Table of Contents 




Digested from case reports published in Westlaw,
West Publishing Co., St. Paul, MN

Deck collapse triggers coverage dispute

Jeffrey and Gail Alexander owned a condominium unit in the Sunnyside Up Condominium Association in Sea Isle City, New Jersey. The unit was on the second floor of the building and had another unit directly below it. Both units had wooden decks situated such that the Alexanders’ deck was stacked on top of the other. Between August 25 and September 1, 2001, the Alexanders leased the condo to Agnes Cunningham. On August 26, the Alexanders’ deck collapsed with 11 people on it. Various negligence causes of action were filed against the Alexanders. The Alexanders hired a contractor, Dennis Funk, to assess the damage and to issue an opinion as to why the deck collapsed. According to Funk, the deck collapsed when the nails used to support the outbound end of the Alexanders’ deck deteriorated. The claims against the Alexanders were eventually settled; however, the various insurance companies involved in the litigation could not agree as to allocation of the payment of the settlement and defense costs.

The Condominium Association was organized under a master deed of declaration of condominium that set forth the requirements for maintenance and repair of “common elements” and “individual units.” Pursuant to the master deed, “any balcony or patio to which there is a direct access from the interior of a unit shall constitute a common element subject to exclusive easement for the exclusive use of the owner of such unit. The unit owner shall be responsible for the removal of snow from any such balcony or patio and for the maintenance and repair of the same which shall not be a common expense.”

At the time of the accident, the Alexanders maintained condominium unit insurance coverage with United States Fidelity and Guaranty Company as well as separate homeowners and umbrella liability insurance coverage with Shelby Insurance Company. The condominium association maintained insurance coverage with National Fire Insurance of Hartford. This policy provided coverage for the common elements. It also contained an endorsement that made individual unit owners insureds, but only “with respect to liability arising out of the ownership, maintenance or repair of that portion of the premises which is not reserved for that unit owner’s exclusive use or occupancy.”

On March 3, 2003, the Alexanders filed a declaratory judgment action against National Fire asking the court to conclude that National Fire was obligated to cover them as additional insureds, to defend and indemnify them in the litigation, and to reimburse them for their defense fees. The lower court found in favor of the Alexanders. National Fire then filed a third-party complaint against Shelby and USF&G on the issue of allocation of costs. The court concluded that the National Fire policy was primary and that the Shelby and USF&G policies were secondary. National Fire appealed both decisions of the lower court.

On appeal, the United States Court of Appeals, Third Circuit, found that the surface of the deck was a limited common element reserved for the Alexanders’ exclusive use, whereas the support structure was a common element. Because deterioration of the support structure was the cause of the collapse, it followed that the National Fire policy provided coverage for the Alexanders.

The court also found that National Fire was the sole primary insurer of the incident and that the Alexanders’ policies were excess. The Shelby and USF&G policies provided that their coverage was excess over “other valid and collectible insurance except insurance written specifically to cover as excess over” these policies. Because the Alexanders possessed “other valid and collectible insurance” (from National Fire) and the National Fire policy was not specifically written to be excess to policies issued to unit owners, National Fire was the Alexanders’ sole primary insurer.

The judgment of the lower court was affirmed.

Alexander vs. National Fire Insurance of Hartford-No. 05-1560-United States Court of Appeals, Third Circuit-July 13, 2006-454 Federal Reporter 3d 214.

Cancellation does not equal expiration

In November 2001, Shahnaz Nazami hired Virgil Gifford, a local home improvement contractor, to renovate her home. While working on the project, Gifford failed to cover portions of the exterior walls of the home and, as a result, the interior of the home suffered water damage. Nazami was under the impression that Patrons Mutual Insurance Company was Gifford’s insurer because Gifford had shown her a certificate of liability insurance from Patrons naming Nazami as the “certificate holder.” In fact, in May 2001, Gifford had obtained a general liability insurance policy from Patrons through its agent Fallon Insurance Agency, but the insurance had been canceled without Nazami’s knowledge.

The certificate Gifford had shown Nazami was issued on June 7, 2001. However, according to its terms, it was issued “as a matter of information only”; and it specifically noted that the policy’s effective date was May 15, 2001, and that it would expire May 15, 2002. Furthermore, the certificate provided that the “issuing insurer” would “endeavor to mail” 10 days’ written notice to Nazami should the policy be canceled before the expiration date, though it disclaimed liability if notice was not mailed. Finally, the certificate provided that it “confer[red] no rights upon the plaintiff, did not constitute a contract between Patrons, Fallon, and the plaintiff, and was subject to “all the terms, exclusions and conditions” of the policy.

When Nazami discovered the policy had been canceled, she brought an action against Gifford, Patrons and Fallon. She alleged, among other things, fraud, negligent misrepresentation, and violation of Connecticut unfair insurance and trade practices statutes. In addition, she claimed that the failure of Fallon or Patrons to notify her of the cancellation of the policy constituted common-law negligence. With regard to these specific allegations, the trial court found in favor of Patrons and Fallon; Nazami appealed. The appeal was transferred to the Supreme Court of Connecticut.

On appeal, in support of her fraud and misrepresentation claims, Nazami argued that she had hired Gifford in reliance on the certificate, and that Fallon “knew, or should have known, that the [c]ertificate, as drafted, might lead her to believe that … Gifford’s insurance coverage was guaranteed until the policy expiration date.” The Supreme Court of Connecticut disagreed. Although the certificate contained specific dates of coverage, it also disclaimed liability in the event the policy was canceled. It “specifically and repeatedly distinguished between expiration and cancellation of the policy.” Thus, the court found that Nazami’s allegations were in direct conflict with the language of the certificate. In addition, the court noted that “even the most liberal reading” of Nazami’s fraud allegations did not support a cause of action for common-law fraud. Thus, the court found that Nazami failed to allege anything to support a claim for fraud, misrepresentation, or violation of the Connecticut statutes.

The court also addressed Nazami’s argument that Fallon and Patrons had a duty to inform her of the cancellation of Gifford’s policy. Again, the court found that Nazami’s allegations failed. According to the court, in order to claim negligence, it was necessary for Nazami to show that Fallon or Patrons owed her a duty of care. Because the certificate was issued “as a matter of information only,” conferred “no rights upon” the plaintiff, and did not constitute a contract between Nazami, Patrons, and Fallon, there was no duty. Thus, Nazami did not have a claim of negligence.

The judgment of the lower court finding no cause of action for fraud, misrepresentation, or negligence was affirmed.

Nazami vs. Patrons Mutual Insurance Company-Nos. 17537, 17539-Supreme Court of Connecticut-December 5, 2006-910 Atlantic Reporter 2d 209.

Does clerical error bar excess status?

On November 20, 2000, Alvin Samuels and his family were involved in a serious single-car accident. The vehicle involved, a Plymouth Grand Voyager, was owned by Samuels’ son, Mark, but Alvin was driving at the time of the accident. One passenger, Mark’s wife, Patty, was killed in the accident. The remaining passengers were seriously injured.

The van was insured by State Farm Mutual Automobile Insurance Company in a policy issued to Mark and Patty. That policy had liability limits of $100,000 per person and $300,000 per accident. Alvin and his wife, Madilyn, also had a State Farm automobile policy with liability limits of $250,000 per person and $500,000 per accident. Both policies covered Alvin as the operator of the vehicle.

In addition to their automobile policy, Alvin and Madilyn carried two personal umbrella liability policies that covered the accident. One was a State Farm policy with a limit of $2 million. The other policy, also with a $2 million limit, was issued by Evanston Insurance Company.

The State Farm umbrella policy listed three “required underlying insurance policies”: (1) an automobile liability policy (250/500/100); (2) a personal residential policy with $100,000 limits of liability; and (3) a watercraft liability policy with $100,000 limits of liability. In addition, the policy provided that “[t]his policy is excess over all other valid and collectible insurance.” The annual premium was $1,385.

The Evanston Insurance umbrella policy listed as underlying policies: (1) “AUTO LIABILITY 250,500/100 STATE FARM INSURANCE S1048BACEOK” and (2) “HOMEOWNERS LIABILITY 2,000,000 STATE FARM INSURANCE T8PO00161F.” The annual premium for this policy was $577.50. The policy provided that it would pay “[e]xcess insurance over and above the amounts provided for in basic policies” (defined as those “policies listed on the declarations (including renewals or replacements) which provide liability coverage for Personal Injury or Property Damage because of accidents.”). In addition, the Evanston policy provided: “There may be other collectible insurance, other than basic policies, covering a claim which is also covered by this policy. If this occurs, the other insurance will pay first and this policy will be excess of the other insurance.”

Mark Samuels filed suit against Alvin Samuels and both insurance companies. State Farm then filed a Motion to Rank Insurance Policies. According to State Farm, the State Farm and Evanston umbrella policies provided coverage on a pro rata basis. Evanston argued that its policy was excess of the State Farm umbrella policy. In support of this argument, Evanston claimed its agent had made some clerical errors that misrepresented the parties’ intent that the Evanston policy would be excess of the State Farm policy. Specifically, Evanston claimed its agent erroneously identified the underlying State Farm policy as a “Homeowners Policy” on the original 1999 policy and the 2000 renewal policy, and that the agent had used the wrong policy identification number on the 2000 renewal policy.

The trial court concluded that the State Farm and Evanston umbrella policies both contained excess “other insurance” clauses that were “mutually repugnant” and that both insurers should share pro rata on the limits of their policies. The district court of appeals reversed, finding that the Evanston policy should be “reformed” to reflect the true intent of the parties. The case was then appealed to the Supreme Court of Louisiana.

On appeal, the Supreme Court found that the evidence indicated that Evanston and Samuels intended that the Evanston policy should provide excess umbrella coverage over and above the State Farm umbrella policy. The court noted that Evanston had provided affidavits from several agents who supported Evanston’s position, and the policy’s annual premium was only $577.50 per year. Furthermore, State Farm did not rely on the clerical errors in issuing its policy or assessing its risks. The only issue, then, was whether, under Louisiana law, a clerical error by an insurer’s agent could be corrected to reflect the intent of the parties to the insurance contract. The court found in favor of Evanston. It concluded that, where the insurance agent makes a clerical error on the declarations page as to the identity of underlying insurance policies, and where the evidence demonstrates the true intent of the parties, the policy can be “reformed” (or corrected) to show the true intent. In reaching its decision, the court noted that the third-party insurer (State Farm) should not benefit from the error, especially when it did not rely on the error in issuing its own policy.

The decision of the court of appeals was affirmed.

Samuels vs. State Farm Mutual Insurance Company-No. 2006-C-0034-Supreme Court of Louisiana-October 17, 2006-939 Southern Reporter 2d 1235.

Claimant seeks penalties against insurer

Derrick Latson was riding his motorcycle when he was struck by a pickup truck driven by Leon Harvey, Jr. Harvey was a laborer for Michael Mitchell’s roofing and remodeling business. The pickup truck was owned by Mitchell, but Mitchell was away on vacation at the time of the accident. Latson filed suit against Harvey, Mitchell and State Farm Mutual Insurance Company, Mitchell’s insurer. The trial court found Harvey and State Farm liable, together, for $25,500. Harvey was found personally liable for $225,000. Latson also demanded penalties and attorney fees, but the trial court denied this demand. Latson appealed the decision of the trial court on the issue of penalties and attorney fees.

On appeal, the issue of attorney fees was dismissed because the relevant Louisiana statute had been amended and no longer provided for attorney fees. On the issue of penalties, Latson argued that State Farm should be penalized because it failed to pay his claim within the time period and in the manner required by the Louisiana statutes. Under the relevant statutes, however, Latson had the burden of proving that State Farm received satisfactory proof of loss, failed to pay the claim within the applicable statutory period, and that its failure to timely tender a reasonable amount was arbitrary, capricious or without probable cause. In evaluating these claims, the Court of Appeal of Louisiana stressed that statutory penalties would be inappropriate if the insurer had a reasonable basis to defend the claim and acted in good-faith reliance on that defense.

According to the court, the State Farm policy provided coverage for a third party only if permission to drive the vehicle was granted by the insured. The central issue throughout the trial was whether Mitchell had given Harvey permission to drive the pickup truck while Mitchell was away on vacation. The court found that State Farm relied on Mitchell’s “steadfast assertion” that he had not given Harvey permission to use the truck. Thus, State Farm had legitimate doubts about coverage and had a right to litigate the claim without being subject to damages and penalties.

In conclusion, the court found that Latson did not prove that State Farm had acted arbitrarily, capriciously or without probable cause. Thus, penalties were not appropriate. The decision of the lower court was affirmed, and the cost of the appeal was assessed against Latson.

Latson vs. Harvey-No. 41,570-CA-Court of Appeal of Louisiana, Second Circuit-November 1, 2006-942 Southern Reporter 2d 609. *