therefore limited the claim to just $98,000.
Buddy Bean filed suit, arguing that the term “value” in its coinsurance policy meant actual cash value and not replacement cost. The industry standard form at issue defined the term “value of Covered Property” as “actual cash value as of the time of loss or damage.” But Axis contended that Buddy Bean opted to purchase expanded coverage that changed that definition. Specifically, the lumberyard selected optional replacement cost coverage.
In response, Buddy Bean said the purchase of optional coverage did not dictate the type of valuation. Instead, the “value of Covered Property” depended on the type of claim filed by the insured – in this case, actual cash value. If the insured was penalized on claims made on basic coverage, there would be no point in purchasing replacement cost coverage, the lumberyard argued.
Noting similar decisions from a Washington state court and a North Carolina federal court, the 8th Circuit agreed with Buddy Bean. “[T]he proper interpretation of the coinsurance provision depends on whether the insured has filed an actual cash value claim or a replacement cost claim,” the panel held. “In order to calculate whether Buddy Bean is subject to a coinsurance penalty on that claim, then, the term ‘value’ in the coinsurance provision should be read as the actual cash value of Buddy Bean’s saw and planning mills.”
This reading of the coinsurance provision “makes sense of the ‘whole policy,’ as Arkansas law directs. Buddy Bean’s choice to purchase a type of expanded coverage was not intended to vitiate its basic coverage,” the court wrote. “If Buddy Bean’s decision to buy replacement cost coverage would automatically change how to calculate the coinsurance provision, the insured would always suffer a substantial coinsurance penalty even on actual cash value claims.”
As the property values were undisputed, the court determined that Buddy Bean was not subject to a coinsurance penalty and was therefore entitled to receive its claim of $725,000 for the stolen wire, less undisputed deductibles and an interim payment made by Axis, for a total of $575,000.
To read the decision in Buddy Bean Lumber Co. v. Axis Surplus Insurance Co., click here.
Why it matters: To determine whether market value or replacement cost should be used to value the insured’s claim, the court looked to the meaning of “value” in the policy as a whole. The purchase of additional coverage for replacement cost claims did not dictate the 8th Circuit’s outcome. The panel noted that when read together, the additional coverage and the coinsurance provision would result in policyholders facing a stiff penalty on most claims – an unlikely outcome that would “vitiate” the policyholder’s basic coverage. Reading the policy as a whole, the court found that basing the definition of “value” on the type of claim filed by the policyholder made the most sense.
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