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Archive for the ‘Insurance Coverage/Bad Faith’ Category

Fire On the Mountain: Non-Replacement Valuation First Party Coverage Disputes Arising From Fire Policies

Posted on: November 16th, 2017

By: Richard E. Wirick

This blog, second in a series of three, deals with coverage issues arising from fire losses in the first party context which do not deal with dwelling replacement cost (loss settlement) disputes. The two main areas of remaining first party issues are (1) business interruption and (2) ingress/egress.

A. Loss of Use [Economic Losses]

Fire losses suffered by commercial, as opposed to residential, insureds, usually present loss of use issues. Policies purchased by businesses often contain coverages for loss of use. Unlike loss of use resulting from flood and water damage, loss of use resulting from fires have formed a fairly pro-insured trend throughout the country, and in California.

Business interruption coverage has been defined by California courts as follows. In Pacific Coast Engineering Co. v. St. Paul Fire & Marine Ins. Co., 9 Cal. App. 3d 270 (1970), the court of appeal stated that it was well settled that “[T]he purpose and nature of ‘business operation’ or ‘use and occupancy’ insurance is ‘to indemnify the insured against losses arising from his inability to continue the normal operation and functions of his business, industry, or other commercial establishment . . .’” The court went on to say that business interruption insurance (“BIC”) was to ‘indemnify the insured for any loss sustained by the insured because of his inability to continue to use specified premises  . . .[that is]  for loss caused by the interruption of a going business consequent upon the destruction of the building, plant, or parts thereof.’” One Texas court enumerated the purpose and time span of BIC when confronted with a restaurant policyholder’s windstorm loss. When the restaurant was rebuilt, it nevertheless did not return to the same volume of business for nine months. Lexington Ins. Co. v. Island Recreational Development Corp. 706 S.W. 2d 764 (Tex. App. 1986). The dispute was whether the BIC indemnified the policyholder just up until the time it reopened, or until the time it recovered its lost business volume. The Island Recreational court reasoned that since the policy did not explicitly exclude the period of recovery after the restaurant reopened, coverage continued up until the point that business was restored to its prior volume. Id. at 768.

Though no California cases have addressed this, a federal Third Circuit case examined a BIC loss for a medical imaging company. In American Medical Imaging Corp. v. St. Paul Fire & Marine Ins. Co., 949 F. 2d 690 (3d Cir. 1991), a diagnostic facility had purchased a business policy whose BIC provisions covered the “necessary or potential suspension” of operations, and required the carrier to indemnify the insured until it returned to “normal business operations.” (Emphasis supplied). The insured had reopened its CT/MRI operations at an entirely new location, but as quickly as possible. The Third Circuit held that relocation costs were recovered as part of the insured’s attempt to minimize its losses, and to deny indemnification for same would give the insured no incentive to mitigate.

B. Ingress/Egress Issues

California’s hilly terrain presents ingress and egress obstacles in the event of a fire loss. Are the costs of surmounting them covered under most BIC coverage parts? Most property policies cover losses when ingress to, or egress from, an insured premises is “prevented” because of a covered peril. Are losses from road closures covered? Again, one must look to other jurisdictions for guidance. In National Children’s Exposition Center Corp. v. Anchor Ins. Co., 279 F. 2d 428 (2d Cir. 1960), a court recognized that “prevent” could embrace the milder verb concept of “hinder.” Accordingly, if road closures hindered travel, this coverage part could provide indemnity.

Some extra-jurisdictional decisions have interpreted ingress-egress clauses even if the insured’s property (including private roads and driveways) were not destroyed by fire. In Fountain Powerboat Industries Inc. v. Reliance Ins. Co., 119 F. Supp. 2d 552 (E.D.N.C. 2000), an insured argued that a floodplain prevented ingress-egress to the insured’s boat-building business such that only heavy trucks could pass through. The insurer’s position was that since the insured’s actual facility had not been damaged, there was no coverage. The argument did not fare well with the court, which ruled “[T]he meaning of the ingress-egress clause is exceedingly clear. Loss sustained due to the inability to access the Fountain Facility and resulting from a hurricane is a covered event with no physical damage to the property required.” Id. Analogous arguments could be made for a fire loss.

If you have any questions or would like more information, please contact Richard E. Wirick at [email protected].

Fire On the Mountain: Insurance Coverage Disputes Arising Under California Property Policies

Posted on: November 6th, 2017

By: Richard E. Wirick

No issue in insurance coverage could be more topical than fire losses. The Napa and Sonoma County fires, as well as lesser wildfire losses in the Anaheim area, may well give rise to more coverage disputes than we have seen since the Oakland Hills (Tunnel) fires of the nineties. This is notwithstanding the extensive statutory changes to such coverages, and the attempts to define troublesome terms and concepts such as actual cash value, fair market value, and total replacement costs in the legislature’s changes to the Insurance Code in 2005. In addition to its treatment of first party valuation issues under loss settlement provisions (the most litigated of all fire coverage issues), this series of blogs will also discuss non-valuation-based controversies, such as loss-of-use and business interruption provisions. Additionally, an upcoming blog will discuss third party coverage issues, as well as straight liability issues, that arise, principally from attempts to sue municipalities and other public entities for fire endangerment.

I. FIRST PARTY COVERAGE ISSUES

The overwhelming majority of coverage issues litigated in commercial and homeowners fire losses concern valuation of the replaced (or partly replaced) property. The valuation methods are contained in the “Loss Settlement Provisions” of any policy, and break down into “actual cash value” and “replacement cost value.”

*Method One: Actual Cash Valuation (ACV)

Under an open policy (one whose limits are not set in advance), the ACV of a structure that is totally destroyed by fire is its fair market value when the loss commenced. Ins. Code 2052(b)(1). “Fair market value” is the price “a willing buyer would pay a willing seller, and factors such as age, condition, fitness for buyer’s particular purpose, etc. If the structure is only partially destroyed, the ACV formula is the amount it would cost to repair, rebuild or replace the thing lost or injured, less a fair and reasonable deduction for physical depreciation. Ins. Code 2051(b)(2). Given the above depreciation schedule controversies and ensuing litigation, the legislature enacted a new version of Ins. Code 2051(b) requiring the insurer to itemize depreciation only with respect to property normally subject to repair during its useful life, and must be attributable to the age and condition of the property. Ins. Code 2051(b)(2) (2005 version).

*Method Two: “Replacement Cost” Valuation: Alternatively, property insurance policies can be deemed to provide a “replacement cost” valuation basis for insured properties destroyed by fire. (Replacement Cost Coverage or RCC). FIE v. Superior Court (Altman), (2004)116 Cal. App. 4th 446.

RCC was devised to compensate the insured for the differential/shortfall resulting from reconstructing a dwelling under a policy that pays only for ACV, since with RCC depreciation cannot be considered. Altman, supra, illustrated this as follows: “For example, if an insured wanted to replace a damaged roof, the insurer would be liable for the cost of the entire new roof, even if the damaged roof had been ten years old.” Id. at 116 Cal. App. 4th at 464.

The Three RCC Coverages & Tests: Just when you thought these analyses were about to conclude, there are three sub-valuations or standards to be utilized with RCC. The three main forms of RCC are replacement cost, extended replacement cost, and guaranteed replacement cost, all defined by statute. “Replacement Cost Coverage” provides for the cost to repair, rebuild or replace the damaged dwelling up to the policy limit. “Extended Replacement Cost Coverage” indemnifies up to a specified percentage (e.g. 10%) or specific dollar amount above the policy limit. Ins. Code 10102. See also Everett v. State Farm Gen. Ins. Co. (2008) 162 Cal. App. 649, 653. (this case defines “extended replacement cost coverage”); Minich v. Allstate (2011) 193 Cal App. 4th 477, 489-490 [150% of policy limit].“Guaranteed Replacement Cost” Coverage entails the full cost to repair, rebuild or replace the damaged dwelling, without regard to the policy limit. See Ins. Code 10102(e) (f)

Every policy containing fire property loss protection in California must specifically state whether the insured has purchased “replacement cost”, “extended replacement cost” or, alternatively, “guaranteed replacement cost coverage.”

*‘Value Protection’ Clauses [Guaranteed Replacement Cost Plus]: A valuable form of protection, and one salient to the wild swings in California property values and thus the most litigated, is a Value Protection Clause. Such provisions protect increased property values and also enable the insurer to increase premiums accordingly. They explicitly permit yearly premium adjustments to reflect increased costs of construction. This was the subject of the Altman case supra. Such a clause is usually an endorsement that supercedes any code upgrade or replacement cost coverage exclusions. Altman, 116 Cal. App. 4th at 469. Similar protection can be afforded by “inflation coverage provisions.” The particular mechanism for same is an “Inflation Coverage Index” that is in the declarations and increases the policy limits.

Mandatory Statutory Appraisal: Breach of contract, declaratory relief, and bad faith are all available judicial causes of action for an aggrieved insured. However, if the only issue is valuation under loss settlement provisions, and the policy contains an appraisal provision, statutory appraisal under Ins. Code 2071—a sort of ‘arbitration lite’—is the parties’ only form of dispute resolution. Indeed, an appraisal provision in a policy constitutes “an agreement for contractual arbitration.” Code of Civ. Procedure 1280 (a) [defining arbitration agreement to include “agreements providing for valuations, appraisals and similar proceedings”]. See Doan v. State Farm Ins. (2011), 195 Cal. App. 4th 1082, 1092.  Again, however, mandatory statutory appraisal regulations “explicitly document that the Section 2071 appraisal procedure does not limit recourse to other remedies.” Doan, 195 Cal. App. 4th at 1096 and Kirkwood v. Calif. State Auto Ass’n, Inter-Ins. Bureau, (2011) 193 Cal. App. 4th 49, 53-54.

If you have any questions or would like more information, please contact Richard E. Wirick at [email protected].

Dealing with Discovery Dangers in Bad Faith Litigation

Posted on: October 25th, 2017

By: Jessica C. Samford

Whenever an insurer could be facing a bad faith claim, what documents may be discoverable during litigation is an important consideration. While the ultimate outcome hinges on specific circumstances of the case, the discovery rules of the applicable jurisdiction is a major factor. Regardless of which state or federal laws apply, counsel often attempt to obtain the broadest scope of documents, which could include the claims file, underwriting file, internal communications, personnel files, claims of other insureds and claims handling procedures.

Although relevancy objections, as well as work-product and attorney-client communication privileges, can be asserted, a proactive rather than reactive approach is better. This is especially true because the scope of protection provided by work-product doctrines for documents created in anticipation of litigation is typically a qualified protection that can be overcome by showing substantial need for the documents and might not protect documents from production in discovery if they were created in the ordinary course of business of claims handling. Even further, it is possible for attorney-client privileges that are asserted based on the relationship between the insured and the attorney hired by the carrier to defend the insured to be waived by the insured. That means that despite the common interest the carrier and the insured once shared in the defense against the third-party claimant, in bad faith litigation, these attorney-client communications could now be discoverable. Therefore, best practice is to keep communications with counsel about defending the insured’s liability separate from communications with counsel about coverage defenses.

One option is to seek to bifurcate or stay discovery on bad faith claims and limit discovery to whether there is coverage under the policy before evidence of bad faith is addressed. The ideal way to accomplish this would be with the consent of opposing counsel early on so that, if necessary, it can be part of a discovery order or, in federal cases, a joint proposed discovery plan for court approval. If opposing counsel does not agree, this relief can be sought by motion to the court.

However, courts may not always grant such relief without consent of all parties. In Virginia, for example, a federal district court recently declined to bifurcate or stay discovery on the bad faith portion of the lawsuit for breaches of contract plus extracontractual attorneys’ fees and costs. Federal judges have the discretion to separate issues “for convenience, to avoid prejudice, or to expedite and economize.” FRCP 42. Delaying discovery on bad faith has been found to meet this standard because bad faith discovery may not ultimately be necessary if it can be established that there was no policy coverage, in the first place, upon which the extra-contractual bad faith claim is based. Similarly, courts applying Georgia law typically follow this reasoning because evidence of bad faith is irrelevant absent coverage.

The court in Virginia, however, noted that the issue of bifurcation was not raised until after considerable discovery and a motion to compel, found “obvious overlap in discoverable evidence that would support” breach of contract as equally as bad faith, and commented that “it would be difficult to imagine a scenario in which there was evidence to support bad faith and not breach of contract.” Hopeman Bros. v. Cont’l Cas. Co., 2017 U.S. Dist. LEXIS 164434. Other courts may be more inclined to agree with persuasive arguments focusing on overreaching discovery requests for documents that are not claim specific, that generate costly (regarding time, effort, and expense) discovery disputes over relevancy and privileged materials, and that is generally more complex an issue, especially if coverage can be determined as a matter of law based on the policy terms and liability allegations themselves.

With advance assistance of counsel, insurance carriers can more effectively evaluate these strategies in defending bad faith claims and navigate these discovery pitfalls in particular.

If you have any questions or would like more information, please contact Jessica Samford at [email protected].

Court Holds that Eleven Claims are Subject to Single Limit

Posted on: October 13th, 2017

By: Joyce M. Mocek

Recently, the Eleventh Circuit, applying Florida law, held that eleven claims of bodily injury by separate patients all against a pharmacy and pharmacist for negligence in repackaging a drug for injections constituted “related claims” under the insurance policy(ies) at issue.  Amer. Cas. Co. of Reading, Pa. v. Belcher, No. 17-10848, 2017 WL 4276057 (11th Cir. Sept. 27, 2017)

In this case, a pharmacy and pharmacist allegedly repackaged drugs from larger vials into single dose syringes for injections into eyes of patients, but did not take the necessary steps to prevent contamination.  The syringes allegedly became contaminated, and eleven patients that were injected with the drugs suffered severe vision loss and/or blindness.   Both the pharmacist and pharmacy tendered the eleven claims to their professional liability carrier- which were separate errors and omissions policies issued by the same insurer, each policy with a $1 million per claim and $3 million aggregate limit of liability.

The insurers defended the claims presented against the pharmacy and pharmacist subject to a reservation of rights and asserted that the claims were “related claims,” subject to the $1 million per claim limit.  The trial court held that the claims were logically connected and thus “related claims.”   

The Eleventh Circuit affirmed the trial court, holding that the test to determine whether the claims were related was whether they were logically or causally connected by any common fact or circumstance.   In this case, the Court found that the claims were logically connected because a single technician supervised by the same pharmacist prepared each syringe using the same process at the same location, violating the same health and safety regulations.

If you would like to know more about this decision or other insurance coverage matters, please contact Joyce Mocek at [email protected]

 

Computer System Fraud and Funds Transfer Fraud Coverages Extended to “Spoofing”

Posted on: September 8th, 2017

By: Richard E. Wirick

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Computer theft insurance takes many forms. Under traditional commercial criminal theft products, coverage only applies if there is a “fraudulent (a) entry into…a Computer; [and] (b) a change to Data elements or program logic of a Computer System.”

Let’s take two examples of claims, one covered and one proving problematic. In the first scenario, a third party hacker hacks into an insured’s computer system, causing it to transfer the funds from the insured’s account into the hacker’s bank account. In the second scenario, a hacker “spoofs” the same result. That is, he emails the insured, fraudulently misrepresenting that he is one of the insured’s clients, and urges the insured to make a transfer to an offshore lender. Note that “spoofing” works because it tricks the insured’s email server into recognizing the fraudulent email as one that originated from the insured client or an agent of the insured’s client.

While coverage has often been found for scenario one, recognizing that the hacker had in fact gained access to and hence “used the [insured’s] computer to…fraudulently cause a transfer from inside [the insured’s premises] to an… outside person,” the second scenario has proven more difficult for policyholders to argue for coverage because it is typically not recognized as the “use of a computer” to “cause a transfer” of money from within an insured’s premises to an outside destination. “To interpret the computer -fraud provision as reaching any fraudulent scheme in which [a computer] communication was part of the process would convert [that] provision into one for general fraud.” Apache Corp. v. Great American Ins. Co., 662 F. App’x. 252, 258 (5th Cir. 2016); see also Taylor & Lieberman v. Fed. Ins. Co., 681 F. App’x 627, 629 (9th Cir. 2017).

Recently, the U.S. District Court for the Southern District of New York issued an opinion that will be argued by policyholders seeking coverage for scenario two. Medidata Sols., Inc. v. Fed. Ins. Co. No. CV-00907, 2017 U.S. Dist. LEXIS 122210 (S.D.N.Y. July 21, 2017). Medidata’s accounting department received a phony email, purportedly from the company’s president, stating that an attorney would be contacting them.  Although the email contained the president’s correct email address on the “from” line (and his picture), it was a “spoof.”  After a phone call and a second email by the hacker to accounting and high level executives, Medidata wired $4.7 million to an offshore bank, and into the hacker’s hands.

The insurer argued no coverage under the Computer Fraud Coverage in the “Crime Coverage Section” of an “Executive Protection” policy because there was no “fraudulent entry of Data into [a] computer system,” because the information instructing the transfer went to an “inbox…open to…any member of the public.” The Medidata court disagreed. It held that the president’s address in the “from” line constituted “data”, entered by the hacker, posing as the company’s president. This satisfied the requirements that the third party “entered the insured’s computer system and “used” it to effectuate a fraudulent transfer.”

On the Funds Transfer Fraud Coverage of the “Crime Coverage Section”  the issue was whether the transfer was “without Medidata’s knowledge or consent.”  The Court held that the fact that the accounts payable employee willingly pressed the “send” icon does not transform the bank wire into a valid transaction. Since the validity of the wire transfer depended upon several high level employees’ knowledge and consent which was only obtained by “larceny by trick.”

The decision can be expected to be appealed by the insurer.   The Medidata decision extension of the concept of “use” or “violation” in computer fraud coverage parts to the ever-increasing practice of “spoofing” is a novel interpretation of the coverage that was at issue and an area that we anticipate will continue to be reviewed by the courts.   

If you have any questions or would like more information, please contact Rick Wirick at [email protected], or John Moura at [email protected].