You Are Indemnified…. Until You Are Not

William F. Bresee | Leech Tishman Fuscaldo & Lampl LLC | February 11, 2019

In the ordinary course of a construction project (or any commercial transactional arrangement, for that matter), something can go wrong. People can get injured; property can be damaged. For that reason, one of the significant risk allocation tools available to business people is indemnification. The concept is elegantly simple – you are an owner and engage me to provide you equipment or services. If there is a deficiency in my deliverable or service and, as a result of that deficiency (which could be negligent performance, a warranty breach, or similar), a third party is harmed by injury or economic loss and sues you, I step in and protect you against the impact of the claim made against you. The simplicity of the arrangement does not, however, mean that you do not have to read the language of indemnification provisions and of contract documents through the product or service supply chain. The ruling in Oliver Communications Group, Inc. v. Schneider Electric Buildings Americas, Inc., Case No, 07-17-00396-CV, Court of Appeals, Seventh District of Texas (November 2018) is instructive.

Schneider Electric Buildings Americas, Inc. (“Schneider”) contracted with the Delaware River Port Authority for installation of security cameras on the Benjamin Franklin Bridge; Schneider then subcontracted portions of the work to Oliver Communications Group, Inc. (“Oliver.”) A provision of the Bridge Contract allegedly obligated Schneider to indemnify Port Authority against certain claims. In the Subcontract, Oliver also agreed to indemnify Schneider against certain claims. An employee of Oliver, Patrick Burness, slipped and fell on steps at the job site. Burness sued the Port Authority, among others. The Port Authority demanded indemnification from Schneider, and, in turn, Schneider demanded indemnification from Oliver. Oliver refused, while Schneider did not. Burness settled his lawsuit, Schneider paid the settlement, and Schneider sued Oliver for indemnification upon the subcontract with Schneider. Both litigants filed motions for summary judgment. The trial court granted that of Schneider, denied Oliver’s, and awarded Schneider over $1.2 million against Oliver. Oliver appealed on the basis of the existence of an obligation to indemnify Schneider and the enforceability of the indemnity agreement, as well as whether it was obliged to also pay pre-judgment interest on attorney’s fees. Noting that Texas law strictly construes indemnity agreements against the indemnitor, the Texas Court of Appeals reversed the trial court and denied judgment for Schneider.

The subcontract entered into by Schneider and Oliver has Oliver agreeing “to indemnify, save and hold harmless the Contractor, Contractor’s agents and employees, and all parties indemnified by Contractor in Contractor’s Contract from and against all claims, damages, losses and expenses…. to the extent caused in whole or in part by any negligent act or omission of Subcontractor, … or anyone for whose acts Subcontractor may be liable” and further provides that “Subcontractor expressly so agrees, whether or not said liability, claim, demand, loss or expense arises in part from the negligence of Contractor or any party indemnified by Contractor in Contractor’s Contract.” The subcontract was to be interpreted and enforced according to Texas law (even though the work was done in Pennsylvania). It makes clear that Oliver was obliged to indemnify Schneider and anyone Schneider was obligated to indemnify. The appellate court easily found that “Contractor’s Contract” was the contract between the Port Authority and Schneider. It then found, however, that Schneider was not obligated to indemnify the Port Authority against the claim of Burness.

The contract between the Port Authority and Schneider was comprised of a Request for Proposal and a Purchase Order from the Port Authority. The Purchase Order was unsigned; contained only elementary terms, and contained no indemnity provision; although referring to a “Solicitation” and “Supplier’s Bid or Proposal” and “documents attached to this Purchase Order or incorporated by reference,” nothing was attached to or expressly incorporated into the Purchase Order. Only the Request for Proposal contained an indemnity provision; that requiring Schneider to indemnify the Port Authority against claims “arising out of or resulting from: (a) performance or non-performance of the Work; (b) breach of any of the Design/Builder’s obligations under the Contract Documents, or (c) acts or omissions of the Design/Builder, its contractors, consultants, suppliers, or anyone directly or indirectly employed by any of them or anyone for whose acts they may be responsible, regardless of whether or not such claim, demand, cause of action, damage, liability, loss, or expense is caused in part by a party indemnified hereunder.” However, although alluding to a “Solicitation,” none was attached or defined by the Purchase Order. Finding that Schneider failed to establish the necessary linkage between the “Solicitation” and the Request for Proposal through its summary judgment evidence, the appellate court found that there was no evidence that Schneider contractually agreed to indemnify the Port Authority and that Oliver’s obligation to indemnify Schneider was never triggered.

The appellate court found that Schneider’s summary judgment evidence failed for a more telling reason pertaining to the scope of Oliver’s duty. Oliver’s indemnity arose “…to the extent caused in whole or in part by any negligent act or omission of Subcontractor [Oliver], [Oliver’s] employees, agents, suppliers, subcontractors or anyone for whose acts subcontractor may be liable and [Oliver] expressly so agrees, whether or not said liability . . . arises in part from the negligence of Contractor [Schneider] or any party indemnified by [Schneider] in Contractor’s Contract.” The court noted that this language required (i) causation “in whole or in part” by Oliver or one of those under it for whose acts Oliver accepted liability, and (ii) a negligent act or omission by Oliver or someone in that group. Finding that the language excluded the sole negligence of Schneider or another indemnified party, the also court found the language required multiple causes, one of which had to a negligent act or omission by a party within the Oliver group. Finding that the record was without evidence of negligence of Oliver or those under it (including Burness), the court found that Schneider’s summary judgment motion would have nonetheless failed on that point.

Whether the obligation to indemnify is in place through the contractual chain, and whether the specific requirements of an indemnity provision are to be triggered are key to being comforted that the intended allocation of risks between and among contracting parties is in place and enforceable. The review should be accomplished upon contracting as well as at the time a claim for indemnity arises.

Church vs. Church – Court Uses Dictionary to Define “Decay”

Jason Cleri | Property Insurance Coverage Law Blog | March 8, 2019

Easthampton Congregational Church submitted an insurance claim to Church Mutual Insurance Company when their roof suddenly collapsed. Church Mutual denied coverage for faulty construction after they sent their engineer, Joseph Malo, out to inspect the property. Mr. Malo noted, and the insured agreed, there was “progressive failure of the fasteners used to attach the layers of the ceiling to the ceiling joists due to the weight of the ceiling” which eventually caused the collapse.

Easthampton asked Church Mutual to reconsider their position stating that the roof was entirely effective in that it had lasted for approximately sixty years and that the loss was covered under the collapse provision which stated:

2. We will pay for direct physical loss or damage to Covered Property, caused by collapse of a [covered property]…if the collapse is caused by one or more of the following:

b. Decay that is hidden from view, unless the presence of such decay is known to an insured prior to collapse;

f. Use of defective material or methods in construction, remodeling, or renovation if the collapse occurs during the course of the construction, remodeling, or renovation. However, if the collapse occurs after construction, remodeling, or renovation is complete and is caused in part by a cause of loss listed [in the previous sections]; we will pay for the loss or damage even if use of defective material or methods, in construction, remodeling, or renovation, contributes to the collapse.

The insurer, in its denial also rejected the insured’s allegation that hidden decay contributed to the collapse.

The trial court held that “the most reasonable reading of the word ‘decay’ as it is used in the Policy is that it refers to the broader concept of the word.” That is, a “gradual decline in strength” or “progressive decline” as opposed to a narrower definition that entails organic rotting.

The appellate court, while not necessarily agreeing with the trial court’s reasoning, affirmed their decision to grant summary judgment in favor of the insured because it was clear that an ambiguity existed as to the definition of the word decay.1

Notably, the First Circuit was not too fond of the insurer’s argument that the chosen definition of decay would encompass all collapses, because “it is difficult to imagine any collapse, of any structure, being cause by something other than ‘decay.’” The court noted:

But, even if the insurance company did not intend to provide coverage for collapses like the one in question, that is a self-inflicted problem. The insurance company, which wrote the policy, could simply have defined “decay” narrowly or limited the coverage period.

I leave you with a quote from English philosopher, Thomas Hobbes:

“[i]magination, therefore, is nothing but decaying sense. . . .”
______________________
1 Easthampton Congregational Church v. Church Mutual Ins. Co., No. 18-1881, 2019 WL 851191 (1st Cir. Feb. 22, 2019).

Suit Limitation Provision Upheld

Tred R. Eyerly | Insurance Law Hawaii | February 25, 2019

    The policy’s one year suit limitation provision was upheld, depriving insureds of benefits under the policy. Oswald v. South Central Mut. Ins. Co., 2018 Minn. App. Unpub. LEXIS 1077 (Dec. 24, 2018). 

    The Oswalds’ hog barn burned down on June 21, 2016. Arson was a possible cause. 

    The Oswalds were insured under a combination policy issued by North Star Mutual Insurance Company and South Central Mutual Insurance Company. Central provided coverage for basic perils, broad perils, and limited perils, which included fire losses. The Central policy required property claims to be brought within one year after the loss. By endorsement, the North Star policy required suits be brought within two years after the loss. Presumably, the claims was denied, although the decision does not state this.

    During the investigation of the cause of the fire, the Oswalds attempted to serve a complaint on Central on June 1, 2017, alleging breach of contract, unjust enrichment, and breach of good faith and fair dealing. The Oswalds failed to properly serve Central and moved to dismiss their complaint without prejudice. The dismissal was granted. The Oswalds then filed an almost identical complaint on September 25, 2017, and properly served the complaint. Central file a motion to dismiss because the suit was filed past the one-year limitation contained in the policy. The motion was granted. 

    On appeal, the court found the one-year limitation was not inherently unreasonable. While investigating the cause of the fire, the Oswalds still managed to file a complaint before the one-year deadline. Had the Oswalds properly served Central, they would have commenced a suit regarding their current claims within the one-year limitations period. Nor was there any statute prohibiting the one-year limitation period. 

    The Oswalds also argued that the policy was ambiguous. The policy continuously referred to the two insurance companies as “we” or “us” instead of including a clear delineation between the two companies. But the policy also clarified that all its terms “applied to both companies listed on the declarations unless otherwise designated.” 

    The Oswalds contended that the policy did not provide a clear and unambiguous limitations period. However, the one-year limitation was clearly stated within the policy conditions. 

    Finally, the one-year limitation was not tolled due to either fraudulent concealment or equitable principles. The Oswalds failed to identify an affirmative statement which concealed a fact, defeating their argument for tolling the one-year limitation due to fraudulent concealment. Equitable tolling was inappropriate when there were no circumstances beyond the plaintiffs’ control that prevented service of a complaint within the limitations period. Here, the Oswalds attempted to commence a suite within the one-year limit, but failed for reasons within their control. Thus, equitable tolling was inappropriate. 

    Consequently, the lower court’s dismissal was affirmed. 

How to Stop Delay, Deny, Defend

Chip Merlin | Property Insurance Coverage Law Blog | March 5, 2019

Rutgers insurance law professor Jay Feinman wrote a book, Delay Deny Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It, which exposed many insurance company unfair claims practices. In the last chapter of the book, he discussed how we can stop insurance claim wrongful delays and denials.

The problem of insurance companies that delay, deny, and defend is big. No one—except the companies themselves, and they’re not telling—Knows exactly how big. But the problem is big enough that thousands of individual policyholders…are not getting the benefits their insurance companies owe them. Big enough, too, that as awareness of the problem increases it may undermine public confidence in the insurance industry.

Consumers can take some steps to protect themselves against unfair claim practices, but they cannot prevent or cure the practices themselves. Bad practices persist because government regulators have failed to do enough to prevent and punish them. Lawmakers and regulators in every state need to do three things to protect consumers (and consumers need to push them into action). First give consumers the information they need to take a company’s claim practices into account when they shop for insurance. Second, make clear in the law that the rules of the road of claim handling are binding on insurance companies, and give regulators the power to enforce those rules. Third, make sure policyholders and accident victims filing claims have the ability to hold insurance companies accountable when the companies delay, deny, or defend.

Here is a paradox: Insurance is the most highly regulated business in the United States, but the system of regulation has so far failed to implement these reforms and to protect policyholders and accident victims from unfair claim practices. Why isn’t more being done?

J. Robert Hunter, Director of Insurance, Consumer Federation of America, agreed that Feinman’s book “explains how America’s premier insurance companies systematically rip off consumers.” Hunter also had this to say following Hurricane Michael:

Americans always pull together to protect one another whenever there is a disaster like this, but when it comes to rebuilding homes long after the storm has passed, too many people find themselves in lonely battles with insurance companies. We all will have to keep a spotlight on the communities hit by Michael to make sure that survivors don’t face a second disaster in the shape of unfair practices by their insurance companies.

While I recognize that many claims get paid and resolved without problems, lawyers in my firm see the unfair claims practices and abuses. Who would call lawyers if your claim is settled quickly and to your satisfaction? But, the issue is “what to do about the abuses and wrongful actors?”

Both Hunter and Feinman agree that insurance regulators have been largely ineffective stopping unfair claims practices. Feinman noted:

A third form of unfairness is the subject of this book, opportunism through delay, deny, defend by the insurance company at the point when its promise obligates it to pay a claim. As the book demonstrates, here market conduct regulation has been notably ineffective. Claims practice regulation is typically an afterthought for regulators; a textbook coauthored by Therese Vaughan, former insurance commissioner of Iowa and now CEO of the National Association of Insurance Commissioners, perhaps inadvertently illustrates the problem when it notes, in only a single sentence between the three-page discussion of solvency regulation and a three-page discussion of rate regulation: ”States have also adopted laws governing claims settlement and prohibiting unfair claims settlement practices. ” Deborah Senn, former Washington insurance commissioner, put it more bluntly: “Regulators have been nowhere on this. Regulation has really failed this issue.

Hunter’s website says:

Consumers spend hundreds of billions of dollars a year on car, home, and life insurance products whose complexity and individual pricing permit insurer inefficiency and abuse. A large majority of the state insurance departments that regulate these insurers have neither the resources nor the will to do so adequately. . . .

So when the Insurance Journal article, Sometimes I Disagree With Blogs I Love, thought that the idea of an administrative complaint rather than a policyholder’s own right to bring a civil lawsuit would prove effective, I would suggest that those studying the situation, and with a lot more experience with unfair claims practices, strongly disagree. Me included.

Indeed, Professor Feinman’s conclusion was that we need stronger laws from our legislatures to fully allow policyholders and victims of insurance company abuse to protect themselves and seek redress:

Establishing an action for bad faith or other wrongful behavior is important; making the action effective is equally important. Making the action effective requires that the policyholder or victim be fully compensated for the harm suffered, and that the economic incentive for delay, deny, defend be taken away from the company. When a company violates fair claims practices, the harm and the incentive should be reflected in the damages. Many courts and legislatures have responded, and all should provide a comprehensive approach. When a policyholder sues for bad faith, the damages start with payment of the full amount of the loss that she was entitled to receive under the policy. If that’s all the company has to pay, the company has an incentive to delay, deny, defend. More is required.

Which begs the question I wrote in a previous blog:1 Why are some Florida politicians supporting laws that remove protections for policyholders?

It is pretty obvious that unless those representatives are working for an insurance company, nobody would think of this legislation by themselves. I suggest that the insurance lawyers and lobbyists are behind this with their massive lobbying monies. I bet those lobbyists quietly admit that they would be upset if they had their insurance claim delayed or wrongly denied only to find out that there existed no remedy to cure the extra damages caused by those actions.

This topic of insurance company lobbying was also studied by Professor Feinman. It will be ripe for discussion tomorrow.

Thought For The Day

Do I not destroy my enemies when I make them my friends?
― Abraham Lincoln
_______________________________________
1 Delays, Denials and Underpayments Occur When Insurance Companies Are Not Held Accountable—What Are Florida Legislators Thinking? Property Insurance Coverage Law Blog, Feb. 29, 2019.

Is an Adjuster Independently Liable for Bad Faith Conduct?

J. Ryan Fowler | Property Insurance Coverage Law Blog | March 10, 2019

I often get calls from potential clients that have filed a claim with their insurance and have been enraged by an insurance agent or adjuster assigned on the claim. Many potential clients say something like “I just wanted to get the claim settled but the adjuster was acting in bad faith and just wouldn’t listen.” Most states have some case law or consumer protection laws that apply to an insurance company, but not all apply to the insurance personnel you deal with. The Supreme Court of Washington will soon decide this issue for members of the Evergreen State.

On February 26, 2019, the Washington Supreme Court heard arguments in Keodalah v. Allstate Insurance Company, et al..1 The insured, Keodalah, suffered catastrophic injuries when his truck was struck by a motorcycle. Keodalah sought the full $25,000 limit of his underinsured motorist coverage with Allstate but the company instead offered to settle for a smaller amount, claiming he had been partially at fault.

Keodalah filed suit against Allstate. In the litigation, the insurance adjuster assigned testified that Keodalah was talking on his cellphone and ran a stop sign. However, the police had determined he was not using his phone and that Allstate’s own accident reconstructionist had determined that he had stopped at the sign. The adjuster later admitted that both reports were true, according to court documents. The jury found that the motorcyclist was solely at fault and awarded Keodalah and his wife more than $100,000.00.

Keodalah then filed a bad faith lawsuit against Allstate and the insurance adjuster individually, claiming violations of the CPA. The trial court dismissed the claims against the adjuster, and Keodalah appealed.

In March of last year, a state appellate court overruled the trial court’s decision2 and found that Keodalah could file an individual bad faith claim against the adjuster, saying that the relevant state law makes no distinction between corporations and individuals. The case is now before the Washington Supreme Court.

Allstate’s arguments are essentially that the relationship of insured and insurer creates the duties and that adjusters don’t have a duty of good faith because they are not a party to the contract. The insurance company also argued that allowing suits against adjusters would deter good adjusters from doing their jobs in fear they may get sued.

Keodalah’s position is that the applicable statute plainly imposes a duty of good faith on insurers and their “representatives,” including adjusters and that the state’s Legislature intended that claims adjusters carry a good-faith duty. Keodalah has argued that the recognition of a bad faith cause of action against individual adjusters would benefit policyholders by deterring adjusters from engaging in wrongful denial or delay tactics in the claim handling stage.

Amicus briefs have been filed by the American Insurance Association, National Association of Mutual Insurance Companies, and Property Casualty Insurers Association of America, and GEICO, along with the Washington State Association for Justice Foundation and the Coalition Against Insurance Fraud. The battle lines have been drawn in Washington with insurance lobby groups and companies on one side and consumer advocacy groups for policyholders on the other and we will await the Washington Supreme Court’s decision.
____________________________________
1 Keodalah v. Allstate Ins. Co., et al., No. 95867-0 (Wash. 2018).
2 Keodalah v. Allstate Ins. Co., 413 P.3d 1059 (Wash App. 2018).