Insurance Recovery Law

Insurer Must Indemnify TCPA Settlement, Despite Lack of Involvement

Why it matters
In a closely watched case out of Illinois, an appellate court held that a $1.7 million settlement in a Telephone Consumer Protection Act case against an insured requires indemnification by the insurer – even though the policyholder reached the agreement on its own. Last year, the coverage dispute between a realtor and an insurer reached the Illinois Supreme Court, which issued a key victory for policyholders when it ruled that damages pursuant to the TCPA are not punitive in nature and can therefore be insured. On remand, the insurer turned to its fallback position: it played no part in the settlement, so it should not be responsible for paying for it. The appellate court disagreed, but the case could make a return to the state’s highest court as the insurer has already filed an appeal.

Detailed Discussion
Ted Lay Real Estate, a small agency located in Girard, Illinois, contracted a now infamous marketing company to send fax advertisements to drum up business (the company, Business 2 Business Services, has been involved in dozens of TCPA class actions nationwide). B2B sent approximately 5,000 faxes on behalf of the real estate agency in June 2006.

One of the recipients, Locklear Electric, Inc., filed a class action under the TCPA. Lay turned to insurer Standard Mutual Insurance Company, which initially agreed to defend subject to a reservation of rights. Standard listed numerous grounds on which coverage could be denied, including that the complaint sought damages based on willful behavior and the policy excluded coverage for intentional or nonaccidental acts. Noting that a conflict of interest existed, Standard permitted Lay to select its own counsel or waive the conflict. Lay chose to waive the conflict initially and the carrier appointed counsel.

Lay, however, later selected its own counsel and settled the suit on its own for a total of $1,739,000 plus costs. Lay also assigned its rights against Standard to the class in exchange for a covenant not to execute.

Standard initially contended that the $500 per violation statutory damages under the act was in the nature of punitive damages because it was far in excess of actual compensation for any injuries suffered by class members. The appellate court agreed, but the Illinois Supreme Court reversed.

On remand, Standard unsuccessfully resorted to various fallback positions.

First, it argued that the policies were limited to liability arising out of the operations of Lay’s real estate business at designated locations. The court held that while several of the policies certainly referred to specific locations, there was no additional language in the policies themselves restricting coverage to those locations.

Second, the carrier invoked the policies’ professional services exclusion. The court rejected this argument, noting that Lay was a real estate business and that the underlying class action did not allege that Lay had performed (or failed to perform) such services.

Third, Standard argued that there was no “property damage,” and, if there was, Lay had caused it intentionally. The court held, however, that the underlying action alleged misappropriation of paper, toner and employee time and therefore constituted “property damage.” The court also noted that Lay itself believed that the faxes had been properly authorized and therefore its conduct was not intentional. (The court also found coverage under the policies’ advertising injury sections.)

Fourth – and finally – the carrier argued that it had not consented to the settlement. Because Standard had relinquished control of the defense due to the conflict of interest, however, it also lost the right to control the settlement of the class action.

Notwithstanding its complete vindication of Lay in finding coverage, the panel’s parting shot took aim at the supreme court’s previous conclusion that TCPA fines constitute covered damages. “We find Standard’s policies issued to Lay cover the damages alleged here, but note the purpose of the Telephone Act is ‘to address telemarketing abuses attributable to the use of automated telephone calls to devices including telephones, cellular telephones, and fax machines,’ ” the court wrote. “By allowing liability for telemarketing abuses to be covered by insurance, the company responsible for the abuses, in this case Lay, has no incentive to stop the abuses from occurring in the future and the purpose of the Telephone Act is unfulfilled.”

To read the decision in Standard Mutual Insurance Co. v. Lay, click here.

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New York Suit Against Insurer Lacked Separate Facts to Carry Breach of Contract, Breach of Good Faith Claims

Why it matters
Providing an important – but painful – lesson for policyholders in how to properly frame claims against carriers, a New York federal court ruled that an insured’s claims for breach of the implied covenant of good faith and fair dealing and breach of contract based on the same alleged facts were duplicative. Therefore, the judge dismissed the breach of good faith and fair dealing cause of action in the suit, which claimed the insurer wrongfully denied policy payments and did not take reasonable steps to investigate claims of property damage resulting from Superstorm Sandy. Insureds in New York should take note: When filing similar causes of action, be sure to ground them in separate factual allegations.

Detailed Discussion
Two separate insureds – Pasque Esposito and a pair of individuals owning property on Coronado Street – filed suit against Ocean Harbor Casualty Insurance Company in New York. The plaintiffs alleged that they suffered “substantial losses and wind damage to their properties” as a result of Superstorm Sandy.

According to the complaint, the plaintiffs submitted timely claims to Ocean Harbor and the insurer “improperly adjusted and denied at least a portion of [their] claims without an adequate investigation,” and “unjustifiably refused to perform their obligations under the policies and wrongfully denied payment in the full amount of plaintiffs’ claims.”

The suit listed three causes of action: bad faith, breach of the implied covenant of good faith and fair dealing, and violations of New York’s general business law. U.S. District Court Judge Sandra J. Feuerstein dismissed two out of the three claims.

New York law does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract is also pled based upon the same facts, she said.

“Since plaintiffs’ claims for breach of the implied covenant of good faith and fair dealing and breach of contract rest upon the same alleged conduct by defendant, the breach of the implied covenant of good faith and fair dealing cause of action is sua sponte dismissed with prejudice as redundant,” Judge Feuerstein wrote.

To avoid such redundancy, the court noted that plaintiffs must premise their breach of the implied covenant of good faith and fair dealing claim on “a different set of facts” than a breach of contract claim, the court explained.

The plaintiffs also failed to allege a loss independent of the loss caused by the alleged breach of contract, dooming their claims under New York’s general business law, the court said. “Indeed, plaintiffs do not allege any loss allegedly sustained by them as a result of defendant’s allegedly deceptive acts, practices or advertisement, much less one that is independent of the loss caused by defendant’s purported breach of contract.”

Judge Feuerstein further declined to allow the two plaintiffs to continue their suit together on the remaining cause of action. The plaintiffs purchased their policies separately, at different times for different properties, and the two separately performed their obligations under the policies.

“[J]udicial economy and fairness dictate that the claims under each distinct policy issued by defendant be tried separately,” she wrote. “The fact that Esposito’s and the Coronado Street plaintiffs’ separate properties, for which they made distinct claims under the separate insurance policies issued to them by defendant, all sustained damage as a result of the same storm is immaterial,” for purposes of determining joinder. And the insurer “will likely have different justifications for denying or limiting” the plaintiffs’ claims, the court added.

Judge Feuerstein severed the Coronado Street plaintiffs, leaving each party to pursue its remaining breach of contract claim on its own.

To read the decision in Esposito v. Ocean Harbor Casualty Insurance Co., click here.

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Insurer Must Defend Against Intentional Torts, Says Tenth Circuit

Why it matters
A commercial general liability policy included coverage for intentional torts such as defamation, the Tenth U.S. Circuit Court of Appeals determined, ordering an insurer to chip in for the defense costs for a surgeon accused of defamation. Finding the insurer’s argument that coverage for intentional torts violates public policy unpersuasive, the federal appellate panel said the insurer messed up. The policy at issue explicitly precluded coverage for intentional conduct resulting in bodily injury or property damage, the three-judge panel noted – but failed to exclude intentional wrongdoing resulting in personal injury.

Detailed Discussion
A dispute between two Oklahoma cardiothoracic surgeons devolved into an insurance dispute between two insurers. Dr. Arshad Yousuf filed suit against Dr. George Cohlmia and his employer, Cardiovascular Surgical Specialists Corp. (CVSS), alleging that Cohlmia made a series of false statements to the local media and in a letter to a local hospital where both doctors had privileges. Yousuf sought damages for defamation and tortious interference with business relations or contract, among other causes of action.

CVSS sought coverage under two commercial general liability policies with American National Property and Casualty Company (ANPAC) and Physicians Liability Insurance Company (PLICO) that named Cohlmia as an additional insured. PLICO defended the suit under a reservation of rights; ANPAC refused to participate in the defense.

A jury awarded Yousuf $5 million. Although the verdict was later reversed on appeal, the two insurers continued to argue over responsibility for defense costs. While PLICO sought a contribution, ANPAC asserted that it had no duty to defend Cohlmia because its policy excluded coverage for intentional acts.

The panel focused on the definition of “personal injury” in the ANPAC policy, which included “the publication or utterance of a libel or slander or of other defamatory or disparaging material, or a publication or utterance in violation of an individual’s right of privacy,” which it found fit the allegations in the underlying complaint.

The definition “is broad enough to encompass the tort of intentional interference with business relations,” the court said.

Public policy considerations did not lead the Tenth Circuit to a different conclusion. The policy itself “specifically provide[s] coverage, in no uncertain terms, for injuries arising from conduct that constitutes several intentional torts,” the court wrote, and while ANPAC’s policy precluded coverage for other intentional conduct (resulting in bodily injury or property damage), “they do not exclude intentional wrongdoing that results in ‘personal injury.’ ”

The court also distinguished authority in support of the insurer’s position as addressing the indemnification of an insured for intentional tortious conduct. The cases “do not stand for the proposition that it is against public policy for an insurer to defend an insured against allegations of intentional acts when its policy specifically provides coverage,” the panel said. “In contrast to a general rule condemning indemnification for intentional wrongdoing, the case law addressing an insurer’s duty to defend makes clear that it is not against public policy to defend an insured against claims for intentional or reckless conduct.”

Even assuming a general rule against providing a defense to an insured for intentional conduct existed, “the instant matter presents a strong case for allowing an exception to that general rule,” the panel added. The policy specifically provided for such coverage “and there is no evidence that the availability of insurance coverage induced Dr. Cohlmia to engage in intentional misconduct. Furthermore, the interest in compensating an innocent third party, Dr. Yousuf, outweighs the concern that Dr. Cohlmia would unjustly benefit from this coverage.”

ANPAC breached its contract by electing not to participate in the defense of Cohlmia, the court concluded, and PLICO was allowed to step into his shoes to recover one-half of its defense costs under a theory of subrogation.

To read the decision in Yousuf v. Cohlmia, click here.

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Food Truck a Piece of “Mobile Equipment” Not Subject to Vehicle Exemption, Says California Appellate Court

Why it matters
What is the primary purpose of a food truck? When faced with that question, a California appellate panel determined that the truck met an insurer’s definition of “mobile equipment,” triggering coverage under a commercial general liability policy. The insurer argued that the truck was a vehicle and therefore exempt from coverage due to an auto exclusion, but the court said “a plain reading” of the policy resulted in coverage under the CGL policy, reversing summary judgment for the insurer. The court added that the policy enumerated special use vehicles subject to the auto exception but – despite the fact that the policyholder maintained a fleet of food trucks and was in the business of leasing them – failed to include food trucks on the list.

Detailed discussion
Royal Catering Company owned a fleet of food trucks and leased them to operators who drove from site to site selling food. One of the trucks was leased by Esmeragdo Gomez, who operated the truck with his wife Irais.

Each day, the Gomezes cooked their food in the truck using a specially designed deep fryer, grill, steam table, oven, refrigerator, and coffee maker. They spent the rest of the day making a dozen stops to sell the food. The truck was equipped with only two seats and seatbelts.

One day, a guest rode in the truck and Mrs. Gomez stood in the back. At an intersection, Mr. Gomez swerved to avoid an approaching truck and hot oil splashed on Mrs. Gomez, burning her. The Gomezes filed suit against Royal.

Royal tendered the complaint to American States Insurance Company, its automobile insurer. American States provided a defense under a reservation of rights but also notified Travelers Property and Casualty, which had issued Royal a commercial general liability policy, about the Gomez suit.

The auto insurer reached a settlement with the Gomezes under the auto policy that allowed the plaintiffs to pursue their products liability claims against Royal to the extent that the claims were covered by Travelers’ policy. An arbitrator assigned 40 percent of the fault to Royal, awarding the Gomezes almost $2.5 million.

The two insurers then fought over who had to pay up.

American States’ policy excluded from coverage claims arising out of equipment furnished in connection with Royal’s “completed operations.” The Gomez action therefore did not trigger coverage under the auto insurer’s policy because the Gomezes’ work was deemed completed by putting the truck, including the deep fryer basket, to work, the court said.

The Travelers policy contained coverage for bodily injury and property damage liability with an auto exclusion. The policy defined an auto as “a land motor vehicle, trailer or semitrailers designed for travel on public roads, including any attached machinery or equipment. But ‘auto’ does not include ‘mobile equipment.’ ” In addition to a list of specified vehicles, the term “mobile equipment” included vehicles “maintained primarily for purposes other than the transportation of persons or cargo.”

“Under a plain reading of the [Travelers policy], the Gomezes’ food truck was ‘mobile equipment’ and not an ‘auto,’ ” the court wrote. “The primary purpose of the Gomezes’ food truck was to serve as a mobile kitchen and not to transport persons or cargo.” The first two hours of the day, the truck was parked while the Gomezes cooked food in it, the court noted; the rest of the day, the truck was driven not to transport anything but rather to stop and sell food.

Travelers could have included food trucks among the vehicles identified as “autos” and not subject to the “mobile equipment” exception, the panel added. “If Travelers had intended to exclude food trucks from coverage as ‘autos’ – a significant consideration in light of the fact that Royal maintained a fleet of food trucks and was in the business of leasing such vehicles – it would have identified them along with the other special use vehicles it identified as ‘auto,’ ” the court concluded.

Travelers had a duty to defend and indemnify Royal, the panel said, reversing summary judgment in its favor.

To read the decision in American States Insurance Co. v. Travelers Property & Casualty Co., click here.

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