The Law

Legal Spotlight

The latest decisions impacting the industry.
By: | February 19, 2015

Court Reverses Case Dismissal

KB Home Tucson Inc. hired GRG Construction Co. Inc. in May 1999 to perform some work at a residential subdivision in Tucson.

In May 2001, the city claimed there were defects in the subdivision’s streets and sidewalks, and KB sued GRG and other contractors to reimburse it for the cost of repairs and attorneys’ fees.

In February 2005, several homeowners in the development sued KB for construction defects.

In both situations, KB sought a defense from Charter Oak Fire Insurance Co. and Travelers Property Casualty Insurance, collectively referred to as Charter Oak in the legal opinion filed on Nov. 25, 2014 by the Arizona Court of Appeals.

KB also sought a defense from Evanston Insurance Co., which had issued two commercial general liability policies insuring GRG and which had denied coverage in the absence of a written contract requiring that GRG make KB Home an additional insured.

In the case involving Charter Oak, the insurer also refused coverage, saying that KB did not qualify as an additional insured under the blanket additional insured endorsement because there was no written contract or agreement requiring that GRG add KB as an additional insured.
KB eventually filed suit against Charter Oak and Evanston, as well as Drachman Leed and American E&S, which provided certificates of insurance to KB as GRG’s insurance agents/brokers.

The lawsuit against Evanston was settled in January 2010, and the other lawsuits, which had been consolidated into one action, were dismissed by the Superior Court in Maricopa County, Ariz.

When the case was appealed, the two agents/brokers argued they did not have an “enhanced relationship” with KB and owed “no duty of care to third-party non-clients.”

The appeals court agreed with the brokers, but reversed the dismissal of the Charter Oaks litigation.

It noted that Charter Oaks did not require pre-approval to add additional insureds, and that such status “could be established without a specific document signed by both parties.”

Scorecard: The lawsuit was remanded to the lower court, to hear evidence on allegations of breach of contract, breach of the implied covenant of good faith and fair dealing.

Takeaway: Although a specific written document on the need for additional insured coverage was not signed by both parties, other correspondence made such a requirement clear.

GL Doesn’t Cover Seasonal Employee

Mary Armbruster was hired to run the hay wagon at a farmer’s market in Michigan for eight weekends. On one of those days, an accident with the wagon crushed her spine and left her a paraplegic.

She filed a negligence lawsuit against Burt Hoey, owner of the farmer’s market, and his daughter, Jennifer Lambers. In turn, Armbruster, Hoey and Lambers filed suit in state court against Western World Insurance Co., seeking coverage from Hoey’s commercial general liability policy.

Western World, for its part, filed suit in federal court, arguing that Ambruster was not covered by the GL policy. In addition, counsel to Hoey provided by Western World also filed a workers’ compensation claim, arguing that Armbruster was an employee and should be covered by workers’ compensation insurance.

Eventually, all lawsuits but the worker’s comp claim, which has not yet been resolved, were consolidated at the U.S. District Court for the Eastern District of Michigan at Detroit.

After that court ruled the GL policy did not cover Armbruster, the case was appealed to the U.S. 6th Circuit Court of Appeals.02012015_Legal_Spotlight_tractor

The court ruled that the policy does not specifically define an employee, but noted that an employee does not include a “temporary worker.”

Temporary worker was defined as a person “who is furnished to you to substitute for a permanent ‘employee’ on leave or to meet seasonal or short-term workload conditions.”

Even though Armbruster was not “furnished” to Hoey, he argued she was a temporary worker as opposed to an employee.

The appeals court disagreed. It ruled that Armbruster was an employee based on the “economic-reality test” that balances whether an employer controlled the worker’s duties and whether those duties were performed to accomplish the employer’s goals, as well as whether the employer paid wages, and could hire, fire or discipline her.

Scorecard: Western World was not responsible for claims resulting from the injury to a farm market’s seasonal worker.

Takeaway: Commercial general liability insurance provides coverage for injuries to the public at large, not to employees.

Fee Limitations Rejected

On May 4, 2007, City Art Inc., which framed and sold art in California, was sued by DK Art Publishing Inc. and Drita Kessler, alleging that City Art refused to return Kessler’s art or compensate her for it.

Kessler alleged breach of contract (consignment), negligence, trade libel and unpaid wages for when Kessler was employed by City Art, and other causes of action.

02012015_Legal_Spotlight_courtroomTravelers Property Casualty Co. of America denied City Art’s request for defense and indemnification on June 20, 2007.

Among the items cited in the 13-page letter were the insurance policy’s exclusion for damage to personal property in the care, custody or control of the insured; and the disqualification of trade libel as a covered claim in the “personal, advertising or web site injury” section of the policy.

The insurer reiterated its denial in 2008, but on April 20, 2009, City Art, again requesting reconsideration, told Travelers that the art had not been in the company’s “exclusive” care, custody or control.

In February 2010, Travelers agreed to participate in the company’s defense under a reservation of rights.

It agreed to pay defense fees at a negotiated rate dating back to April 20, 2009. On Nov. 2, 2010, City Art, and later Kessler, sued Travelers for breach of contract, bad faith and declaratory relief.

They asked the court to require the insurer to pay “reasonable and necessary fees and costs” incurred by the company’s counsel and rule that the fees were not subject to statutory rate limitations.

Travelers cross-filed, seeking to have the statutory fee rate imposed, and a ruling that it had no duty to defend prior to April 20, 2009. The insurer argued that the rate limitations should be retroactive to the April 20 date even though they didn’t start paying defense fees until Feb. 12, 2010.

The lower court ruled that the rate limitations should be triggered on the same date as the recognition of the duty to defend — April 20. On appeal, the Court of Appeal for the State of California, Second Appellate District, Division Three, reversed.

Scorecard: Travelers must pay City Art’s independent counsel at previously agreed-upon rates instead of reducing the fees based on statutory limitations.

Takeaway: Allowing an insurer to retroactively limit the fees it pays for defense would encourage insurers to reject their responsibility to defend, the court ruled.

The late Anne Freedman is former managing editor of Risk & Insurance. Comments or questions about this article can be addressed to [email protected]

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