Insurance Carrier gets Popped in Bad Faith Action

In case you missed it, Judge Roger Young just found in favor of the plaintiffs to the tune of $21,746,022.87 – and that does NOT include punitive damages.  The plaintiffs include the developers of a condominium as well as the individual condo owners and the homeowners association.  They filed a declaratory judgment, breach of contract and bad faith action against an insurance carrier, after the carrier denied defenses in underlying water intrusion and construction defects complaints filed by the homeowners association and individual unit owners.  Judge Young found that the four requirements of the insurance agreement for each of the policy years had been met and that the exclusions cited were ambiguous and, therefore, must be construed in favor of the insured.  Thus, the insurance carrier owed a duty to defend and indemnify its insured.  Interestingly, the court took issue with the content of the denial letter in much the same way as we recently saw in the Heritage v. Harleysville case.  The punitive damages hearing is set to occur at a later date and it remains to be seen if this decision will be appealed.

Stay tuned for an update, after the upcoming punitive damages hearing.

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Excess Insurer U.S. Fire Insurance Co. Urges Fifth Circuit to Affirm District Court Finding that Faulty Work Award is Not Covered Under Excess Policy

U.S. Fire Insurance Co. (“U.S. Fire”) is requesting that the Fifth Circuit Court of Appeals  affirm a district court’s ruling that an $8 million arbitration award for repairs necessitated by faulty construction is not covered under its excess liability policy.  U.S. Fire Insurance Co. (“U.S. Fire”) is requesting that the Fifth Circuit Court of Appeals  affirm a district court’s ruling that an $8 million arbitration award for repairs necessitated by faulty construction is not covered under its excess liability policy.

The insurance coverage dispute arises out of the alleged deficient construction of a courthouse in Zapata County, Texas, by Satterfield & Pontikes Construction, Inc. (“S&P”).  Arbitration of the underlying claims resulted in an $8 million judgment against S&P, allocated as follows: $6,072,000.00 in compensatory damages; $1,500,000 in attorneys’ fees; $430,458 in pre-judgment interest; and $29,909.74 in arbitration fees.  S&P sought contractual indemnity from each of its subcontractors and ultimately obtained $4,492,500 in settlements with their subcontractors.

S&P then sought coverage from its primary commercial general liability insurer, American Guarantee & Liability insurance Company (“AGLIC”), and its umbrella liability insurer, U.S. Fire, for the remaining balance of the judgment.  U.S. Fire refused to pay any portion of the remaining judgment on the ground that applying non-covered amounts under the excess policy to the subcontractor settlements was improper.  U.S. Fire’s excess policy contained a “Fungi and Bacteria Exclusion,” and the excess insurer took the position that after subtracting the attorney’s fees, arbitration fees, prejudgment interest, and portions of the award attributed to mold remediation, there remained $3,240,000 of potentially covered claims – less than the subcontractor settlements plus the underlying coverage limits.

S&P, AGLIC, and Amerisure then sued U.S. Fire in the United States District Court for the Southern District of Texas.  In its June 1, 2017 order granting U.S. Fire’s motion for summary judgment, the district court held that no loss reaches the excess layer of insurance.  The district court reasoned that the subcontractor settlements were structured as “undifferentiated general releases” and failed to allocate the settlement money between covered and non-covered damages under the excess policy.  The court concluded that “allocating the settlement money it received only to uncovered harms” and then pursuing reimbursement from the excess carrier was an attempt to “manufacture a covered loss.”  In so holding, the court noted that Texas courts “generally put the burden on the insured to identify the portion of a liability or loss that was produced by a covered condition.”

On November 6,  2017, S&P and Amerisure appealed to the Fifth Circuit Court of Appeals.  They argue that there is no basis in the U.S. Fire policy to apply its terms, conditions and exclusions to reduce the amount of the subcontractor settlements, as those settlements were made pursuant to indemnification obligations arising out of S&P’s subcontracts and were not the product of insurance coverage for S&P.  Additionally, S&P contends that it was not required to allocate between covered and non-covered damages in the subcontractor settlements.   In its reply brief filed on January 5, 2018, U.S. Fire urged the Fifth Circuit to affirm summary judgment.

The appeal remains pending.  However, this dispute is an important reminder to contractors and insurers alike to 1) carefully consider the terms of a settlement agreement and 2) determine whether the jurisdiction in which any dispute of the agreement’s terms would be litigated requires identification of the portion of a liability or loss that was produced by a covered condition.  Does anyone else think that this sounds a good bit like the recent D.R. Horton v. Builder First Source decision in South Carolina? D.R. Horton, Inc. v. Builders FirstSource – Se. Grp., LLC, No. 5529, 2018 S.C. App. LEXIS 2, at *13 (Ct. App. Jan. 10, 2018).

The case is Satterfield & Pontikes Construction, Inc. and Amerisure Mutual Ins. Co. v. U.S. Fire Ins. Co., Case Number 17-20513, in the United States Court of Appeals for the Fifth Circuit.  We will follow the case and update this blog post after the Fifth Circuit’s decision.

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Tennessee Supreme Court Holds That Full and Undiscounted Medical Bills may be Submitted as Proof of Reasonable Medical Expenses

The Tennessee Supreme Court has issued its long-awaited decision in the Dedmon v. Steelman case. This case has direct and significant consequences to personal injury litigation in Tennessee. In short, defendants may not argue that the amount actually received by a medical provider is the reasonable amount of a plaintiff’s medical bills.  Plaintiffs may submit undiscounted medical bills in full as proof of reasonable expenses.

The Tennessee Supreme Court granted an appeal in Dedmon to address whether its ruling in West v. Shelby County Healthcare Corp., 459 S.W.3d 33 (Tenn. 2014) applies in personal injury cases. In West, the court held that a hospital’s reasonable charges under Tennessee’s hospital lien statute are the amount the hospital accepts from the patient’s private insurer, not the full amount of the medical bills sent to the patient.

The Supreme Court released its decision on November 17, 2017.  The court held that the collateral source rule applies to personal injury claims in which the collateral benefit at issue is private insurance. Consequently, plaintiffs may submit evidence of the injured party’s full, undiscounted medical bills as proof of reasonable expenses. Furthermore, defendants are precluded from submitting evidence of discounted rates accepted by medical providers from an insurer in order to rebut the plaintiff’s proof that the full, undiscounted charges are reasonable.

The court reasoned that to allow defendants to submit discounted rates would conflict with the collateral source rule. However, defendants remain free to submit any other competent evidence to rebut a plaintiff’s proof on the reasonableness of medical expenses, so long as that evidence does not conflict with the collateral source rule.

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Does Your Business Policy Actually Protect You? If it has a “Professional Services” Exclusion, it might not

If you did not believe it before, you can believe it now—Ponzi-scheme cases make bad law.  On July 5, 2017, the Eleventh Circuit decided Furr v. National Union Fire Insurance Company of Pittsburgh (No. 15-14716), in which the court considered the impact of a “professional services” exclusion in a bank’s executive and organization liability insurance policy.*  The court held that there was no coverage for anyone because some of the claims asserted were related to the professional services that the bank rendered to the Ponzi scheme.  In denying coverage to everyone, the court reviewed this exclusion:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured alleging, arising out of, based upon, or attributable to the Organization’s or any Insured’s performance of or failure to perform professional services for others, or any act(s), error(s) or omission(s) relating thereto.

The court upheld coverage denial (1) because the policy did not contain a severability provision and (2) because the text of the exclusion prohibited payment if a claim is made against any insured who performed or failed to perform professional services.  To be clear: if anyone was a professional subject to a claim (or performing professional services), no one gets coverage, even non-professionals.

This has two important consequences: First, if a claim is made under a policy with similar contents, then claiming a legal, accounting, or medical error will jeopardize coverage for everyone.  Second, and perhaps more importantly, this particular policy evidently does not protect a bank from claims arising from banking services because those services are professional enough to be encompassed by the exclusion.

Exclusions like the professional services exclusion (and the personal injury exclusion) are designed to keep claims inside the appropriate policy and preclude doubling-up on coverage across multiple policies.  That is fair.  A D&O policy shouldn’t cover personal injury—that is the role of the general liability policy.  But excluding coverage based on a bank’s banking services seems to have left the bank’s executives without any coverage.  That is a harsh result.

I do not mean to sound shrill, but everyone should look at their policies and make sure that they actually have the coverage that they intend to have both from the perspective of whether the company’s services would be included in the “professional services” exclusion and to make sure that an errant claim touching on a professional’s work inside the business does not jeopardize coverage for everyone.

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* I have not actually seen the policy, but this “executive and organizational” policy sounds more like a Director & Officers (D&O) policy than an Errors and Omissions (E&O) policy.

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