D.R. Horton-Texas, Ltd. v. Markel Int'l Ins. Co., No. 06-1018 (Tex. Dec. 11, 2009) (See Markel Decision)
The holding of this decision seems unremarable -- even if a liability insurer has no duty to defend, it might have a duty to indemnify, based on actual facts proven at trial -- the practical implications are probably huge. Before Markel, everyone more or less assumed that an insurance company winning summary judgment that it had no duty to defend automatically won dismissal of the case because the rule was: no duty to defend, no duty to indemnify. Now that has changed.
D.R. Horton-Texas is a general contractor sued for defects in home construction. The defective work was performed by a subcontractor, but the plaintiff sued only the GC and did not mention anything about subcontractors. The GC is an additional-insured under the sub's CGL policy and notified the insurer of the suit. Markel denied coverage because the additional-insured endorsement would cover the GC only for claims arising from the sub's operations. Since Texas is, as I have pointed out ad nauseum (see, e.g., Another 8-Corner Rule Heartbreaker) a strict 8-corner rule state, extrinsic evidence of the sub's actual role in the construction is not admissible on duty to defend. Because the pleading is silent on the existence of subs, GC is not entitled to a defense.
GC sued Markel, who won summary judgment despite GC's deposition evidence of the sub's role. Now, here's the thing. Markel also won summary judgment that it had no duty to indemnify GC as well based on Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81 (Tex. 1997), which held that an insurer who has no duty to defend has no duty indemnify when the same reasons that negate the duty to defend will likewise negate the duty to indemnify. Ever since 1997, insurers routinely got dismissed from the coverage action once they won summary judgment on duty to defend. But, as the Markel Court observes, that is only because everyone ignored the highlighted part of the holding in Griffin.
Unlike the duty to defend, which is based solely on the allegations in the lawsuit, the duty to indemnify is based on the actual facts established at trial. GC introduced summary judgment evidence that the alleged defects were the work of the named insured sub. Even though that evidence was not admissible on the duty to defend, the Court held that it was evidence relevant to the duty to indemnify. Therefore, the Court reversed the part of the judgment granting Markel summary judgment on the duty to indemnify.
Why is this decision potentially huge? Before Markel, insurers with colorable objections against defending the underlying lawsuit had little incentive to negotiate and settle coverage claims because summary judgment relatively early in the litigation on duty to defend ended the ball game. If the insurer lost at the summary judgment stage, then it might come to the settlement table for reasonable negotiations. Now, winning the duty-to-defend issue will no longer end the lawsuit in many cases, particularly where the 8-corner rule is barring evidence that establishes coverage, as in this case.
A second practical implication is that insurers may no longer be allowed to routinely move to strike extrinsic evidence from summary judgment pleadings. Before Markel, courts would exclude extrinsic evidence as irrelevant to the duty to defend. Now, however, such evidence may be necessary to show the possibility of a duty to indemnify and so avoid summary judgment under Griffin on the duty to indemnify.
Time will tell if Markel results in more settlements at an earlier stage.
On December 2, 2009, the House Financial Services Committee passed H.R. 2609 that would create the Federal Insurance Office (hence the name: Federal Insurance Office Act - see Bill ). We all know that the Federal government knows next to nothing about insurance. It also seems likely that Federal regulation of insurance is looming (see my discussion, If Federal Charters Issued). So the the logical first step is the Feds must get up to speed on all things insurance.
Rep. Paul Kanjorski introduced H.B. 2609 (see his press release here) to create the Federal Insurance Office that will serve as a sort of national insurance commission, gathering what information it needs to recommend policy to the Secretary of the Treasury, hobnobing with state insurance commissioners to coordinate the flow of insurance information, identify policy inconsistencies among the states, and basically establish an modicum of expertise before Congress wades into the fray with optional Federal chartering.
As with most momemtous changes, the word on the street is mixed. The American Insurance Association issued a statement of guarded optimism (see AIA Release) applauding the effort but fearing that the new Office might not have sufficient authority to advocate for the insurance industry on the international stage. An interesting thought.
The Big "I", representing insurance agents and brokers, also applauded the Bill as long as it does not apply to them. (See Big"I" Release, noting that a saving amendment changes the definition of "insurer" to exclude agents and brokers).
So it goes.
Middlesex Ins. Co. v. PBC Operations, L.P., No. A-08-CA-305-SS (W.D. Tex. November 5, 2009) see case
Texas's 8-corners rule can just be torture. In this advertising injury case, the judge reconsiders his earlier ruling that the "first-publication" exclusion barred the insurer's duty to defend trade dress infringement claims that allegedly began more than 7 years before the policy issued. For the record, the exclusion excludes coverage for allegations of otherwise covered trade dress infringement "arising out of oral or written publication of material whose first publication took place before the beginning of the policy period." So why is the judge rethinking the obvious?
Because, says policyholder's counsel, the underlying pleading alleges trade dress violations before the policy period, but nowhere alleges "publication." Under the adamantine, no-peak-at-anything-outside-the-pleading-without-exception 8-corners rule in Texas, you, judge, may not consider the insurer's affidavits and deposition testimony (including PBC's website) that proves earlier publication.
So the judge takes a second look. The pleading reads:
[Plaintiff] at no time consented to defendant's use of [Plaintiff's] trademarks or tradde dress for any purpose, including the advertising of an [of Plaintiff's] products. As a result of defendant's unlawful marketing and sale of conterfeit goods, [Plaintiff] has suffered injury to its reputation and good will. In addition, [Plaintiff] has suffered injury in the form of lost sales in an amount yet to be determined. [Emphasis added]
The court then carefully scrutinizes the legal reach of "publication" under existing case law and determines that "publication" is not the same thing as manufacturing, marketing, distributing or selling. "Alleging sales or vague allusions to advertising and marketing, without allegations printed or oral materials issued for public distribution, is not sufficient evidence of publication, even under the broadest definition."
By Hercules!, as the ancients would say, that is tight. The court acknowledges that some form of publication must necessarily be inferred for the alleged trade dress offense to be actionable. But, there it is, the 8-corners rule in action.
We feel insurer counsel's pain. Indeed, we must, because the 8-corners rule, like justice, is blind and can strike policyholder as well as insurer. I have commented on this fact before (See Good for the Gander II). Certainly the court cannot be faulted for setting aside common sense and taking a closer look at actual allegations and following the law. At some point, the Texas Supreme Court may find a way to create some exceptions, but, until then, we are all at the mercy of plaintiffs' lawyers and their choice what to plead or not.
Colony Insurance Co. v. Peachtree Construction, LTD., No. 4-08-CV-135-Y (October 14, 2009), see Peachtree Construction Decision
Texas's unusually strict adherence to the "complaint-allegation" or "8-corners" rule can be especially perilous for additional-insureds, a group typically including general contractors, commercial landlords, and oil companies, who have the clout to require subcontractors and tenants to add them as additional insureds to the subordinate's liability insurance. Additional insureds are usually covered only when the accident arises from the named insured's activities.
The 8-corners rule precludes a court from considering any evidence to resolve an insurer's duty to defend other than the 4 corners of the pleading and the 4 corners of the policy. All too often, as in this case, an injured plaintiff, often in his zeal to tag the defendant with the deepest pockets, fails to sue the named insured subcontrator or even allege that it exists. (Often the plaintiff is the subcontractor's employee and is barred by the workers' compensation laws from suing the employer).
When that happens, the subcontractor's insurer refuses to defend its additional insured because the pleading fails to allege that the injury arose out of the subcontractor's work. The insurer almost invariably wins dismissal of the insurance claim because the judge is barred from considering the abundant proof that in fact the named-insured subcontractor's work was the cause of the injury. Texas is, I believe, the only state that recognizes no exceptions to the 8-corner rule to avoid law-is-an-ass ridiculous results. I would welcome any corrections if this is not the case.
Here, Peachtree Construction was building a road and hired Cross Roads LP to install warning signs and barriers. A passing motorcyclist lost control and crashed at the site. The surviving spouse sued Peachtree alleging that the crash was the result of negligent placement of barriers and failure to post warning signs, matters squarely within Cross Road's contractual responsibilities. However, the pleading did not mention Cross Roads.
Although Peachtree was an additional insured under Cross Road's general liability policy, the insurer refused to defend for the reasons described above. In the ensuing coverage litigation, the judge refused to admit the subcontract or other evidence establishing Cross Road's role in the construction, again for reasons described above.
Compare this result with one in a similar case I discussed last year. See 8-Corners Rule Requires Close Look at Factual Allegations, Says Fifth Circuit, in which the court put on its Sherlock Holme's cap and searched the pleadings with a magnifying glass to find traces in the pleadings that potentially implicated the involvement of a subcontractor in the allegations. But the 5th Circuit had more to go on than here. At least the the subcontractor was mentioned in that case. In Peachtree, nothing was said to justify an inference supporting coverage.
So, what can an additional insured do in this situation? It might try to challenge the pleadings in the underlying case by filing "special exceptions" in Texas state court or a motion for a more definite statement under Rule 12 (e) in federal court, devices designed to force the plaintiff to replead with greater detail. Should Peachtree have pointed out to the plaintiff that Cross Roads was the subcontractor responsible for the signage and barriers, the plaintiff might have repled and at least mentioned the subcontractor.
Failing that, Peachtree might bring Cross Roads into the lawsuit as a third-party defendant, which might prompt the plaintiff to add the subcontractor as an additional defendant.
But these are cumbersome strategms that could fail. The rationale behind the 8-corner rule is sound. The insurer should have to take the pleadings as given and defend without developing extrinsic evidence early in a case to avoid coverage. But the rule arguably gives the underlying plaintiff too much control over coverage. Plaintiffs motivated to bring a deep pocket insurance company to the settlement table may plead or omit allegations just to trigger the duty to defend. On the other hand, a plaintiff seeking to deprive the defendant of a fund to pay for the defense, may falsely plead out of coverage.
It seems only fair that the parties to the insurance contract have some means of addressing obvious and egregious manipulation of the pleadings.
Two novel developments this week. First, the House Judiciary Committee approved H.R. 3596, a bill that would remove the antitrust exemption in the McCarran-Ferguson Act of 1945 for health and medical malpractice insurers. See Health Insurance Industry Antitrust Enforcement Act of 2009. The Senate Judiciary Committee is considering the same legislation in S. 1691. Although the politics and emotions roused in the the debate over this legislation is seen as just another wrinkle in the health care reform debate, repeal of McCarran-Feguson has been kicked around for years. Proponents of the bill argue that the insurance industry, particularly health insurance, is not competitive, in part because insurers have managed under lax state controls to conspire, fix prices, and carve up markets.
Not so, says the Attorney General of Connecticut, Richard Blumenthal, who yesterday announced a $1.3 MM settlement with Hartford Financial Services Group, the first antitrust settlement of its kind in the reinsurance industry. See Press Release. The settlement is part of ongoing litigation by Blumenthal against Guy Carpenter & Company LLC, one of the world's largest reinsurance brokers. The Connecticut AG began the action in 2007 against Guy Carpenter and reinsurers, like Hartford, allegedly part of a market allocation and price-fixing conspiracy. This action is similar to the other enforcement suits that spun out of Eliot Spitzer's 2006 New York investigation of Marsh McClennan and other brokers.
"The Hartford is making history by this first-in-the-nation settlement --- and drawing back the cloak of secrecy on a series of illegal price-fixing conspiracies that inflated insurance costs by hundreds of millions of dollars nationwide at the expense of 170 insurance companies and their customers," said Blumenthal.
Hartford, one of 20 alleged co-conspirators, cooperated in the investigation, said Blumenthal, hence the light penalty. Blumenthal also commented:
"Bolstered by backroom deals, insurance industry inertia and an unregulated market, Guy Carpenter's conspiracies continued undetected for almost 50 years. The Hartford helped Guy Carpenter create an illusion of competition, but now has helped my investigation to break apart business practices that have inflated costs for consumers by as much as 40%."
So which is more compelling, head-cracking, fire-breathing state regulators fully capable and financed to police the insurance industry state-by-state, or the fact that this type of arrangement went on for 50 years before anyone blew the whistle? A spokesperson for the health insurance industry, Karen Ignagni, said in a letter to the chairman of the House committee that the bills are unnecessary because McCarran-Ferguson doesn't shield insurers from antitrust regulation. See Repeal of Antitrust Exemption. "The bills attempt to remedy a problem that does not exist," said Ignagni.
I'd call that an overstatement. The problem exists. Which is the better remedy is the question. If I had to bet, with or without health care reform, state regulation of insurance is probabaly on its way out.
SNL Financial, LC v. Philadelphia Indemnity Co., No. 3:09-cv-00010 (W.D. Va. September 30, 2009), see SNL Decision
This time the policyholder escaped the steel jaws of the late-notice trap. But why do they linger like moths before the flame when prompt notice of what may or may not be a "claim" will avert any danger of losing coverage?
Claims-made policies are rampant now-a-days, particularly with errors & omissions, directors & officers, and professional liability policies. Coverage under these policies is triggered not by the occurrence of the covered risk during the policy period, the alleged wrongful act itself, but by the claimant's assertion of the claim arising form the conduct. The concept is simple: should you, the insured, open your mail one day and find a "claim" being made against you, alarms should sound, and you immediately forward said claim to your insurer, who responds within 15 business days (in Texas) that receipt of claim is acknowledged within the policy period then in effect.
The SNL case from Virginia illustrates that it is not always easy to recognize that the communication you received is a "claim."
The policy at issue covered employment-related wrongful acts, such as discrimination, harassment, wrongful termination and the like. The policy period was August 1, 2008 through August 1, 2009. Philadelphia had issued employment-practice liability policies to SNL before and after the policy period in question. But, the steely trap is that a claim made against SNL in one year that is submitted to Philadelphia the next year is not covered.
SNL received a letter on January 18, 2008 from an attorney stating a desire to meet with SNL's president to discuss "certain discriminatory conduct" against the attorney's client, a former SNL employee. Numerous communications followed between the attorney and counsel for SNL, including a February 1, 2008 email, titled "Litigation Hold," instructing SNL to preserve all evidence that might be relevant to the former employee's potential claims. In May 2008 SNL was permitted to review a draft complaint against SNL. In July 2008, SNL's counsel asked the attorney if he wanted to make any demand for money to SNL, but the attorney declined.
Also in July, SNL submitted a renewal application to Philadelphia and marked the "no" box next to the question whether SNL "had been the subject or involved in any litigation in the past 12 months."
Suit was filed in October 2008, whereupon SNL submitted the matter to Philadelphia, who denied the claim due to late notice (as well as failing to truthfully disclose the claim in the application). Coverage litigation ensured. The court correctly identified the $64,000 question in the case. "Had SNL received a "claim" before August 1, 2008?"
The policy defined "Claim" in several ways (mostly this or that type of formal proceeding or lawsuit), including, "a written demand for monetary or non-monetary relief."
The coverage quandary here for the policyholder reminds me of the Dirty Harry challenge. I don't know how many of you are fond enough of Clint Eastwood to remember the climactic question in "Dirty Harry," during the gun-to-gun showdown when the bad guy is trying remember if Harry had shot all 6 rounds from his 357 Magnum, or just 5. But, says Harry, since this is "the most powerful handgun in the world and would blow your head clean off, you've got to ask yourself one question: Do I feel lucky? Well, do ya, punk?"
Is a "litigation hold" letter instructing SNL to preserve documents relevant to potential claims a demand for non-monetary relief? You got to ask yourself.
Here the judge found that no claim had been submitted. The monetary or non-monetary relief was either not presented in a written request or was not unequivocally demanded. Luck goes to the policyholder. I have appeared before plenty of judges who would have poured out the policyholder for being so dumb as to sit on letters like these instead of turn them over immediately.
The kicker is that most policies of this sort, including this one, have a mercy provision that allows the insured to send in communications that may or may not be "claims" but clearly point to potential claims, and nail down coverage later down the road, in a year or two, when the lawsuit is actually filed. The policy in effect when notice of the potential claim is sent will cover the lawsuit.
So what excuse does the policyholder have for not promptly sending in hostile letters from attorneys or ex-employees?
Basic Energy Services, Inc. v. Liberty Mutual Ins. Co., #08-CV-78 (W.D. Tex. September 18, 2009)
In my last post, I called this case a potential harbinger of how Texas courts might interpret CGL policies that revoke the duty to defend (see Court Applies 8 Corner Rule to Loss-Indemnity Policy). The case also addresses another open issue under Texas law by prescribing a methodology for calculating penalties an insurer must pay under Texas' delay statute for denial of the duty to defend (or refusal to advance defense costs under a loss-indemnity policy).
Section 542.051 of the Texas Insurance Code (formerly Art. 21.55) imposes a penalty of 18% per annum on the amount of a 1st-party claim that an insurer delays or refuses to pay. The Lamar Homes decision in 2007 resolved in favor of policyholders a long-standing controversy over whether the statute applies to the defense-payment compoment of a 3rd-party liability policy (see my post Delay Penalty Held Applicable to Defense Costs). However, Lamar Homes did not spell out the way the penalty should be calculated. The statute keys payment of the penalty on the insurer's delay or failure to pay a "first-party claim." Lamar Homes held that the policyholder's claim for defense is a first-party claim but did not define when and how that claim is made for purposes of calculating the 18% penalty.
Does the penalty begin to accrue from the time the insured demands a defense? From the time defense fees are first incurred? From the time defense-cost invoices are submitted to the insurer? Not until the insurer is adjudged liable? If the insured submits defense bills monthly, is each bill a new "claim" starting its own 18% calculation (implied in Primrose Operation Co. v. National Am. Ins. Co., 382 F.3d 546, 555 (5th Cir. 2004))?
The Basic Energy case elects the latter option and holds that the "penalties apply at the time an insurer improperly denies a first-party claim and, thus, fails to meet its obligation within the ... statutory deadline." The court noted that Basic Energy tendered notice of the underlying lawsuit and claims for insurance on November 12, 2007. The insurer denied the claim on February 13, 2008. "Thus, the Court finds that the date that Defendant improperly denied Plaintiff's first claim was February 13, 2008." In a footnote, the Court stated that Basic Energy would have to provide further evidence of its defense invoices for the court to determine "the precise damages and from what date interest may apply."
Although the Court could have elaborated the method in greater detail, I see no other way to read the footnote than to follow the method suggested in Primrose Operations: a new interest calculation begins on each separate invoice from the time it is submitted through final judgment against the insurer. The denial date, February 13, 2008, may or may not be the date to begin accrual of the penalties. If the insured submitted invoices before the denial date, the penalty should being to accrue as early as the 15th business day after the insurer received the invoice or any "items, statements, or forms required by the insurer to secure final proof of loss." (See Tex. Ins. Code Sec. 542.056 stating that the insurer must accept or reject a claim within 15 business days after receiving required items). Once the insurer denies the claim, then presumably the insurer has waived any right to delay accrual by requesting "items statements or forms."
The key point for policyholders: for greatest recovery, submit each separate defense invoice to the insurer for payment as soon as possible.
A number of open issues regarding Sec. 542.051 remain that future courts will need to resolve. (For example, other than the invoice itself, what "items, statements, or forms" could an insurer require before accepting or rejecting a claim?) However, by following the suggestion of the Primrose Operation case, this court has put the invoice-accrual method for calculating delay damages on a more solid footing.
Basic Energy Services, Inc. v. Liberty Mutual Ins. Co., #08-CV-78 (W.D. Tex. September 18, 2009)
This case resolves a liability insurer's duty pay defense costs when the policy imposes no "duty to defend" but instead requires the insurer to "reimburse" what the policy describes as the "Allocated Loss Adjustment Expense." I think this decision is a potentially significant harbinger of how courts might interpret well-worn CGL concepts, like "occurrence," eight-corners," and "that particular part" of an insured's work, under an "indemnification" or "reimbursement" policy, rather than the more common "duty-to-defend" policy. I say significant because, more and more, we are seeing reimbursement policies replacing duty-to-defend policies.
Basic Energy Services was hired to replace a pump on an oil well. In the process, Basic pressure tested the well casing and unfortunately dropped the casing into the well damaging the well bore and the casing itself. This was not a small dollar deal. The lawsuit against Basic alleged that the damage forced the operator to abandon the well and risk losing the entire value of the well due to loss of production. So Basic turned to its insurer to cover the damage, including costs of defending the lawsuit. Liberty challenged coverage.
In many ways, Basic's policy was like most standard CGL policies, covering basically bodily injury or property damages caused by an occurrence. Most of the exclusions were also typical, including one for property damage to "that particular part" of property Basic worked on. But the policy explicitly revoked the insurer's duty to defend and included an "Allocated Loss Adjustment Expenses (ALAE)" Endorsement requiring the insurer to reimburse Basic for any ALAE incurred by the insured for any "occurrence." So, Liberty Mutual has no duty to defend but must reimburse Basic's defense costs. What's the difference between this arrangement and the "duty to defend"?
First, argues Liberty, note the word, "Allocated." This policy does not require the insurer to reimburse all of the defense costs, only that portion allocable to covered loss. And because this allocation cannot be made until after a trial has sorted out what is covered and what is not, the insurer has no obligation to reimburse ALAE until the lawsuit is over. Indeed, Liberty is correct that a number of courts have held that pure indemnity policies that impose no duty to defend require indemnity only after the insured has incurred the loss (a judgment or settlement), and, in the absence of an advancement clause, this includes defense costs.
The court, however, disagreed. The policy is silent both on when reimbursement must be made and on any allocation of ALAE (despite the title). The court held that the insurer must reimburse defense costs as they are incurred.
Second, Liberty had obtained some depositions that arguably proved that a significant portion of the damages were not covered. Again. note the allocation idea. Basic countered by asserting that most
Texas of insurance rules, the "eight-corners" rule, that a court may consider only the pleading and policy and not consider any extrinsic evidence, like affidavits or depositions.
This issue put the court in a pickle. On the one hand, Texas courts have almost universally discussed the eight-corner rule in connection with the duty to defend. Much of the rationale for requiring insurers liberally to defend allegations that might fall within coverage without resort to actual facts that might clarify murky or spotty allegations emanates from the distinction between the duty to defend and the duty to indemnify, a distinction that the court acknowledges.
On the other hand, having held that Liberty is obligated to reimburse defense costs as soon as they are incurred, the court must hold either that all defense costs must be paid, or reverse itself and hold that a trier of fact must first resolve which claims are covered and which are not. "The Court agrees with [Basic] that this reimbursement of defense costs obligation is most analogous to a duty to defend, even which the duty to defend is explicitly disclaimed."
Liberty also challenged coverage arguing that the alleged conduct was not an "occurrence," and that the exclusion for damage to "that particular part" of the insured's work was excluded. However, once the court has started down the path of ruling by analogy to duty-to-defend cases, Liberty's arguments are doomed. Under the Lamar Homes line of cases (see my discussion Lamar Homes Decision), arguments that a contractor's defective work can't be a covered occurrence have been rejected -- but these are duty-to-defend cases. Likewise, Liberty's argument that the whole well, including casing, bore, and subsurface space, should be considered Basic's "work" has been rejected by a number of state and federal cases. Only the casing and the pump comprised Basic's particular work. Damage to the bore and the loss of well itself is not excluded.
Liberty cannot be blamed for arguing that the analogy should go in the opposite direction, away from duty-to-defend cases and toward pure-indemnity cases. Arguably, this decision could have gone either way. If other courts follow suit, this decision may be seen in hindsight as a significant precedent expanding duty-to-defend doctrines to other types of policies.
Correction: Court calculated actual damages at $1,081,189.40.
Mitchell V. Fortis Insurance Company, # 26718 (S.C. September 14, 2009), see Mitchell Decision
This decision out of the South Carolina Supreme Court is remarkable first as a model for intelligent, careful consideration of a difficult legal and factual issue, and second, I have not seen such outrageous conduct by an insurance company since the wild and wooly days before bad faith liability entered American jurisprudence (yes, I am that old).
Briefly the facts: Mitchell, 17, applied for health insurance when he left home and went away to school. The insurance application asked if he had even been diagnosed or treated for any immune deficiency disorder. He answered no and submitted the application to Fortis on May 15, 2001. In April 2002, Mitchell's blood was screened by Red Cross and tested positive for HIV. On May 14, 2002, Mitchell contacted a doctor who confirmed the result and noted in a medical chart that Mitchell tested positive for HIV, was 18 years old, and the date of the confirming test was May 14, 2001 (not 2002).
Mitchell submitted insurance claims for the tests and subsequent treatment. Fortis investigated, found the referral note with the erroneous date, and concluded that Mitchell had lied on his May 15, 2001application. Fortis rescinded the policy and refused payment. There followed a series of communications to Fortis from Mitchell, his doctor, his lawyer, and his mother's insurance agent, all providing ample proof that Mitchell's first inkling that he was HIV-positive was in 2002 and urging, even begging, that Fortis reconsider its decision.
All calls to Fortis were routed to one or another customer service representative who invariably said that there "was nothing [the representative] could do." The Fortis rescission committee that initially made the decision met to consider the appeal and noted only that Mitchell's lawyer had written that Mitchell had not lied because the diagnosis was first made a year after the inception of the policy. Apparently finding lawyers inherently untrustworthy, the committee refused to budge. Evidence developed later in the lawsuit showed that Fortis, contrary to its usual practice, either had failed to log telephone calls to its claims manager, or those logs were deleted. Fortis also twice sent Mitchell altered or illegibile copies of the referral form that contained the wrong date.
Folks, it gets worse. At trial, Mitchell produced evidence that it was Fortis' practice to shut down an investigation once a single piece of evidence was discovered that would support rescission. (Even in Texas, where bad faith is rarely sustained on appeal, this evidence would doom an insurer). Then, a Fortis manager testified that she was not "able to answer" whether she or any of her employees "had a responsibility to find out the truth" about a policyholder's medical conditions. Oy vey!
The jury awarded Mitchell $186,000 in compensatory damages, $36,000 on the breach of contract claim, and $15,000,000 in punitive damages. Fortis appealed the punitive damages award as violative constitutional due process. The South Carolina High Court got down to business.
Ever since the U.S. Supreme Court recognized due process restrictions on state-imposed punitive damages in BMW of North America v. Gore, 517, U.S. 599 (1996), the courts of the land have struggled to find reasonable criteria for evaluating the amount of punitive damages an incensed jury might award. The Mitchell Court applied the three basic criteria stated in Gore: (1) the degree of reprehensibility of defendant’s conduct, (2) the disparity between the actual or potential harm and the amount of the punitive damages (ratio), and (3) comparative penalty awards from other cases.
The South Carolina High Court first found that actual damages should have been calculated at $1,081,189.40, but found that the award, almost 14 times actual damages, was excessive under the Gore criteria. Accordingly, the Court determined that an award of approximately 9 times actuals would not offend due process and would comport with South Carolina's "substantial history of upholding punitive damages wards against insurance companies that fraudulently rescind their customer’s heath insurance policies.” Noting that without the coverage, Mitchell could not afford treatment and would lilkely die of AIDS within a few years, a fact of which Fortis was aware (in fact, Fortis reinstated the policy but only after getting kicked in the slats in court), the Court remitted the award to $10,000,000.
Because the pre-existing exclusion appears to be on everybody's health-care reform list, this case may be among the last of these enormities we will see. Let's hope so.
Pennzoil-Quaker State Co. v. American Int'l Specialty Lines Ins. Co., # H-08-2025 (S.D. Tex. September 4, 2009)
Certain issues of insurance law have become hopelessly fubar. "Number of occurrences" under Texas law is one of those issues. Most general liability policies provides "per occurrence" limits, say up to $1 million for each occurrence. If a particular loss involved 2 occurrences rather than just 1, then claimants could recover up to double what they could get if only 1 occurrence was involved. This was the fight after the twin towers fell on 9/11. The insurers argued that 1 coordinated plot meant only 1 occurrence. The policyholder urged that 2 towers brought down by 2 airplanes must involve 2 occurrences. Insurers won.
But why is the issue hopelessly screwed up? Because half the time, policyholders want as many occurrences as possible (to maximize per-occurrence limits), and half the time insurers want multiple occurrences. If the issue is, as in this case, how many per-occurrence deductibles must be paid, the shoe is on the other foot, and the parties switch sides of the argument; insurers argue for multiple deductibles. I believe that most of the inconsistencies in the case law on number-of-occurrences is due to courts unconsciously pulling for policyholders. Ironically, in this case, the confusion worked against the insured.
Pennzoil has a refinery in one Louisiana city. In a 4 month period in 2001, Pennzoil was hit with 5 separate lawsuits brought by numerous residents near the refinery complaining of physical ailments and property damage caused by the release of various pollutants into groundwater and air. All 5 cases were consolidated. The insurer agreed the suits were covered and agreed to defend, but only after Pennzoil first paid deductibles totaling $10 million (5 deductibles of $2 million each). Not surprisingly, Pennzoil argued that 1 deductible was due because all the alleged releases were part of "the same, related or continuous Pollution Condition," as defined in the deductible clause.
The court decided the issue in favor of the insurer after an exhaustive analysis of the rules and guidelines other courts have contributed over the years, which I submit are hopelessly inconsistent. The insurer argued for 5 separate "Pollution Conditions" (really no different than "occurrences") because the 5 lawsuits alleged: (1) releases from a fire on January 18, 2000; (2) exposures from a release on November 4, 2001; (3) continuous releases into the groundwater; (4) continuous releases into the air; and (5) releases of various substances that differ from one suit to the next.
I plead guilty to over-simplifying the issues somewhat, and I do not in any way impugn the court's painstaking attempt to correctly apply existing law. But I am not sure that some of the distinctions between one type of release from another are persuasive. For example, the White lawsuit alleged release of benzene, but the Daughtry suit alleged releases of "benzanthracene, benopyrene, bis(2-Ethylhexly)phthalate, benzo(b)floanthene, benzo(k)floranthene, and chrysene, but not benzene." Not being a chemist, I couldn't say if the substances listed in Daughtry could not accurately be called "benzene," but I suspect the differing allegations are more a function of the plaintiff attorneys' attention to detail than a matter of differing releases from the refinery. The question is, do the distinctions stand up to scrutiny, or, as Pennzoil, argues, do they all more or less allege a continuous hodge-podge of related releases.
I also suspect this one is going up on appeal.