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Professional liability: 4th Circuit finds insurer required to defend Maryland accounting firm
In Trice, Geary & Myers, LLC v. Camico Mutual Ins. Co., No. 10-1473 (4th Cir. Dec. 22, 2011 (unpublished), an accounting firm appealed the district court's award of summary judgment to their insurer in a declaratory judgment concerning insurance coverage. The 4th Circuit reversed.
The district court had awarded summary judgment to the insurer, finding that it had no duty to defend, on the grounds that all the underlying claims were "in connection with or arising out of" a member of the firm's sale and promotion of annuity plans as an agent or broker of Hartford, and under a Special Exclusion Endorsement, any of the plaintiffs' alleged acts, errors or omissions connected with the plan sales were excluded from coverage.
The 4th Circuit reversed and remanded, on the grounds that the underlying actions alleged that the accounting firm rendered substandard tax and accounting advice. Because these claims raised a potentiality that there is coverage under the professional liability policy, the Court ruled that the insurer's duty to defend was triggered. The Court therefore reversed the district court's award of summary judgment to the insurer, and remanded for further proceedings.
The underlying actions were three actions in which the insured were sued for their alleged recommendation to clients that they create section 412(i) defined benefits plans that would invest in insurance policies written by Hartford Insurance, and informed the clients that the premiums for that insurance would be tax deductible expenditures. These tax deductions were later audited by the IRS and the deductions were disallowed.
The 4th Circuit agreed with the insured's argument that because the insurer's Special Endorsement Exclusion invoked the exclusion for claims "in connection with or arising out of any act, error or omission by any Insured in his/her capacity as an [insurance] agent or broker," the exclusion applies only to claims asserting insurance agent or broker professional liability.
The Court disagreed with the insurer's argument that when the parties to the insurance contract agreed to the "in connection with or arising out of" language in the "Special Exclusion Endorsement", they also agreed that, even if there were several grounds for a claim, coverage would be barred so long as one of the grounds was any insured's having placed or sold an insurance product. Rather, the Court defined the issue as whether the acts, errors, or omissions of the insureds arise out of their capacity as brokers and agents. The Court also disagreed with the insurer's argument that merely "acting" as an agent or broker is itself sufficient to invoke the "Special Exclusion Endorsement." Instead, the Court pointed out that the terms "agent" and "broker" are terms of art under Maryland law, that the burden is on the insurer to prove the applicability of the exclusion, and that the insurer has not proven the principal-agent factors.
The Court also analyzed the complaints in the underlying action, and found that based on an analysis of the four corners of the complaints, contrary to the district court's interpretation, all of the underlying actions asserted that the insureds acted as accountants and tax advisors, and none of them contained allegations which put all of the counts in the underlying actions within the "Special Exclusion Endorsement."
Impact: This decision illustrates that in Maryland, if even a single count of a complaint creates the potentiality of coverage, the insurer must defend the entire complaint, including the counts which fall within policy exclusions. Sometimes it is difficult to determine what causes of action have been plead, depending on how the complaint is written and whether separate causes of action have been set forth in separate counts.
Posted by David B Stratton on 02/06/2012 at 09:21 PM
Insurance •
Maryland •
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Allocation of lead paint poisoning liability under Maryland law
In Pennsylvania Nat. Mut. Cas. Ins. Co. v. Roberts, No. 10-1987 (4th Cir. Feb. 3, 2012), the Court considered an insurer's allocation of liability, under Maryland law, for a $850,000 judgment arising from lead paint poisoning, where the insurer's time on the risk was only a fraction of the plaintiff's exposure to lead paint poisoning. The insurer had sought a declaratory judgment that its allocation was no more than 40%, because it had covered its insured for no more than 40% of the time in which the plaintiff was exposed to lead poisoning.
The district court held that the insurer was only responsible for a portion of the judgment, notwithstanding that its insured was held jointly and severally liable for the entire judgment in the state proceeding. The district court reasoned that in lead paint or "continuous trigger" cases like this, Maryland courts determine an insurer's liability through a "pro-rata allocation by "time on the risk." The 4th Circuit affirmed in part and reversed in part.
On appeal, the plaintiff argued that the insurer was responsible for paying the entire $850,000 judgment in light of the joint and several liability of its insured. The plaintiff argued that the insurer contracted to cover the risk of any judgment for bodily injury by promising to "pay those sums that [the insured] becomes legally obligated to pay as damages because of 'bodily injury.'"
The 4th Circuit rejected this argument, because under the policy, the insurer contracted only "to pay those sums that [the insured] becomes legally obligated to pay as damages because of 'bodily injury' . . . To which this insurance applies." By its own terms, the contract does not cover damages that the insured because legally obligated to pay for injuries that occurred outside of the policy period. Not only was the insurer's coverage restricted to the policy period, it was also limited to premises that the insured owned, rented, or occupied. Thus, the insurer could not be liable for injuries that occurred after the insured sold the property.
The 4th Circuit concluded:
In seeking to impose the entire judgment on . . . [the insurer], [the plaintiff] would have us turn a blind eye to these terms and hold an insurance company liable for risks for which it never contracted and for which it never received premiums. We decline to do so.
The 4th Circuit also relied on Maryland precedent which holds that in lead paint or continuous trigger cases like this, Maryland courts engage in a pro rata time-on-the-risk allocation of liability." Under this method of allocation, each insurer is liable for that period of time in was on the risk compared to the entire period during which damages occurred, and losses will be prorated to the insured for period during which it was uninsured.
The Court emphasized that this rule does not reduce the tort defendant's own joint and several liability for the judgment. Rather, the question here was whether the insurer is liable for the entire judgment, and that question could be answered only be reference to the insurance contract and the application of contract law.
The 4th Circuit ultimately ruled that the insure was only liable for 22months/55 months of time-on-the-risk, or 40% of the $850,000 judgment.
Impact: By providing more certainty concerning the allocation of judgments to the tortfeasors' insurance policies, this opinion should permit disputes concerning such allocation to be resolved more easily.
Posted by David B Stratton on 02/05/2012 at 09:33 PM
Insurance •
Lead Paint Poisoning •
Maryland •
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Insurer’s Late Notice Defense in Virginia: Dabney v. Augusta Mutual Ins. Co.
In Dabney v. Augusta Mutual Insurance Co., 282 Va. 78, 710 S.E.2d 726 (2011), the Virginia Supreme Court held that the question whether the insured gave the insurer notice of the claim "as soon as is practicable" was a question for the jury, notwithstanding the insured's 254-day delay in providing notice. The Court reversed the trial court's award of summary judgment to the insurer, because the trial court only focused on the length of the delay, and failed to consider the facts and circumstances surrounding the delay.
The Virginia Supreme Court reasoned that the timeliness of the notice of the claim must be considered in light of all the facts and circumstances presented in the case. There were extenuating circumstances here: The insured was unaware of the claim before her death; and the address for notice in the insurance policy had been changed, unbeknownst to the executor of the insured's estate, resulting in the initial written of notice letter being sent to the wrong address, and yet the letter was never returned to sender or acknowledged.
Given the extenuating circumstances, whether the notice was timely under the policy was a question of fact upon which reasonable minds could disagree, and the trial court erred in ruling that the notice was untimely as a matter of law.
Elsewhere in the decision, the Virginia Supreme Court held that the trial court correctly held that the plaintiff was limited to the alleged date of notice plead in the amended complaint. The Court emphasized that the law in Virginia is well established that a court cannot enter judgment based on facts that are not alleged in the parties' pleadings. The issues in a case are made by the pleadings, and not by the testimony of witnesses or other evidence.
However, the Court noted that the plaintiff's counsel did not argue to the circuit court that, pursuant to Code sec. 8.01-377, its pleading could have been amended to conform to the evidence presented at trial. Because the Virginia Supreme Court remanded the case for trial, this raised the possibility that plaintiff's counsel still could amend the pleading to allege alternative dates of notice.
The alternative dates of notice were a key underlying issue at trial, because of the operation of Virginia Code sec. 38.2-2226, which states in pertinent part that:
Whenever any insurer on a policy of liability insurance discovers a breach of the terms or conditions of the insurance contract by the insured, the insurer shall notify the claimant or the claimant's counsel of the breach. Notification shall be given within forty-five days after discovery by the insurer of the breach or of the claim, whichever is later. . . . Failure to give the notice within forty-five days will result in a waiver of the defense based on such breach to the extent of the claim by operation of law.
Id.
Thus, if the plaintiff could show that the insurer had received notice of the claim earlier than 45 days from the time that the insurer gave the claimant notice of the late notice defense, the defense would be waived as a matter of law under this statute. Virginia courts have been strict in applying such waiver. See, e.g., Aetna Casualty & Surety Co. v. Compass & Anchor Club, Inc., 33 Va. Cir. 235 (Feb. 24, 1994). See also Morrell v. Nationwide Mut. Fire Inc. Co., 188 F.3d 218 (4th Cir. 1999).
For those reasons, whether or not the trial court would, on remand, allow an amendment of the pleadings to conform to the evidence presented at trial, could mean the difference between victory or defeat for the parties.
All insurers doing business in Virginia and their counsel should keep the notification requirements of Va. Code sec. 38.2-2226 in mind in any claim involving a late notice defense or any other claim involving alleged breach of the conditions of the insurance policy as a defense.
Posted by David B. Stratton on 11/30/2011 at 10:32 PM
Defenses •
Insurance •
Virginia •
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Subrogation suit dismissed based on contractual limitations period in arbitration clause
In Vigilant Insurance Company v. American Mechanical Services of Maryland, LLC, the U.S. District Court for the District of Columbia dismissed a subrogation action by an insurance company against a contractor on the grounds that the claim was barred by a contractual limitations period.
Vigilant sued American Mechanical Services to recover amounts paid by Vigilant to Venable, LLP following a fire at Venable's offices which Vigilant claimed was caused by American Mechanical Services. As Vigilant was subrogated to the rights of its insured, it was bound by the contract between American Mechanical Services and Venable, LLP, which included a mandatory arbitration clause. That clause included a requirement that a written demand for arbitration needed to be served within one year after the date the dispute arose.
Vigilant conceded that no written demand for arbitration was made, but argued that a demand letter sent to American Mechanical Services (which did not mention arbitration) was sufficient to discharge American Mechanical Services' obligation to initiate arbitration. The Court disagreed, finding that the term was unambiguous, and that no reasonable jury could find that American Mechanical Services had lulled Vigilant into disregarding the contractual period of limitations.
Posted by Padraic K. Keane on 11/22/2011 at 07:13 PM
Arbitration •
District of Columbia •
Insurance •
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Innocent Insureds provision held not to save coverage for accounting firm for employee theft
In Bryan Brothers Inc. v. Continental Casualty Co., No. 10-1439 (4th Cir. March 24, 2011)(published per order filed Sept. 6, 2011), the Court held that the prior knowledge provision in an accounting firm’s professional liability policy was a clear and unambiguous condition precedent to recovery under the policy for thefts from client accounts by a former employee of the accounting firm. Because the former employee had prior knowledge of her thefts, a condition precedent was unfulfilled, and the coverage agreement was not triggered. In addition, the 4th Circuit held that exclusions and exceptions in the policy cannot provide coverage that is precluded by the prior knowledge exception. Thus, the Court affirmed Bryan Brothers v Continental in favor of the insurer.
Significantly, the accounting firm’s professional liability policy with Continental included the following Innocent Insureds provision under the Policy conditions:
If coverage under this Policy would be excluded as a result of any criminal, dishonest, illegal, fraudulent, or malicious acts of any of you, we agree that the insurance coverage that would otherwise be afforded under this Policy will continue to apply to any of you who did not personally commit, have knowledge of, or participate in such criminal, dishonest, illegal, fraudulent or malicious acts or in the concealment thereof from us.
The accounting firm argued that since the former employee who committed the thefts was the only person with prior knowledge of her thefts, the innocent insureds provision saved coverage for any insured other than her. Continental Casualty argued, on the other hand, that the prior knowledge provision in the main insuring clause was a condition precedent that precluded coverage if unfulfilled.
Applying Virginia law, the 4th Circuit agreed with the insurer. The Court agreed that based on the plain language and structure of the policy, the prior knowledge provision in the main insuring clause was a condition precedent to coverage. Thus, the accounting firm’s lack of prior knowledge was a condition of the insurer’s agreement to cover the accounting firm’s liability from acts predating the policy. The knowledge of the former employee breached that condition. The Court found that the Innocent Insureds provision was inapplicable, because the insurer did not deny coverage under the bad acts exclusion. The Court stated that the Innocent Insureds provision “appears to be an exception to the bad acts exclusion”, which was not implicated.
In any event, the Court found that it is elemental that exclusions and exceptions in an insurance policy cannot expand the scope of agreed coverage.
Accounting and law firms should be aware of this decision when negotiating the renewals of their professional liability policies. The Innocent Insureds provision does not trump the provisions of the main insuring clause.
Posted by David B. Stratton on 09/12/2011 at 01:57 PM
Insurance •
Virginia •
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Maryland federal court denies coverage under CGL policy for alleged theft of $1.5 million in goods
In IFCO Systems North America, Inc. v. American Home Assurance Company, No. 09-2874 (D. Md. June 23, 2011), the Court granted summary judgment to American Home Assurance Company, finding no coverage under the American Home policy for the insured's liability arising from alleged theft by the insured's employees of over $1.5 million of goods from a client's warehouse.
The insured, IFCO Systems North America, had contracted with Rite Aid of Maryland to provide pallet management and logistics support at Rite Aid's warehouse in Perryman, Maryland. Rite Aid notified IFCO that it believed that IFCO had stolen over $1.5 milling in Rite Aid goods from the Perryman facility. IFCO reported this claim to its insurer, American Home. American Home investigated the claim and disclaimed any duty to defend or indemnify. IFCO then filed a declaratory judgment action that the Policy covered the Rite Aid claim. The case is somewhat unusual in that in the declaratory judgment action, both IFCO and American Home are represented by insurance defense firms.
The Court agreed with American Home's argument based on a basic principle: the Policy defined an "occurrence" as "an accident", and theft is not an accident.
The Court rejected IFCO's argument that even though the IFCO employee who allegedly stole the Rite Aid goods did so intentionally, IFCO itself as a corporation was an innocent insured. The Court ruled that under the applicable law, the intentional acts of a corporation's employees do not constitute an "accident", even if the corporation did not foresee or intend the employee's actions.
IFCO next argued that that the Policy definition of "occurrence" is ambiguous and can be read to include even intentional acts by IFCO employees. The Court characterized this argument as absurd, noting that by IFCO's logic, repeated intentional acts would fall within the definition of "accident", even where an isolated intentional act may not. "Routinized theft cannot be accidental, even under insurance law."
IFCO also argued that the Policy provisions, read as a whole, imply that property losses due to theft will be covered by the Policy. The Court rejected this argument, noting that "The problem with this argument is that the "solitary provisions" of the Policy cited by [American Home] also happen to be the Policy's operative provisions establishing the scope of coverage."
Notwithstanding the Court's rejection of its arguments, IFCO filed a motion to alter or amend the Court's judgment, which is still pending.
Posted by David B. Stratton on 09/05/2011 at 05:56 PM
Insurance •
Maryland •
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Rescission action requires reasonable promptness by insurer
In The Charter Oak Fire Ins. Co. v. American Capital, Ltd., No. DKC 09-0100 (Aug. 9, 2011), the Court considered the issue of whether an insurer acted with reasonable promptness to rescind an insurance policy after learning of misrepresentations in the application for insurance. The district court denied the insured's motion to dismiss, finding that the facts alleged in the amended complaint that the element of reasonable promptness was adequately plead in the complaint.
In reaching that conclusion, the district court reviewed key points concerning an action for rescission of an insurance policy.
Because rescission is a "radical remedy", courts have long recognized that a party requesting it must move quickly. Courts have deemed the promptness requirement so important that they place the onus on the plaintiff insurer to show it.
The relevant trigger for rescission is when a plaintiff learns of "the facts that would justify rescission", not merely "facts that raise the mere potentiality for rescission." Also, when an insurer suspects that its policyholder may have made misrepresentations, it is entitled to a "reasonable time" within which to investigate the matter before it must rescind.
Even assuming that the insurer has not sought rescission with reasonable promptness, the policyholder would need to show actual prejudice because of the delay. Prejudice cannot be presumed from the mere fact of the delay. See North American Specialty Ins. Co. v. Savage, 977 F.Supp. 725 (D. Md. 1997).
Posted by David B. Stratton on 09/04/2011 at 07:54 PM
Insurance •
Maryland •
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Legal malpractice insurer breached duty to defend, affirms 4th Circuit
In Minnesota Lawyers Mutual Insurance Co. v. Batzli, Nos. 10-1684, 10-1839, 10-1910 (4th Cir. Aug. 4, 2011)(unpublished), the 4th Circuit affirmed the trial court's denial of a post-trial motion for judgment as a matter of law, made by the insurer, that challenged the jury's verdict that the insurer breached its duty to defend under a legal malpractice policy. Although the decision was unpublished, the opinion is lengthy and also has a dissent by Circuit Judge Shedd.
The 4th Circuit found that there was sufficient evidence in the record for a reasonable jury to conclude that the insurer breached its policy.
The underlying legal malpractice claim arose from a drafting error in a property settlement agreement prepared in the client's divorce proceeding. Essentially, the client instructed the insured lawyer to seek the wife's interest in a family business during the settlement negotiations. After some negotiations, the insured believed he had negotiated a deal under which the wife would transfer her interest in the family business to the husband, however, the property settlement agreement he prepared had indicated that the husband would retain "his" interest in the family business, rather than "their" interest. This mistake came to light when the insured sent a follow-up document to the wife's lawyer to effect the transfer of the family business, to which the wife's lawyer responded that his client had not agreed to such a transfer. The wife's interest in the family business was worth over $400,000.
The insured disclosed his drafting omission to the husband, and the husband decided to go through with the property settlement and to move for correction of the agreement on the grounds of a scrivener's error.
In August, 2006, the insured filed a motion in the Circuit Court seeking correction of the scrivener's error, which was denied by the Court. The Virginia Court of Appeals affirmed this denial in May, 2008.
Around October, 2008, the insured's law firm renewed its legal malpractice policy with MLMIC. The policy included prior acts coverage but only if the insured had no knowledge of facts which could reasonably support a claim at the effective date of the policy. Also, coverage under the policy is conditioned on compliance with a notice requirement that requires the insured to give immediate written notice to the insurer in the event a claim; and that a claim is made whenever an act, error, or omission by any insured occurs which has not resulted in a demand for damages but which an insured knows or reasonably should know, would support such a demand.
In January, 2009, the husband filed a malpractice suit against the insured lawyer and his firm. The insured gave prompt notice of the suit to MLMIC, which denied coverage because the insured failed to comply with the notice requirement. The scrivener's error had been the subject of litigation since 2006.
In the district court, cross motions for summary judgment were denied because the there were genuine factual disputes between the parties as to whether it was reasonable for the insured to anticipate a claim by the husband.
At trial, the jury found for the insured and awarded damages of $8400, representing attorney's fees to date to defend the legal malpractice claim.
In response to MLMIC's post-trial motion, the district court reduced the damages award to nominal damages ($1), because the insured lawyer failed to provide evidence of the reasonableness of the fees, such as the nature of the services performed, the length of such services, and the applicable rates for such representation, and thus there was insufficient evidence to support the jury's award of damages.
However, the district court denied MLMIC's argument that the insured's notice of a claim by the husband was untimely as a matter of law, in large part because it was uncontested that the former wife would not have agreed to transfer her interest in the family business to the husband.
The parties thereafter filed cross appeals.
On appeal, the 4th Circuit acknowledged, as did the district court, that the test for whether the circumstances would give rise to a claim, for purposes of the notice requirement, was an objective one:
Failure to give timely notice will not be excused when the insured only subjectively concludes that coverage under the policy will not be implicated. Such a policy provision requires the insurer to be notified whenever, from an objective standpoint, it should reasonably appear to the insured that the policy may be involved.
The appellate court stated that the district court's decision was not that the insured did not need to notify MLMIC because any foreseeable claim would lack merit; instead, the district court determined that there was no reasonably foreseeable potential claim. The appellate explained that:
The distinction is perhaps confusing because both conclusions could potentially result from the determination that [the insured's] error caused no damage to his client. See Campbell v. Bettius, 244 Va. 347, 352, 421 S.E.2d 433, 436 (1992) ("In a legal malpractice action, the fact of negligence alone is insufficient to support a recovery of damages. The client must prove that the attorney's negligence proximately caused the damages claimed.").
Here, the wife had testified at trial that she would not have signed an agreement to transfer her interest in the family business to her husband. Thus, a reasonable jury could have determined that the insured lawyer could not have anticipated a demand for damages for "failing to procure that which was unprocurable." A reasonable belief that an insured's error caused no harm to the insured's client is relevant to whether an objectively reasonable person in the insured's position would expect his error to give rise to a claim for damages.
Accordingly, the 4th Circuit affirmed the ruling of the district court, finding that the jury had sufficient evidentiary basis to conclude that the insured reasonable thought his drafting error would not result in a claim until he learned from the husband that a legal malpractice suit would be filed.
Circuit Court Judge Shedd dissented, on the grounds that the insured admitted his error to his client in a letter, offered to bear the costs of the action in state court to try to correct the error, and in addition, the insured said that upon realizing the error, he felt sick about it and lost sleep over it. The insured knew that the wife's 20% interest in the family business was worth $440,000. Because the wife's interest in the family business was a non-marital asset, the divorce court did not have jurisdiction over it and the only way the husband could have received the wife's 20% interest was through the property settlement agreement, which the insured failed to properly draft. Thus, Judge Shedd would have reversed and entered judgment in favor of MLMIC.
[For practitioners, this opinion teaches the importance of providing timely notice of a potential claim to one's professional liability insurer. In addition, it teaches that a fee claim must be supported by an affidavit of fees and costs.]
Posted by David B. Stratton on 09/01/2011 at 01:54 PM
Insurance •
Legal Malpractice •
Virginia •
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Reminder Notice Can Extend Grace Period for Life Insurance Premium Payment in Maryland
In a decision of interest to estate attorneys and insurance advisors, the Maryland Court of Special Appeals considered whether a life insurance policy issued to Dr. John Griffith (“Dr. Griffith”) was in force at the time of his death. See United States Life Ins. Co. v. Wilson, 198 Md. App. 452, 18 A.3d 110 (2011).
On July 28, 2007, Dr. Griffith was struck and fatally injured by a passing motor vehicle. Prior to his death, Dr. Griffith purchased a 10 year level term life insurance policy (“Policy”) from United States Life Insurance Company in the City of New York (“US Life”). He was the named insured under the Policy and his wife, Elizabeth Wilson (“Wilson”), the primary beneficiary. The Policy was administered by AMAIA, a subsidiary of the American Medical Association.
Premiums were due on the Policy bi-annually, on November 15 and May 15. The Policy had a “Grace Period” provision, however, that provided:
Each premium, after the first, may be paid up to 31 days after its due date. . . .The insurance provided by the group policy will stay in effect during this period. If the premium is not paid by the end of this period, such insurance will end at that time. United States Life may extend the grace period by written notice. Such notice will state the date the insurance will end if the premium remains unpaid.
The Policy also contained a “Reinstatement” provision that provided the Policy could be reinstated without the written approval of US Life so long as any overdue premium was paid within 31 days from the end of the Grace Period.
Dr. Griffith failed to make the premium payment that was due May 15, 2007. After he missed the payment, US Life sent him a Reminder Notice that stated: “To assure active coverage, full payment must be received no later than 60 days [from May 15, 2007].” On July 23, 2007, Dr. Griffith entered an online directive for his bank to make the payment. The bank complied and on July 25, 2007, issued a check for the payment and sent the check to AMAIA. AMAIA received the check on July 30, 2007. Without knowledge of Dr. Griffith’s death, AMAIA returned the check, contending that the Policy had lapsed and could not be reinstated unless a new application was submitted.
Wilson subsequently filed a claim under the Policy for death benefits. AMAIA denied the claim, indicating that the Policy was not in force at the time of Dr. Griffith’s death. Litigation ensued and ultimately, the trial court granted summary judgment to Wilson on her breach of contract claim against US Life and AMAIA (“the Insurers”).
The Insurers appealed, arguing that the trial court’s judgment was erroneous. Specifically, they argued that the Reminder Notice did not extend the Grace Period from 31 to 60 days and as such, the Policy lapsed because payment was not received within the required time frame. Alternatively, they argued that even if the Reminder Notice had extended the Grace Period from 31 to 60 days, there was no obligation to reinstate the Policy because Dr. Griffith died before the Insurers received and negotiated the premium payment.
The Court of Special Appeals rejected the Insurers’ arguments concluding that the trial court had correctly entered summary judgment in favor of Wilson. In so concluding, the Court held that the Reminder Notice served to extend the Grace Period to July 14, 2007, as expressly permitted under the Policy, because the notice was in writing and contained a substitute date that the insurance would end?60 days from May 15, 2007.
The Court then held that because the premium payment was dispatched to the Insurers within 31 days of July 14, 2007, the conclusion of the extended Grace Period, the Insurers were required to reinstate the Policy pursuant to the contract terms. The Court explained that the premium payment was deemed received by the Insurers not when they took actual physical possession of the payment, but rather when Dr. Griffith’s bank dispatched the payment, or set it into motion. Thus, Dr. Griffith’s acceptance of US Life’s offer to reinstate his Policy was effective and his Policy revived on July 25, 2007, when his bank sent the premium payment to the Insurers. Accordingly, the Court held that the Policy was in force at the time of Dr. Griffith’s death on July 27, 2007.
Posted by Mandy Wolfe on 06/27/2011 at 12:54 PM
Insurance •
Liability of Agents and Brokers •
Maryland •
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Coverage Issues in Review: E.D. of Virginia Tackles Pollution Exclusion in Chinese Drywall case
Most liability insurance policies include what is commonly referred to as a "pollution exclusion" provision, which essentially excludes insurance coverage for bodily injury or property damage arising out of the discharge of "pollutants." The inception of the pollution exclusion provision in liability insurance policies dates back to the 1970s, at which time the insurance industry was becoming increasingly concerned about pollution claims resulting from environmental catastrophes that occurred during the 1960s, including specifically the Torrey Canyon disaster and the Santa Barbara off-shore drilling oil spills in 1969. Many insurance companies used the adoption of the pollution exclusion provision as an opportunity to address public concerns regarding environmental pollution and to clarify and publicize the position that commercial general liability insurance policies did not indemnify companies that were knowingly polluting the environment.
Initially, most policies were drafted to include a "sudden and accidental" pollution exclusion provision, which denied coverage for bodily injury arising out of the discharge, dispersal, release, or escape of irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water; unless the discharge, dispersal, release, or escape was "sudden and accidental." In light of controversy over the interpretation of the "sudden and accidental" pollution exclusion provision by the courts with respect to whether the language of the provision was clear and unambiguous, and in an effort to limit coverage for pollution related claims, an "absolute pollution exclusion" was adopted in 1985. Pursuant to the absolute pollution exclusion, "bodily injury or property damage arising out of the actual, alleged or threatened discharge, release, or escape of pollutants" was excluded from coverage; the term "pollutant" being defined as "any solid, liquid, gaseous or thermal irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalies, chemicals and waste." The revision of the pollution exclusion did little to resolve issues of the scope and application of the provision, which was one of the most heavily litigated insurance coverage questions in the late 1980s and early 1990s.
Although these issues are not as hotly contested today, there continues to be a split of opinions by state and federal courts nationwide. Specifically, "[n]umerous courts have held that a pollution exclusion bars coverage for all injuries caused by the release of pollutants, even where the pollutant is dispersed into a confined or indoor area." However, "other courts have held that the exclusion does not apply if the facts show that the discharge, dispersal, release or escape was a localized toxic accident occurring within the vicinity of the pollutant's intended use." Firemen's Ins. Co. v. Kline & Son Cement Repair, Inc., 474 F. Supp. 2d 779, 792-793 (2007)(collecting cases) (citation omitted). For example, case law from Maryland and the District of Columbia suggests that the pollution exclusion applies only to environmental pollution. See Clendenin Bros. v. U.S. Fire Ins. Co., 390 Md. 449, 458, 889 A.2d 387, 393 (2006)(Pollution exclusions were intended to apply only to environmental pollution and insurer had a duty to defend and/or indemnify insured against claims for bodily injury caused by harmful localized, non-environmental fumes containing manganese produced from an insured's proper use of welding equipment); Richardson v. Nationwide Mut. Ins. Co., 826 A.2d 310 (D.C. 2003)(vacated as moot)(Pollution exclusions refer to the types of pollutants that were ordinarily understood in the context of federal environmental legislation; its purpose was to protect insurers from liability in the billions of dollars for environmental cleanups of hazardous waste sites and industrial facilities. Accordingly, the pollution exclusion did not apply to claim for bodily injury from exposure to carbon monoxide fumes that leaked from a defective furnace in an apartment building.)
Most recently, the United States District Court for the Eastern District of Virginia, applying Virginia law, addressed this issue in a declaratory judgment action in the context of the applicability of a pollution exclusion to claims for bodily injury and property damage related to the installation of defective drywall imported from China, which allegedly "emits various sulfide gases and/or other toxic chemicals through 'off-gassing' that created noxious odors, and caused damage . . . [and] dangerous health consequences . . . " Nationwide Mut. Ins. Co. v. Overlook, LLC, 2011 U.S. Dist. LEXIS 55282 (2011). The Court analyzed the policy at issue and concluded that, because the policy did not reference the word "environment," "environmental," "industrial," or any other limiting language to suggest that the pollution exclusion was not equally applicable to both traditional and indoor pollution scenarios; accordingly, construing the policy to apply only to environmental pollution would require the Court to interject words into the policy, contrary to the elemental rule that the function of the Court is to construe the contract made by the parties, and not to reformulate a contract for them. The Court further explained that it was unnecessary to evaluate the manner in which other jurisdictions analyzed or resolved similar contract disputes, because the Supreme Court of Virginia has explained that the law of the Commonwealth of Virginia and the plain language of the insurance policy provided the answer to this coverage question.
Finally, pursuant to what is often referred to as the "Eight Corners Rule," the Court compared the four corners of the complaint to the terms contained within the four corners of the insurance policy and determined that the insurer owed no duty to defend. Specifically, the Court explained that, because the bodily injury and property damage claimed were caused by a harmful gas that was released in a manner contemplated by the pollution exclusion provision, and the harmful gas, which allegedly necessitated a repair or replacement of various parts of the house as well as medical care, was a "pollutant" (i.e., an irritant or contaminant), and every claim in the underlying complaint referred to the defective drywall as either the basis for each claim or the cause of the resulting damage, the pollution exclusion was implicated and there as therefore no duty to defend.
Ultimately, in analyzing coverage issues that may implicate the pollution exclusion of a liability insurance policy, the applicable state law may be as important as the particular facts of the case in determining how the exclusion will be interpreted and whether it will be applied by the court. This often means that the choice of law analysis for a particular claim may be dispositive of the question. For further assistance on Virginia insurance coverage matters, call Jordan Coyne & Savits partners John H. Carstens, Esq. or Carol T. Stone, Esq., at 703-246-0900.
Posted by Jamie Keenan on 06/26/2011 at 11:04 PM
Insurance •
Virginia •
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