Insurer To Pay “Extra” Expenses
On May 22, 2011, a tornado struck Joplin, Mo., substantially damaging the Midwest Regional Allergy, Asthma, Arthritis & Osteoporosis Center and its contents.
Dr. Michael Joseph moved the medical practice to a temporary location in Webb City, Mo., until a permanent relocation, which required substantial construction, could take place in Joplin.
While at the temporary location, Midwest Regional did not accept new patients, operated at a reduced schedule and did not install various pieces of specialty equipment — such as an MRI machine, X-ray machine and bone density machine — because of space restrictions and other reasons.
The new location finally opened on May 1, 2012, and Dr. Joseph requested additional reimbursement from Cincinnati Insurance Co. under the “extra expense” provision of his business owner’s policy for the cost to repair and relocate the MRI machine and other specialty equipment.
Cincinnati Insurance had already paid Midwest Regional the policy limits of $2.4 million for building loss, $388,000 for business personal property loss and $828,100 for business income interruption and extra expenses.
It denied the physician’s request for the additional payment, contending that the specialty equipment expenses had already been covered under the building and personal business property provisions.
After Midwest Regional filed suit in the U.S. District Court for the Western District of Missouri-Joplin, the federal court ruled the expenses were recoverable under the extra expense provision. It noted that the policy was ambiguous and therefore should be read as providing coverage.
Although the insurer and physician subsequently settled, the insurer appealed the court decision to the U.S. 8th Circuit Court of Appeals.
Cincinnati Insurance argued the expenses were not recoverable because they were connected to the policy’s business income provision. It also argued the request was the insured’s attempt to circumvent the policy limits of the building and business personal property provisions.
The court ruled on July 31 that “an ordinary person of average understanding” would interpret the policy’s definitions of extra expenses as “distinct and separate” from the business income provision, and that the policy “specifically states that ‘Extra Expense’ coverage is not subject to the policy limits.”
Scorecard: Although the insurance company had already agreed to a settlement, the ruling underscored that reimbursement was covered under the policy.
Takeaway: Because the policy did not clearly prohibit reimbursement of the extra expense coverage, “an ordinary person” would expect the insurer to pay the disputed amount.
Court Rejects Claim
On April 7, 2011, a custom-built bookmobile for the City of Beverly, Mass., was destroyed after fire spread from a nearby vehicle at Moroney’s Body Works Inc.
The city refused to accept delivery of the damaged bookmobile, and Moroney submitted a claim to Pilgrim Insurance Co., which had issued a garage insurance policy, and to Central Insurance Cos., which had issued a commercial property insurance policy.
Pilgrim paid $12,450 to Moroney, based on an appraiser’s estimate of repair costs. Central denied coverage, asserting that its policy was not triggered until Pilgrim’s coverage was exhausted.
Moroney sued both insurers in Massachusetts Superior Court, after which Pilgrim settled the case, with a total payment of $30,668. The judge found in favor of Moroney, and ordered Central to pay $126,232 – which was the difference between the original contract price for the bookmobile ($156,900) and the amount received from Pilgrim.
Central appealed. On Aug. 6, 2015, the state’s Supreme Judicial Court reversed the decision.
It ruled the “other insurance” provision in Central’s policy meant that it did not come into play until Pilgrim’s limits were exhausted. It also agreed with Central’s other argument that if it did have liability, its coverage was limited to the cost to repair the bookmobile.
“Because both policies insure the same insured’s interest (Moroney’s ownership) in the same property (bookmobile) against the same risk (fire), Central’s ‘other insurance’ provision applies,” the court ruled. “Accordingly, Central’s liability does not begin until Pilgrim’s policy limit is exhausted.”
The three-panel judicial panel also ruled that Moroney was not entitled to receive anything more than repair costs.
Scorecard: The insurance company did not have to pay $126,232 for the claim.
Takeaway: Claims involving “other insurance” clauses often default to allocation of liability between carriers, whether it is excess, such as in this case, pro-rata shared liability, or escape clauses, which result in no payment.
Paralyzed Man Can’t Collect From Insurers
In September 2009, Scot Vandenberg fell from the upper deck of a 75-foot chartered yacht during a five-hour cruise. The bench he was sitting on tipped over when turned around to speak to someone. It left him paralyzed from the chest down.
The yacht was owned by RQM Inc., a corporation owned by Alan Rose — whose company Rose Paving maintained a marketing relationship for the chartering of the yacht — Michael Rose and one other man.
Rose Paving was insured by Westfield Insurance Co. for commercial general liability and an umbrella policy.
Vandenberg settled liability claims against the owners and operators of the yacht for $25 million on Oct. 10, 2012. In addition, RQM’s insurer paid $2 million; Rose Paving, Michael Rose and Alan Rose agreed to pay $300,000. The $25 million was to be satisfied through an assignment of rights of recovery under their insurance policies.
Earlier, in January 2012, Westfield had sought a court determination that it owed no duty to defend or indemnify Rose Paving. It noted that Rose Paving represented that it did not use watercraft on its insurance application and that the CGL policy had a “watercraft exclusion.”
A federal district court in Illinois agreed.
On appeal to the U.S. 7th Circuit Court of Appeals, Vandenberg argued the policy did not expressly exclude accidents on the yacht. He also argued that even if Rose Paving was designated a construction business, the policy should extend to all of that corporation’s businesses, including yacht charters.
The federal appeals court rejected the arguments, noting the insurance policy only covered premises and operations “in connection with construction, reconstruction, repair or erection of buildings.”
“A policy does not need to exclude from coverage liability that was not contemplated by the parties and not intended to be covered under the agreement,” according to the ruling.
“Such a speculative exercise in hypotheticals [such as requiring Rose Paving to explicitly exclude all possible risks] would be nonsensical,” the court ruled.
Scorecard: Westfield Insurance Company did not have to pay $25 million to settle the liability claim.
Takeaway: For Vandenberg to succeed, he would have had to prove his injuries were wholly independent of any negligent operation of the watercraft.