May 24 2018

MM Insurance News 05/24/18

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NOTEWORTHY NEW RULINGS

SECOND CIRCUIT Limitations Periods (CT)

The U.S. Court of Appeals for the Second Circuit has asked the Connecticut Supreme Court to clarify what it means for there to be a "continuing course of conduct" that might toll the 3‑year statute of limitations. In a dispute between an insurance company and an adjuster. the Second Circuit declared in Evanston Insurance Company v. William Kramer and Associates LLC, 16-2082 (2nd Cir. May 10, 2018) that the evidence in this case was unclear and did not justify the District Court's entry of judgment for the defendant when the jury had found a continuing course of conduct. The case was therefore forwarded to the Connecticut Supreme Court for determination of whether the relationship between Evanston and the adjuster satisfied the special relationship circumstances that might require a tolling of the 3-year statute of limitations.

CALIFORNIA “Personal Injury”/Invasion of Private Occupancy

The California Court of Appeal has ruled in Albert v. Truck Ins. Exchange, B278295 (Cal. App. May 15, 2018) that ruled that a homeowner’s insurer was required to defend allegations that a homeowner erected and refused to remove a fence that partially blocked the only road leading to her neighbor’s undeveloped property pursuant to the policy’s “personal injury” coverage. While agreeing with the Truck that the plaintiff had not alleged a claim for “wrongful entry”, the court declared that the policy’s coverage for “invasion of the right of private occupancy” was ambiguous and may include non-physical invasions of rights in real property.

ILLINOIS Arbitration

The Appellate Court has ruled in Zurich American Ins. Co. v. Personnel Staffing Group LLC, 2018 IL App (1st) 1172281 (Ill. App. Ct. May 15, 2018) that an insurer’s claim that its insured fraudulently transferred funds to the other defendants to avoid paying an anticipated arbitration award concerned collection of the arbitration award and was therefore not itself subject to arbitration as the parties had not agree to arbitrate issues regarding collection of arbitration awards. The First District further ruled that staying proceedings on the fraudulent transfer claims pending arbitration would conflict with the purposes of the Uniform Fraudulent Transfer Act.

TEXAS Arbitration

The Texas Supreme Court has ruled that the Appeals Court erred in holding that a signatory to a crop insurance policy containing an arbitration clause was obliged to arbitrate its non-contractual claims against parties that were not signatories to the agreement. In Jody James Farms v. Altman Group, No. 17-0062 (Tex. May 11, 2018), the court declared that arbitration clauses cannot be imposed on non-signatories, nor could such an obligation arise under theories of agency or third party benefits.

WASHINGTON First Party/Fortuity

A federal district Court has ruled in Market Place North Condominium Association v. Affiliated FM Insurance Company, 2018 U.S. Dist. LEXIS 76724 (W.D. Wash. May 7, 2018) that an "all risk" property insurance policy did not provide coverage for mold and water damage to a homeowners to the outdoor deck of a condominium where the insured was already aware of this damage. Under the circumstances, the District Court declined to find that this loss was fortuitous.

WISCONSIN "Occurrence"/Negligent Supervision Claims

A sharply-divided state Supreme Court has ruled that a CGL policy does not cover allegations of negligent supervision when a negligent supervision claim rests solely on an employee's intentional act of assault and battery without any separate basis for a negligence claim against the employer, no coverage exists. In reversing the decision of the Court of Appeals, the majority found in Tulley v. Mustafa, 2018 WI 47 (Wis. May 11, 2018) that coverage could not be based upon the employer’s failure to tell his employees not to punch employees in the face and that coverage would only arise in such cases if the employer’s own acts were found to have accidentally caused the plaintiff’s injuries. Writing in dissent, Justice Bradley (joined by Justices Abrahamson and Kelly) argued that the majority had erred in not considering the meaning of “accidental” from the standpoint of the employer and that the majority had improperly that coverage would not apply because no jury would award damages on the theory that an employer had a duty to instruct employees not to punch customers. Justice Kelly filed a separate dissent, echoing Justice Bradley and insinuating that the majority had seized this case as an excuse to eliminate coverage for negligent supervision claims.

OTHER DEVELOPMENTS OF NOTE

* * * ALI Approves Insurance Restatement * * *

Following a vigorous two hour debate, the American Law Institute voted on May 22 to give final approval to the Restatement of Law, Liability Insurance. Eight years in the making, this Restatement is the first one devoted to a specific industry. It was to have received final approval at the 2017 ALI Annual Meeting but a final vote was postponed by the ALI leadership after a last minute controversy arose with respect to whether certain provisions of Proposed Final Draft No. 1 truly mirrored the common law.

Tuesday’s debate focused on Sections 3, 8, 12, 25, 27 and 46.

Several significant changes have been made to this draft since May 2017, most notably in the rules of insurance policy interpretation in Section 3. The Reporters belatedly abandoned their experimental “presumption of plain meaning” and have now largely retreated to conventional “plain meaning” rules. Controversy remains with respect to several sections of this Restatement, however, and a vigorous floor debate is expected on Tuesday.

Based upon the Motions that have been filed with the ALI as of this weekend, Tuesday’s debate will likely focus on the following proposed Sections:

--Rules of Contract Interpretation: While Proposed Final Draft No. 2 modified Section 3 to abandon the previously-stated “presumption of plain meaning,” the “plain meaning rule” proposed by the Reporters had a twist, as Comment c. allows courts to consider evidence of “custom, practice and usage” (of both the insured’s industry and the insurer) in determining plain meaning. Motions to delete Comment c. that I filed and that was submitted Vanita Banks of Allstate were voted down. The Reporters did prove amenable to a suggestion by John Buchanan of Covington & Burling that the legal authority that they had deleted after abandoning the “presumption of plain meaning” approach earlier this year be restored to the Reporters’ Notes for Section 3 as reflecting the “spectrum” of views in this area.

--Misrepresentation: A Motion filed by Vanita Banks to amend Section 8’s black letter rule to eliminate language that presently only permits insurers to rescind policy if an insured’s misrepresentation caused them to underwrite a policy with “substantially different terms” than they would have had the truth been known was defeated from the floor. The Reporters responded that this was needed to avoid insurers from rescinding a policy based on a trivial misstatement

--Liability for Defense Counsel—While Section 12’s earlier imposition of vicarious liability for the acts of defense counsel has disappeared in the face of fierce opposition from DRI and other defense bar advocates, it retains an unfortunate and face statement in Subsection (1) that insurers may still be liable if they are negligent in their selection of counsel, especially if the firm does not have “adequate” malpractice insurance. Concerns were also expressed that the illustrations used by the Reporters, many of which involved an insurer’s knowledge of substance abuse or other personal problems, were problematic or would place insurers in the position of intruding into the privacy of defense counsel. A motion to delete Subsection (1) by Brackett Denniston of Goodwin LLP and Harold Kim on the Chamber of Commerce was defeated. Reporters did state that they were open to revising the illustrations, particularly with respect to privacy concerns, and might clarify the Comments to cite the lack of case support for this proposition.

--Duty to Make Reasonable Settlement Decisions: Prior to the meeting, the Reporters accepted a proposal by Malcolm Wheeler of Wheeler Trigger to amend Sections 25(3) and 27 to require that insureds give full notice and information to insurers before being permitted to enter into settlements over the insurer’s objection in cases where the insurer is defending under a reservation prevent insureds from entering into settlements unless their insurers are given full information and an opportunity to participate in the settlement. The Reporters have said that they will likely accept these proposed changes.

--Consequences of Failing to Settle—Section 27 declares that an insurer is liable for all damages resulting from a failure to make a reasonable settlement decision, including punitive damages that may be awarded against its insured even if punitive damages are otherwise uninsurable. Despite the fact that the only legal support for this contention are a few dissenting opinions in cases where the majority had refused to require coverage, a motion by Victor Schwartz of Shook Hardy & Bacon to strike this aspect of the Comment was defeated.

--Known Liabilities: The only Motion that prevailed today also the only motion filed by a policyholder lawyer. David Goodwin of Covington & Burling sought to delete Section 46(a)(2), which extends the “known loss” doctrine to defense costs. The Motion argued that there was no legal support for applying the known loss doctrine to defense costs and that doing so would be contracted to Section 13 of this Restatement, which sets forth four narrow circumstances in which courts may look outside of a Complaint to justify denying a duty to defend. I had argued in earlier-filed Comment that there were citing numerous state and federal decisions that have declined to distinguished between indemnity and defense costs in applying the “known loss” doctrine and that there was no logical research for distinguish between defense costs and indemnity where a law suit or demand for damages had been received by the insured before the policy in question was issued. Despite the lack of authority supporting David’s motion, the Reporters quailed and decided to accept Goodwin’s argument a “friendly” motion.

Shortly before Noon, the ALI voted to approve the full Restatement. For the next few months, the Reporters will continue to fine tune the wording of various provisions and various areas where Comments and Reporters’ Notes need to be revised to reflect the debate. It is therefore unlikely that the Reporter will finally be published by the ALI before the Fall of 2018.

* * * Inside the Insurance Industry * * *

A.M. Best reports that P/C net premiums grew 15.2% during the first quarter of 2018,

The Connecticut legislature has approved SB 377 that will authorize the creation of “agency captives” in the Nutmeg State.

John Elias will become the Insurance Commissioner of New Hampshire next month, succeeding Roger Sevigny, who served in the past for sixteen years.

Proposed changes to the federal Dodd-Frank Act will reportedly require federal officials engaging in international insurance negotiations to consult with state insurance regulators.

* * * Cyber * * *

The New York Attorney General’s Office reports that it received reports of 1583 data breaches in 2017, quadruple the number that were reported the year before.

* * * Across the Bar * * *

Boston partner Michael Aylward was named to serve as President-Elect of the American College of Coverage Counsel at the ACCC’s annual meeting in Chicago last week.

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