INSURANCE-RELATED COURT CASES
Court Decisions
Digested from case reports published in Westlaw,
West Publishing Co., St. Paul, MN
Insureds challenge drop-down limit
On November 27, 2004, Nathan Frey, age 17, was involved in a one-vehicle automobile accident. Frey’s father and mother, Stephen and Patricia, were passengers in the car, along with Frey’s sister, Aven, age 21, and her fiancé, Thomas Alexander. Thomas and Stephen were killed in the accident. Patricia and Aven sustained injuries.
The automobile that Nathan had been driving was owned by Stephen Frey and insured by United Services Automobile Association (USAA). The policy’s bodily injury liability limits were $300,000 per person or $500,000 per accident. There was a “drop-down limit” for bodily injury liability coverage to $30,000 per person or $60,000 per accident when a “covered person” was legally liable to pay “a member of that covered person’s family residing in that covered person’s household.”
Nathan Frey was a covered person under the language of the policy, but the insurer denied coverage to Aven Frey for amounts above the policy’s drop-down limits. According to USAA, Aven was residing with her fiancé, Thomas Alexander, at the time of the accident.
Patricia, Aven and the estate of Stephen Frey filed a complaint against USAA and Nathan. The complaint asked the court to find that drop-down limits for resident family members were invalid under Minnesota law. The complaint also asked the court to find that Aven was entitled to receive compensation within the remaining $500,000 policy limits. The lower court found in favor of the Freys; USAA appealed.
On appeal, the Court of Appeals of Minnesota first addressed the issue of whether the reduction of bodily injury coverage for resident family members in an automobile insurance policy was valid and enforceable under Minnesota law. The court found that the USAA drop-down exclusion provided the minimum coverage required by the applicable Minnesota statute, and that it did not otherwise conflict with other applicable statutes. The court also noted that there was nothing to indicate that the exclusion violated any state regulatory agency policies.
The Freys submitted several arguments on the issue of enforceability. First, they argued that the phrase “resident of your household” in the USAA policy was ambiguous, and that the policy must therefore be construed against the insurer. The court disagreed; it found that Minnesota case law had already determined that the phrase was unambiguous. The Freys also argued that the drop-down provision violated the “reasonable expectations of the insured,” a doctrine that protected the objectively reasonable expectations of the insured, even if a close study of the policy would indicate otherwise. The court was not convinced that the drop-down limit violated the “reasonable expectations of the insured” doctrine because the phrase “resident of your household” was not ambiguous and because the drop-down provision was clearly labeled as an exclusion. While the court did concede that the drop-down provision could be a surprise to most policyholders, it noted that in the absence of an ambiguity, a hidden major exclusion, or other special circumstances, the doctrine of reasonable expectations was inapplicable.
The court concluded that the drop-down provision was valid and enforceable.
The second issue addressed by the court was whether Aven Frey was a family member residing with Stephen and Nathan Frey. At the time of the accident, 21-year-old Aven, a college student in Iowa, was living with her fiancé on the college campus. She was in her fourth year of college and was not listed on her parents’ automobile policy. She had a separate Iowa policy listing her as sole operator, and she visited her parents during school breaks and holidays. Under these circumstances, the court found that Aven was not a family member residing in the Frey household at the time of the accident. Thus, her recovery under the USAA policy was not limited by the drop-down exclusion.
The decision of the lower court in favor of the Freys was affirmed.
Frey vs. United Services Automobile Association-No. A06-2445-Court of Appeals of Minnesota-January 8, 2008-743 North Western Reporter 2d 337.
Volunteer injury triggers named insured dispute
On April 28, 2001, Todd Black, an employee of California State University, was injured while participating as a volunteer in a home rehabilitation project for an organization called Christmas in April USA. Christmas in April is a Washington, D.C.-based nonprofit corporation that enlists volunteers to repair and rehabilitate homes for low-income, elderly and disadvantaged individuals. Christmas in April volunteers are often recruited from large companies such as Boeing.
In an attempt to obtain compensation for his injuries, Black filed a lawsuit against Boeing, California State University and the owners of the home that was being rehabilitated. With regard to Boeing, Black claimed that while working on the project he was working under the supervision and direction of Boeing, and that Boeing had supplied him with a defective stepstool.
Christmas in April had a Continental Casualty Company liability policy with coverage of $1 million per occurrence. Boeing tendered its defense of the Black lawsuit to Continental, but the insurer declined the tender. In support of its denial of coverage, Continental asserted that Boeing was not identified in the policy as an additional insured, that Christmas in April did not have a legal requirement to name Boeing as an additional insured, and that Boeing did not ask to be named as an additional insured.
Boeing spent $108,744.41 successfully defending itself against Black’s allegations. It then filed suit against Continental to recover its defense costs. According to Boeing, the language of the Continental policy supported a finding that Boeing was an additional insured. The trial court found in favor of Continental and dismissed the case; Boeing appealed.
On appeal, Boeing argued that the following policy language supported a finding that Boeing was an additional insured under the policy: “The following are additional insureds: 3. Any person (other than the named insured, or any employee of the named insured) or any organization while acting as any agent for, or on behalf of, the named insured, including but not limited to real estate agents; however, such coverage will be granted only on written request of the insured and for such limits as are afforded by this policy.” Boeing argued that it had met the policy requirement of submitting a “written request of the insured” when it requested coverage. To bolster its argument, Boeing emphasized that “the insured,” not the “named insured,” was required to make a written request, and that Boeing had become an insured when it requested coverage.
The Court of Appeal, Second District, Division 3, California, disagreed. It cited another policy provision that stated: “This policy contains all the agreements between you and us concerning the insurance afforded. The first Named Insured shown in the Declarations is authorized to make changes in the terms of this policy with our consent.” Thus, the court argued, Christmas in April, as the named insured, was the only party that had the authority to request changes to the policy.
The court concluded that the Boeing was not an additional insured under the Continental policy. The decision of the lower court was affirmed.
Boeing vs. Continental Casualty-No. B194996-Court of Appeal, Second District, Division 3, California-November 20, 2007-69 California Reporter 3d 322.
Must insurer defend killer’s parents?
On April 28, 2000, Richard Baumhammers left his home and went on a shooting rampage. Over a period of two hours, he killed five individuals and injured another. Baumhammers was eventually convicted of five counts of first-degree murder and one count of aggravated assault.
Baumhammers was an adult at the time of the shooting, but he still resided in his parents’ home. The estates of the five murder victims, as well as the individual who had been injured, filed complaints against Richard and his parents, Andrejs and Inese Baumhammers. The complaints alleged that Mr. and Mrs. Baumhammers had failed to procure mental health treatment for their son, that they had not taken his handgun away from him, and that they had not informed the authorities that Richard had a handgun.
Mr. and Mrs. Baumhammers had a homeowners insurance policy issued by Donegal Mutual Insurance Company that covered them as well as any relative living in their household. The policy provided coverage for claims brought against an insured for damages resulting from bodily injury caused by an “occurrence.” The liability limit for an occurrence was $300,000. Occurrence was defined as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the policy period, in … [b]odily injury or [p]roperty damage.” “Accident” was not defined by the policy.
Donegal agreed to provide a defense “even if the suit [was] groundless, false or fraudulent,” then filed a motion for summary judgment asserting that it was not required to defend or indemnify Baumhammers or his parents. The trial court found that the insurer did not owe a duty to defend or indemnify Richard Baumhammers, but that it did have a duty to defend and indemnify Richard’s parents. The court also found that there were six individual “occurrences” within the meaning of the policy resulting in six $300,000 liability limits. These decisions were affirmed by the Superior Court. Donegal then appealed to the Pennsylvania Supreme Court.
On appeal, Donegal noted that Richard Baumhammers was found to have engaged in intentional criminal conduct, and asserted that intentional conduct did not qualify as an “accident” within the meaning of the policy. The Supreme Court of Pennsylvania noted that the complaints against the Baumhammers contained allegations of negligence; however, according to the court, Donegal was required to defend Mr. and Mrs. Baumhammers against negligence claims even where the alleged negligence may have led to the intentional acts of a third party. In reaching its decision, the court noted: “The extraordinary shooting spree embarked upon by Baumhammers resulting in injuries to Plaintiffs cannot be said to be the natural and expected result of Parents’ alleged acts of negligence. Rather, Plaintiffs’ injuries were caused by an event so unexpected, undesigned and fortuitous as to qualify as accidental within the terms of the policy. Because the alleged negligence of Parents resulted in the tragic accidental injuries to the individual plaintiffs, Donegal is therefore required to defend Parents.”
Next, the court determined whether, under the policy, the injuries to the six victims constituted six separate “occurrences” within the meaning of the policy. According to the court, Mr. and Mrs. Baumhammers’ alleged negligence was the “occurrence” that began the sequence of events leading to the plaintiffs’ injuries. This was only one “occurrence” within the meaning of the policy; thus, Donegal was required to meets its liability limit of $300,000 only one time.
The decision of the lower court regarding Donegal’s duty to defend and indemnify Mr. and Mrs. Baumhammers was affirmed; the decision finding that there were six different “occurrences” was reversed.
Donegal Mutual Insurance Company vs. Baumhammers-Supreme Court of Pennsylvania-December 27, 2007-938 Atlantic Reporter 2d 286.
Is negligence claim against agent assignable?
In 2000, Neal and Gail Berliant bought a liquor store called The Liquor Vault. Working with licensed insurance agent Victoria Gittlen, they purchased a business and umbrella liability policy covering the business. They did not, however, purchase liquor liability coverage. According to the Berliants, Ms. Gittlen did not advise them that they could purchase such coverage.
In 2001, The Liquor Vault sold beer to a minor, who gave it to another minor. The second minor drove his car into a cement barrier, killing his passenger. The passenger’s father filed a wrongful death action against the Berliants and The Liquor Vault. The Berliants’ insurer refused to defend them because they did not have liquor liability coverage.
The Berliants settled the wrongful death case for $3 million. The passenger’s father, D. Jere’ Webb, agreed not to execute the judgment against the Berliants if the Berliants assigned to him their rights to sue the insurer and the agent. The Berliants made the assignment, then Webb sued Gittlen and the two agencies she had worked for: G & G Insurance Service and CDS Insurance Agency. Webb’s complaint alleged negligence and breach of fiduciary duty. The trial court dismissed these claims, holding that claims against an insurance agent for professional negligence are not assignable. The court of appeals affirmed the decision. The Supreme Court of Arizona granted review to consider the issue.
On appeal, the Supreme Court noted that Arizona case law generally allows assignment of claims, except those involving personal injury. According to the court, prohibition of the assignment of personal injury claims can be traced all the way back to Roman times, when these claims were considered to be too “personal” to the claimant to be assignable. Personal injury claims could not even be assigned to the claimant’s heirs or his or her estate, absent a law to the contrary. In 1955 the state of Arizona passed such a law, but the courts continued to discourage such activity. The courts claimed that allowing assignment of personal injury claims would cause “vexatious litigation” by “unscrupulous people.” This approach was also adopted by the Arizona courts for other types of claims, such as legal malpractice claims. One lower court even found that assignment of claims against insurance agents should be prohibited because they were similar to legal malpractice claims. It was this case that Gittlen relied upon when she asserted that the Supreme Court should adopt the rule that professional negligence claims against insurance agents are sufficiently analogous to legal malpractice claims to justify extending the prohibition on assignment.
Addressing Gittlen’s argument, the Arizona Supreme Court compared the attorney-client relationship with the insurance agent-client relationship. It noted important differences. First, an attorney is a “fiduciary” owing a duty of loyalty, care, and obedience. An insurance agent owes only a duty of reasonable care, skill, and diligence. Second, clients tend to share more personal information with their attorneys than they do with their insurance agents. Attorney-client privilege enables individuals to consult their attorneys without fear of retribution. Attorneys are bound by stricter confidentiality rules than insurance agents. According to the court, the attorney-client relationship was not sufficiently analogous to the insurance agent-client relationship to justify a finding that negligence claims against insurance agents are non-assignable.
Gittlen also asserted several public policy reasons as to why negligence claims against insurance agents should not be assignable, including a fear that professional negligence claims could become “bargaining chips” or that courts would be flooded with unwarranted litigation. The court was not convinced by any of these arguments. It held that negligence claims against insurance agents are assignable. Therefore, the Berliants could assign to Webb their claims against Gittlen and her employers.
The judgment of the lower court was reversed, and the case was remanded for further proceedings.
Webb vs. Gittlen-No. CV-07-0127-PR-Supreme Court of Arizona, En Banc-January 10, 2008-174 Pacific Reporter 3d 275.
Was boy’s hockey stick attack intentional?
While attending hockey camp, eight-year-old Daniel endured three days of teasing by some of the other boys at the camp who thought he was an inferior hockey player. By the third day, he had reached his limit and retaliated by swinging his hockey stick at seven-year-old Caleb. Daniel claimed that he didn’t mean to hurt Caleb and had intended to strike him on the shoulder (which was padded), but the stick struck the boy in the head, fracturing his skull and causing brain injuries.
Daniel was insured under his parents’ homeowners policy issued by Safeco Insurance Company of America. The policy provided coverage for liability for “damages because of bodily injury or property damage caused by an occurrence.” The policy defined an “occurrence” as “an accident, including exposure to conditions which result in: bodily injury; or property damage.” Caleb filed a claim under the Safeco policy, but Safeco denied coverage. Caleb then filed a declaratory judgment action, asking the court to find that Safeco must provide coverage. Safeco argued that the hockey stick incident was not an “accident” within the meaning of the policy and that, therefore, there was no “occurrence” for which it was obligated to provide coverage. The court agreed with Safeco and entered a judgment in its favor. The Supreme Court of Utah accepted the case for appeal.
On appeal, the Supreme Court of Utah noted that while the Safeco policy did not define the term “accident,” Utah case law has consistently defined the term as it is used in insurance policies as follows: “The word [accident] is descriptive of means which produce effects which are not their natural and probable consequences … The probable consequence of the use of given means is the consequence which is more likely to follow from their use than it is to fail to follow. An effect which is the natural and probable consequence of an act or course of action is not an accident, nor is it produced by accidental means. It is either the result of actual design, or it falls under the maxim that every man must be held to intend the natural and probable consequences of his deeds.” Under this definition, the court noted that there are two ways bodily injury or property damage can be considered “nonaccidental.” First, damage can be “nonaccidental” if it is the result of the “actual design or intended action by the insured”; second, if it is the “natural and probable consequence of the insured’s act or should have been expected by the insured.”
As a preliminary matter, the court noted that Daniel’s age was a relevant consideration in determining how to evaluate the natural and probable consequence of his act. According to the court, the natural and probable consequence of Daniel’s actions must be viewed from the perspective of an average eight-year-old child.
The court next addressed Safeco’s contention that the focus of the court in determining whether there was an “accident” should be on Daniel’s actions as opposed to Caleb’s injuries. The court disagreed with the insurer’s contention. It noted that Utah case law had consistently focused not on whether an act is intentional or deliberate but, rather, on whether the result was intended or expected. In addition, according to the court, “the test is not whether the result was foreseeable, but whether it was expected.” However, the court noted that the specific type of injury suffered need not be intended or expected by the insured.
The court then turned to the specific facts of the case. It concluded that there was an issue of fact as to whether Daniel intended to inflict “nontrivial harm” upon Caleb. It also held that “an average eight-year-old would not anticipate anything more than a minor injury as a result of a hockey stick striking the padded shoulder of another child.”
The court reversed the lower court’s decision and remanded the case for further proceedings.
N.M. on behalf of Caleb vs. Daniel E.-No. 20060284-Supreme Court of Utah-January 8, 2008-175 Pacific Reporter 3d 566. *