Insurance Defense Blog

The case for banning contingent commissions

Daniel Schwarcz, a Fellow at Harvard Law School who is going to teach at the University of Minnesota, has written an article making The Case for Banning Contingent Commissions.

Maryland allows named driver exclusion in commercial auto policy

The Maryland Court of Appeals has issued an opinion that holds that a named driver exclusion endorsement is not prohibited by Maryland law in a commercial automobile liability policy.  This opinion is discussed in the relatively new Maryland Injury Law Blog.  I am sure I will be a regular reader of Miller & Zois' blog.

I previously wrote here about the intermediate appellate court's opinion in this matter.  Because it found that the named driver exclusion endorsement is valid in the context of a commercial auto policy, the Court of Appeals did not address the second issue that it had before it, namely, "whether a declaratory judgment that there is no coverage for a particular claim, entered in an action between the insurance company and its insured, binds a person who (1) has filed a claim against the insured, but (2) was not a party to that action." 

Damages due to defective construction material are held not to be "occurrences" for purposes of coverage

In OneBeacon Insurance v. Metro Ready-Mix, No. AMD 05-1530 (D. Md. 4/18/2006),the Court granted the insurer's motion for summary judgment in a case involving construction defects.  The insured was alleged to have provided defective grout to a contractor for use on a construction project in Baltimore.  Consequently, the contractor was required to demolish and reconstruct pilings that had been constructed employing the grout.  When the insured filed suit against the contractor for unpaid invoices, the contractor filed a counterclaim alleging a breach of contract and breach of express warranty in conection with the defective grout as to the one project.

The insurers filed a declaratory judgent action to determine whether they were obligated to defend and indemnify on the counterclaim.

The insurers raised the familiar argument that since the insured failed to meet its contractual obligations in failing to provide conforming grout, it was expected and foreseen that the contractor would request and be entitled to corrective action and reimbursement for the costs of the same, for the defect and that therefore there was no "occurrence."

The Court agreed that the damages sought by the contractor in its counterclaim were plainly related to the satisfaction of the insured's contract and that therefore no "occurrence" gives rise to the insured's liability.  As the grout's only purpose was to support the pile caps and columns, and was an integral component of them in relation to the structure, the contractor's damages relate to the satisfaction of the insured's contractual obligations to construct its product.

Privilege and Insurer-Insured Communications Under Maryland Law

The Defense Line has an article entitled "Insurer-Insured Communications and the Scope of Maryland's Attorney-Client Privilege."   Such communications can be privileged if (1) the dominant purpose of the communication was for the insured's defense, and (2) the insured had a reasonable expectation of privacy.

History of Flood Insurance

The history of flood insurance follows the history of flooding in the United States.  The basic incompatibility of floods with insurance became clear long ago.  This was alluded to in the recent AEI seminar on Katrina Insurance Liability, which I Tivo'd on CSPAN2, and I thought it would be useful to see what relevant resources are available on the web.

The USGS has a useful summary of significant flooding in the U.S. in the 20th Century.  (Be sure to scroll down and read about why it is a bad idea to drive a car into flood waters.)  Some historical perspective from the New Orleans Times Picayune blog.  NPR has a webpage on the history of Disaster and Response in the United States.  Here's a page on  Flooding in New England.  See also The Nation's Response to Flood Disasters - A Historical Account, by James Wright; the Wikipedia entry on the Great Flood of 1927; and the Wikipedia entry on the Great Flood of 1993.  Who is exposed to flooding?  Just about everybody.

There is a online course on the National Flood Insurance Program, which includes a historical summary:

Hurricane Related Coverage Litigation in Maryland

Today's Washington Post reported on Maryland residents who still have not recovered from Hurricane Isabel and who are involved in a class action lawsuit against FEMA and a number of insurers.

Hurricane victims who have disputed insurance claims with FEMA and their private insurers have banded together and created an interesting website.

There have been a couple of class actions filed in Maryland arising out of Hurricane Isabel. One, the "Howell" suit, concerns the method of calculating losses. A copy of the complaint is available here.

Another class action, the "Moffett" suit, was filed in June, 2005 against FEMA and a number of insurers. A copy of the complaint is available here.

Critical Article about AIG in Washington Post

The Washington Post recently slammed AIG based on allegations about certain claims handling practices.  One passage caught my eye:

Robert Cook, a supervisor from 1978 to 1985, said that under an AIG "check-retention policy," checks owed insureds, vendors and others were simply locked in a safe until payees complained. Cook said AIG created an internal form to keep track of complaints. Even then, Cook said, he had to cajole the regional manager, Robert C. Davidson, with special "buzzwords" to convey the urgency of the complaint.

One has to wonder why 20 year-old events are being resurfaced in this article. 

I've heard rumors about this sort of "check retention" practice, but those rumors weren't about AIG, but an unrelated company.

The insurance  business is tough and competitive, and in my brief career I've seen large insurers like The Home Insurance Company, Aetna, and Reliance go out of business.  And that's the other side of the issue.  People want their claims paid promptly and in full,  but more importantly they also want their insurer to still be in business if and when, down the road, a large claim needs to be paid.  As the Post reporter pointed out:

But AIG has long stood out. Five times as large as its nearest competitor, it is also the industry's most successful and influential company. AIG shares have returned a stunning 4,800 percent over the past three decades, far better than its peers and five times better than the Dow Jones industrial average. Its many innovations -- from new products to claims handling -- have been widely imitated, insurance brokers and competitors say.

Later:  Jonathan G. Stein, who is a personal injury attorney in California who has worked as an insurance adjuster, condemns practices like this.  Mr. Stein's California Personal Injury and Insurance Blog is well worth visiting.

Named Driver Exclusion Is Void In Commercial Auto Policies

In Zelinski v. Townsend, the Maryland Court of Special Appeals said that the named driver exclusion is void in a commercial auto policy. 

Interestingly, Harleysville, which was the insurer, had filed a declaratory judgment action in the U.S. District Court for the District of Maryland, to establish that it had no duty to defend or indemnify, based on the named driver exclusion.  The declaratory judgment action resulted in a finding that Harleysville was relieved of any obligation to defend or indemnify claims arising out of the accident in question.  However, the claimants in the underlying tort action were not made a party to the declaratory judgment action.

Meanwhile, in the underlying tort suit, there was a three day jury trial which resulted in a $6 million verdict.  The tort claimants then had a writ of garnishment issued against Harleysville Ins. Co.

Harleysville moved to dismiss the writ of garnishment, on the grounds that it had already received a judgment stating that it had no duty to defend or indemnify that claim.  The trial court granted Harleysville's motion.

On appeal, the Court of Special Appeals found that the trial court erred in dismissing the writ of garnishment, stating as follows:

It is well settled that, in a declaratory judgment action
initiated by an insurance company that seeks to be “relieved of
any duty to defend or indemnify” its insured against claims
arising out of an accident caused by the insured’s negligence,
the insured is not in privity with a victim of the insured’s
negligence. Therefore, because appellants were not parties to
the federal declaratory judgment action, there is no merit in the argument that the writ of garnishment was properly quashed on the ground of either res judicata or collateral estoppel.

The opinion does not give any details about the timing of these events, but it seems to be a very strange result , assuming that the judgment in the DJ action was handed down before the judgment in the underlying tort action.  Without doing any legal research, here is my seat of the pants view: 

Maryland is not a direct action state, and a third party tort claimant cannot bring suit directly against a tortfeasor's insurer until the claimant has received a judgment and it has gone unsatisfied.  Therefore, it seems to me that the claimants had no rights to, or interest in, the Harleysville policy until they had secured a judgment, and that they were not necessary parties to the DJ action. 

Further, after Harleysville had obtained a judgment in the DJ action that it had no obligation to defend or indemnify Townsend, the at-fault driver, he then had no right or interest in the Harleysville policy, and the claimants by taking a judgment against Townsend could not accede to rights to the policy greater than the rights that Townsend had. 

Or, to put it another way, the claimants cannot file a writ of garnishment against nonexistent insurance coverage.  A writ of garnishment can only attach property rights of the judgment debtor as they exist at the time the judgment is entered, and Townsend had no rights in that policy.

Instead of going through that kind of analysis, the Court simply rejects the notion that the federal court's judgment had a res judicata or collateral estoppel effect against the claimants.  I think that is missing the real issue.

Now, it may be that the trial court granted the motion to dismiss the writ of garnishment on res judicata or collateral estoppel grounds, although the opinion does not say that directly.  Further, it may be that the Court of Special Appeals regarded the motion to dismiss as a motion for summary judgment, because extraneous matters were considered, and that it could not affirm on grounds other than those considered by the trial court -- although the opinion does not say that either. Alternatively, it may be that the judgment in the DJ action was entered subsequent in time to the verdict in the underlying tort action -- but as I already pointed out, the opinion does not disclose the timing of these events either.

In the Maryland Daily Record, dated July 13, the lead counsel for the tort claimants is quoted as saying that "The most important part of this case in the long run is the very first part of the decision", which is what is discussed above.   That may be true, if it were possible to figure out what the Court of Special Appeals really decided here.   

I think in practice the decision will be easily distinguished.

Harleysville has a difficult decision to make as far as whether to file a petition for cert. to the Court of Appeals on this.  On one hand, they prevailed in a DJ action concerning coverage, and it must really stick in their craw to have that result disregarded by the Court of Special Appeals in such an offhand manner.  On the other hand, the Court of Special Appeals persuasively shows that the limited driver exclusion is void in a commercial motor vehicle policy.  Harleysville would be in the position of arguing to the Court of Appeals that the federal court's judgment should be determinative of the coverage question, even though it was (perhaps) wrongly decided and against the public policy of Maryland.  The result could be an even worse precedent.

What If An Adjuster Asks You To File An Answer For An Insured Who Supposedly Has Been Served, But Who Cannot Be Contacted?

Once in awhile an insurance adjuster may ask counsel to file an answer for an insured who has supposedly been served (or who was served by substituted service on a State official), but it turns out that the insured cannot be located or contacted.  When informed of this, the adjuster may ask counsel to file the answer anyway, to avoid a default -- and the case is one that should be and likely will be settled quickly anyway, the adjuster may add.  What to do?

Although there are probably exceptions, the better approach is not to accept such an assignment. 

1. It may be an ethical violation in your jurisdiction to take legal action on the insured's behalf without the insured's knowledge and consent.  The insurance policy may not constitute advance consent to such action.
2. The insured may not have been properly served, or may have good grounds to challenge service or personal jurisdiction on due process grounds.  Filing an answer will waive those defenses in some jurisdictions, e.g., in Maryland Circuit Court.
3. The complaint, and any presuit claims investigation, may not reflect the true nature and severity of the damages.  Filing an answer may expose the insured to a judgment in excess of insurance coverage, which would make any waiver of defenses a serious matter. 
4. It may be difficult to frame an answer, raising all the appropriate affirmative defenses, without any information from the insured.
5. Under these circumstances, it will be impossible for the insured (your client) to participate in discovery, which will likely result in discovery sanctions, e.g., a default on some or all issues, and/or adverse inference instructions to the jury.  Thus in the end the case may not be defensible anyway.  And that quick settlement?  It's probably not going to happen, at least, not in the range contemplated by the adjuster.
6. Once you enter an appearance and file an answer for the insured, the Court may refuse to allow a subsequent motion to strike your appearance.
7. The insurer may in the future decide to raise coverage defenses, which also could make any waiver of affirmative defenses caused by the unauthorized answer a serious matter.

Untimely Notice to Insured of Breach of Policy Condition Can Result In Waiver of the Policy Defense in Virginia

Under Va. Code § 38.2-2226, in order to disclaim coverage based on an insured’s breach of a policy condition, an insurer has to give notice to the claimant or claimant’s counsel within 45 days after discovery by the insurer of the breach of the condition. Failure to give such notice within 45 days will result in a waiver of the defense. Virginia courts have been strict in applying such waiver. See, e.g., Aetna Casualty & Surety Co. v. Compass & Anchor Club, Inc., 33 Va. Cir. 235 (Feb. 24, 1994).

In other words, under Va. Code § 38.2-2226, an insurer's policy defense based on breach of the cooperation clause can be waived by operation of law if there is failure to give notice to the insured within the statutory time frame. See Morrell v. Nationwide Mut. Fire Inc. Co., 188 F.3d 218 (4^th Cir. 1999)