Insurance Recovery Law

Exception to Mold Exclusion Requires Defense of Suit Alleging Injuries From Moldy Water

Why it matters: An exclusion for "Fungi or Bacteria" did not prevent a federal court judge in Tennessee from ordering an insurer to provide a defense to a policyholder facing a lawsuit over allegedly moldy water. Tenants filed suit against a property management company, claiming that they were evicted after complaining about mold infestation in their water supply and that they suffered personal injury as a result of ingesting the moldy water. When the property management company requested a defense from its insurer, the carrier argued that coverage was precluded by an exclusion for "Fungi or Bacteria." The insurer sued for declaratory judgment, but the court sided with the policyholder. Relying on an exception within the exclusion for a "good or product intended for bodily consumption," the court found that the drinking water at issue qualified and the insurer therefore owed a defense for the lawsuit.

Detailed discussion: A couple rented a house from Reed & Associates of Tennessee, a property management company. The couple filed a two-count complaint in state court against Reed & Associates alleging that the company evicted them from the house after they complained about a mold infestation in their water. The company also failed to comply with building and housing codes, keep the area in a clean and safe condition, and keep the premises fit, all in violation of the Uniform Residential Landlord and Tenant Act, the couple claimed.

The couple alleged they incurred monetary losses and personal injury as a result of the moldy water.

Reed tendered defense of the suit to its insurer, Acuity, which accepted defense under a reservation of rights. Acuity then filed a declaratory judgment action in federal court arguing that the policy did not require coverage and that it should be allowed to cease its defense.

Applying Tennessee law—and noting that insurance contracts are subject to the same rules of interpretation that apply to any contract in the state—U.S. District Court Judge S. Thomas Anderson disagreed.

Under "Coverage A" of the policy, Acuity provided insurance for "bodily injury" and "property damage." The allegation of retaliatory eviction, which only stated damages for "unnecessary expenses for moving and storage" as well as money the couple had paid toward the purchase option of the house, did not give rise to coverage under the policy, the court said. The couple did allege bodily injury as a result of the mold infestation, however, including medical bills, which were covered under the policy.

Acuity pointed to the policy's Fungi or Bacteria Exclusion, which broadly precluded coverage for bodily injury or property damage caused, in whole or in part, by "fungi or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event material or product contributed concurrently or in any sequence to such injury or damage." The exclusion, however, had a carve out, such that it did not apply "to any fungi or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption."

The court agreed that the exclusion, at first glance, appeared to preclude coverage for claims of bodily injury stemming from mold exposure. Further analysis, however, showed that the claims in the underlying complaint triggered the "intended for bodily consumption" carve out from the exclusion.

The couple's "complaint clearly alleges bodily injury as a result of a mold infestation affecting the water in the home," Judge Anderson wrote. "And the Court cannot ignore the 'exception' to the mold exclusion, which provides that the exclusion does not apply to preclude coverage for bodily injury suffered as a result of 'any fungi or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption.'"

Other courts have construed language similar to that in the exception to find that water constitutes a "good" or "product," the judge said, including federal courts in Florida and Georgia considering application of the phrase to a hotel hot tub and a vaporized spa tub and shower.

In those cases, the courts described a "good" as "something that has economic utility or satisfies an economic want," with "consumption" defined as "the utilization of economic goods in the satisfaction of wants."

"If water in a spa tub and a shower is considered a good intended for consumption, it follows that water in a rented house, some of which will be ingested by drinking and bathing, is intended for consumption," the court said. "Therefore, the exception to the mold exclusion applies in this case to provide coverage over the [couple's] allegation that they suffered bodily injury as a result of mold in the water supply."

Judge Anderson denied Acuity's motion and entered summary judgment in favor of Reed & Associates on the duty to defend, saving a determination of the duty to indemnify for a later date.

To read the opinion in Acuity v. Reed & Associates of Tennessee, click here.

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Tenth Circuit: Insurer Breached Duty to Broker by Failing to Appoint Counsel

Why it matters: An insurer breached its duty to defend by failing to provide substitute counsel for a securities broker where the insurer had agreed to defend with a reservation of rights but original counsel had withdrawn, the Tenth Circuit Court of Appeals recently determined. Two investors filed a Financial Industry Regulatory Authority (FINRA) arbitration action against a securities broker and the brokerage firm he worked with for allegedly failing to disclose the risks involved in a series of investments. The firm and the broker sought coverage for the arbitration from their insurer, which agreed to defend subject to a reservation of rights. Appointed defense counsel later withdrew and the parties never agreed on new counsel. However, the insurer provided limited approval to the brokerage firm's attorney to settle the matter. The parties reached a deal but the investors limited their agreement to the securities firm and not the broker. Unaware that he lacked counsel, the broker failed to attend the arbitration and a $500,000 award was entered against him. In a subsequent breach of the duty to defend suit against the insurer, a federal court judge divided the dispute into three time periods where a duty to defend was potentially implicated and ruled in favor of the carrier. A panel of the Tenth Circuit reversed with respect to one period of time: the lead-up to and during the FINRA arbitration. The court was not persuaded by the insurer's argument that it thought the settlement included the broker and that it believed the brokerage firm's counsel was defending the broker, finding that the insurer breached its duty to defend the broker by failing to appoint counsel.

Detailed discussion: A licensed securities broker, Forrest Templeton, sold high-risk investments over a three-year period to a Robert and Lisa Cordaro. He sold one of the investments while he was a registered representative for CapWest Securities, Inc. When the investments failed, the Cordaros filed claims against Templeton and CapWest with FINRA.

Catlin Specialty Insurance Co. insured CapWest and Templeton under an errors and omissions policy, which provided coverage for claims regarding the sales of securities while Templeton was a registered representative at the brokerage firm. The insurer agreed to defend both the firm and Templeton against the Cordaros' claim subject to a reservation of rights.

Although Catlin retained counsel, the law firm withdrew after a disagreement with CapWest. The brokerage firm and the insurer disagreed about replacement counsel, with Catlin objecting to Fields, Fehn & Sherwin (FF&S), the law firm preferred by CapWest. The insurer did not acquiesce to the firm's representation but did provide it with limited authority to attempt a settlement with the Cordaros.

Just prior to the FINRA arbitration hearing, FF&S negotiated a deal with the Cordaros. The couple then dismissed CapWest from the action but not Templeton. Believing that the settlement resolved the claims against him, Templeton did not attend the FINRA hearing, and a $500,000 award (plus interest and costs) was entered against him.

Templeton paid the Cordaros $550,000 to settle the arbitration award. He then filed suit against Catlin (and others), alleging the insurer breached its duty to defend. A Colorado federal court granted summary judgment in favor of all the defendants.

The broker appealed to the Tenth Circuit. Although the three-judge panel affirmed the majority of the district court's findings, it reversed on the issue of Catlin's breach of the duty to defend.

Three phases existed during the length of the dispute potentially implicating the insurer's duty to defend: "the lead-up to and during the FINRA arbitration, the time when an appeal could have been taken, and during settlement negotiations with the Cordaros," the court explained. "We conclude Catlin breached its duty to defend during the first phase, but did not breach its duty to defend during the second and third phases."

Catlin argued that it justifiably believed FF&S was handling the Cordaro matter on behalf of both CapWest and Templeton and that the firm settled the matter before the FINRA hearing date. Templeton countered that the insurer violated its duty because it never retained replacement counsel after the initial law firm withdrew and even if the insurer had retained FF&S, that firm could not represent him because of a conflict of interest.

The panel agreed. Catlin never yielded and "adamantly objected" to the appointment of FF&S, the court said. Although the insurer authorized via e-mail authority to settle the Cordaro matter for $15,000, "that e-mail does not show that Catlin acceded to CapWest's selection of FF&S as defense counsel," the panel wrote, particularly as the insurer's message included a statement that Catlin and CapWest "still need to find an 'agreed-to defense counsel.'"

At most, the communications between CapWest and Catlin "can be read to show Catlin agree to retain FF&S to represent the insureds only for settlement negotiations with the Cordaros," the court said. "Nothing indicates Catlin agreed to FF&S assuming the defense of CapWest and Mr. Templeton for the entire arbitration proceeding."

The insurer could not rely on the settlement agreement, the panel added, because the timing cut a little too close. Even if Catlin reasonably believed that FF&S had settled the Cordaro matter, "it still had not retained defense counsel for the arbitration proceeding scheduled to start the next day and therefore did not fulfill its duty to defend Mr. Templeton. No evidence shows that Catlin had counsel in place for CapWest or Mr. Templeton had the arbitration actually proceeded, which it did for Mr. Templeton. If Catlin had fulfilled its obligation to hire counsel to represent Mr. Templeton, Mr. Templeton's counsel would have been aware that the matter had not settled against him, and Mr. Templeton would have been represented in the arbitration."

Even if the court found that Catlin permitted CapWest to select FF&S, the insurer "still failed to appoint nonconflicted counsel for Mr. Templeton, who was separately insured under the Policy," the court wrote. When the insurer originally appointed counsel, that firm required Templeton and CapWest to sign a waiver for their joint representation. "Catlin never received a waiver from any of the parties for FF&S' possible joint representation of them," the court said. "Without such a waiver, Catlin could not satisfy its duty to defend Mr. Templeton."

However, the panel did not find Catlin breached its duty to defend for the latter two phases of the dispute, either the post-arbitration period or a post-judgment duty to negotiate a settlement with the Cordaros.

"Mr. Templeton does not point to any reasonable basis to appeal the arbitration award," the court noted, and the duty to prosecute an appeal exists only if there are reasonable grounds to do so. "[T]he duty to defend does not include bringing a groundless appeal." As for the duty to negotiate a settlement, Templeton failed to appeal this aspect of the case and the panel declined to consider it.

The court reversed summary judgment in favor of Catlin on the duty to defend claim as it related to the lead-up to and during the FINRA arbitration proceedings and remanded to the district court.

To read the order in Templeton v. Catlin Specialty Insurance Co., click here.

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Client Spreadsheet Constitutes a Claim, Triggers Notice Requirements

Why it matters: Can a spreadsheet listing monetary damages sent by a client to an insured constitute a "claim," triggering the notice requirements of an insurance policy? Applying a broad interpretation of the term, a panel of the Eighth Circuit Court of Appeals answered in the affirmative, defining a claim as "an assertion by a third party that the insured may be liable to it for damages within the risks covered by a policy." A client of the insured sent the company a spreadsheet prior to filing suit to document "the specific total of how much monetary damages" the client had sustained allegedly caused by the insured's product failures. When the client later filed suit, the insurer refused to provide a defense, arguing that a claim was made prior to the effective date of the claims-made policy, eliminating coverage. While a mere request for information would be insufficient to constitute a claim, "a demand for relief" like that presented in the spreadsheet "generally constitutes a claim," the Eighth Circuit said. Affirming summary judgment for the insurer, the federal appellate panel noted that the policyholder itself treated the spreadsheet like a claim and, as such, notice had to be provided under the prior policy and could not be made under a subsequent claims made policy. This case highlights the need to be extremely mindful of the need to give notice when even potential claims come to a policyholder's attention.

Detailed discussion: Ritrama, Inc. manufactures pressure-sensitive flexible films and cast vinyl films for various applications. For client Burlington Graphics System, Ritrama sold more than $8 million worth of cast vinyl film products to manufacture graphic decals for customers in the recreational vehicle (RV) industry.

In early 2008, Burlington reported to Ritrama that RV owners were having problems with the graphics. The parties began a series of discussions about how to solve the issues and how to allocate payment for the losses Burlington had sustained. In July, a Ritrama manager sent an e-mail about a meeting with a Burlington representative with comments including: "Ritrama will discuss the Keystone claim on Monday during conference call" and "Mark will be compiling a summary of the re-work claims submitted to them."

On September 9, 2008, Burlington sent Ritrama a spreadsheet detailing three claims for monetary damages based on the product failures, totaling $53,219.37. A Ritrama e-mail in response noted that a group "went over the claim summary" and had questions such as "What is [Burlington's] expectation of Ritrama on this claim? Is there a certain percentage split you have in mind? When we settle on what the split will be, will this be it?"

The companies continued to discuss dollar amounts without reaching an agreement. Burlington filed suit against Ritrama in April 2011. Ritrama looked to HDI-Gerling America Insurance Co. for defense coverage pursuant to a commercial general liability policy that covered the time period between March 31, 2009 and March 31, 2010. Gerling denied coverage and Ritrama filed suit against the insurer.

Gerling moved for summary judgment in the coverage dispute, arguing that Burlington made a "claim" within the meaning of the policy prior to March 31, 2009 and thus the claim was covered, if at all, under a prior policy. A federal district court granted the insurer's motion and Ritrama appealed to the Eighth Circuit.

Applying Minnesota law, the federal appellate panel found the term "claim" as used in the policy to be unambiguous, adopting the definition used by the district court: "an assertion by a third party that the insured may be liable to it for damages within the risks covered by the Policy."

This definition was "entirely consistent" with dictionary definitions, the court said, as well as with the policy as a whole. "Ritrama believes the term 'claim' should carry a similar meaning to 'suit' because the terms are used 'side-by-side,' but the Policy specifically defines the term 'suit' and does not define the term 'claim'—suggesting they carry different meanings within the Policy," the panel wrote. The definition was also not contrary to the primary purpose of claims-made insurance policies and consistent with the general principle that insurance policies are meant to cover risks of future events—not known losses, the court said.

Neither was the definition inconsistent with Eighth Circuit and Minnesota law (which has made clear "that the focus of whether a claim has been made is whether a demand for relief has been made") and case law from other jurisdictions, the court said, citing opinions from the Second and Fifth Circuits.

"Our review of the law indicates that a mere request for information is generally insufficient to constitute a claim, whereas a demand for relief generally constitutes a claim," the panel wrote. "In light of the uniform case law, we believe that to be considered a 'claim' under this policy, the third-party must make some kind of demand or assertion of a legal right. Here, the district court used the word 'assertion,' which we read to mean something more than just a mere statement of facts already occurred but rather an assertion of a right to relief, i.e., demand for relief. This definition is not only consistent with the case law but also with Black's Law Dictionary, which defines a claim as '[t]he assertion of an existing right.'"

The definition would not lead to absurd results requiring insureds to provide notice of garden-variety product quality communications, the court added, as "[m]ere complaints of a defective product without a demand for relief would not fall within the general definition of a claim."

Ritrama told the court that no communications from Burlington satisfied this definition of "claim," but the panel determined the spreadsheet was sufficient. "In the context of the surrounding communications and already developed discussions on the issue between the parties, there is no reasonable way to interpret the spreadsheet as anything other than a demand for relief," the court wrote. "Ritrama itself treated the spreadsheet of damages as a claim and demand for payment and aggressively attempted to settle the claim before the damages reached even higher amounts. Ritrama cannot now, in the heart of litigation, contort its prior words into something else."

The court affirmed summary judgment for Gerling. "On the record before us, in the absence of any evidence to suggest why Burlington would send Ritrama a detailed list of damages other than to demand payment, and in light of Ritrama's own repeated acknowledgements that Burlington submitted a claim, we believe the spreadsheet cannot reasonably be understood as anything other than a demand for relief," the panel said.

To read the opinion in Ritrama v. HDI-Gerling America Insurance Company, click here.

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Choice of Law Question May Leave CGL Insurers on the Hook for Coverage of HIPAA Lawsuit

Why it matters: The Eleventh Circuit Court of Appeals held that a pair of commercial general liability (CGL) insurers may be on the hook for defense of a lawsuit alleging violations of the Health Insurance Portability and Accountability Act (HIPAA) filed against a policyholder. The insured was sued for falsely claiming to provide quality security services, and failing to conduct a background check or provide the proper training for an employee who allegedly stole three laptops containing HIPAA-protected personal data belonging to a client. The policyholder settled the suit and then sued three insurers for reimbursement: an employment practices liability carrier and two CGL insurers. A federal court judge granted summary judgment in favor of all three insurers. In an unpublished opinion, the Eleventh Circuit reversed as to the CGL insurers. The federal district court erred by not considering whether Florida or Maryland law applied to the dispute, the panel said. Given the differences between the states' laws when considering ambiguities in a policy, and the dispute between the parties as certain phrasing in the CGL policies, the panel reversed and remanded the case.

Detailed discussion: Admiral Security Services provides janitorial, security, and alarm services. Admiral entered into a "Protective Services Agreement" with AvMed in 2009, agreeing to provide security services at AvMed's premises. A few months later, an Admiral security guard stole several laptop computers from AvMed that contained a wealth of private and personal information concerning AvMed members, including data protected by HIPAA.

AvMed sued Admiral to recover its losses (including the costs of notifying those affected by the breach, providing two years of free credit protection, and resolving a class action lawsuit filed by victims of the breach) on two theories of liability: negligent supervision of its employee and vicarious liability. AvMed and Admiral reached a confidential settlement in 2012.

During the course of the litigation, Admiral tendered defense of the AvMed suit to three insurers: Carolina Casualty, which issued an employment practices liability policy, as well as two commercial general liability (CGL) insurers, Continental Casualty Company and National Union Fire Insurance Co. of Pittsburgh.

The insurers responded with a declaratory judgment action, contending that they owed no coverage. Applying the law of either Florida (the forum state) or Maryland (the state where the contract was executed), the result was the same, a federal district court said, granting summary judgment in favor of the insurers.

Admiral appealed to the Eleventh Circuit.

Reviewing the choice of law, the panel found that the lower court erred in stating that there was no conflict because the result was the same under both states' law. "When construing insurance policies Florida and Maryland courts start in the same place: They interpret the plain language of the policy as a whole," the appellate panel wrote. "But their constructions of ambiguous language differ in an important way."

Florida courts construe ambiguous terms in insurance contracts liberally in favor of the insured and strictly against the drafter who prepared the policy, the court explained, while Maryland courts construe insurance policies in the same manner as contracts generally—and not most strongly against the insurer.

"When the district court ruled that Florida and Maryland law led to the same result in this lawsuit, it failed to acknowledge that the two are different," the court said. Performing the necessary analysis, the panel concluded that the failure to recognize the distinctions between the states' laws did not affect the judgment in favor of Carolina Casualty.

"The dispute between Admiral and Carolina Casualty turns on the meaning of the phrase 'employment relationship' and whether that phrase applies to Admiral's relationship with AvMed," the court said. "Even if we apply Florida's rule that ambiguous terms in insurance contracts are construed 'liberally in favor of the insured,' Admiral and AvMed did not have such an 'employment relationship.' Reviewing the policy as a whole, we hold that it was designed to apply to damages arising from disputes between Admiral and its own employees, not between Admiral and another entity employing it. Admiral's relationship with AvMed, therefore, was not an 'employment relationship' under the Carolina Casualty policy, and the policy provides no coverage for the settlement amount paid by Admiral."

The choice of law decision did make a difference when considering the CGL policies, the panel found, as two issues were in dispute.

"The first is whether the CGL policies covered Admiral's settlement payment to AvMed," the court explained. "Whether the CGL policies provide coverage depends on whether the damages alleged by AvMed were 'damages because of . . . 'property damage.' If the CGL policies cover Admiral's claim, then a second question might turn on which state's law applies: whether the electronic-data exclusion applies to Admiral's attempt to recover its payments to AvMed. Both CGL policies exclude coverage for damages 'arising out of the loss of [or] loss of use of . . . electronic data.' Those two phrases may be ambiguous. If they are ambiguous, then the difference between Florida and Maryland law may determine whether Admiral's claim succeeds or fails."

Declining to attempt the fact-intensive determination of which state's law applied, the panel vacated judgment in favor of National Union and Continental and remanded the case for the district court to decide whether Florida or Maryland law should apply and whether, under the applicable state law, the CGL policies provide coverage for Admiral.

To read the per curiam opinion in Carolina Casualty Insurance Co. v. Red Coats, Inc., click here.

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