Insurance Recovery Law

In a variety of recent decisions, courts have grappled with ongoing and persistent issues regarding coverage for Superstorm Sandy, more asbestos-related disputes, and a new application of unfair competition claims. The insurance industry’s proclivity to seek ways to limit coverage fosters disputes on both old and new issues alike.

N.Y. Court Rules In Deductible Battle For Flood Damage Caused By Sandy

Why it matters: The destruction left in the wake of Superstorm Sandy has resulted in a mess of insurance battles for policyholders as well ( In a new decision from New York, a state court judge sided with an insured that a deductible for flood damage equal to “2% of the total insurable values at risk per location” applied to the value of the specific property at risk for flood damage – not the total value of the fuel oil terminal facilities covered by the insurance policy, as the insurer claimed. Accepting the insurer’s argument would leave the insured without coverage for a multimillion-dollar loss, the court said, which could not have been the policyholder’s intent when agreeing to the terms. The court applied N.Y.’s general principles of insurance that require ambiguities or two reasonable but conflicting interpretations to be decided in the policyholder’s favor.

Detailed Discussion
Located in the Bronx adjacent to the East River, Castle Oil operates a fuel oil terminal that serves as a port facility and supplies energy to New York City. Castle purchased a commercial property policy from Ace American Insurance Co. that included an endorsement that specifically extended coverage for loss caused by flood.

The policy featured a sublimit of $2.5 million annual aggregate for “flood including storm surge located in special flood hazard areas . . . AE . . . as defined by FEMA.” In addition, the endorsement provided for a deductible applicable to flood loss in flood hazard areas equal to “2% of the total insurable values at risk per location subject to a minimum of $250,000.”

Sandy left Castle with damage totaling $2,284,293.95. The company made a prompt claim to Ace, which determined that the affected location was within the AE flood zone. Two percent of the total insurable value of the property ($124,701,000) amounted to $2,494,020. According to Ace, since the damage was less than that, the insurer claimed it was not required to respond to Castle’s loss.

Castle pointed to the “values at risk” language of the endorsement in its suit against the insurer to argue that the deductible applied to the “insurable values” of property at the terminal actually “at risk” of flood damage. The $2.5 million sublimit of flood coverage was the maximum risk insured by Ace. Thus 2 percent deductible would be less than $250,000, meaning that the minimum was the correct deductible payment.

Judge Mary H. Smith agreed, granting Castle’s motion for partial summary judgment.

The court noted that the phrase “values at risk” is not defined in the policy, finding three reasons to reject the insurer’s position. First, it disregarded a separate policy endorsement that expressly provided the aggregate values set forth in the policy—such as the total insurable value of $124 million—are “for premium purposes only.”

Ace’s reading of the provision would also result in leaving the phrase “at risk” without meaning in the endorsement. The court stated that “The ‘values at risk’ language necessarily refers to the policy’s sublimit amount, and not the total value of the property insured under the policy, as defendant maintains, because the insurance company expressly is ‘at risk’ of paying only the full amount of the sublimit.” This interpretation “would render the flood damage sublimit of $2,500,000 absolutely meaningless and the flood insurance plaintiff believed it had procured illusory.”

Finally, the court stated that its ruling was consistent with “identical language and respectively similar arguments” had reached analogous results in federal courts in Nebraska and Florida. The court concluded that to the extent any ambiguity existed as to how the deductible in the endorsement should be calculated, the general rule of construing the provision liberally in favor of the insured applied.

To read the decision in Castle Oil Corporation v. Ace American Insurance Co., click here.

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Injury Context Horizontal Pro Rata Allocation Of A Given Claim Does Not Mean That All Primary Coverage Must Be Exhausted Before A Given Excess Policy May Apply

Why it matters: Analyzing Maryland’s horizontal exhaustion rule in the context of pro rata allocation, a federal court judge ruled that an insulation company facing asbestos litigation might be able to tap into its excess insurance even if all primary insurance was not exhausted. The combination of the two legal theories still recognizes that excess coverage may be available because excess insurance in any given year can be triggered once the primary coverage in that year is exhausted.

Detailed Discussion
Insulation company Porter Hayden, primary and excess insurer National Union Fire Insurance Company, and additional excess insurer American Home Assurance Company have already been fighting over coverage issues for ten years in the Maryland federal court system.

In the most recent opinion in the dispute, U.S. District Court Judge Catherine C. Blake focused on a single issue: whether Porter Hayden is entitled to excess coverage for asbestos litigation even though not all of the primary insurance has been exhausted.

National Union issued two primary policies to Porter Hayden that featured different limits for operations claims and completed operations claims. Specifically, some operations claims were not subject to an aggregate limit, while completed operations claims were subject to a limit.

Porter Hayden also purchased two excess insurance policies from National Union as well as a single excess policy from American Home Assurance Company. All of the policies were in force during the relevant years at issue in the underlying asbestos cases.

The parties all agreed that Maryland follows the theory of pro rata allocation among triggered policies, as well as the fact that insureds must exhaust their liability horizontally.

Because Porter Hayden had not exhausted operations claims in certain years, the insurers argued that the policyholder had therefore not exhausted its primary policies and could not tap into excess coverage.

But Judge Blake determined that “the horizontal exhaustion rule must be understood in the context of Maryland’s adoption of the theory of pro rata allocation. Accordingly, the court rejects the insurers’ argument that, because some operations claims were not subject to an aggregate limit, this means that some primary insurance policies were not exhausted, and therefore, no excess insurance may be triggered.”

Adopting the insurers’ contention would imply that excess insurance might never be available, an idea that failed to recognize that because some primary policies provide less coverage, they will be exhausted sooner than others, resulting in an earlier response from excess insurers.

The court stated that “In the course of allocating damages pursuant to the pro rata allocation method, certain years of primary insurance coverage may prove to be exhausted, while other years of primary insurance coverage may not be. But this does not necessarily mean excess insurance is not available. If the primary insurance as to a particular year on the risk has been exhausted, then an excess policy applicable to that year must pay its pro rata share. As for operations claims not subject to an aggregate limit, excess insurance for those claims may not be available for a particular year or years due to lack of exhaustion.”

Where primary coverage has been exhausted, the court said, excess insurance in that year may be required to pay for remaining losses. “This interpretation avoids the problem of requiring an insurer to pay more than its pro rata share,” the court explained, and is consistent with the idea “that certain primary policies may be exhausted sooner than others and, as a result, certain excess policies respond sooner than others.”

The court saved for another day an analysis of the specifics of Porter Hayden’s policies.

To read the decision in National Union Fire Insurance Co. v. Porter Hayden Co., click here.

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Policyholders Already Yielding Positive Results On California UCL Claims

Why it matters: In August policyholders scored a major victory when the California Supreme Court held that insurers can be liable for unfair competition suits if the insured can allege violations of other state statutes or common law ( The decision in Zhang v. Superior Court made clear that if an insured alleges claims handling practices that are not based simply on violations of the state’s Unfair Insurance Practices Act but on independent grounds – even where the insurer’s conduct also violated the insurance law – then an unfair competition law (UCL) claim may be pursued. This additional tool in a policyholder’s litigation toolbox has already yielded positive results. In an unpublished decision, a California appellate court reversed the dismissal of a suit making UCL claims and remanded the case, allowing the plaintiffs another bite at the apple to amend their complaint to reflect a post-Zhang understanding of the law.

Detailed Discussion
California resident Dan Kaplan purchased a home warranty plan from Fidelity National Home Warranty Company. Pursuant to the contract, if Kaplan needed the repair or replacement of a covered home system or appliance, he contacted Fidelity and a contractor was sent to handle the problem.

Kaplan sued Fidelity, alleging that the company violated its contractual obligations and engaged in unfair and unlawful business practices by improperly adjusting and/or denying claims. Kaplan’s suit was consolidated with another complaint and class allegations were added. A second amended complaint was filed with additional allegations and causes of action, including violation of the UCL, with a predicate wrongful act of breach of the implied covenant of good faith and fair dealing.

A trial court certified a nationwide class of individuals who made a claim with Fidelity after purchasing a home warranty plan. Fidelity sought a judgment on the pleadings, which the court granted. Relying upon pre-Zhang case law, the trial court said the class could not bring a private cause of action pursuant to the UCL.

The court did allow the plaintiffs to file a fourth amended complaint (a third complaint had been filed and withdrawn), but class counsel made new allegations, growing a 15-page complaint with four causes of action to seven causes of action laid out in 52 pages and seeking to expand the already certified class.

Fidelity objected, arguing that the plaintiff was not entitled to a litigation “do over” just because the court had allowed a new complaint. The trial court agreed, striking the fourth amended complaint and dismissing the entire suit without leave to file yet another amended complaint.

The three-judge appellate panel agreed that the plaintiff had overstepped its bounds with the fourth amended complaint, affirming the order to strike.

But the court then took the additional step of allowing the class leave to file a fifth amended complaint in light of Zhang. As the state’s highest court allowed UCL claims to be based upon common law as well as statute, Kaplan’s allegations that Fidelity violated the implied covenant of good faith and fair dealing would suffice to carry a UCL claim.

“Under the law now clarified by the Zhang court, the trial court erred in concluding these allegations are barred merely because they also encompass alleged violations of the UIPA,” the panel wrote. “Under Zhang, it is likely the proposed amendment could withstand Fidelity’s challenge to the pleadings on the UCL claim.”

The panel cited an unpublished October decision from the Ninth U.S. Circuit Court of Appeals reaching a similar conclusion in a case with comparable facts.

The court rejected both of Fidelity’s counterarguments that Zhang was inapplicable because it was limited to false advertising allegations and individual suits, not class actions. “Zhang recognized that insurance bad faith allegations can be a sufficient predicate to plead a valid UCL cause of action,” the panel wrote. And although Zhang was an individual action, “the Zhang court did not state or suggest that its holding is limited to nonclass claims.”

Allowing Kaplan to file an amended complaint will likely cure the defects in the class’s earlier pleadings, the court said. “The record makes clear that in refusing to permit an amendment, the trial court was viewing the case through the lens of pre-Zhang law regarding the viability of a UCL claim,” the panel explained. “Having the benefit of Zhang’s clarification, we are satisfied there is a strong likelihood plaintiffs could have amended their complaint to avoid a dismissal of the entire action.”

To read the decision in Kaplan v. Fidelity National Home Warranty Company, click here.

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