Faulty Workmanship Not Occurrence, Travelers No Duty to Defend / Indemnify Real Estate Investment Companies, Federal Judge Rules

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PHILADELPHIA,  September 1 — A Pennsylvania federal judge granted summary judgment Travelers Insurance last week, ruling it had no duty to defend insured real estate developers who were sued for claims of defective community living infrastructure construction.

In the breach of contract suit over coverage (bad faith claims had been dismissed earlier in the case), U.S. District Judge Mitchell Goldberg said that no coverage existed under the applicable Travelers insurance policies because the defective workmanship issues were not “occurrences” under well-established Pennsylvania precedent.

The insured plaintiffs, Northridge Village LP and Hastings Investment Co. Inc., bought and subdivided lots in Chester County, Pa., subsequently selling them to a builder.   Northridge built roads, storm water and runoff  management and other infrastructure for the planned community.

The community  association alleged defects with the construction of roads, drainage ponds, utility boxes, and other items, later suing Northridge and Hastings in Pennsylvania state court in 2013.  Northridge and Hastings then sought defense and indemnity for the suits under a commercial general liability policy with a $1 million occurrence limit, $2 million aggregate limit and $2 million products-completed-operations aggregate limit, as well as excess coverage of $2 million.  When Travelers denied the claims, Northridge and Hastings brought a coverage and bad faith suit against Travelers  in 2015.

Judge Goldberg dismissed the coverage suit, relying on what he called well-settled precedent stemming from a 2006 case, Kvaerner Metals Div. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006).  Judge Goldberg held that under Kvaerner, construction workmanship issues did not constitute “occurrences”‘ within the meaning of the CGL policies, as they were not accidental, fortuitous events which the instrument of insurance is designed to cover:

 “Courts in this circuit have consistently applied Kvaerner and held that claims based upon faulty workmanship do not amount to an ‘occurrence,’ and thus do not trigger an insurer’s duty to defend … The same conclusion has been reached in this circuit in cases where the faulty workmanship results in foreseeable damage to property other than the insured’s work product…Given the weight of Pennsylvania and Third Circuit precedent, I conclude that the term ‘occurrence’ in defendants’ CGL policies and excess policies does not include faulty workmanship. Further, the definition of ‘occurrence’ excludes negligence claims premised on faulty workmanship.”

Judge Goldberg further held that even if a duty to defend were potentially triggered, that was mooted by a ‘Real Estate Development Activities’ exclusion which also appeared in the applicable policies.

Northridge Village LP and Hastings Investment Co. Inc. v. Travelers Indemnity Co. of Connecticut et al., (E.D. Pa 2:15-cv-01947)(Goldberg., J.)

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Attorney Client Privilege Waived In Bad Faith Case Despite No Advice of Counsel Defense, Federal Magistrate Rules

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HATTIESBURG, Aug. 15 — A federal magistrate judge in Mississippi has ruled Nationwide Insurance must produce documents and that the insurer’s former counsel must produce billing records in a bad faith case related to the handling of an uninsured/underinsured motorist’s claim, finding the insurer waived protections under the attorney-client privilege and the attorney work product doctrine, even though it did not formally assert the advice of counsel defense.

In Craig Flanagan, et al. v Nationwide Property and Casualty Insurance Company,  U.S. Magistrate Judge Michael T. Parker  found that while Nationwide did not formally assert the advice of counsel defense opening the door to prior counsel’s work product and communications, it did pick and choose certain potentially privileged documents to produce in  aid of  its defense in the case, thereby waiving attorney – client and work product protections.

Nationwide’s insured, Craig Flanagan was severely injured in a motor vehicle accident on  May 31, 2014 while driving a vehicle owned by owned by Flanagan Construction Co. and insured by Nationwide Property and Casualty Insurance Co.  The Nationwide Policy provided UM/UIM Coverage, out of which Nationwide paid  $1 million statutory limits for noneconomic damages and $1.5 million for the medical expenses.  After Nationwide failed to pay the remaining $4.15 million in remaining UM/UIM limits, Flanagan, his wife,  and Flanagan Construction sued Nationwide in the U.S. District Court for the Southern District of Mississippi. In the suit, the  Plaintiffs sought the remaining UM/UIM limits ,  and also alleged fad faith, for which they sought punitive damages.

During the course of the case the Plaintiff’s filed a motion to compel production of a number of Nationwide claims documents, including investigative documents, and the files of outside counsel, Bill McDonough of Copeland Cook Taylor and Bush, relating to the claims. The Plaintiffs also sought the billing records of McDonough and the Copeland firm,  which was retained initially by Nationwide  to investigate the claim, but was later retained to represent Nationwide in the UM/UIM claim as well.

In granting the motion to compel, Judge Parker wrote:

“Plaintiffs argue that Nationwide is relying upon the advice and actions of McDonough as a defense despite Nationwide’s insistence that it is not asserting an ‘advice of counsel’ defense.  According to Plaintiffs, ‘Nationwide has produced a number of communications between Nationwide and Copeland Cook in support of its defense to the bad faith allegations, but has chosen to cherry-pick which communications to produce in discovery and which communications to withhold on a claim of privilege.’ . . .  Plaintiffs also point to the fact Nationwide identified McDonough as a witness in its initial disclosures and point to Nationwide’s interrogatory response.”

Nationwide opposed the motion to compel,  and argued that did not plead advice of counsel.  It also argued that the documents it did produce showing communication between Nationwide and McDonough contained only “objective facts,” and neither legal advice nor attorney work product.

Judge Parker disagreed, however, writing:

“review of the documents produced by Nationwide . . . reveals that Nationwide did not simply disclose ‘objective facts’ as it alleges, but also disclosed McDonough’s opinions regarding Flanagan’s evidence supporting his loss of income claim, Flanagan’s ability to prove cognitive impairment, the need to hire experts, the benefits and risks involved in scheduling a medical examination, and the timeliness of Nationwide’s investigation and payment to Flanagan…

An insured cannot force an insurer to waive the protections of the attorney-client privilege merely by bringing a bad faith claim.  Nationwide’s prior production, however, has put at issue Nationwide’s confidential communications with McDonough.  Nationwide has voluntarily injected its counsel’s advice into this case by purposely disclosing, inter alia, its counsel’s opinion that Nationwide has not ‘unnecessarily delayed payment of [Flanagan’s] claim.  . . .

To allow Nationwide to use the attorney-client privilege to withhold additional information related to counsel’s advice ‘would be manifestly unfair’ to Plaintiffs.”

Judge Parker also  found that Nationwide’s disclosure of certain documents containing McDonough’s opinions and impressions constituted waiver of the work product doctrine as well, and ordered the documents to be produced.

Editor’s Note: The price of asserting the Advice of Counsel Defense in a bad faith case is always waiver of attorney – client privilege and the attorney work product doctrine.  The calculus of the costs and benefits of asserting the defense must therefore always  be done thoroughly and carefully.   Insurers and their lawyers must be mindful that there are many ways to assert Advice of Counsel, and few, if any, to try to put it back in to the bottle once it has been let out.  Formal assertion of the defense is but one way to waive the protections of   attorney – client privilege and the attorney work product doctrine.  The defense can be asserted by conduct as well, leading to inadvertent waivers of privilege and work product protection. 

Craig Flanagan, et al. v Nationwide Property and Casualty Insurance Company, No. 2:17-cv-33-KS-MTP, S.D. Miss., Eastern Div., 2017 U.S. Dist. LEXIS 123204

Third Circuit: Insurers May Have Easier Time Keeping Coverage Litigation In Federal Court

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PHILADELPHIA, Aug. 22 – In a recent ruling, the U.S. Court of Appeals for the Third Circuit may well have made it easier for insurers to litigate coverage in federal court regardless of whether there is an existing underlying proceeding pending in state court.

In Kelly v. Maxum Specialty Insurance Group,  the Third Circuit Court of appeals reversed a ruling by U.S. District Judge Joel Slomsky, who  had opted to abstain from exercising jurisdiction over the removal of a declaratory judgment action filed by a dram shop  liability personal injury plaintiff against the tavern defendant’s insurance agent  and the agent’s liability insurer.  The Plaintiff sought a ruling that the insurer, Maxum, had an obligation to defend and indemnify the insurance agent Carman, in an underlying state suit against Carman relating to the agency’s failure to advise the tavern’s insurer of notice of the original dram shop suit, which led to a default judgment against the tavern.

Judge Slomsky remanded the insurance coverage suit, filed under the Federal Declaratory Judgment Act, on the grounds that the underlying state proceeding against the insurance agent, Carman, was a prior, parallel proceedinging.  Judge Slomsky ruled that the insurance coverage issues could be resolved in the state court action filed by the dram shop plaintiff against the agent, Carman, because Maxum could conceivably be added as a party to that suit.

Last week, however,  a three-judge panel of the Third Circuit disagreed with Judge Slomsky’s reasoning and ruled instead that that a federal action brought under the Declaratory Judgment Act is not parallel to a state case “merely because they have the potential to dispose of the same claims.”

Circuit Judge Michael Chagares wrote on behalf of the panel that “[Defining] ‘parallel state proceeding’ so broadly balloons a court’s discretion to decline a [Declaratory Judgment Act] action beyond the measured bounds we set forth in our prior decisions.”  The appeals panel further ruled that while the presence of related state court proceedings was a factor to consider, the district judge failed to consider a number of other factors, including Maxum’s argument that it was not even a party to the underlying civil errors and omissions case  against its insured, Carman.

 

 

Judge Chagares wrote:

“We hold that the mere potential or possibility that two proceedings will resolve related claims between the same parties is not sufficient to make those proceedings parallel; rather, there must be a substantial similarity in issues and parties between contemporaneously pending proceedings.”

Using that standard, the Third Circuit found that the state negligence action against Carman  and the federal declaratory judgment suit which included Maxum were  clearly not parallel, as they involved different parties and distinct claims.

The Third Circuit remanded the federal declaratory judgment  case to Judge Slomsky with the instruction that he proceed to confirm complete diversity of citizenship of the parties to the federal declaratory judgment action.

Kelly v. Maxum Specialty Ins. Grp._ 2017 U.S. App. LEXIS 15824.

Editor’s Note: The opinion issued by the Third Circuit in Kelly should be given close attention by insurers wishing to maintain declaratory judgment litigation in generally more favorable federal forums.  Those insurers often have to defend their federal coverage suits from remand motions in which state court plaintiffs make enticing arguments to federal trial judges presenting them with an opportunity to clear an active case off of their dockets through exercise of the abstention doctrine.  The rule set forth in Kelly may allow insurers to effectively respond to such remand claims, by pointing out to the federal court that an underlying personal injury proceeding which does not involve a defendant’s insurer and a federal declaratory judgment suit on coverage which does, are hardly “parallel” proceedings.  CJH

Alternative Fee Program Data Shows As Program Matures, Clients Realize Savings On Outside Legal Expense

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Here is an actual set of alternative fee numbers I’ve just happily provided to update one of the insurance clients I represent, demonstrating that an alternative fee program is saving them money on outside legal expense.  Real money.

Listed below are data for seven insurance related  cases I am handling under a monthly flat fee program (with a cap on the number of months the flat fee can be charged, so as to encourage efficiency).  First a look at the numbers, and then a few quick observations.   Only the case names below are changed to protect identities.  The numbers are 100% actual  and show actual flat fees paid by the client versus what they would have paid under an hourly rate agreement.  Green numbers in the Net Diff. column represent savings to the client.

Case            Hourly Fees      Flat Fees       Net Diff.

Smith        $17,218.50       $25,350.00       $8,131.50

Jones         $30,433.00        $13,650.00     -$16,783.00

Ajax           $2,212.50         $2,775.00         $562.50

King          $4,781.00          $1,950.00       -$2,831.00

Queen       $2,157.50         $895.00            -$1,262.50

Western   $4,074.50         $2,925.00         -$1,149.50

Atlantic   $351.00            $2,775.00        $2,424.00

Total         $61,228.00     $50,320.00     -$10,908.00

Client Savings:            -17.8%

Before the observations, a caveat:  This data, at any given time, is a snapshot in the life of an assignment, and/or group of assignments.  The data changes, but as the assignments mature in terms of their life cycle, a clear picture emerges:

  • Overall the client savings in this alternative fee program approaches 20%.  As the data set increases, the savings  ratio will stay relatively stable, but the real dollars saved in outside legal expense will grow, and grow, and grow.  A company with a million dollars a year  in outside legal expense based on hourly engagements would spend only $821,846.21, a savings of nearly $200,000.00.
  • The insurance clients are “winning” more fee agreements than they are not “winning.”  This is a sign that the alternative fee program is rightly priced so that it is both 1.) an real financial benefit for the client, and 2.) not a financial hardship for the outside law firm.
  • The program retains extreme flexibility, as each assignment is quoted independently (although the quotes generally do cluster closely for similar type cases) and either side retains the right to seek adjustment as the matter proceeds.  Clients also reserve the right to request the traditional billable hour arrangement for any case which they feel does not suit the alternative fee program.
  • There are and there will be outliers in any alternative fee program.  But as you can see from the data, the outliers are rare — in the two cases with  more than a $5,000.00 difference between what the client paid and what the client would have paid, one benefitted the client, and one benefitted the law firm, but the client benefitted twice as much as the law firm when the two outliers are aggregated.  Win-win-win.
  • The program provides simultaneous double benefit to the participating client:  1.) the client gets the benefit of outside counsel with local knowledge and expertise;  and 2.) the client secures this quality at less than hourly rate pricing.

I cannot think of any CEO’s, CFO’s or any other XXO’s who would not like their General Counsel to approach them with an immediate simple way to give their outside legal expense a 20% haircut, while at the same time retaining the right to assign any matter under a flat fee or traditional billable hour arrangement.

I also cannot think of a General Counsel for whom I have ever worked who would not want to take the alternative fee arrangement mechanism I’ve  outlined above for a spin, if it meant retaining the desired law firm at reduced cost.  There is literally nothing to lose except 20% off your outside legal expense budget.

CJH

 

Disability Insurer Prevails: Pre-Existing Condition Justifies Denial, Federal Judge Rules

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HARRISBURG, June 21 — A Pennsylvania federal judge has granted a disability insurer’s summary judgment motion, finding that a refusal of long term disability (LTD) benefits was neither arbitrary nor capricious, because the denial properly relied on a pre-existing condition exclusion in the policy.

In Yvonne Hilbert v. The Lincoln National Life Insurance Co., 15-471, M.D. Pa., 2017 U.S. Dist. LEXIS 93424), U.S. District Judge Sylvia Rambo ruled that Lincoln National Life Insurance Co., did not violate or abuse its discretion under the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq. (1974) (ERISA), when it found that Ms. Hilbert’s claim was not covered under a LTD policy it issued to Delta Dental, covering her as an employee.
Hilbert worked at Delta Dental and received benefits under the company’s short term disability policy (STD) for back and leg pain, and depression, claiming she was unable to work.   When Lincoln reviewed her claim for LTD status, the LTD policy in question barred coverage for any condition for which the employee was treated within 3 months of her hire.  Lincoln determined that Hilbert received treatment for depression  during her “look back” period of  Aug. 1, 2011 to Nov. 1, 2011, and eventually denied Hilbert’s claim for LTD benefits pursuant to the pre-existing condition exclusion.  Lincoln contended that Hilbert did not prove she was unable to work independent of her depression.
Following the denial of her administrative appeals, Hilbert sued Lincoln in the Eastern District of Kentucky, but the case was moved by Lincoln to the Middle District of Pennsylvania on grounds that  that it was a more convenient forum.
Following transfer, the parties filed cross motions for summary judgment..Judge  Rambo granted Lincoln’s motion and denied Hilbert’s motion , ruling that Lincoln’s denial of LTD benefits was not arbitrary and capricious.  She rejected Hilbert’s argument that the grant of STD benefits undercut the denial — the STD policy did not have a pre-existing condition exclusion.  She also found that Hilbert failed to prove her inability to work was wholly divorced from her depression:
“[the record] demonstrates that Lincoln considered the relevant medical evidence and supports Lincoln’s decision that Plaintiff was not totally disabled due a physical condition as of September 18, 2012…Lincoln did not act in an arbitrary and capricious manner in characterizing the principal duties and responsibilities of Plaintiff’s occupation…Significantly, although Plaintiff treated with several medical providers, not a single physician — not even her primary care physician or her pain physician — supported her claim… Here, Lincoln’s decision to deny Plaintiff LTD benefits is supported by substantial evidence in the record, and without substituting the court’s judgment for that of the defendant in determining eligibility for plan benefits, the court concludes that Plaintiff is not entitled to benefits under the terms of the LTD Policy and that Lincoln’s decision was neither arbitrary nor capricious.”
The judge also found that Hilbert’s receipt of Social Security disability benefits did not entitle her as a matter of course to LTD benefits under the Lincoln policy, observing that SSDI rules do not bar coverage for pre-existing conditions.

Federal Judge Rules Pollution Exclusion Ambiguous; Orders Insurers To Defend School District In Copper/Lead Class Action

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Pittsburgh, June 9 – A U.S. District Judge in Pittsburgh has granted a motion for judgment on the pleadings in favor of a school district, ordering a primary and excess insurer to defend the district in a pollution class action case.  In The Netherlands Ins. Co., et. al. v. Butler School District, et. al., U.S District Judge Arthur Schwab interepreted pollution exclusions in the involved insurance policies as ambiguous because they did not specifically exclude pollution claims arising out of copper becoming “bioavailable.”

The school district had a  general liability policy issued by Netherlands and an umbrella policy written by Peerless.  The insurers sought a declaratory judgment in the Western District of Pa. that they had no duty to defend the district because the claims were within exclusions for “pollutants” and lead exposure.

Judge Schwab ruled that both The Netherlands Insurance Co. and Peerless Insurance Co. had to defend Butler Area School District and a prior superintendent, Dale Lumley,  from parents’ claims against the district for concealing hazardous levels of lead and copper in one of the district’s elementary schools.  The Court found the insurance policies’ general pollution exclusions were ambiguous enough to allow coverage and that the specific lead poisoning exclusions did not specifically reference copper.

In ruling on the parties’ cross-motions for summary judgment, Judge Schwab looked to prior decisions in lead paint cases which held that exclusions “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants,’” did not sufficiently address the gradual chemical process by which the paint caused lead poisoning.

“These findings are similar to the facts, as here, where lead and copper are essentially components of the water system at Summit Elementary, which have degraded over time, thereby allegedly rendering the lead and copper bioavailable.”

The judge also held that without a specific copper exclusion, the insurers were bound  to provide a defense in the underlying case, as there has been no factual decisions made as to whether the alleged injuries were caused by the lead, copper or both.  He also ruled that the duty to indemnify would have to await those factual determinations in the underlying case.

Judge Schwab emphasized the bedrock premise that the duty to defend was broader than the duty to indemnify, and then concluded:

“The court will not countenance the insurers’ invitation to turn Pennsylvania law relative to the duty to defend on its head, so as to allow the potential exclusion of a single type of claim to relieve them of their duty to defend, when the law actually requires a defense when a single potentially covered claim is alleged.”

The Netherlands Ins. Co., et. al. v. Butler School District, et. al., (W.D. Pa., June 9, 2017)(Schwab, J.)

 

W.Va. Supreme Court Finds Earth Movement Exclusion Unambiguous

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WEST VIRGINIA,  June 2  – The West Virginia Supreme Court  ruled that Erie Insurance was not liable to provide coverage to an insured business which claimed landslide damage, in part because the earth movement exclusion in the policy made no distinction between natural and artificial earth movement events.

In Erie Property and Casualty Ins. Co. v. Chaber, the Chabers’ motorcycle shop leased property and insured it with a policy issued by Erie Insurance Property and Casualty Co.  A Feb. 19, 2014, landslide caused damages to the property, including broken windows.  Erie engaged an expert who opined the damage was the result of seasonal climate change.  The insureds disputed the claim, and engaged an expert who said the loss was the result of improperly excavated ground.

The W.Va. Circuit Court granted judgment in favor of the Chabers in February 2016, holding that the insuring agreement did not unambiguously exclude manmade landslides.  The state Supreme Court reversed, however, and held that manmade landslides and natural events were both excluded from the Earth Movement Exclusion in the policy.  They also held that that an exception for glass breakage to the exclusion could  not be extended to cover all aspects of the loss.

Judge Margaret Workman wrote:

“A provision in an insurance policy that excludes a loss regardless of whether such loss is ‘caused by an act of nature or is otherwise caused’ is not ambiguous and excludes coverage for the loss whether it is caused by a man-made or a naturally-occurring event.”

The Court also found that while ensuing loss involving breakage of glass was covered via an exception to the Earth Movement Exclusion, the lower court misapplied that exception when it used it to require Erie to pay for the entire claim, calling the circuit court’s interpretation “unjustifiable.”

Erie Insurance Property and Casualty Ins. Co.  v. Chaber, No. 16-0490, W.Va. Supreme Court (Workman, J.)