The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | November 2, 2015 • 6 min read

Court: Misrepresentation Voids Claim

An 18-year-old employee of Sky High Athletics in Nevada attempted to do a backflip when being trained as a trampoline instructor and broke his neck, leaving him a quadriplegic.

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Sky High, which runs trampoline-lined fitness centers, filed a workers’ compensation claim for the worker with Companion Property and Casualty Group, which agreed to provide benefits.

After an investigation, however, Companion discovered that, contrary to statements on the fitness center’s application, employees routinely used the trampolines at the center. The application stated that employees were stationed at the front desk and dining area, and “they do not teach nor are they out on the trampolines,” according to documents.

 

112015_legal_trampoline230x300In November 2012, Companion sued Sky High, claiming it misrepresented information in its workers’ compensation application, according to documents. Sky High countered that Companion knew employees used the trampolines because they had already paid benefits for such injuries. It filed counterclaims against the insurer for delaying payments to the employee.

After a trial in U.S. District Court for the District of Nevada, a jury decided on Sept. 21 that Sky High made a “negligent misrepresentation” to the insurance company, but ruled that Companion was also negligent in the case.

It ordered Sky High to pay $8 million in damages to Companion for making false statements, but decreased the amount by 40 percent, due to Companion’s own negligence in the case.

That reduced the award to $4.8 million, which was further reduced to $3.49 million because of some setoffs in the case, according to published reports.

The brokers involved in the case were also sued by Companion, but reached a settlement prior to trial.

Scorecard: The fitness center must pay $3.49 million for misrepresentations in its workers’ compensation insurance application.

Takeaway: False statements on insurance applications will void coverage.

Insurers Unable to Recoup $132.5 Million

On Sept. 12, 2008, Robert Sanchez, engineer of a passenger train owned by Metrolink and operated by Connex, ran through a red signal in the Chatsworth area of Los Angeles because he was distracted by text messages on his cell phone, according to a federal investigation.

The train collided with a Union Pacific freight train, injuring more than 100 people and killing 24, including Sanchez.

Lloyd’s of London and other insurers paid out $132.5 million from excess railroad claims made policies issued to Metrolink and Connex, and other layers of excess insurance totaling $146 million, over a $4 million self-insured retention.

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Subsequently, the insurers filed suit seeking reimbursement from Connex, and its parent company, Veolia Transportation Inc., claiming the policies excluded coverage for bodily injury “which the insured intended or expected or reasonably could have expected.”

The insurance companies argued that the railroad had knowledge of “multiple violations” of its no-cell-phone-usage policy by train employees and that such a disaster “reasonably could have been expected,” according to court documents.

In dismissing the case on Sept. 18, Los Angeles Superior Court Judge Elihu Berle said that argument was not sufficient under New York law, under which the case was tried.

The insurers’ argument “fundamentally fails to meet the more stringent New York standard, which requires that a reasonable person in [the railroads’] position would know that the injuries and damage resulting from the Chatsworth accident would flow immediately and directly from [the railroads’] intentional acts.”

He noted that neither Sanchez nor any other Connex engineer ever previously caused injury or damage because of a violation of the cell phone policy, and that Connex was not aware of the cell phone violation until the National Transportation Safety Bureau investigation.

At the same time, Berle dismissed a suit by the railroads against the insurance companies, arguing breach of contract, bad faith and fraud because the litigation was filed after a “policy release and agreement,” which “released all of the claims [insurers] had against [the railroads] at the time.”

The court ruled the claims in the lawsuit filed by the insurers fell within the scope of the agreement.

Scorecard: The insurers will not be reimbursed for $132.5 million in claims following the train crash.

Takeaway: An intentional act, even if it ultimately causes damage, is considered accidental under New York law unless the damage flows “directly and immediately from the act.”

Insurers Need Not Defend in Spyware Case

On July 30, 2010, Crystal and Brian Byrd leased a laptop computer from Aspen Way, a rent-to-own franchisee of Aaron’s Inc. On Dec. 22, 2010, an Aspen Way store manager came to repossess the computer, under the mistaken impression that the couple’s account was delinquent.

112015_legal_spotlight230x300The store manager showed Brian Byrd a picture taken with the computer’s webcam that showed Byrd using the computer, and the Byrds later discovered that Aspen Way had installed spyware known as “Detective Mode” on the computer.

Detective Mode gave Aspen Way access to private emails, keystroke logs for user names and passwords, financial information and personal photos, according to court documents.

The Byrds filed a class-action lawsuit alleging a violation of the U.S. Electronic Communications Privacy Act (and some other claims that were later dismissed) against Aaron’s and Aspen Way (collectively called Aspen Way) in May 2011.

They said their computer was accessed nearly 350 times and that the information was “transmitted via unencrypted email and forwarded to unknown persons and locations.”

Aspen Way sought defense and indemnification from Hartford Fire Insurance Co. and three Liberty Mutual Insurance Corp. subsidiaries, which had issued primary and umbrella policies. All agreed to defend under a reservation of rights.

The insurers sought a court judgment that they need not defend Aspen Way, and on Sept. 25, the U.S. District Court for the District of Montana, Billings Division, ruled in their favor.

The court ruled that coverage was triggered in all of the policies by the allegations of “personal and advertising injury,” which was defined as injury arising out of publication “of material that violates a person’s right of privacy.”

However, because a Recording and Distribution Exclusion precluded coverage for any “violation of a federal statute that prohibits the transmitting or distribution of material or information,” the court ruled defense and indemnity was not covered.

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The court also ruled the insurance companies did not owe a duty to defend Aspen Way in a Washington State lawsuit, which was settled in February 2015, when Aspen Way entered into a consent decree that required it to pay $150,000 to the state and agree not to install any such software, while not admitting any violations of the state’s Consumer Protection Act and Computer Spyware Act.

Scorecard: The insurers need not pay to defend or indemnify Aspen Way. The Liberty Mutual subsidiaries may be due reimbursement of funds they paid for defense already, depending on further court proceedings.

Takeaway: Although Aspen Way argued the exclusion was ambiguous due to the phrase “arising directly or indirectly out of any action or omission,” court rulings determined that a policy term is not automatically invalidated because it is found to be ambiguous.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]