How Specific does a Specific Litigation Exclusion have to be?

Larry P. Schiffer | Squire Patton Boggs | July 9, 2019

Insurance policies often have general exclusions for known losses or prior acts. The reason for this is that most insurance is for fortuitous risks–risks that will take place in the future; not risks that already have taken place. For large policyholders that have ongoing litigation, it is not uncommon for a new carrier to craft a specific exclusion to preclude coverage for an existing claim or set of circumstances that already exists. The First Circuit recently addressed a specific litigation exclusion to determine whether it was broad enough to cover new litigation and investigations arising out of the same investment product.

In USB Financial Services, Inc. of Puerto Rico v. XL Specialty Insurance Co., No. 18-1148, 2019 U.S. App. LEXIS 19946 (1st Cir. Jul. 3, 2019), the First Circuit addressed an appeal by policyholders of a summary judgment order granted to the insurance carriers based on the application of a specific litigation exclusion. The circuit court affirmed.

Basically, there were a series of investigations and lawsuits over a certain financial product sold by the policyholders. The policyholders sought new insurance going forward and the new carriers sought a specific litigation exclusion for the prior investigations and lawsuits. Using a major broker and a well-known policyholder law firm, the policyholders negotiated a new policy along with the specific litigation exclusion. The exclusions was broad and when the policyholder sought to negotiate a narrowing of the exclusion by replacing broad language with more narrow language, the carriers rejected the policyholders’ changes and the policyholders accepted the exclusion.

The exclusion precluded coverage of “any Claim in connection with any proceedings set forth below, or in connection with any Claim based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any such proceeding or any fact, circumstance or situation underlying or alleged therein.” New investigations and lawsuits arose concerning the same financial product and the policyholders sought coverage. The carriers disclaimed.

In affirming the grant of summary judgment to the carriers precluding coverage based on the exclusion, the court held that the common and usual meaning of the words of the exclusion were unambiguous and no coverage was available for any claim in any way involving the prior matters or any fact, circumstance or situation underlying or alleged in the prior matters. Moreover, the court found that it was equally clear what the intention of the parties was as demonstrated by the negotiations that preceded the issuance of the insurance policies when the policyholders tried to modify the exclusion and the carriers refused. Thus, held the court, although the language was undoubtedly broad, it was the language the policyholders bargained for during negotiations. The court found that the policyholders were aware that the breadth of the unchanged exclusion and nevertheless agreed to purchase the policies as they read.

The court also rejected the argument that the scope of the exclusion rendered the policies illusory. The court also rejected the argument that the exclusion should be construed in favor of the policyholders noting that those principles seek to protect a weaker party when there is a disparity at the bargaining table. Here, the court found those concerns not to be present because the terms of the exclusion were clear and the parties negotiated the polices at arms-length. The court noted that the policyholders were sophisticated financial players, which engaged a major insurance broker and a major policyholder law firm to negotiate the policy and the specific litigation exclusion. The court concluded that the policyholders could have reasonably expected that they bargained for the plain reading construction that the court gave the exclusion in this case.

Insurer’s Confession of Judgment Through Post-Lawsuit Payment

David Adelstein | Florida Construction Legal Updates | May 11, 2019

The recent opinion in the property insurance coverage dispute, Bryant v. Geovera Specialty Ins. Co., 44 Fla.L.Weekly D1232a (Fla. 4thDCA 2019), discusses the doctrine known as an insurer’s “confession of judgment.”   In this case, an insured suffered water damage from a pipe leak.  The insurer paid the insured $6,000 because of sublimits in the property insurance policy.   There was a $5,000 sublimit for mold and a $1,000 sublimit for water leakage that occurs over a period of 14 days or more.  The insured sued the insurer for covered water damage arguing that the sublimits did not apply.

After the lawsuit was filed, an agreed order was entered that stayed the case pending an appraisal.  The appraisal award did not apply the $1,000 sublimit to the water damage from the pipe leak and segregated out damage for mold.  (The insurer already paid the mold sublimit).  The insurer ended up paying the appraisal award for the water damage caused by the pipe leak after deducting its pre-lawsuit sublimit payment.  The insurer paid the award and did NOT challenge the application of the $1,000 sublimit in court, although it could have since coverage issues are decided by courts.

An issue became whether the insurer’s post-lawsuit payment of the appraisal award above the $1,000 sublimit constituted an insurer’s confession of judgment.

[I]t is well settled that the payment of a previously denied claim following the initiation of an action for recovery, but prior to the issuance of a final judgment, constitutes the functional equivalent of a confession of judgment.” Johnson v. Omega Ins. Co., 200 So. 3d 1207, 1215 (Fla. 2016). The confession-of-judgment doctrine “applies where the insurer has denied benefits the insured was entitled to, forcing the insured to file suit, resulting in the insurer’s change of heart and payment before judgment.” State Farm Fla. Ins. Co. v. Lorenzo, 969 So. 2d 393, 397 (Fla. 5th DCA 2007).

The confession-of-judgment doctrine is limited to situations where the filing of the lawsuit “acted as a necessary catalyst to resolve the dispute and force the insurer to satisfy its obligations under the insurance contract.” See, e.g.State Farm Fla. Ins. Co. v. Lime Bay Condo., Inc., 187 So. 3d 932, 935 (Fla. 4th DCA 2016).However, “[i]t is the incorrect denial of benefits, not the presence of some sinister concept of ‘wrongfulness,’ that generates the basic entitlement to the fees if such denial is incorrect.” Ivey v. Allstate Ins. Co., 774 So. 2d 679, 684 (Fla. 2000). Thus, “an incorrect denial of benefits, followed by a judgment or its equivalent of payment in favor of the insured, is sufficient” to constitute a confession of judgment and to allow the insured to recover attorney’s fees.

An attorney’s fees award is also appropriate “where, following some dispute as to the amount owed by the insurer, the insured files suit and, thereafter, the insurer invokes its right to an appraisal and, as a consequence of the appraisal, the insured recovers substantial additional sums.” Lewis v. Universal Prop. & Cas. Ins. Co., 13 So. 3d 1079, 1081 (Fla. 4th DCA 2009).

Even after Johnsonnot all post-suit payments by an insurer will constitute a confession of judgment. We recently held that where an insurer valued a loss, issued payment, and was unaware of the insured’s disagreement with the damage valuation until the filing of the complaint, the insurer’s timely payment of an appraisal award during the litigation did not constitute a confession that the insurer breached the insurance policy. See Goldman v. United Servs. Auto. Ass’n, 244 So. 3d 310, 311-12 (Fla. 4th DCA 2018).

Bryant, supra

Here, the appellate court held the insurer’s payment of the post-lawsuit appraisal award constituted a confession of judgment that it incorrectly denied benefits by invoking the $1,000 leakage sublimit.    Once the insurer invoked the sublimits, it raised a coverage issue that only a court could decide and [t]his coverage issue went beyond a mere dispute about the valuation of the loss, so the insureds could not have simply invoked the policy’s appraisal provision before filing suit.”  Bryant, supra.  (“Under Johnson, “[o]nce an insurer has incorrectly denied benefits and the policyholder files an action in dispute of that denial, the insurer cannot then abandon its position without repercussion.” Here, the insurer’s payment of the appraisal award…demonstrated that GeoVera [insurer] had abandoned its pre-suit coverage position that the claim was subject to the $1,000 sublimit for long-term water leakage.”) (internal citation omitted)

Why is the Carrier so Quick to Argue the Wear and Tear Exclusion?

Nicole Vinson | Property Insurance Coverage Law Blog | June 26, 2019

Chip Merlin posted about the Wear and Tear Exclusion just last month in Wear and Tear Exclusions Versus Depreciation For Resulting Damage To Worn and Torn Older Parts of a Structure. Explaining about wear and tear, Chip gave this example:

The judge made up his own example of ten old bolts giving way and then the rest of what the bolts failed to hold up, crashed and broke the rest of the old structure. The worn-out bolts may not be covered, but if you have the right ensuing loss provisions after the “wear and tear” clause, the rest of the loss is covered—even if the rest is old.

The older parts of the structure are the ensuing loss. They did not suffer a loss because they were worn out and broke. They suffered a loss because other parts of the structure broke from “wear and tear.” Those ensuing parts of the loss are depreciated on an actual cash value basis. If replaced, they are then valued at Replacement Cost.

This is such a hot topic because so many times we see the wear and tear policy language listed (often improperly) in a denial letter. If you are policyholder who receives a letter that says, here is a small payment or we are not paying your claim, it is not uncommon to see the wear and tear provision quoted in the list of “reasons.” Frequently this language is cut and paste from the insurance policy and looks very official. But does it really apply?

The distinction Chip pointed out above is very important, but carriers sometimes even list the wear and tear exclusion in cases where the cause of the damage was a peril like wind, fire, theft, or vehicle impact.

Javier Delgado of Merlin Law Group often reminds us to look at the policy language specifically written about the exclusions as will likely be language that says something similar to, “Exclusions… caused by:” and then a laundry list of reasons. The “caused by” requirement cannot be forgotten.

When a property with some age and bruises suffers any peril (we will use a hurricane as an example) the caused by language cannot be overlooked. That property invariably had some wear and tear to its roof before the hurricane winds impacted the property. This is very common.

Take a look around the building you are in and you will see signs of wear and tear. Look at your office and your own home. You will see the condition is likely not brand new. But this condition of the property did not cause the property to lose the roof in Hurricane Michael. The wind caused the damage to the roof.

When a sudden and accidental loss happens to your property that is not brand new, everything all together is not excluded because of a wear and tear exclusion in a policy.

And insurance companies contemplate that the property they are insuring is aged or will have some battle scars. Just look at the underwriting file. The premium may have been calculated, in part, based on the year of construction.

The condition of the property, and the wear and tear, is considered when the adjuster applies depreciation. Say it with me again. When wear and tear exists but is not the cause of the loss, wear and tear of the property is considered when depreciation is applied.

This analysis is taken further in Chip’s post about the ensuing loss and resulting loss issues.

The Insurance Coverage Law Center explained:

Wear and Tear was written into policies to let the insured know that the insurance is not for claiming things that reach their natural life span. Property insurance and a maintenance contract are very different. “The purpose of a wear and tear, marring and gradual deterioration is to exclude maintenance type loss that naturally occur over time… to eliminate insurance recovery in situations where claim is made on property, which has been damaged through normal use, abuse or has simple been ‘used up’.”

If you are a public adjuster, insurance agent or an insurance adjuster trying to wrestle with a hard to understand coverage provision and not make a wrong decision, Chip explained: Insurance is important. We defeat its purpose with over-broad use of exclusions.

So, to answer the question, why is this exclusion being used so often, it may very often be improperly cited as an exclusion. Remember to check the grant of coverage, the exceptions to the exclusions, and the ensuing loss and resulting loss coverage.

For more insight on why carriers may have listed the exclusion in your claim, take a look at the resources in FC&S Bulletins, their website, and Bill Wilson’s book, When Words Collide: Resolving Insurance Coverage and Claim Disputes.

And a quick note about the Insurance Coverage Law Center, (formerly FC&S Legal), it states that it,

[D]elivers the most comprehensive expert analysis of current legal and policy developments that insurance coverage attorneys rely on to provide daily actionable counsel to their clients.

The Insurance Coverage Law Center is part of the National Underwriter authoritative insurance portfolio developed more than 80 years ago. ICLC ensures attorneys practicing insurance coverage law, or business professionals wishing to keep apprised of the latest industry developments, have access to a single source of objective legal analysis, practical insights, and news for the insurance industry.

Today, our team of experts continues to provide objective insights and analysis, particularly in the area of policy interpretation, to meet the insurance law information needs of busy legal professionals working in private practice or in-house and representing either policyholders or insurance carriers.

Matching Endorsement Upheld as Modifying Policy to Exclude Coverage for Undamaged Material

Christina Phillips | Property Insurance Coverage Law Blog | June 1, 2019

The Eight Circuit Court of Appeals in Noonan v. American Family Mutual Insurance,1 recently upheld that the Minnesota Amendatory Homeowners Endorsement (“Endorsement”) excludes “matching.” The Endorsement provides that an insurer does “not pay to repair or replace undamaged property due to mismatch between damaged material and new material used to repair or replace damaged material.”

The insureds in Noonan sustained hail damage to their home. The matter proceeded to appraisal, wherein it was requested that the appraisers distinguish their award to two categories – one for replacing damaged shingles and another for replacing undamaged shingles that would not match. The panel entered a lump sum award, stating that “[t]his is a matching issue. Alternative products do not match current shingle on the roof.” Ultimately the appraisers clarified their award and reported the amounts attributable to damage and matching. American Family paid the part of the award attributable to damage but took the position that the policy did not cover the cost of matching. The insureds filed suit against American Family for breach of contract.

The policy issued by American Family included the Endorsement. The Endorsement, however, stated that it applied to “the Form,” but it did not expressly reference or state it applied to the insured’s policy. The district court concluded that Endorsement was ambiguous and granted judgment for the insureds.

On appeal, the Eight Circuit reversed the district court’s opinion holding that the Endorsement unambiguously applied to the policy. The Eight Circuit looked to the first page of the policy which stated that the Endorsement applied, and a physical copy was attached. And the Eight Circuit noted that the Endorsement’s failure to reference the policy was intentional as American Family argued. Rather than amending a provision in the policy, the Endorsement was a separate, independent part of the policy. The Endorsement covered a topic (matching), which the policy did not. The Eight Circuit concluded that the Endorsement explicitly and unambiguously applied, and American Family was not obligated to pay for damage attributable to matching difficulties.
1 Noonan v. American Family Mut. Ins., No. 18-1393, 2019 WL 2236092 (8th Cir. May 24, 2019).

Tennessee High Court Excludes Labor Costs from Insurer’s Actual Cash Value Depreciation Calculations

Michael S. Levine and Geoffrey B. Fehling | Hunton Andrews Kurth | April 24, 2019

The Tennessee Supreme Court has refused to construe an ambiguous definition of actual cash value to allow for deduction of labor costs as part of depreciation calculations where that subset of repair costs are not clearly addressed in the policy. Despite the split of authority nationwide, the Tennessee case presents a straightforward application of policy interpretation principles to a common valuation issue in first-party property claims.

In Lammert v. Auto-Owners (Mutual) Insurance Co., No. M2017-2546-SC-R23-CV (Tenn. Apr. 15, 2019), insureds brought a class-action lawsuit against their property insurer, Auto-Owners, alleging breach of contract. The plaintiffs each owned buildings damaged by a hail storm and had each submitted claims to Auto-Owners. Auto-Owners accepted the claims and determined that the losses would be determined on an actual cash value basis. In performing those valuations, Auto-Owners depreciated both the building materials and the labor costs associated with repairing the properties. The insureds challenged the labor cost depreciation. Auto-Owners moved to dismiss the lawsuit. In response, the insureds requested that the district court certify to the Tennessee Supreme Court whether, “[u]nder Tennessee law, may an insurer in making an actual cash value payment withhold a portion of repair labor as depreciation when the policy (1) defines actual cash value as ‘the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss,’ or (2) states that ‘actual cash value includes a deduction for depreciation?”’

In their briefing to the Court, the insureds asserted that to allow for depreciation of both materials and labor would defeat the purpose of indemnity, which is to make the insureds whole after the hail storm. In response, Auto-Owners argued that applying depreciation only to materials would result in a windfall to the insureds by leaving them in a better position than they were in before the loss (by receiving full value of non-depreciated labor costs). Given the policy’s lack of clarity as to whether depreciation should apply to labor costs, the Court sided with the insureds.

The Court discussed the split of authority among state and federal courts nationwide, but applied basic policy interpretation principles that undefined policy terms are to be construed according to their plain, ordinary, popular meaning and that ambiguous policy language must be construed against the insurer and in favor of coverage. The Court found that both parties presented plausible interpretations of the policies, neither of which explicitly stated whether labor expenses were depreciable when calculating actual cash value.

The Court recognized the principle under Tennessee law that the purpose of indemnity insurance is to reimburse and restore the insured to the position he or she was in before the loss. The Court also looked to the dictionary meaning of “depreciation,” which is “a reduction in value or price of something; specif[ically] a decline in an asset’s value because of use, wear, obsolescence, or age.” Despite Auto-Owners’ plausible interpretation that all components of repair costs, including labor, are subject to depreciation, the Court found that it is also reasonable that a homeowner would understand that depreciation would only be applicable to material goods that can age and experience wear and tear and that an insurer calculating actual cash value of repair costs would only apply depreciation to the physical materials that actually deteriorated. If Auto-Owners had wanted a more technical definition of depreciation that is not evident on the face of the policy, they had the burden of clarifying the policy to incorporate that meaning.

The Lammert decision applies bedrock contract interpretation principles to resolve ambiguous policy language. The decision is also interesting because it addresses a basic property valuation issue that is often disputed but rarely litigated because contested valuation issues that relate to the value or quantum of loss suffered are frequently resolved through the appraisal process, even though issues of policy interpretation and construction should be determined by a court. The concepts of market value, replacement cost, and actual cash value are relevant in nearly every property insurance claim, but despite their ubiquity, the applicable valuation method must be clearly set forth in the policy. Where there is ambiguity, it should be resolved in favor of the insured. This is especially true where, as in Lammert, the undefined term’s ordinary meaning conflicts with the insurer’s preferred technical or industry-specific meaning.