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Insurance-Related Court Cases

Court Decisions

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

Insurers face off on defense costs

The Township of Evesham, New Jersey, hired Roland Aristone, Inc., to serve as the general contractor in a $14,566,000 project for the construction of a new school. Soon after the school was finished, it experienced leakage and other defects primarily related to the roof. The township sued Aristone, alleging negligence and breach of contract. Aristone notified its insurance carriers of the claim, demanding that they indemnify and defend it. One of the insurers, OneBeacon Insurance Company, paid $264,000 of Aristone's legal fees and defense expenses. Another, Pennsylvania Manufacturers' Association Insurance Company (PMA), initially disclaimed coverage but eventually contributed to a portion of Aristone's $700,000 settlement with the township. Aristone and PMA signed a written release.

OneBeacon sued PMA and another insurer seeking reimbursement for the cost of Aristone's defense. PMA claimed that OneBeacon's complaint was barred by Aristone's release.

During the trial, OneBeacon said it had told Aristone's attorney that it would absorb $91,000 of the defense costs, and forgo an action against the two insurers that had not shared in those costs. According to OneBeacon, the relationship between the insurers later "soured" and OneBeacon was forced to pay a much larger amount. PMA told a different story. It claimed that the settlement amount agreed to by Aristone was intended to include all of PMA's obligations under its policies, including any outstanding claims for defense costs.

The trial court found in favor of OneBeacon. It held that OneBeacon was not a party to the settlement between PMA and Aristone and that there was never an agreement between PMA and OneBeacon that OneBeacon would give up its right to sue PMA for an allocation of defense costs. The court then apportioned the $528,868.54 in defense costs. It allocated $68,752 to OneBeacon, noting that OneBeacon had overpaid by $195,000. The court found that PMA was liable for 16% of the total defense costs, or $84,618.76. OneBeacon also was awarded $74,308.97 in legal fees in connection with its action against PMA; and PMA was ordered to pay OneBeacon a total judgment of $171,358.24. PMA appealed and the Appellate Division affirmed. The Supreme Court of New Jersey certified PMA's petition for certification.

The certified question was whether an insurance company that has already settled with its insured may be sued for a share of defense costs by a co-insurer. The appellate court found that it could and concluded that the evidence supported the trial court's finding that OneBeacon's contribution claim was not barred by the release that was executed by PMA and Aristone. The court noted that, "given the continuous property damage that spanned a period during which Pennsylvania provided coverage, Pennsylvania's obligation to defend as well as indemnify the parties' common insured and OneBeacon's payment in excess of its share of the defense costs, the trial court properly allocated sixteen percent of the defense costs to Pennsylvania." In addition, the court noted that PMA could have insisted, but chose not to insist, that OneBeacon be a "releasing party" as defined in the written release with Aristone, nor did it require OneBeacon to sign the release. There was no meeting of the minds between OneBeacon and PMA, and therefore OneBeacon's contribution claim against PMA was not barred or limited by the release.

The judgment of the Appellate Division in favor of OneBeacon was affirmed.

Potomac Insurance Company of Illinois vs. Pennsylvania Manufacturers' Association Insurance Company-Supreme Court of New Jersey-September 16, 2013-2013 WL 5018577.

Phantom vehicle and prejudicial delay

Forester Vanderhoff was driving a truck insured by Harleysville Insurance Company when he rear-ended a vehicle driven by Ryan Piontkowski, who was waiting to make a left-hand turn. Vanderhoff said that he momentarily took his eyes off the road, and when he looked again, Piontkowski's vehicle was stopped in front of him.

Over eight months later, when submitting a claim for uninsured motorist benefits, Vanderhoff claimed that the accident was caused by a phantom vehicle pulling out in front of Piontkowski, causing him to stop suddenly. Harleysville denied Vanderhoff's claim, saying that the phantom vehicle did not exist and that, even if it did, Vanderhoff failed to satisfy the statutory requirement to notify the insurer of the vehicle's existence within 30 days of the accident.

The court found in favor of Vanderhoff. The court held that the phantom vehicle did exist and that Vanderhoff had reported it to the investigating officer at the scene and to the insurer "as soon as practicable," as required by statute. Harleysville appealed.

According to the Superior Court, nothing in the record supported the lower court's finding that Vanderhoff gave Harleysville timely notice of the phantom vehicle. In addition, the court rejected Vanderhoff's argument that even if he failed to provide proper notice, Harleysville had to demonstrate that it had been prejudiced by the delay before it could deny him benefits.

The Supreme Court of Pennsylvania then agreed to address the question "whether an insurance carrier should be required to prove prejudice relative to the late reporting to the carrier of an accident involving an unidentified vehicle when such accident was timely reported to law enforcement officials[.]" It found that the insurer was required to demonstrate prejudice and remanded the case to the trial court. When the lower court concluded that Harleysville did not meet its burden of proving actual prejudice, the insurer again appealed to the Superior Court.

On appeal, Vanderhoff argued that in order to show prejudice, "[t]he insurance carrier must point to concrete evidence or witnesses that are no longer available due to the late notice" and "must show the loss of a substantial defense opportunity and the likelihood of success in defending liability and damages[.]"

Harleysville argued that such cases must be evaluated on a case-by-case basis. The insurer claimed there was a defense to an uninsured motorist claim "where the insurer shows that its ability to investigate the [phantom vehicle] claim was impaired by that late notice in the context of the accident in question along with the extent of and explanation for that delay." The insurer then argued that the evidence it presented at trial, detailing the manner in which its investigation was hampered by Vanderhoff's late notice, and the importance of prompt investigation in phantom vehicle claims arising from accidents occurring in high-traffic areas, was sufficient to meet this standard.

The Superior Court agreed, stating that "by the time notice was received, there was nothing left on the roadway in terms of physical evidence from the accident, and conducting a canvass of the area for additional witnesses was deemed pointless." The court concluded: "Under these specific circumstances . . . the trial court erred in requiring Harleysville to establish conclusively what evidence a timely investigation would have discovered."

Vanderhoff then appealed to the Supreme Court of Pennsylvania. That court affirmed the decision of the Superior Court, holding that "such cases must be addressed on a case-by-case basis wherein the court balances the extent and success of the insurer's investigation with the insured's reasons for the delay." The court acknowledged that the 30-day notice requirement existed for a reason, but it would not go so far as to require an insurer to show prejudice by proving what it would have found had timely notice been provided. The court concluded: "While the insurer is always obligated to investigate the case such as it can, where an insured's delay results in an inability to thoroughly investigate the claim and thereby uncover relevant facts, prejudice is established."

The decision of the Superior Court was affirmed.

Vanderhoff vs. Harleysville Insurance Company-No. 98 MAP 2012-Supreme Court of Pennsylvania-October 30, 2013-2013 WL 5826958 (Pa.).

Did library waive rights in fuel spill?

In 2004 the Allen County, Indiana, Public Library hired W.A. Sheets & Sons, Inc., as construction manager and MSKTD & Associates, Inc., as architect for a renovation project. The library also contracted with Shambaugh & Son, L.P., to handle mechanical, electrical, and fire protection work, and Hamilton Hunter Builders, Inc., to handle concrete work. As part of the project, Shambaugh permanently installed an emergency diesel generator and two diesel fuel storage tanks in the library's basement. Hamilton Hunter poured a concrete floor that covered copper piping connecting one of the tanks and the generator.

The construction contract was written on an American Institute of Architects form. Pursuant to the contract, the library was obligated to obtain property insurance to cover the cost of "the Entire Work at the site on a replacement cost basis." In addition, each of the contractors was obligated to "purchase . . . such insurance as will protect the Contractor from claims set forth below which may arise out of or result from the Contractor's operations under the Contract and for which the Contractor may be legally liable, whether such operations be by the Contractor or by a Subcontractor or by anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable: 5. claims for damages, other than to the Work itself, because of injury to or destruction of tangible property, including loss of use resulting therefrom . . ."

"The Work" was specifically defined as "the construction and services required by the Contract Documents, whether completed or partially completed, and includes all other labor, materials, equipment and services provided or to be provided by the Contractor to fulfill the Contractor's obligations. The Work may constitute the whole or part of the Project."

The contract contained waivers of subrogation that provided: "The Owner and Contractor waive all rights against each other and against the Construction Manager, Architect, Owner's other Contractors and own forces described in Article 6, if any, and the subcontractors, sub-subcontractors, consultants, agents and employees of any of them, for damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work, except such rights as the Owner and Contractor may have to the proceeds of such insurance held by the Owner as fiduciary . . ."

In December 2007 the library discovered that approximately 3,000 gallons of diesel fuel had leaked into the ground from a hole in the copper piping, beyond the strict confines of where the construction project had been, and was seeping into the surrounding land. The library believed that the hole was made by a Hamilton Hunter employee who had driven a steel stake through the pipe during the construction process.

After cleaning up the leaked fuel, the library filed a claim with Great American Insurance Group, the insurer that had issued a "Builders Risk Plus" policy to the library for the renovation project. Great American covered the claim and paid $5,000 pursuant to its policy limit for pollution cleanup. In 2010 the library sued Sheets, Shambaugh, MSKTD, and Hamilton Hunter to recover approximately $490,000 in damages plus costs associated with the fuel cleanup. The contractors argued that, pursuant to the construction contract, the library had waived its right to seek reimbursement for the fuel cleanup.

The court found in favor of the defendants. The library appealed.

On appeal, the Court of Appeals of Indiana noted that the library was required by the contract only to cover the cost of "the entire Work at the site on a replacement cost basis," and that it was under no obligation to procure insurance for damage to property surrounding the job site or to property outside of the building project itself. Therefore the waiver of subrogation provision did not apply to damaged, contaminated land outside of "the Work."

The court concluded that the contractors might be required to reimburse the library for cleanup costs on the land outside of the library building itself, which could well exceed and be completely unrelated to the total replacement cost of "the Work." The decision of the lower court was reversed, and the case was remanded for further proceedings consistent with the appellate court opinion.

Allen County Public Library vs. Shambaugh & Son, L.P.-No 01A04-1302-PL-78-Court of Appeals of Indiana-October 22, 2013-2013 WL 5716812.

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