The Law

Legal Spotlight

A look at the latest decisions affecting the industry.
By: | September 15, 2014 • 5 min read

Insurer Wins Priest Abuse Case

Between 1979 and 1986, now-former priests of the Roman Catholic Church of the Diocese of Phoenix sexually abused adolescent males. The diocese settled four sexual abuse cases, and obtained partial coverage from its primary insurance carrier, Lloyd’s of London.

09152014_legal_spotlight_churchIts excess liability carrier, Interstate Fire & Casualty Co., (IFC) denied the diocese’s claim. The insurer sought a declaration that it was not responsible for coverage, while the church sought $1.9 million in damages, claiming breach of contract and bad faith.

The U.S. District Court for the District of Arizona found in favor of the church, but in a 2-1 decision, the U.S. 9th Circuit Court of Appeals reversed that decision in July.

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The argument came down to whether “any” means “any” or whether it means “any one,” according to the majority opinion.

The insurance policy excluded liability “of any Assured for assault and battery committed by or at the direction of such Assured … .”

The appeals court agreed with IFC’s argument that “such Assured” refers back to “any Assured” — so that coverage would be excluded for “both the insured who committed the assault and battery as well as innocent co-insureds [referring to the diocese].”

It rejected the diocese’s “effort to infuse ambiguity into an otherwise clear agreement,” according to the opinion.

In a dissenting opinion, however, Senior Judge D.W. Nelson, found the wording more ambiguous, and said there were “three possible qualities that ‘such’ can refer to,” including Assureds facing liability; the “entire class of those covered by the policy;” or “those Assureds who committed or directed assault and battery.” Thus, she would have ruled in favor of the diocese.

The case was remanded to the lower court to determine attorneys’ fees and costs.

Scorecard: Interstate Fire & Casualty Co. was not responsible for more than $1.9 million in settlement costs.

Takeaway: The decision adds uncertainty to the so-called “any insured” exclusions, which generally are interpreted narrowly.

Warranty to Repair Supersedes an Implied Warranty

Doug and Karen Crownover spent “several hundred thousand dollars” to fix problems in the foundation and HVAC system at their Texas home, which was built by Arrow Development Inc.

In its October 2001 construction contract, Arrow had provided the Crownovers a warranty to repair work, but the developer failed to correct the problems or abide by an arbitrator’s ruling that ordered it to pay damages to the couple.

Arrow later entered bankruptcy, and the Crownovers sought recovery from Mid-Continent Casualty Co., which had issued a succession of comprehensive general liability policies to Arrow from August 2001 through 2008.

Mid-Continent denied the demand for payment, citing several exclusions in the policy. The couple then filed suit against the insurer for breach of contract, and a district court in Texas granted Mid-Continent’s request for summary judgment.

It based that decision — which was upheld by the U.S. 5th Circuit Court of Appeals in June — on a contractual-liability exclusion in the insurance policy.

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That clause excludes claims when the insured assumes liability for damages in a contract or agreement unless the insured would be liable for those damages absent the contract. In this case, the contractual liability referred to the warranty to repair work that was included in the construction agreement.

The court rejected the couple’s argument that Arrow was liable for the repair work in the absence of the warranty because it had an “implied warranty of good workmanship.”

In its findings, the court ruled that the arbitrator found in favor of the Crownovers explicitly based on the warranty to repair, and that an express warranty supersedes an implied warranty. The court also ruled the arbitrator’s decision was based on Arrow’s failure to repair the work, not for the work done initially.

Scorecard: Mid-Continent Casualty Co. did not have to pay “several hundred thousand dollars” to the owners of a defectively built home.

Takeaway: The ruling aids insurers fighting indemnification in construction defect cases, as it narrows the scope of the contractual-liability exclusion that had been set in a recent Texas Supreme Court decision.

Effort to Focus on Condo’s Decreased Market Value Rejected

In 2010, a fire destroyed a commercial office condominium building owned by Whitehouse Condominium Group in Flint, Mich.

The Cincinnati Insurance Co. owed Whitehouse the “actual cash value” of that building at the time of loss. The question, eventually determined by the U.S. 6th Circuit Court of Appeals in June, was how much that actual cash value amounted to.

09152014_legal_spotlight_burningWhitehouse said its claim amounted to $2.8 million. Cincinnati Insurance said the value was only $1.2 million because of a decrease in market value.

The policy defined actual cash value as the “replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.” At issue in the case was the definition of “obsolescence.”

While the insured argued the word related only to “functional” obsolescence — generally meaning something inherent to the building itself such as an outdated electrical panel — the insurance company said the word also included “economic” obsolescence, meaning a decrease in market value due to an external event.

Whitehouse said the insurer’s position was “definitional high jinks,” arguing that economic obsolescence is a “specialized concept used only in certain settings and does not fall within the general meaning of obsolescence.”

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The U.S. District Court for the Eastern District of Michigan agreed with that position, ordering a summary judgment in favor of Whitehouse. On appeal to the 6th Circuit, a three-judge panel affirmed that decision.

Scorecard: The condominium association received $1.6 million more on its property claim due to the ruling.

Takeaway: When contract terms are ambiguous, the common definition applies, and in Michigan, in particular, if a term has two different reasonable interpretations, it is construed against the insurer.

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

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]