Adjusters May Be Personally Liable Under Washington Law

Dwain Clifford | The Policyholder Report | April 11, 2018

The Washington Court of Appeals recently held that the obligation to act in “good faith” applies to the adjuster working for an insurer, not just the insurer that employed the adjuster. This rule not only permits insureds to go directly after the person at the insurance company responsible for denying a claim in bad faith, but it may also allow insureds to keep state-law claims filed in state court right where they were filed.

In Keodalah v. Allstate Ins. Co., Division 1 of the Washington Court of Appeals accepted the insured’s request for interlocutory review of a trial judge’s decision that shielded an adjuster making bad-faith decisions from personal liability (this procedure allows review of trial-court decisions before the case goes all the way to trial). The trial judge had ruled that bad-faith claims and claims under Washington’s Consumer Protection Act (CPA) could be brought only against the insurance company, Allstate, but not Allstate’s employee, Tracey Smith, who made the decisions about what Allstate would pay.

In this case, Moun Keodalah had stopped at a stop sign and then started to drive through an intersection when his truck was struck by a motorcycle, killing the motorcycle driver and injuring Keodalah. The police department determined that the motorcycle had been traveling between 70 and 74 mph (in a 30 mph zone!). And the insurer’s own investigator found that Keodalah had stopped, that the motorcycle had been going at least 60 mph, and that the motorcyclist’s “excessive speed” had caused the accident. Straightforward approval of the claim, right? Well, no.

Photo by Chris Yarzab

Despite all of this evidence pointing to the motorcyclist’s fault, Allstate responded to Keodalah’s claim under his underinsured-motorist coverage with its determination that Keodalah was somehow 70% at fault, offering only $1,600 to settle the claim (the jury in this first lawsuit later found nearly $109,000 in damages). Disregarding the police report and the conclusions of Allstate’s own investigators, Smith claimed that Keodalah had run the stop sign and been talking on his cell phone (the latter conclusion was contradicted by Keodalah’s phone records). Keodalah won his coverage lawsuit, including a jury determination that the motorcyclist was 100% at fault, and then filed a second lawsuit asserting bad-faith and CPA claims against both Allstate and Smith.

In this second lawsuit, the trial judge gave a quick victory to Smith in dismissing the bad-faith and CPA claims against her, but this was not to last. The Keodalah court held that Washington’s statute requiring “good faith” in the business of insurance applies to insurers and those acting on behalf of insurers: “Smith was engaged in the business of insurance and was acting as an Allstate representative. Thus, under the plain language of the statute, she had the duty to act in good faith. And she can be sued for breaching this duty.”

Similarly, the court followed a recent decision by the Washington Supreme Court to reverse an older case that had required a contractual relationship between the defendant and a plaintiff asserting claims under the CPA. Without this element, the Keodalah court held that CPA claims can be asserted against adjusters like Smith even though, of course, an insured and an adjuster do not have any contact with each other.

While this result will gratify insureds who often feel personally aggrieved by an adjuster’s bad faith and relish the thought of holding an adjuster personally responsible, Keodalah will doubtlessly play an important role in the familiar battleground between insurers and insureds about which court will hear a case.

Insurers often prefer federal court and remove coverage cases filed in state court to federal court based on what is known as “diversity jurisdiction,” which applies when the plaintiffs and defendants are all citizens of different states. Under Keodalah, insureds can sue individual adjusters, which may defeat diversity jurisdiction (if the insured and adjuster are citizens of the same state) or defeat removal (if the adjuster is a defendant of the state where the suit is brought).

Both because of the availability of bad-faith and CPA claims against another defendant, and because of the procedural advantages in suing an adjuster, Keodalah offers several tools for lawyers on the policyholders’ side of the bar.

Don’t Sleep on This: New York High Court Addresses Scope of “Blanket” Additional Insured Endorsements

Tyrone R. Childress, Edward M. Joyce and Jason B. Lissy | Jones Day | April 2018

The Situation: The issue of whether “blanket” additional insured endorsements require direct contractual privity with an insurance policy’s “named insured” has received inconsistent treatment by U.S. courts.

The Development: The New York high court’s recent Gilbane decision confirms that the requirements for “additional insured” status continue to be determined by the specific language of additional insured endorsements themselves and not by the insurance requirements of parties’ underlying contracts.

Looking Ahead: Prior to a project’s commencement, the actual language of additional insured endorsements should be carefully reviewed to confirm its alignment with parties’ contractual intent.

Is a contractual privity requirement lurking within the fine print of your “additional insured” coverage? As illustrated by the New York high court’s recent decision in Gilbane Building Co./TDX Constr. Corp. v. St. Paul Fire and Marine Ins. Co., No. 22, 2018 WL 1473553 (N.Y. Mar. 27, 2018) (“Gilbane“), the answer, if overlooked, can mean the difference between being fully insured and not covered at all. 

Additional Insured Endorsements and the Contractual Privity Issue 

In addition to contractual indemnification provisions, many companies require that they be added as “additional insureds” to the liability insurance policies of those with whom they do business. By conferring direct rights to coverage for third-party liabilities that arise out of the performance of others’ work, additional insured status provides a number of important risk management benefits. It allows the additional insured to keep these losses off of its own insurance program, thereby protecting its loss history and avoiding related premium increases. It also protects the additional insured in the event that its counterparty is unable to perform its contractual indemnification obligations.

While additional insureds can be added to a policy via a “specific” endorsement (i.e., expressly identifying the particular individual or entity to be added), parties instead frequently rely upon “blanket” (also referred to as “automatic”) endorsements to do so. Designed to avoid having to create a new endorsement and obtain insurer authorization each time an additional insured is added to a policy, “blanket” additional insured endorsements generally provide additional insured status to any person or entity that the named insured is contractually required to add to the policy.

As is the case in many large-scale construction and development projects (e.g., where a “downstream” subcontractor agrees in its subcontract with the project’s general contractor to add the “upstream” project owner as an additional insured under the subcontractor’s liability policies), the party to be added as an additional insured often is not in direct contractual privity with the named insured. The issue of whether such arrangements are sufficient to confer additional insured status under these “blanket” endorsements has received inconsistent treatment by United States courts.

As the New York high court’s recent Gilbane decision demonstrates, the question of whether direct contractual privity with a policy’s named insured is a prerequisite to additional insured status continues to depend on the precise language of the “blanket” additional insured endorsement used. 

Factual Background

Gilbane involved the construction of a 15-story building at the Bellevue Hospital Campus in Manhattan for use by New York City’s Chief Medical Examiner. The Dormitory Authority of the State of New York (“DASNY”), which was financing and overseeing the project, retained a joint venture formed between Gilbane Building Company and TDX Construction Corporation (the “JV”) to serve as the project’s construction manager. 

The construction management agreement between DASNY and the JV provided that any prime contractor, whether retained by DASNY or otherwise, was required to name the JV as an additional insured under its liability insurance policies. 

DASNY contracted separately with Samson Construction Company (“Samson”) to serve as the prime contractor for the project’s excavation and foundation work. In its prime contract with DASNY, Samson agreed to obtain a commercial general liability (“CGL”) insurance policy that included several entities, including the JV, as additional insureds. 

To satisfy this requirement, Samson obtained a CGL policy from Liberty Insurance Underwriters (“Liberty”), containing a blanket additional insured endorsement (titled “Additional Insured—By Written Contract”) stating:

“WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you.” (emphasis added). 

During construction, Samson’s excavation work allegedly caused significant structural damage to adjacent buildings. DASNY sued Samson and the project architect for negligence, and the project architect, in turn, commenced a third-party action against the JV.

When the JV looked to Liberty to defend and indemnify the JV against the project architect’s third-party claim, Liberty denied coverage on the ground that the JV was not an additional insured under Samson’s CGL policy.

Disagreement Between the Trial and Intermediate Appellate Courts

In the ensuing coverage dispute commenced by the JV, Liberty moved for summary judgment, maintaining that its “blanket” additional insured endorsement added as additional insureds only parties with whom Samson had a direct contractual relationship. Given that Samson and the JV were not in contractual privity, Liberty argued that its “blanket” additional insured endorsement therefore did not extend coverage to the JV. 

In response, the JV maintained that Liberty’s “blanket” additional insured endorsement did not require direct contractual privity between the named insured and the additional insured, but instead required only that the additional insured be identified in a written contract to which the named insured is a party. Given that Samson was required to add the JV as an additional insured in its prime contract with DASNY, the JV maintained that it was therefore afforded additional insured status under Samson’s CGL policy. 

Denying Liberty’s motion for summary judgment, the trial court determined that the CGL policy’s “blanket” additional insured endorsement “requires only a written contract to which Samson is a party” and that this requirement was met by Samson’s written contract with DASNY, which obligated Samson to obtain insurance including the JV as an additional insured. 

Over a vigorous dissent, the intermediate appellate court reversed, holding that the CGL policy’s “blanket” additional insured endorsement “clearly and unambiguously requires [that] the named insured execute a contract with the party seeking coverage as an additional insured.” Differentiating between the phrases “with whom” and what it viewed as the more-expansive phrase “for whom,” the intermediate appellate court reasoned that the “plain meaning” of the words “any person or organization with whom you have agreed to add as an additional insured by written contract,” as used in the “blanket” additional insured endorsement, required a direct contractual relationship between the named insured and additional insured. 

New York Court of Appeals Finds a Contractual Privity Requirement

 In a 5-2 opinion affirming the intermediate appellate court’s decision, the New York Court of Appeals determined that the CGL policy’s “blanket” additional insured endorsement was “facially clear” and the phrase “with whom,” when afforded its ordinary meaning, “can only mean that the [named insured’s] written contract must be ‘with’ the additional insured.”

Finding the “blanket” additional insured endorsement unambiguous, the New York high court determined that extrinsic materials such as the insurance procurement requirements of the Samson–DASNY prime contract could not be used to “rewrite” the CGL policy, and instead merely conferred the JV with potential third-party beneficiary standing under the prime contract to sue Samson for its breach.

Tips to Avoid Unintended Consequences

The New York high court’s recent Gilbane decision underscores the need for parties to carefully review the scope of their additional insured coverage prior to a project’s commencement. To that end, the following tips will help to avoid unintended consequences like those in Gilbane and ensure that additional insured coverage aligns with parties’ contractual intent:

  • Avoid “Contractual Privity” Requirements. Where parties to be added as additional insureds lack a direct contractual relationship with the policy’s named insured, “specific” endorsements, or “blanket” additional insured endorsements that do not require direct contractual privity with the named insured, should be used. In particular, parties should avoid “blanket” additional insured endorsements like the one at issue in Gilbane (e.g., ISO Form CG 20 33 04 13) and instead consider broader forms, such as ISO Form CG 20 38 04 13 (“Additional Insured—Owners, Lessees or Contractors—Automatic Status for Other Parties When Required in Written Construction Agreement”), which provide additional insured status to both the party with whom the named insured directly contracts in writing to perform operations, as well as “any other person or organization [the named insured is] required to add as an additional insured under the contract or agreement.”
  • Require Additional Insured Coverage to be “Primary And Noncontributory.” Parties should consider whether to require that additional insured coverage be provided on a “primary and noncontributory” basis and have named insureds obtain endorsements to their liability policies providing the same (e.g., ISO Form CG 20 01 04 13, “Primary and Noncontributory—Other Insurance Condition”). Doing so ensures that contribution will not be sought from the additional insured’s own insurance policies (i.e., that the additional insured’s own insurance policies will apply in excess of, and not subject to pro-rata allocation with, the named insured’s liability policy).
  • Specify “Completed Operations” Coverage Requirements. Many standard form additional insured endorsements provide coverage only for “ongoing operations.” In addition, while “completed operations” coverage for additional insureds is available via separate endorsements (e.g., ISO Form CG 20 37 04 13, “Additional Insured—Owners, Lessees or Contractors—Completed Operations), these endorsements may provide only completed operations coverage for occurrences during the policy period, which may be of insufficient duration. Additional insureds seeking completed operations coverage should accordingly consider requiring downstream parties to purchase project-specific completed operations coverage for a specified period following the project’s substantial completion (e.g., through the applicable state’s statute of repose).
  •  Evaluate the Scope of Coverage for Additional Insureds’ Sole Negligence. Parties should consider whether the particular language of their additional insured endorsements will provide coverage for the additional insured’s sole negligence (i.e., for liabilities that are not at least partially caused by the named insured’s own acts or omissions). Given courts’ inconsistent treatment of this issue, parties should be familiar with how their insurance policy language has been construed under applicable state law, as well as with any state anti-indemnity statutes that may further restrict the availability of coverage for an additional insured’s sole negligence.
  • Do Not Rely on “Certificates of Insurance” as Proof of Coverage.Parties should keep in mind that additional insured status is created only by an actual endorsement issued and approved by the insurer, and cannot be obtained via a “certificate of insurance.” To confirm their additional insured status, parties therefore should not rely upon “certificates of insurance” (which do not constitute adequate proof of coverage) and should instead require that they, at a minimum, be provided with copies of the policy’s declarations pages, schedule of forms, and the additional insured endorsement itself.

Three Key Takeaways

  1. In many large-scale construction projects, parties frequently rely upon “blanket” endorsements, which generally provide additional insured status to any person or entity that the named insured is contractually required to add to the policy.
  2. In these situations, however, the party to be added as an additional insured often is not in direct contractual privity with the policy’s named insured. As illustrated by the Gilbane decision, whether such arrangements are adequate to confer additional insured status under “blanket” endorsements depends on the precise language of the endorsement used.
  3. Prior to a project’s commencement, the actual language of additional insured endorsements should therefore be carefully reviewed to confirm its alignment with parties’ contractual intent.

Explaining Depreciation of Personal Property Contents in Colorado

Jonathan Bukowski | Property Insurance Coverage Law Blog | April 14, 2018

Whether your insurance company forced you to sift through soot and ash, trying to recollect what has just been stolen, or trying to identify items damaged by water, going through damaged contents and creating an inventory is an emotionally draining experience that typically comes with little to no guidance by the insurance company. After spending countless hours substantiating lost personal property contents, the insurance company responds with random, and sometimes substantial reductions in the value of the personal property for depreciation, often with little to no explanation as to how it arrived at that conclusion.

But what is depreciation, and why is it important?

Depreciation is the loss in value to a particular item due to wear and tear, age, obsolescence, or any other factor. Depreciation is subtracted from the cost to replace the damaged items to arrive at an actual cash value. While most insurance policies provide for recovery based on a replacement cost basis, some policies limit recovery of personal property contents to the actual cash value. It is also common for replacement cost value policies to limit recovery to actual cash value until the damaged property is repaired or replaced. While it may not be difficult to replace an inexpensive item that has been substantially depreciated, it can become very difficult, or nearly impossible, to replace an expensive item improperly depreciated to a point where the policyholder is financially unable to purchase a replacement item.

To determine depreciation, Colorado follows the broad evidence rule which requires that allrelevant factors must be considered to determine appropriate depreciation. This requires looking beyond just wear and tear or market value, and includes looking at all facts and circumstances which would lead to a correct estimate of the value of the particular item.1 These facts may include the original cost, the cost of replacement, collectability, location, use, and even the opinion of witnesses. More important, depreciation should not be taken generally, and items should be depreciated on an individual basis.

Colorado policyholders should always carefully review and scrutinize personal property contents estimates provided by the insurance company to determine whether excessive or unsupported deductions have been made for depreciation. If you suspect the insurance company has not considered all relevant factors to determine appropriate depreciation, consider requesting the insurance company provide a reasonable explanation of the depreciation methodology used in determining the depreciation applied to the individual items.
1 Nebraska Drillers, Inc. v. Westchester Fire Ins. Co., 123 F.Supp. 678 (D.Colo.1954).

The Proper Standard for Evaluating “Actual Cash Value” Under New Jersey Law

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | April 12, 2018

One of the most common questions we hear from our clients has to do with the differences between “actual cash value” and “replacement cost value.” Replacement cost value on its face seems relatively straight forward, but what is “Actual Cash Value” determined under New Jersey law?

This topic was visited by Shane Smith following Super Storm Sandy in Calculating Actual Cash Value, Part 5: New Jersey and New York, and I was curious if the criteria had changed following such an influx of first party property damage claims.

There are typically three general ways to determine Actual Cash Value:

  1. market value;
  2. replacement cost less depreciation; and
  3. the broad evidence rule.1

The Broad Evidence Rule, in layman’s terms, is a combination of Market Value (what it’s selling for now) and Replacement Cost less Depreciation (how much it costs to replace minus age/wear & tear/condition, etc.).2 In Messing v. Reliance Insurance Company, the court found “that the broad evidence rule was most consistent with the principle of indemnity.”3

The Supreme Court of New Jersey agreed. In Elberon Bathing Company v Ambassador Insurance Company,4 a fire case that went to appraisal, the Court held:

“[T]hat (1) appraisal based on replacement cost without consideration of depreciation does not measure actual cash value; (2) the proper standard for evaluating ‘actual cash value’ under New Jersey standard form policy is broad evidence rule. . . .”

The Elberon the New Jersey Supreme Court found broad evidence to be the standard because it requires the fact-finder to consider the same evidence an expert would consider relevant to an evaluation; fair market value and replacement cost minus depreciation. The Court does allow the fact-finder to use the criteria as guidelines if the facts of the case are appropriate.
1 See Note, “Valuation and Measure of Recovery Under Fire Insurance Policies,” 49 Colum. L. Rev. 818, 820-823 (1949); Cozen, Op. cit., supra, 12 Forum at 648-658; Hinkle, “The Meaning of ‘Actual Cash Value,’” 1967 Ins.L.J. 711. See generally Annot., 61 A.L.R.2d 711 (1958).
2 Messing v. Reliance Ins. Co., 77 N.J.Super. 531, 187 A.2d 49 (1962).
3 Id. at 534.
4 Elberon Bathing Co. Inc. v Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978).

An Exception to an Exclusion: Always Read the Policy

J. Ryan Fowler | Property Insurance Coverage Law Blog | April 9, 2018

I commonly get asked coverage questions that relate to a commercial client’s claim for damages. My response is always the same, “send me the policy and I will take a look.” I know this sounds obvious but with the multitude of policies out there it is impossible to relate a policy to a factual situation without first reading the policy.

A recent ruling from the United States District Court of North Dakota points out why this is so important. The court in Spring Glen Apartments LLP v. Arch Specialty Insurance Company, ruled that an exception to an exclusion lead to coverage for the insured.1

The facts of the case were predominantly undisputed. A forty-year-old water pipe approximately seven feet below the complex burst due to wear and tear causing property damage and a loss of business income. The insurance company denied coverage due to an exclusion which read in part:

We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

The specific exclusion cited to deny coverage was the “water exclusion” which excluded coverage in part for:

Water under the ground surface pressing on, or flowing or seeping through: (a) Foundations, walls, floors or paved surfaces; (b) Basements, whether paved or not; or (c) Doors, windows or other openings.

At this point in the opinion it sure looks like the insurance company is correct and there is no coverage for the pipe that burst under the complex. The court goes on to talk about another exclusion, the “wear and tear exclusion.” The wear and tear exclusion stated “loss or damage caused by or resulting from wear and tear” is not covered. The policy goes on to say that:

but if an excluded cause of loss [listed in this subsection] results in a ‘specified cause of loss’…we will pay for the loss or damage cause by that ‘specified cause of loss.’

The Definitions section of the policy states “specified cause of loss” is defined, in part, as “water damage” and “water damage” is defined as:

(1)Accidental discharge or leakage of water…as the direct result of the breaking apart or cracking of a plumbing, heating, air conditioning or other system or appliance…that is located on the described premises…and (2) accidental discharge or leaking of water…as the direct result of the breaking part or cracking of a water or sewer pipe that is located off the described premises and is part of a municipal potable water supply system…if the breakage or cracking is cause by wear and tear.

The definitions section then explains:

But water damage does not include loss or damage otherwise excluded under the terms of the Water Exclusion…to the extent that accidental discharge or leakage of water falls within the criteria set forth [above]…such water is not subject to the provisions of the Water Exclusion which preclude coverage for surface water or water under the surface of the ground.

The court went on to conclude that the cracked pipe is a covered cause of loss under the policy. Holding that once you read the policy, “Wear and tear” is one of the causes of loss that is excluded from coverage under the policy. The exclusion, however, states that if wear and tear “results in a ‘specified cause of loss’. . . [insured will cover] the loss or damage caused by that ‘specified cause of loss.’” The policy defined “specified causes of loss,” in part, as “water damage.” Water damage is then defined, in part, as “[a]ccidental discharge or leakage of water. . . as the direct result of the. . . cracking of a water or sewer pipe that is located off the described premises. . . if the breakage or cracking is caused by wear and tear.” The leaking water leading to the damage in this case was due to the circumstances explicitly provided for in the water damage definition. Therefore, the water was “not subject to the provisions of the Water Exclusion.” The court thus concluded that the policy unambiguously provided coverage for damage caused in a situation such as this one and imposed liability on insurer.

So, at the end of the day the simple answer was yes there is coverage for the damage, but it took a careful reading of the policy, the exclusions, an exception to an exclusion, and a rereading of the definitions to get there. As an insured or insurer, it is always important to Read the policy.
1 Spring Glen Apartments LLP v. Arch Specialty Ins. Co., No. 3:17-cv-00028 (D. N.D. April 2, 2018).