Insurance-Related Court Cases 11/05

INSURANCE-RELATED COURT CASES

COURT DECISIONS

Digested from case reports published in the North Eastern Reporter 2d,
West Publishing Co., St. Paul, MN

Auto lessee claims coverage under lessor’s policies

Ronald Armentrout was severely injured on October 1, 1997, when the car he was driving was hit head-on by a drunk driver, Marvin Bolden. Bolden was driving a car owned by Donna Fresch. Armentrout’s car was leased by his wife, Elizabeth Armentrout and was owned by Toyota Motor Credit Corporation.

Tokio Marine and Fire Insurance Company, Ltd., was Toyota’s insurer. Toyota had two policies with Tokio, a business automobile liability policy and a follow-form excess liability policy. Both policies had liability limits of $1 million. The Armentrouts claimed they were insureds under these policies and were thus entitled to underinsured motorist coverage. Tokio denied the claims. The Armentrouts then filed a lawsuit seeking a declaration that they were entitled to coverage. The trial court found in favor of Tokio and dismissed the suit. The Armentrouts appealed.

The issue on appeal was whether underinsured motorist coverage arose in the Tokio policies by operation of law. The case turned on whether the policies were subject to an Ohio law that mandates a two-year period during which the policy cannot be altered. This law became effective on September 3, 1997. If the Tokio policies were found to be “automobile liability insurance polic[ies]” as defined by statute, the two-year guarantee period would apply, and the underinsured motorist law in effect at the time the policy period began would apply.

Under the statute, an “automobile liability insurance policy” had to insure as a named insured “any of the following: (1) Any one person; (2) A husband and wife resident in the same household; (3) Either a husband or a wife who reside in the same household if an endorsement on the policy excludes the other spouse from coverage under the policy and the spouse excluded signs the endorsement.”

The Court of Appeals of Ohio, Eleventh District, Portage County, found the policies were not “automobile liability insurance polic[ies]” as defined by statute. The Tokio policies at issue were reissued December 5, 1997, for a period of one year. Before reissue, the named insureds on the policies were Toyota Motor Credit Corporation and Toyota Motor Credit Receivables Corporation. After reissue, Toyota Lease Trust and Toyota Leasing, Inc., were added as named insureds. Under Ohio law, corporations are “persons.” Thus, the policies named more than one person and these insureds were not husband and wife. Therefore, the policies were not “automobile insurance policies,” and the two-year guarantee period did not apply.

Having found that the two-year guarantee period did not apply, the court said that the law in effect on the December 5, 1997, renewal date applied. This version of the law mandated an offer of underinsured motorist coverage for any “automobile liability or motor vehicle liability policy of insurance” serving as proof of financial responsibility. Under Ohio’s financial responsibility laws at that time, the “owner” of the vehicle was required to maintain proof of financial responsibility. Elizabeth was the “owner” because she had the right to buy the car at the end of the lease. As a result, neither Tokio nor Toyota had a duty to provide UM/UIM coverage on the leased vehicle, and the policies issued by Tokio did not have to be construed as providing “automobile liability or motor vehicle liability polic[ies] of insurance.” Thus, Tokio was not required to offer Toyota underinsured motorist coverage, and underinsured motorist coverage did not arise by operation of law.

The decision of the lower court was affirmed.

Armentrout vs. Tokio Marine and Fire Insurance Company, Ltd.-No. 2003-P-0134-Court of Appeals of Ohio, Eleventh District, Portage County-December 23, 2004-824 North Eastern Reporter 2d 117.

Injured worker’s employer rescinds tender of defense

Joseph Duffy and Ozark Steel Sales and Fabricators, general contractor and subcontractors at a construction site in Chicago, were sued by a construction worker, Ronald Stone, who was injured at the site. Both parties filed third-party complaints against the injured worker’s employer, Barrco Industries, for contribution. At the time of the accident, Barrco was covered by two insurance policies: an employers liability/workers compensation policy issued by Legion Insurance Company, and a commercial general liability policy issued by Empire Fire and Marine Insurance Company. Barrco tendered its defense of both the Duffy and Ozark complaints to Legion. Barrco’s attorney (hired by Legion) sent a letter to Empire, tendering Barrco’s defense to Empire. Later, on July 20, 2000, Barrco wrote Empire, indicating that it did not want to tender its defense to Empire. Empire subsequently filed an action seeking the court’s declaration that it owed Barrco no duty to defend or indemnify; this action was subsequently dismissed, without prejudice.

The parties settled the Stone lawsuit, including the Duffy and Ozark contribution actions, for $2,040,000. Legion paid Barrco’s share, which was $640,000. Legion then filed suit against Empire, seeking damages incurred in its defense of Barrco. According to Legion, Empire had a duty to defend and indemnify Barrco in the Ozark third-party contribution action. Empire argued that Barrco’s tender of its defense to Empire had been rescinded in the July 20, 2000, letter from Barrco to Empire. Empire also submitted technical arguments as to why its policy did not provide coverage even if the tender of defense was not rescinded. The lower court found in favor of Empire; Legion appealed.

On appeal, the Appellate Court of Illinois, First District, Fourth Division, concentrated on the issue of whether Barrco ever sought coverage under Empire’s policy such that Empire had a duty to defend and indemnify Barrco. In reaching its decision, the court emphasized the language of the July 20, 2000, letter from Barrco to Empire. The text read: “Barrco Industries, Inc. to date does not want to tender the third party actions for contribution from Ozark Steel Fabricators, Inc. and Joseph J. Duffy Co. for defense and indemnification to Empire. The above mentioned claim has been forward[ed] to Legion and they [sic] are aware of the third party complaints. Please be aware that we were only trying to put Empire Fire and Marine Insurance Company on notice of a potential claim. This is as a result of the reservation of rights letter from Legion and the ‘Alternate Employer’ endorsement. Barrco Industries wants to make sure that we are completely and appropriately indemnified and covered for defense costs for the loss. If there is a question or problem in regards to coverage, we would like to know about it before an award or judgement is reached. Thank you for your attention to the file and pursuit of the enclosed document. We will inform you of any changes from Legion Insurance Company in regards to defense and indemnification for this particular case. Also, you will be informed if Barrco Industries need[s] to tender the defense if Legion denies coverage.”

The court found that, with this letter, Barrco expressly deactivated its previous tender to Empire. The letter gave Empire clear direction not to defend, and stated that Barrco would inform Empire in the future if Barrco needed to tender its defense to Empire. The result was that Barrco targeted Legion to exclusively defend it in the contribution suits, and Empire had no duty to defend or indemnify Barrco. Thus, Legion was not entitled to contribution from Empire.

The decision of the lower court in favor of Empire was affirmed.

Legion Insurance Company vs. Empire Fire and Marine Insurance Company-No. 1-03-2833-Appellate Court of Illinois, First District, Fourth Division-December 23, 2004-822 North Eastern Reporter 2d 1.

Insurers debate “super escape clause”

Youngblood Plumbing and Heating Company performed work at Woburn Nursing Center. Due to Youngblood’s negligence, there was an explosion and fire at the nursing center, resulting in bodily injury. Youngblood had a

$1 million “Contractor’s Business Owners Insurance Policy” with Worcester Insurance Company, the primary insurer. He also had a commercial umbrella policy with United States Fire Insurance Company with excess liability limits in the amount of $5 million. Six claims were filed as a result of the explosion and fire. When tendering a defense to the six claims, Worcester informed U.S. Fire thatthe claims were likely to exceed the $1 million primary insurance policy limit.

Worcester negotiated full settlements on five of the claims totaling $150,500. The sixth claimant was St. Paul Fire and Marine Insurance Company. St. Paul had paid Woburn $2.9 million on the nursing center’s property damage claim. It then claimed subrogation from Worcester. On July 17, 1994, after negotiating a settlement with St. Paul, Worcester received a partial and limited release in exchange for a total payment of $849,500, exhausting the $1 million limit under the Worcester policy.

Worcester notified Youngblood and U.S. Fire that it was withdrawing its defense of Youngblood against St. Paul. U.S. Fire took up the defense and eventually settled the case. It then filed a declaratory judgment action, asking the court to find that it was entitled to recover its costs from Worcester. The court found in favor of Worcester. U.S. Fire appealed.

On appeal, U.S. Fire argued that the language of Condition H of its own policy made Worcester responsible for all costs of Youngblood’s defense. The language of Condition H read: “Other Insurance. If there is any other collectible insurance available to the ‘Insured’ (whether such insurance is stated to be primary, contributing, excess or contingent) that covers a loss that is also covered by this policy, the insurance provided by this policy will apply in excess of, and shall not contribute with, such insurance. This Condition H does not apply to any insurance policy purchased specifically (and which is so specified in such insurance policy) to apply in excess of this policy.” U.S. Fire argued that because Condition H of its policy provided that it had no obligation to contribute “if there is other insurance, ‘whether such insurance is stated to be primary, excess, or contingent,’” it is a so-called “super escape clause.” It also argued that the “other insurance” provision of Worcester’s policy made it an excess insurer. Worcester’s policy read, “If there is other insurance covering the same loss or damage, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether you can collect on it or not. But we will not pay more than the applicable Limit of Insurance.” According to U.S. Fire, Worcester’s “other insurance” clause made its coverage excess and subject to U.S. Fire’s “super escape clause.” The court disagreed. The existence of the Worcester policy did not relieve U.S. Fire of the responsibility for the costs of Youngblood’s defense.

U.S. Fire next argued that Worcester was not discharged from its duty to defend Youngblood because the settlements were not reached in good faith and included counsel fees. The court found there was nothing in the record that suggested Worcester squandered its policy limit in fully settling five claims and partially settling a sixth. Overall the court found that U.S. Fire’s arguments were no more than a complaint that Worcester gave Youngblood’s interests priority over U.S. Fire’s. Furthermore, U.S. Fire’s arguments concerning attorneys’ fees were raised only on appeal and were not supported by the evidence.

The judgment of the lower court in favor of Worcester was affirmed.

United States Fire Insurance Company vs. Worcester Insurance Company-No. 03-P-1170-Appeals Court of Massachusetts, Middlesex-January 20, 2005-821 North Eastern Reporter 2d 91.

Four insurers dispute liability

Park Newberry was the developer of a condominium project. Park hired Kenny Construction Company as the general contractor for the project. Kenny hired Safway Steel Products, Inc., as a subcontractor to erect and perform heavy-duty sidewalk canopy work. Safway’s primary insurer was Reliance Insurance Company of Illinois. Its excess insurer was Transcontinental Insurance Company. Under the Kenny/Safway contract, the Reliance policy was primary and noncontributory to any policies maintained by Kenny and Park. In addition, Kenny and Park were listed as additional insureds under the Reliance policy.

On December 16, 1996, Donald Hallsten was injured near the construction site when his bicycle collided with a taxicab. Hallsten claimed the accident resulted from a construction canopy’s obstruction of the view around the site. Kenny, Park and Safway were named as defendants in Hallsten’s lawsuit. Kenny tendered defense of the suit to Reliance, but the suit was actually defended by Argonaut Insurance Company, Kenny and Park’s primary insurer. The case was eventually settled for $4 million. Argonaut’s policy limit was $1 million, so the remaining $3 million was paid by Federal Insurance Company, Kenny’s excess insurer.

Argonaut, Kenny and Park filed an action against Reliance to determine whether Reliance had a duty to defend and indemnify them. The parties claimed that because Reliance failed to provide a defense and indemnification, Argonaut was forced to defend and incur expenses that should have been borne by Reliance. Argonaut claimed Reliance was liable for the $1 million paid by Argonaut and the $472,566.50 in legal costs incurred.

The circuit court found that Reliance did have a duty to defend and indemnify. However, while Argonaut’s arguments were still under consideration, Reliance was placed in rehabilitation. All pending actions against the company were put on hold for 60 days. During this 60-day period, Federal intervened in Argonaut’s action against Reliance and filed its own action against Transcontinental, Safway’s excess insurer. Federal intervened and argued that it was entitled to the first $3 million recovery from the Reliance-Transcontinental “tower of insurance”—$1 million from Reliance and $2 million from Transcontinental.

On October 3, 2001, Reliance was declared insolvent and placed in liquidation. Argonaut’s claim was dismissed pursuant to the liquidation status, but the court continued the case for status as to Federal’s complaint against Transcontinental. On July 12, 2002, the circuit court dismissed Federal’s complaint against Transcontinental, finding that the complaint was insufficient. The court also determined that it had improperly granted Federal’s petition to intervene in the Kenny, Park and Argonaut action. Federal appealed.

On appeal, the Appellate Court of Illinois, First District, Second Division, found that Federal’s intervention in the Argonaut, Kenny and Park proceeding was appropriate. Federal had “an ‘enforceable or recognizable right,’ and more than a general interest in the subject matter of the proceedings.” The court also found that the lower court’s dismissal of Federal’s action against Transcontinental was appropriate. Federal had claimed Transcontinental should pay for its loss under a theory of “equitable contribution,” i.e., when an insurer that paid for an entire loss should be reimbursed by other insurers liable for the same loss. The court found that this theory did not apply because Transcontinental and Federal did not share the same risks with respect to Kenny. Federal also argued that Transcontinental should pay for its loss under a theory of “equitable subrogation.” Under this theory, Federal needed to show, among other things, sufficient facts to establish Reliance and Transcontinental’s duty to defend and indemnify Kenny and Park. The court found that Federal’s complaint failed to make this showing. In addition, Federal had failed to join Reliance as a party. For all these reasons, the court found that Federal’s complaint against Transcontinental was properly dismissed.

The lower court’s order vacating the granting of Federal’s intervention in the Argonaut, Kenny and Park proceeding was reversed, and its decision dismissing Federal’s complaint against Transcontinental was affirmed.

Argonaut Insurance Company vs. Safway Steel Products, Inc.-No. 1-02-2449-Appellate Court of Illinois, First District, Second Division-December 30, 2004-822 North Eastern Reporter 2d 79. *