The Law

Legal Spotlight

A look at the latest decisions impacting the industry,
By: | September 14, 2015

Insurer Must Pay for Defense

On Feb. 11, 2013, the United States sued ATP Oil & Gas Corp., alleging it discharged pollutants as part of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico.

R9-15-15p14_LegalSpotlight.inddThe lawsuit alleged ATP built and used a hidden tube to allow an unpermitted chemical dispersant to mask discharges of oil discharged from the platform, as well as negligent operation of the platform.

ATP did not notify its maritime insurer, Water Quality Insurance Syndicate, until Sept. 12, 2013, although the policy required “immediate notice” of an occurrence under the policy.

When the insurer refused to defend ATP, the Chapter 7 trustee of the then-bankrupt company filed suit, claiming breach of contract and violations of Texas insurance law.

The question that needed to be decided by the U.S. Bankruptcy Court for the Southern District of Texas was whether the law of Texas (home of the insured) or New York (as required by the policy) should apply.

The difference between the two laws is that New York has a more onerous requirement regarding when late notice by the insured negates defense coverage. Texas law is more favorable to insureds.

The court ruled on June 5 that Texas law would apply.
It noted that when there is ambiguity in the choice of which applicable law to use, the “ambiguity would be resolved against the maritime insurer.”

Under Texas law, the court ruled, the insurer has a duty to defend “if at least one of the claims in the complaint is facially within the policy’s coverage,” even as it noted that the policy likely excludes indemnity coverage for the alleged “willful misconduct by ATP.”

Scorecard: Water Quality Insurance Syndicate must pay the bankruptcy trustee the costs of defending ATP.

Takeaway: Even though the policy’s choice of governing law in this case was trumped, policyholders should take care to choose jurisdictions that are favorable to them.

Broker Not Liable for Lack of Coverage

In June 2010, Douglas Johnson attended a Kids Fun Day event prior to a Cleveland Indians baseball game. While viewing the team’s wall of fame display, an inflatable slide collapsed on him, and he died of the injuries several days later.

His estate sued the Indians, National Pastime Sports (which put on the event) and other organizations. It won a $3.5 million default judgment against National

R9-15-15p14_LegalSpotlight.inddPastime in Ohio state court, and when it couldn’t collect on that judgment, the estate sued Doodson Insurance Brokerage in the Eastern District of Michigan for negligence and breach of contract.

Doodson had secured a $5 million comprehensive liability policy from New Hampshire Insurance Co. for National Pastime. Although National Pastime’s application stated that inflatable attractions would be part of the Kids Fun Day event, the policy excluded coverage for injuries caused by inflatable slides.

The case primarily revolved around whether an injured third party to a liability insurance policy had a claim against a broker for failure to procure proper liability insurance.

The estate appealed the case to the U.S. 6th Circuit Court of Appeals after the district court ruled against it.

In a July 15 opinion, the appeals court agreed with the lower court, saying that Doodson had no legal duty to a third party. It also ruled the brokerage was not liable because the coverage it obtained did not protect the insured from liability to injured parties.

“Failure to perform a contractual obligation to procure insurance against suits by injured parties does not implicate a risk of harm that the broker had any common law duty to prevent,” according to the ruling.

While there was some dispute over whether Michigan or Texas law should be used in the case, the court ruled that it didn’t matter, as the decision would have been the same in either jurisdiction.

Scorecard: The insurance broker was not liable for any damages resulting from the lack of insurance coverage for the incident.

Takeaway: While it is possible that third parties might rely on insurance coverage when it is mandated by the state, that is not the case when voluntary liability coverage is involved.

Individuals Granted Jury Trial in Insurance Fraud Case

Sixty-three individuals, including physicians, medical equipment companies, imaging practices and others, were accused in December 2008 of defrauding insurance companies of $8.14 million by staging auto accidents and claiming personal injuries.

Allstate New Jersey Insurance Co. and affiliated companies filed suit, seeking payment of compensatory damages, treble damages and attorneys’ fees under the state’s Insurance Fraud Prevention Act (IFPA).

R9-15-15p14_LegalSpotlight.inddA lower court and an appeals court denied the defendants’ request for a jury trial, stating that the IFPA did not provide for that right. In a July 16 opinion, the Supreme Court of New Jersey disagreed. The state’s high court remanded the case back to a lower court for further proceedings.

At issue in the case was the difference between “legal” and “equitable” claims. The lower courts had ruled that remedies under the IFPA were “equitable in nature.” Equitable claims are those similar to restitution, whereas legal claims impose liability — and damages — for negligence.

The Supreme Court of New Jersey held that the lawsuit brought under the IFPA resembled a common-law fraud claim, which provides for a jury trial. The court also denied the insurers’ claims that the IFPA did not provide for jury trials because they result in “delays and inefficiencies” in combatting insurance fraud.

“The right to a jury trial is deeply rooted in the English common law and traces its origins as far back as the Magna Carta,” the court ruled, noting that New Jersey provided a right to jury trial even before the American Revolution.

Scorecard: The insurers’ demand for at least $8.14 million in compensatory damages, treble damages and attorneys’ fees will be determined by a jury.

Takeaway: This precedent-setting decision provides the right of defendants in New Jersey facing lawsuits by insurers under the Insurance Fraud Prevention Act to have a jury trial.

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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