Insurance Recovery Law

Policyholder Entitled to Select Counsel, Even Where Insurer Withdrew Reservation of Rights

Why it matters
An insured dissatisfied with counsel selected by its insurer was entitled to select counsel of its choice where its potential liability significantly exceeded the insurer’s policy limits, according to an Illinois federal court. The court ruled that a conflict of interest existed, even though the insurer had agreed to defend without a reservation of rights, since the claim was for an amount substantially larger than the policy limits. The commercial general liability policy provided $1 million in coverage with a $2 million aggregate limit, whereas the insured was facing potential liability of up to $50 million. As the court explained, there was a conflict of interest because of the risk that the counsel selected and compensated by the insurer would be indifferent to any judgment amount in excess of the policy limits. The court concluded, “in order to properly protect their interest in light of the conflict[, the insured] is entitled to the retention of independent counsel at [its insurer’s] expense to defend it in the underlying suits.”

Detailed Discussion
Perma-Pipe manufactured pipes for the University of California. In 2010, the university notified Perma-Pipe that the pipes were defective and caused damages of up to $50 million. Perma-Pipe notified its insurer Liberty Surplus Insurance Company (“Liberty”) and requested coverage. Liberty’s policy provided coverage of $1 million per occurrence with a $2 million aggregate limit. Liberty agreed to defend but issued a reservation of rights letter.

The reservation of rights created a conflict of interest between the parties, prompting Perma-Pipe to seek independent counsel of its choosing for its defense. Liberty subsequently withdrew its reservation of rights, announced its intention to defend the insured and appointed its choice of counsel.

Perma-Pipe objected, arguing that a conflict of interest remained between the parties due to the real possibility of a judgment or settlement in excess of Liberty’s policy limits. The court agreed with Perma-Pipe.

Under Illinois law, if a conflict exists between an insured and an insurer, the insurer must pay for independent counsel selected by the insured. The court recognized that conflicts can arise under a myriad of circumstances and not just because the insurer has an interest in limiting coverage. “In other words, because an insurer’s exposure is capped by a policy limit, it may decide to try claims exceeding the limit, hoping that the resulting liability, if any, will be less, despite the risk that its insured could be found liable for an amount far greater than the limit,” the court explained. Thus, “a conflict exists when there is ‘a nontrivial probability’ of an excess judgment in the underlying suit.”

Liberty attempted to distinguish the facts of the case because Perma-Pipe was aware of the potential coverage from the beginning and notified its excess carriers early on in the litigation. But not only did Liberty fail to offer evidence of such communications, the court said the mere existence of excess coverage did not alter the existing conflict.

“[B]ecause excess insurance applies only after primary coverage has been exhausted, its existence does not vitiate the conflict between the primary and the insured that arises from the likelihood of an excess judgment,” Judge Guzman wrote, finding the basis for the two conflicts the same. “Because the record establishes that there is a conflict between Perma-Pipe and Liberty, Liberty breached its duty to defend Perma-Pipe by refusing to pay counsel of Perma-Pipe’s choosing.”

To read the decision in Perma-Pipe, Inc. v. Liberty Surplus Insurance Corporation, click here.

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California Court Finds Insured v. Insured Exclusion Prevents Defense in FDIC Suit

Why it matters
A policy that excluded coverage for suits brought by a “receiver” of the insured barred coverage for a claim filed by the Federal Deposit Insurance Corporation (FDIC) in its capacity as the receiver of a failed bank, a California federal court ruled. The court held that the “insured v. insured” exclusion barred coverage because the FDIC brought the claims against the former officers in its capacity as a “receiver.” The court rejected the FDIC’s position that the exclusion’s reference to “receiver” referred only to a court-appointed receiver, ruling that “while the FDIC attempts to differentiate itself from other types of receivers, it fails to identify any significant distinction that would justify an interpretation of [the insured v. insured exclusion] that would treat the FDIC differently from any other type of receiver.”

Detailed Discussion
In February 2009, the California Department of Financial Institutions closed state-chartered County Bank and the FDIC was appointed as receiver. The agency then filed a civil action against five former officers of the bank, alleging that they were negligent and breached their fiduciary duties to the bank.

The officers requested a defense from the bank’s insurer BancInsure. Although the officers qualified as insured persons under the policy, the insurer denied coverage based on an insured v. insured exclusion that barred coverage for “a claim by, or on behalf of, or at the behest of, any other insured person, the company, or any successor, trustee, assignee or receiver of the company.”

In cross-motions for summary judgment, the FDIC and BancInsure sought a ruling on the application of the insured v. insured exclusion. While BancInsure argued that the claims were excluded because the FDIC was appointed as “receiver” of County Bank, the agency said it was not a “receiver” within the meaning of the policy, which was intended to reference a court-appointed receiver.

As the term “receiver” was not defined in the policy, the court looked to the “ordinary and popular” meaning of the term. Finding Black’s Law Dictionary’s definition, which does not limit the term “receiver” to those appointed by courts, to be representative of the “ordinary and popular” meaning of the term, the court concluded that the FDIC meets the definition of “receiver,” relieving the insurer of its coverage obligations.

An argument that the exclusion was at odds with the parties’ reasonable expectations similarly did not sway the court, which granted summary judgment for BancInsure.

To read the order in Hawker v. BancInsure, Inc., click here.

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Insurer Must Defend, Not Prejudiced by Two-Year Delay in Receiving Notice

Why it matters
In a victory for policyholders, an Iowa federal court recently affirmed a jury verdict that an insurer was not prejudiced by the policyholder’s two-year delay in providing notice of a claim. In the early morning hours of June 18, 2007, a fire occurred at a country club causing $3.8 million in damages. The country club’s insurer paid the claim and then in 2009 sued Asoyia, Inc., claiming that the oil manufacturer failed to provide proper warning labels in its product. Asoyia’s insurance carrier asserted that the two-year delay in providing notice prevented it from conducting its own investigation of the fire and otherwise resulted in prejudice. But the jury disagreed, finding no evidence of prejudice because other independent parties had adequately investigated the fire.

Detailed Discussion
A fire occurred at the Sunnyside Country Club in Waterloo, Iowa, in June 2007. The club’s insurer, United Fire, conducted an investigation, as did the local fire department. During the course of the investigation, United Fire sent a subrogation notice to several parties, including Asoyia, Inc., a cooking oil manufacturer.

Asoyia did not participate in the investigation nor did it pass the subrogation notice along to its insurer, Michigan Millers Mutual Insurance Company. In June 2009, United Fire sued Asoyia in Iowa state court, alleging that the fire at the club was caused by the spontaneous combustion of recently laundered kitchen rags that had been used to clean a fryer containing Asoyia’s soybean oil.

Asoyia then – two years after the fire – notified Michigan Millers. Based on the two-year time gap, the insurer denied coverage for the underlying suit. Michigan Millers also filed a federal suit seeking declaratory relief that it had no duty to defend or indemnify Asoyia. After a three-day trial, jurors sided with Asoyia.

The parties agreed that Asoyia’s notice was late as a matter of law, leaving only the issue of whether Michigan Millers suffered prejudice. Importantly, the court said, Asoyia provided notice to the insurer promptly after being sued and did not settle with United Fire or otherwise fix its liability. Therefore, Michigan Millers’ opportunities to respond to the litigation – such as engaging in settlement negotiations, for example – were not impacted.

“Asoyia’s notice to Michigan Millers after being sued has enabled Michigan Millers to participate in and control the litigation between United Fire and Asoyia,” the court wrote. “Asoyia did not bind itself to any finding of liability or judgment amount in the underlying lawsuit.”

Also relevant to the issue of prejudice: the preservation of materials from the scene of the fire and photographs taken during the course of the investigations. “The jury could have reasonably found that any prejudice presumed by Michigan Millers’ inability to photograph the scene itself was rebutted by the hundreds of photographs of the fire scene entered into evidence,” the court ruled, especially in conjunction with the physical evidence preserved from the fire and witness statements.

In upholding the jury verdict, the court reasoned that “[b]ased on the evidence at trial, including evidence of the photographs, interview notes, and artifacts preserved from investigations conducted near the time of the Sunnyside fire, the jury had a reasonable, and legally sufficient, basis for finding that Michigan Millers was not prejudiced by Asoyia’s delay in notifying Michigan Millers of the Sunnyside fire.”

To read the decision in Michigan Millers Mutual Insurance Co. v. Asoyia, Inc., click here.

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Homeowner’s Insurance Covered Claim Involving Jealous Husband Knocking Potential Suitor Unconscious

Why it matters
Bad facts sometimes leave a policyholder without coverage. But an insured man in Ohio managed to overcome some very bad facts when an appellate court reversed summary judgment for his insurer and held that he may be entitled to coverage – even though he pushed the man his wife cheated on him with into a urinal rendering him unconscious. The insurer refused to defend the man when the former lover filed suit on the basis that the incident was not a covered occurrence under the policy because it was not an accident. After all, the man admitted he shoved his former rival. The appellate court disagreed, holding that intentional acts can still give rise to accidental results, such as throwing a baseball (intentional act) and breaking a window (accident), or confronting your wife’s ex-lover and shoving him (intentional) and he hits his head on a urinal and is knocked unconscious (accident).

Detailed Discussion
John Musil and his wife Peggy have been married for 31 years. However, Peggy admitted to her husband in 2010 that she had an affair with Nick Schaefer. The couple underwent counseling and stayed together.

In 2011 the Musils attended a local concert. Returning from a trip to the concession stand, Peggy was crying and upset. She told her husband that she had run into Schaefer. After calming his wife, Musil went to the restroom. He testified that as he was waiting in line, he thought he saw Schaefer in front of him.

According to Musil’s testimony, he stepped out of line and confronted Schaefer when the man stepped up to use a urinal. Yelling at Schaefer to leave his wife alone, Musil pushed his right shoulder in an attempt to turn him so the men would be facing each other. Instead, Schaefer fell, hit his head, and was rendered unconscious.

Schaefer filed suit alleging he was injured by the fall. Musil’s insurer sought a declaratory judgment that it had no obligation to him under his homeowner’s policy. A trial court agreed and granted summary judgment for the insurer, holding that the incident was not a covered “occurrence” under the policy.

But the appellate court reversed.

The policy defined “occurrence” as “an accident…resulting in bodily injury or property damage,” but did not include a definition of “accident.” While the court recognized that Musil admitted he intentionally pushed Schaefer, “an intentional act does not necessarily preclude the finding of an accident, an unintended and unforeseen injury.”

For example, the court stated that a baseball intentionally thrown that accidentally breaks the neighbor’s window, the intentional lane change that forces another driver into the ditch, or the intentionally started trash fire that spreads to an adjacent lot – none of these would be covered under the insurer’s position.

Insurance contracts must be viewed as a whole, the court added, and if all injuries that resulted from an intentional act were automatically excluded under the definition of an occurrence, there would be no need for the intentional act exclusion.

To read the decision in Schaefer v. Musil, click here.

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Guilty Pleas: Trigger Policy Exclusions, Entitle Insurer to Recoupment

Why it matters
When four executives accused of fraud entered guilty pleas, a Virginia federal district court held those pleas triggered four policy exclusions in the D&O policy and entitled the insurer to recoup defense fees it had advanced. The lesson for policyholders: be sure to consider all the possible ramifications of a guilty plea.

Detailed Discussion
Protection Strategies Inc. (PSI) is a global security management and consulting company. In 2012, the NASA Office of the Inspector General served a subpoena in conjunction with a search and seizure warrant from the local federal court. In addition to the company itself, several PSI executives were also targeted in the investigation, which revealed that executives created shell companies to win government contracts PSI would not otherwise have qualified for, yielding more than $31 million from the federal government.

As the investigation continued, four executives reached plea agreements for crimes ranging from major fraud against the United States to conspiracy to commit fraud to bribery. Each guilty plea stipulated that the officer knowingly and willfully took actions in furtherance of the fraud.

After the guilty pleas were entered, Starr Indemnity & Liability Co. sought a declaration that coverage for both the company and the executives was precluded by policy exclusions and sought recoupment of the over $670,000 already paid in defense costs.

The court granted Starr’s motion, ruling that the entire investigation fell within the policy’s exclusions and that the insurer was entitled to recoupment.

Four exclusions were triggered by the guilty pleas:

Section 3 of the policy contained three relevant exclusions, for claims: “(a) arising out of, based upon or attributable to the gaining of any profit or advantage or improper or illegal remuneration if a final judgment or adjudication establishes that such Insured was not legally entitled to such profit or advantage or that such remuneration was improper or illegal,” the profit exclusion; “(b) arising out of, based upon or attributable to any deliberate fraudulent act or any willful violation of law by an Insured if a final judgment or adjudication establishes that such act or violation occurred,” the fraud exclusion; and “(d) alleging, arising out of, based on or attributable to any facts or circumstances of which an Insured Person had actual knowledge or information of…and that he or she reasonably believed may give rise to a Claim under this policy,” the prior knowledge exclusion.

The plea agreements made clear that PSI executives “knowingly, intentionally, and improperly gained an advantage and illegal remuneration of at least $31 million,” the court held, and committed fraud against the U.S. government, triggering both the profit and fraud exclusions.

Turning to the prior knowledge exclusion, the court again found it “evident that each of the four PSI officers charged had actual knowledge…of an ongoing scheme to defraud the government.” Given this undisputed knowledge, “it can be said that the officers should reasonably have believed that a claim would result under the D&O policy.”

The final exclusion was found in a warranty and representation letter executed by the company CEO, in which he represented that “[n]o person or entity proposed for insurance under the policy referenced above has knowledge or information of any act…which might give rise to a claim(s), suit(s) or action(s) under such proposed policy.” Starr relied upon this misrepresentation when it granted the policy, the court said, and multiple officers clearly had knowledge of their fraudulent acts that would have given rise to claims under the policy.

The court dealt a final blow by ordering a full repayment of all defense costs advanced by Starr. By its express terms, the policy itself provided for recoupment as a remedy in the General Terms and Conditions.

To read the decision in Protection Strategies, Inc. v. Starr Indemnity & Liability Co., click here.

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