The Law

Legal Spotlight

A look at the latest legal cases impacting the industry.
By: | April 28, 2016 • 4 min read

Insurers Must Pay $58 Million

On sept. 12, 2008, a power plant unit owned by TransCanada Energy USA’s subsidiary TC Ravenswood in New York was taken out of service due to excessive vibrations. On Sept. 16, a crack in the unit’s rotor was discovered. The unit was out of action until May 18, 2009.

R5-16p14_LegalSpotlight.inddTransCanada filed a claim for $7 million in property damage and $50.8 million for loss of gross earnings from Factory Mutual Insurance Co., National Union Fire Insurance Co., ACE INA Insurance and Arch Insurance Co.

The insurers denied the claim.

In legal proceedings, the insurers argued the crack that damaged the unit formed before the policy went into effect on Aug. 26, 2008, and that the plant’s loss of sales were not covered because they were incurred after the period of liability ended.

National Union later settled.

TransCanada countered that the all risks policy covered the breakdown because the unit was operating properly when the policy began.

The New York Supreme Court ruled on March 2 that “it is irrelevant here whether the crack existed or could have been discovered before the policy commenced.” It also ruled for TransCanada on the loss of capacity revenue.

The losses, the court ruled, “were neither speculative nor incapable of being linked directly to the period of liability at issue.” &

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Scorecard: The insurance companies must pay TransCanada $58 million to cover its property damage and business interruption costs.

Takeaway: It was immaterial when the cause of the damage began as long as the property damage was sustained during the policy period.

Sophisticated Buyers of Coverage

Templo Fuente De Vida Corp. formed Fuente Properties in 2002 to acquire a property for a church and daycare centers.

Templo and Fuente (collectively Templo) received a funding commitment from Merl Financial Group Inc. (which later restructured and renamed itself First Independent Financial Group).

However, Templo had to terminate its purchase agreement when the funding did not materialize on the closing date. It filed suit against First Independent in February 2006.

On Aug. 28, 2006, First Independent gave notice of the claim to National Union, which had issued the company a $1 million directors, officers and private company liability policy.

Templo and several defendants, including First Independent, reached a settlement exceeding $3 million. First Independent assigned its rights under the National Union policy to Templo.

National Union denied coverage because of the delay in notifying them of the claim. On Feb. 11, the Supreme Court of New Jersey agreed with both a lower court and an appeals court, upholding the insurance company’s decision.

At issue was whether the insurance company had to establish it suffered prejudice by the late notice in a claims-made policy. For occurrence policies, the state has ruled that insurers must show they are prejudiced by late notice because many insureds are unsophisticated consumers.

For insureds under a claims-made policy, such as D&O, however, the court ruled insureds are sophisticated buyers of insurance. &

Scorecard: National Union will not have to contribute a share of a $3 million-plus settlement agreement.

Takeaway: New Jersey insureds with claims-made policies are treated as sophisticated consumers who are expected to comply with policy terms.

Ingredients for Dismissal

In July 2008, Wisconsin Pharmacal Co. placed an order with Nutritional Manufacturing to manufacture its Daily Probiotic Feminine Supplement chewable tablet, sold at a major retailer. The tablet was to contain Lactobacillus rhamnosus (LRA), a probiotic ingredient.

Nutritional Manufacturing ordered a supply of LRA from Nebraska Cultures of California Inc., which in turn ordered the LRA from Jeneil Biotech Inc.

After the tablets were manufactured and sold by Pharmacal, the retailer notified the company in April 2009 that the tablets contained Lactobillus acidophilus (LA) instead of LRA.

R5-16p14_LegalSpotlight.inddNutritional Manufacturing assigned its causes of action against Nebraska Cultures and Jeneil to Pharmacal, which filed suit against those companies on Jan. 14, 2011, along with their respective general liability insurers, Evanston Insurance Co. and The Netherlands Insurance Co.

In October 2011, a Wisconsin circuit court dismissed some of the allegations and held others in abeyance while it decided whether the insurers must defend and indemnify its insureds. The court ultimately granted the insurers’ request for summary judgment.

That decision was reversed by the court of appeals, which ruled the defective ingredient physically injured the other tablet ingredients, and that the claim was covered by the policies.

On March 1, the Supreme Court of Wisconsin reversed that decision, in a 3-2 ruling.

It ruled there was no property damage because the policies covered only products that caused damage to “property other than the product or completed work itself.” Because the LA ingredient was integrated into the tablet, it did not cause damage to “other property,” it ruled.

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In addition, it ruled, there was no “loss of use of tangible property” because a “reduction in value” of the tablets is not the same as “loss of use.”

Scorecard: The insurance companies do not have to defend or indemnify Nebraska Cultures or Jeneil.

Takeaway: Blending all of the ingredients together into one tablet created one product.

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

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The R&I Editorial Team can be reached at [email protected]