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Archive for the ‘Insurance Coverage/Bad Faith’ Category

FAIR or Unfair?

Posted on: June 22nd, 2017

By: Zachariah E. Moura

California FAIR Plan Association v. Garnes (May 26, 2017) __ Cal.App.5th __ [218 Cal.Rptr.3d 246]

Hewing to the rule that “where an insurer’s policy contains terms that conflict with the law, the courts will decline to enforce the impermissible terms and read into the policy the terms required by statute,”[1] the Court of Appeal, First District, held in California FAIR Plan Association v. Garnes that Ins. Code § 2051, coupled with sections 2070 and 2071, sets a minimum standard of coverage that requires an insurer to indemnify its insured for the actual cost of the insured structure, minus depreciation, even if this amount exceeds the fair market value of the structure, where an open fire insurance policy pays “actual cash value,” and there has been a “partial” but not “total loss to the structure.”

The California FAIR Plan Association (“FAIR”) is an insurance industry placement facility and joint reinsurance association created by the California Legislature in 1968 to provide basic property insurance to homeowners who live in high risk or otherwise uninsurable areas. Marlene Garnes, residing in just such an area of Richmond — the “Iron Triangle” (named for the intersecting railroad tracks that frame it) — insured her family home through FAIR, with a policy limit of $425,000.

After her home was damaged (but not destroyed) by fire, Garnes submitted a claim to FAIR seeking indemnity for the costs required to repair her home, less depreciation, the net amount of which was $320,549. FAIR declined and instead paid her the $75,000 it determined represented the fair market value of her property in 2011, and filed a declaratory relief action against her regarding the interpretation of Ins. Code § 2051.

After the trial court granted summary judgment in favor of FAIR, the court of appeal reversed.

The FAIR Policy stated that if the cost to replace or repair a damaged dwelling exceeded its actual cash value, which the Policy defined as “Total Loss,” FAIR would pay the actual cash value, but in any other case, which the Policy described as “Partial Loss,” FAIR would pay the lesser of the cost to repair less reasonable depreciation or the actual cash value.

The court held that Ins. Code § 2051 provides mandatory minimum coverage under an open ACV fire insurance policy. Section 2051 provides that in the case of a “total loss to the structure,” recovery is limited to the lesser of the policy limit or a property’s “fair market value.” (§ 2051, subd. (b)(1).) However, where the loss is a “partial loss to the structure,” recovery is not limited to fair market value but instead is the lesser of the policy limit or “the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its conditions at the time of the injury.” (Ibid.)

Because Ins. Code § 2070 requires “[a]ll fire policies” to be on the standard form or provide coverage for fire losses that is “substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy,” the court held that the FAIR Policy was unenforceable to the extent that it purports to cap indemnity for partial losses at fair market value, or to treat a loss that did not destroy the structure as a “total loss.”

The decision may prod a lobbying effort to encourage the Legislature to amend section 2051 by inserting “fair market value” as a cap on recovery. Until then, given the dramatic difference in value to an impoverished homeowner when a fire-damaged home is deemed a “partial loss” rather than a “total loss”, it appears that there will be many factual disputes over what degree of damage qualifies as “total loss to a structure.”


 [1]  California FAIR Plan Association v. Garnes (May 26, 2017) __ Cal.App.5th __ [218 Cal.Rptr.3d 246], citing Howell v. State Farm Fire & Casualty Co. (1990) 218 Cal.App.3d 1446; Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, 754; and Wildman v. Government Emp. Ins. Co. (1957) 48 Cal.2d 31, 39–40.

For any questions, please contact Zach Moura at [email protected].

Georgia Modernizes Captive Insurer Law

Posted on: May 23rd, 2017

By: Allan J. Hayes

According to the National Association of Insurance Commissioners (NAIC) a Captive Insurer is an insurance company established by a parent firm for the purpose of insuring the parent’s exposures. Currently, 75 percent of the world’s Fortune 500 companies are parent owners of captive insurance companies and total captive premium income is exceeding $14 billion with more than 5,000 captives established worldwide. Twenty-four captives are domiciled in Georgia.

Benefits of a captive include greater business opportunities and more risk management options for the parent company which can result in lower premium payments and management costs. Also, a captive can be formed in a jurisdiction where taxes, solvency rules and reporting requirements are more advantageous.

The Georgia Department of Insurance and other state leaders are interested in attracting some of the growing captive insurance market. During the 2017 legislative session they supported passage of SB 173, a bill sponsored by Senate Insurance and Labor Committee Chairman Burt Jones and House Insurance Committee member Jason Shaw that extensively revises provisions relating to captive insurance companies and updates several definitions within the Insurance code. Governor Deal signed the bill on May 9, 2017 and the new provisions contained in it become effective July 1, 2017.

Briefly, the new law will:

  • Update definitions used throughout the captives chapter to make them more consistent with best practices in other states.
  • Update the rules for captive formation to make them more specific to the captive company. Currently captives are required to incorporate like any other general insurer.
  • Make captives subject to the provisions of the general corporations statute, while allowing the Commissioner rule-making authority where the provisions of the general corporations statute might not make sense for captives.
  • Allow captives to form as manager-managed LLCs rather than limiting formation to corporations.
  • Put an end to the differences in the code regarding taxation of risk retention group captives (RRG) and all other captives. RRG captives will only be subject to relevant taxes on direct premiums collected for coverage within the state of Georgia.

For any questions or for more information regarding forming a captive, please contact Allan Hayes at [email protected].

Insurance Disclosures Under § 627.4137 and its “Teeth”

Posted on: April 3rd, 2017

teeth[1]By: Jeremy W. Rogers

For those insurance defense attorneys and insurance carriers handling liability cases or claims in Florida, unless you have not been paying attention for the past 35 years, you are aware of Fla. Stat. § 627.4137 and its requirements. This statute gives claimants access to information about a defendant’s liability insurance. This usually occurs at or near the outset of plaintiff’s engagement of his or her attorney because, as is always the case, insurance coverage is a major factor (or, in reality, THE factor) in how a plaintiff pursues the case and negotiations toward settlement. The statute requires a liability insurer to produce a copy of the policy and to disclose the following information, under oath, within 30 days of a claimant’s request: a) the name of the insurer; b) the name of each insured; c) the limits of liability coverage; d) a statement of any policy or coverage defense which such insurer reasonably believes is available to such insurer at the time of filing such statement; and (e) a copy of the policy.

While we know the requirements, a question often arises about what are the consequences of failing to comply. The statute has no provision for a private right of action. See Lucente v. State Farm Mut. Auto. Ins. Co., 591 So.2d 1126, 1127-28 (4th DCA 1992)(stating there is no implicit third party right of action against an insurer for failure to comply); Brannan v. Geico Indemnity Co., 569 Fed.Appx. 724, 728 (11th Cir. 2014)(indicating there is no first-party private cause of action). Without a private right of action, where are the “teeth” in the statute?  Most or all of the decisions on the issue appear to fall within two categories:

  1. Invalidating settlements
  2. Invalidating or striking of defenses or pleadings

In the first category, the courts reason that the purpose of disclosure is to guide the parties in their handling of the case and negotiations. The failure to disclose, or to supplement as new information is obtained, means that the plaintiff is proceeding with false or incomplete information. Thus, the statutory disclosure requirement is an essential term of the settlement. The end result is that motions to enforce settlement are denied or defenses based on a pre-suit settlement are not tenable. There was no settlement because there was not meeting of the minds. See, e.g., Cheveire v. Geisser, 783 So. 2d 1115 (Fla. 4th DCA 2001); Schlosser v. Perez, 832 So. 2d 179 (Fla. 2d DCA 2002).

The second category of cases are usually those where the carrier is sued and assert various policy defenses. The court will invalidate or strike a policy defense as a sanction for failure to comply with § 627.4137. In United Auto. Ins. Co. v. Rousseau, 682 So. 2d 1229 (Fla. 4th DCA 1996), because the carrier failed to comply with § 627.4137, the court affirmed a denial of the carrier’s motion for directed verdict that was based upon the failure of plaintiff to comply with certain policy conditions. In Figueroa v. U.S. Security Ins. Co., 664 So. 2d 1130 (Fla. 3d DCA 1995), the court reversed summary judgment in favor of the carrier for the same reason.

The most disturbing decision is a case where a defendant’s pleadings were stricken entirely and the case went forward on damages only. In Oceanside 932 Condominium Assoc., Inc. v. Landsouth Construction, LLC, Case No. 16-2009-CA-007958, plaintiff made a pre-suit insurance disclosure request under the statute. The defendant responded, but not completely. Shortly before trial, Plaintiff’s counsel discovered additional policies which provided coverage. As a result, upon plaintiff’s motion, the Court struck the defendant’s pleadings, entered a default judgment as to liability, and allowed a trial on damages which resulted in an excess verdict. While this is a trial court decision and not binding, it illustrates that there is real jeopardy in the most egregious failures to comply.

So, to answer the question of whether there are “teeth” in § 627.4137, the answer is certainly a yes. It is important, therefore, that when faced with a disclosure request, one complies with the requirements set forth in the statute.

For any questions, please contact Jeremy Rogers at [email protected].

It Can Take Much Less Than Fraud to Forfeit Insurance Coverage

Posted on: March 28th, 2017

By: Jessica C. Samford

When people think of insurance fraud, they likely imagine someone intentionally causing a loss in order to receive policy proceeds, but most insurance policies do not limit a carrier’s right to deny coverage or void the policy to fraud alone. Rather, all kinds of policies (homeowner, commercial general liability, and more) often include in their fraud-related provisions misrepresentation of a material fact as well. But what constitutes a “material misrepresentation” exactly? The answer, of course, depends on which state law applies.

Take for example an insurance carrier that filed an action in California, asking the federal district court to declare that there was no coverage under a cyber liability policy because, among other reasons, the insured had represented in its policy application that its medical records system had certain security measures in place to protect personally identifiable information and other sensitive data while, allegedly, patient information was accessible online with no encryption.

Although the court did not make a ruling on this issue, incorrect statements that are made by an insured in a policy application, even if unintentional, are very likely to support rescinding and voiding the policy ab initio (from its inception) under California law. This is because California’s test for materiality is the effect which truthful answers would have had upon the carrier in its evaluation of risk (such as requiring additional underwriting or charging additional premium): the fact that the carrier requires answers to specific questions in an application for insurance is usually in itself sufficient to establish the materiality as a matter of law.

The rule under Georgia law is a similar one, although from a more clearly objective standpoint: A material misrepresentation is one that would influence a prudent insurer in determining the nature, extent, or character of the risk and whether or not to accept it or fix a different amount of premium.  And a Georgia statute sets forth specifically that all that is required in a policy application to give grounds to deny or rescind is a material misrepresentation, omission, concealment or incorrect statement (as opposed to proof of intent to defraud).

Going back to our example, the data security measures implemented by the insured would likely be material under Georgia law by increasing or decreasing the risk assessed by a prudent carrier of a cyber liability policy, such that any incorrect statement in the application as to those measures could entitle a carrier to deny or rescind. Under California law, since this carrier alleged it actually asked the insured in the application about checking for security patches, replacing factory default settings, etc., the insured’s responses would likely be found material as a matter of law.

Again, the meaning of material misrepresentation can involve other inquiries depending on the applicable law, such as proof of actual reliance by the carrier on that representation or other prejudice to the carrier, so when faced with a potential false statement or omission, a carrier should seek counsel to determine which state law(s) could be applicable.

For any questions, please contact Jessica Samford at [email protected].

Strict Scrutiny Standard Applied for Reservation of Rights Letters

Posted on: March 13th, 2017

By: Joyce Mocek

The South Carolina Supreme Court recently addressed whether an insurer’s reservation of rights letter was adequate where a carrier was providing a defense in a claim and, adopting a strict scrutiny standard, found that the letters did not adequately explain to the insured how the policy provisions quoted in the letter applied to preclude coverage. Harleysville Group Insurance v. Heritage Communities, Inc., et al., 2017 S.C. LEXIS 8 (Jan.  11, 2017). To be a valid reservation of rights letter, the Court maintained that the letter needed to contain specificity on the reason for the reservation and be detailed and precise enough to explain to the insured why there might not be coverage under the policy. The Court advised that the letter should notify the insured of the potential for conflict, that the insurer might file a declaratory judgment action, and the potential of a special verdict for apportioning damages. Although the reservation of rights letter at issue included quoted verbatim policy language, the Court stated that “cutting and pasting” from a policy is not enough. Further, the Court held that the insurer did not sufficiently inform the insured how the exclusions referenced could result in an allocation between covered and noncovered damages, if the insurer decided to file a declaratory judgment action.

The Court did not cite any specific South Carolina authority, rather it relied on decisions from other jurisdictions and maintained that the insurer’s letter was not sufficiently specific and precise. Although the claim at issue involved a construction defect claim, the decision did not appear to be limited to construction claims. Thus, it may have far reaching implications to liability insurers in South Carolina and potentially other jurisdictions reviewing reservation letters in all liability claims. The decision did not specify that it would only apply on future claims. As a result, insurers that have issued reservation of rights letters that pre date this decision may want to review the letters to determine whether they meet the requirements outlined in the Harlesyville decision and, if there is any concern, consider supplementing or amending the letters. 

For any questions, contact Joyce Mocek at [email protected].