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Archive for September, 2019

The Statute of Repose Defense is Expanded

Posted on: September 23rd, 2019

By: Jeff Alitz

In John C. Rankin v. South Street Downtown Holdings, Inc v. Truexcullins and Partners Architects, decided August 6, 2019, The New Hampshire Supreme court extended the application of that state’s Statute of Repose to bar not only direct claims filed by plaintiff’s, but also to claims for indemnification and contribution that are filed by third-party plaintiffs after that state’s 8 year statute of repose period has run. In so ruling the Court clarifies – at least in New Hampshire – confusion over the reach and application of the Statute.

Unlike a statute of limitation, a statute of repose period typically starts to run on the completion of an improvement to real property and the period ends on a date established by state law. A substantial majority of states have enacted such time bar statutes of repose though there are state by state variations in them that should be considered by parties and their counsel. The statutory period is set by state law and it can vary from as short a period as 4 years (Tennessee) to up to 15 years (Iowa). Unlike the statute of limitations, there is no “discovery” component to the statute of repose or any “tolling” of the running of the statutory time period, rather, the period described in that statute starts to run when a real estate improvement is complete and ends with finality when the statutory time period concludes. No exceptions are typically available. At least one state’s highest court has called the application of the statute of repose “draconian”.

Consistent with that comment, after considering if third-party claims (brought by parties who were timely joined to the Rankin lawsuit), could be filed after the New Hampshire Statue of Repose period had run the New Hampshire Supreme Court implicitly ruled that the third party claims did not relate back to the successfully pled initial complaint, nor was there any exception that could save and preserve the third party claims. Accordingly, in broadly interpreting the preclusive language in the New Hampshire statute, that state’s highest court found that the statute does in fact means what it says and it does bar indemnification and contribution based claims that are not filed within the 8 year period established by the statute. While the Rankin decision is of course only binding in New Hampshire lawsuits the straightforward issue the case presents and the near universal presence of statutes of repose in other states suggests the case decision will be instructive to other state courts that consider this issue.

If you have any questions or would like more information, please contact Jeff Alitz at [email protected]

More Money Can Mean More Problems: The Evolution of Coverage for Cryptocurrency

Posted on: September 20th, 2019

By: Danny Walsh and Isis Miranda

Businesses, governments, and non-profits across the globe are implementing projects that leverage blockchain, a digital ledger technology, to improve their operations.

Cryptocurrency is one of the more controversial uses of blockchain technology. Although Bitcoin is the most dominant cryptocurrency, there are approximately 2,600 cryptocurrencies valuing over $260 billion. As cryptocurrencies become widely accessible through mobile applications combined with increased self-regulation, including voluntary leverage caps, the current trend toward acceptance by governments will continue.

As with early insurance claims arising in the world of cyber, traditional forms of cover are being updated to reflect the scope of coverage, and altogether new forms are in the works.

Coverage for cryptocurrency under traditional insurance policies may depend on how the term is defined. An Ohio court relied on an Internal Revenue Service (IRS) definition in holding that the insured’s stolen Bitcoin valued at $16,000 was “property” under his insurance policy. Kimmelman v. Wayne Ins. Grp., No. 18 CV 1041 (Ct. Com. Pl. Sep. 25, 2018). IRS Notice 2014-21 states as follows: “For federal tax purposes, virtual currency is treated as property” and is therefore subject to capital gains taxes. Accordingly, when the insured in Kimmelman submitted his claim for stolen Bitcoin, the insurer concluded that Bitcoin constituted “money” under the policy and, therefore, was subject to the policy’s $200 sublimit. In the subsequent coverage litigation, the trial court rejected the insurer’s argument that the stolen Bitcoin constituted “money” and denied the insurer’s motion for judgment on the pleadings. The court, however, did not address the policy’s definition of “property,” which may have limited coverage to loss of “tangible property.”

Federal courts have consistently held that Bitcoin is “money or funds” under federal law governing money transmission. A Florida appellate court also held that selling Bitcoin constitutes “money transmission” for purposes of the state’s money transmission law. State v. Espinoza, 264 So.3d 1055 (Fla. Dist. Ct. App. 2019). Defendant Espinoza was charged with money laundering and engaging in the business of a money transmitter without a license. He sold Bitcoin to an undercover agent of the Miami Beach Police Department after the agent said he planned to use the Bitcoin for illicit purposes. The trial court dismissed the charges against Espinoza, but the appellate court overturned the dismissal. The appellate court conceded that Bitcoin is not “currency,” but based its ruling on the fact that it has “monetary value” since it can be exchanged for currency.

The issue of whether crypto assets, including cryptocurrencies and digital tokens, constitute securities subject to regulation is still in flux. The Securities and Exchange Commission (SEC) has taken the position that cryptocurrencies, such as Bitcoin, are not “securities” because they are designed to operate like currency. On the other hand, the SEC has stated that other cryptocurrencies that act as digital tokens do constitute securities and that initial coin offerings (ICO’s), which involve digital tokens, are subject to securities regulations.

In the insurance context, a significant issue is whether cryptocurrency or digital tokens are viewed as “money,” “property,” “securities,” or some other term. Currently, some policies expressly include or exclude coverage for cryptocurrencies. For example, crime and fidelity ISO forms can have either a broad virtual currency exclusion or an “Include Virtual Currency as Money” endorsement, which revises the definition of “money” to include virtual currency.

We will be following the development of crypto cover policy forms as the use, acceptance, and regulation of cryptocurrencies emerge and evolve in the years to come.

If you have any questions or would like more information, please contact Danny Walsh at [email protected] or Isis Miranda at [email protected].

Georgia Federal Judge Enforces Contractual Liability Limitation, Cuts Jury Verdict in Half

Posted on: September 19th, 2019

By: Jake Carroll

A federal judge in Georgia enforced a limitation of liability clause in a construction contract for engineering services—reducing the jury’s award from $5.7 million to just over $2 million. See U.S. Nitrogen LLC v. Weatherly, Inc., No. 1:16-CV-462-MLB, (N.D.Ga. Sept. 16, 2019).

The case arose from the design and construction of an ammonium nitrate solution plant in Midway, Tennessee. The project owner, US Nitrogen (“USN”), hired Weatherly to provide engineering services related to the construction, and entered into a written contract.

Constructing the plant cost more money and took longer than the parties initially anticipated—to the tune of $200 Million. USN attributed more than $30 million of cost overruns and delays to Weatherly’s design, and brought suit against Weatherly for breach of contract, breach of warranty, professional negligence, negligent misrepresentation, and bad faith.

Following discovery, Weatherly moved for partial summary judgment, arguing that the contract contained an enforceable limitation of liability provision which capped the damages USN could seek to fifteen percent (15%) of Weatherly’s contract price. Weatherly also argued that the terms of the contract prevented USN from recovering consequential damages.

The court agreed with Weatherly—finding that USN could only recover up to $2,203,800 of the more than $30 million it was seeking—and the case proceeded to trial for the jury to determine the amount of damages incurred by USN as a result of Weatherly’s breach. Although the jury ultimately awarded $5,755,000 in damages, the court reduced the award to $2,203,800, pursuant to its earlier findings, and consistent with the terms of the contract. However, the judgment is not final: either party may still appeal the decision to the Eleventh Circuit Court of Appeals.

While Georgia courts have long recognized limitation of liability clauses as valid and enforceable, this case is another example of how carefully drafted contract language can mitigate future risk. Typically, a party’s exposure can be limited to the amount of compensation under the contract, or even less in Weatherly’s case. Such clauses are most frequently seen in contracts for services such as agreements with design professionals and testing laboratories. Nonetheless, there is no reason that they could not be included in general contracts and subcontracts.

If you have questions regarding this decision, or any other contract drafting questions, Jake Carroll practices construction and commercial law as a member of Freeman Mathis & Gary’s Construction Law, Commercial Litigation, and Tort and Catastrophic Loss practice groups. Mr. Carroll represents business and commercial entities in a wide range of disputes and corporate matters involving breach of contract and warranty, business torts, and products liability claims.

Investors’ Life Insurance ‘Gamble’ Busts out in NJ Courts

Posted on: September 19th, 2019

By: Justin Boron

To take out insurance, you almost always need an “an insurable interest” in the risk being insured, such as a financial interest in a home or a car.  It’s what prevents strangers to the risk from betting on the occurrence of a casualty, like your neighbor taking out a policy on your house or car in the hopes that either is destroyed in an accident.  The requirement takes on heightened importance in the area of life insurance where it prevents strangers to the insured life from betting on someone’s death and discourages worse things, like foul play.

But because life insurance is treated as a transferrable asset—much like a home or car—investors developed a workaround for the “insurable interest” requirement.  In arrangements referred to as stranger-oriented life insurance policies—STOLIs, for short—investors fund the premiums for a life insurance policy purchased by the insured who has the insurable interest when the policy is purchased but who intends to re-sell it at a discount to investors without an insurable interest.  The insured’s frequent practical purpose is to pay for immediate health care needs or other expenses.  The investors’ purpose is to make a profit off the benefit when it is paid.  Usually, that means that their profit increases the sooner the insured dies.  STOLIs, of course, are controversial.  But despite efforts to regulate them, they continue to evolve in one form or another.

Considering New Jersey law, the Third Circuit Court of Appeals recently confronted whether a STOLI involving a $5 million benefit could be upheld under the states’ public policy.  Based on certified questions answered by the New Jersey Supreme Court, it concluded that the life insurance policy was void ab initioSun Life Assurance Co. v. Wells Fargo Bank NA, Nos. 16-4337, 16-4387, 2019 U.S. App. LEXIS 24916, at *5-6 (3d Cir. Aug. 21, 2019).  It reasoned that the STOLI arrangement was intended to benefit the investors whose interest was in the early death of the insured rather than anyone whose interest was in the continued life of the insured.  As a result, it was not an insurance policy; it was a gamble on a person’s life.

In so holding, the Third Circuit and the New Jersey Supreme Court joined at least 30 other states prohibiting or regulating STOLIs, so its decision is not particularly remarkable on its own.  But it illustrates how determined investors are to bet on the duration of a person’s life when there is a financial incentive and how common the STOLI arrangements might be.  Absent a large benefit, they probably go unchallenged.

In fact, there have been multiple recent cases that either voided such policies or precipitated legislative change to the “insurable interest” requirement.   See, e.g., Wells Fargo Bank, N.A. v. Pruco Life Ins. Co., 200 So. 3d 1202 (Fla. 2016); Lincoln Nat’l Life Ins. Co. v. Gordon R.A. Fishman Irrevocable Life Tr., 638 F. Supp. 2d 1170 (C.D. Cal. 2009); Sun Life Assurance Co. v. Conestoga Tr. Servs., LLC, 263 F. Supp. 3d 695, 702 (E.D. Tenn. 2017).

Although the New Jersey ruling places it in line with other states’ position on the issue, the Third Circuit decided to refund the policyholder the premiums paid to the insurer.  As a result, the ruling might not discourage the practice completely, and it certainly will persist in other states where there is no anti-STOLI legislation.

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

The Pennsylvania Superior Court Rules that Snow Contractors Qualify for Liability-Limiting “Hills and Ridges” Doctrine

Posted on: September 18th, 2019

By: Justine Baakman

A three-judge panel of the Superior Court of Pennsylvania recently reaffirmed a snow contractor’s protection from liability during ongoing snow events.  More specifically, the plaintiff initiated a personal injury suit in Pennsylvania state court after slipping and falling on snow in the early morning hours during an ongoing snow event.  The plaintiff arrived on the subject property – an industrial complex – around 5:30am on the date in question.  It was during his walk in the parking lot that he slipped and fell on unplowed snow totaling between 5 ½ and 6 inches.  Notably, the plaintiff did not dispute that his fall occurred during an ongoing snow event.

Prior to the start of the snow event at issue, the property owner had entered into a contract with a snow removal company to perform snow and ice removal services.  On the date at issue, that snow contractor had begun performing services approximately one hour prior to the plaintiff’s fall.  However, snow removal services were not fully completed by the time the plaintiff arrived on the property – primarily due to the ongoing nature of the snow event.

Following the close of discovery, the snow contractor filed a motion for summary judgment, arguing that the “hills and ridges” doctrine protected it from liability for the plaintiff’s alleged injury.  More specifically, the snow contractor argued that the “hills and ridges” doctrine – which protects owners or occupiers of land from liability for generally slippery conditions as the result of snow and ice if the owner or occupier has not permitted that snow and ice to unreasonably accumulate into ridges or elevations – protected it from liability for the plaintiff’s alleged injury as a function of the ongoing nature of the snow event in question.

After hearing oral argument on the issues, the trial court granted summary judgment in favor of the snow contractor.  The plaintiff appealed that ruling to the Pennsylvania Superior Court, arguing that the trial court erred in applying the “hills and ridges” doctrine to the snow contractor because the contractor did not own or occupy the land.  Therefore, the plaintiff argued, the snow contractor did not qualify for liability protection under the “hills and ridges” doctrine.

In reaffirming the trial court’s granting of summary judgment, the Pennsylvania Superior Court noted that it is well-established Pennsylvania law that an independent contractor in possession of an area of land necessary to perform its work under a contract replaces the owner of the property while performing that work.  During that time, the independent contractor assumes the responsibilities and obligations of the property owner while the property owner foregoes its right to possess and control the land.

As such, the Pennsylvania Superior Court reasoned, the snow contractor at issue was operating as an independent contractor in possession and control of the subject property at the time of the plaintiff’s fall.  Therefore, it was entitled to the protections offered by the “hills and ridges” doctrine to occupiers and possessors of land. As such, the snow contractor was entitled to the granting of summary judgment due to the ongoing nature of the snow event at issue.  The court’s decision was a key one for snow contractors, allowing them to continue to utilize this important defense.

If you have any questions or would like more information about the “hills and ridges” doctrine, please contact Justine Baakman at [email protected].