Insurer Required to Defend, But Not Indemnify
On July 27, 2005, Alex Sehat, a footwear company employee based in a Kmart store in Hollywood, Fla., helped a Kmart employee get a baby stroller down from a high shelf.
The stroller fell and struck Judy Patrick, a customer, in the face. She later sued Kmart for negligence, on May 17, 2006, but her counsel ultimately discovered that Sehat was actually an employee of Footstar Inc., which operated footwear departments in Kmart stores.
Footstar contacted Liberty Mutual on June 6, 2007 about the incident, and on Jan. 24, 2008, Kmart formally requested defense and indemnification from the carrier. Two days later, Patrick amended her complaint to include Footstar as a defendant.
Liberty Mutual denied defense and indemnification.
After Kmart settled the litigation with Patrick later that year for $300,000 and $10,000 in Kmart gift cards, the retailer filed suit against Footstar and Liberty Mutual for defense and indemnification. A magistrate judge ruled Liberty Mutual and Footstar owed a duty to defend (as of Jan. 24, 2008, when notice was given) and apportioned Footstar’s fault at 15 percent.
The judge also ruled that the insurer did not act in bad faith by denying coverage and Kmart did not breach the notice provisions of the policy. Kmart appealed.
On Feb. 4, 2015, a three-judge panel on the U.S. 7th Circuit Court of Appeals affirmed the duty to defend, but reversed the indemnification ruling. The opinion cited the “master agreement” under which Footstar operated inside Kmart’s stores. That agreement noted that “any injury had to arise ‘pursuant to’ or ‘under’ the Master Agreement to trigger indemnification, and the Master Agreement explicitly prohibited Sehat’s out-of-department action that resulted in the injury.”
It noted, however, that Sehat’s actions were “potentially covered,” and therefore, the insurer had a duty to defend dating to Jan. 24, 2008, when Kmart made an official request for coverage.
Scorecard: The insurance company was required to provide a defense to the retailer, but did not have to contribute to the $310,000 settlement paid in the case.
Takeaway: Because the Footstar employee violated the scope of the company’s agreement with Kmart, the insurer did not have to indemnify the retailer.
Fraud Negates Coverage
On Dec. 21, 1998, Cigna Corp. revamped its retirement plan, converting its traditional defined-benefit plan to a cash-balance plan.
It assured plan participants that the conversion would not affect benefits accrued as of Dec. 31, 1997 and presented the change as “an enhanced benefit.” In 2001, plan participants filed a class-action lawsuit on behalf of about 27,000 employees, and courts have since ruled that such communications were “downright misleading.”
In a separate but related action in 2012, Cigna filed suit against two of its professional liability and fiduciary liability insurers, Executive Risk Indemnity and Nutmeg Insurance Co., seeking coverage. Each of the insurers had issued excess policies of $10 million.
The other primary and excess carriers settled separately.
The Court of Common Pleas of Philadelphia County dismissed the lawsuit, which was then appealed by Cigna to the Pennsylvania Superior Court.
The main issue before the higher court was whether the policy’s “deliberately fraudulent acts” exclusion precluded coverage, as the lower court had ruled in dismissing the case.
Cigna contended that the policy would cover its conduct as a “wrongful act,” defined in the policy to include “any actual or alleged … misstatement, misleading statement, act, omission … .” It argued the wrongful act provision negated the fraudulent acts exclusion.
On Feb. 3, 2015, the state Superior Court disagreed, ruling that the “plain meaning” of the policy in its entirety is contrary to that argument. In addition, the company’s conduct “would clearly qualify as fraudulent under Pennsylvania law,” which requires as a matter of public policy that insurance coverage not be provided for fraudulent acts.
Scorecard: The insurance companies are not required to indemnify the company up to the $20 million total excess coverage.
Takeaway: Fraudulent activity bars insurance coverage.
Insurer vs. Insurer
On Aug. 15, 2010, before an International Kart Federation race event at the Grand Junction Motor Speedway in Colorado, a 9-year-old go-karter was killed during a practice event when his go-kart collided with a maintenance/recovery vehicle.
The parents sued the Speedway, its employees, the International Kart Federation (which was the sanctioning body for the race event) and others in state court. Mt. Hawley Insurance Co. defended IKF as its insured, and Speedway and its employees as additional insureds.
On June 24, 2013, Mt. Hawley filed suit against National Casualty Co., which provided commercial general liability coverage to members of the National Karting Alliance (NKA). Speedway was a member of the NKA.
The policy covered bodily injury, property damage and personal and advertising injury liability “caused, in whole or in part, by your acts or omissions or the acts or omissions of those acting on your behalf … .”
National Casualty denied coverage, saying the Speedway and its employees did not qualify as additional insureds under the NKA policy. In court, it sought a summary judgment.
The U.S. District Court for the District of Colorado ruled that a summary judgment was warranted, basing its decision on the key term of “acting on your behalf” found in the policy. It cited case law that determined that coverage was not available when a member’s acts are “for his own private actions done for his own pleasure” or “completely personal and voluntary” actions.
“Although Speedway had liability insurance through NKA’s policy, Speedway acted voluntarily and for its own benefit on the day of the accident and not at the direction, request, or benefit of NKA,” the court ruled on Jan. 30, 2015.
Scorecard: National Casualty Co. did not have to contribute a pro rata share of Mt. Hawley’s defense costs incurred on behalf of Speedway.
Takeaway: Merely being a member of an organization will not trigger the organization’s insurance coverage.