Battle of Experts Cannot Be Decided on Summary Judgment

Tred R. Eyerly | Insurance Law Hawaii | June 6, 2018

When two competing experts disagreed on the cause of the loss, the trial court erred in granting summary judgment to the insurer. Garcia v. Firs Community Ins. Co., Fla. App. LEXIS 4237 (Fla. Ct. App. March 28, 2018).

Garcia, the homeowner, discovered water damage in his home, allegedly due to a roof leak. Garcia notified his insurer, First Community Insurance Company. A forensic engineer, Ivette Acosta, was retained by First Community to inspect the property. After the inspection, coverage was denied.

The homeowner’s policy covered direct loss to property only if the loss was a physical loss. Loss caused by “”rain snow, sleet, sand or dust to the interior of a building was excluded unless a covered peril first damaged the building causing an opening in a roof or wall and the rain, snow, sleet, sand or dust enters through this opening.” Loss caused by wear and tear, marring, or deterioration was also excluded.

Garcia filed a complaint against First Community. The insurer moved for summary judgment arguing that the cause of the water intrusion through the roof was a combination of deterioration, tree branch abrasions, and construction defects. Acosta also found that the nails observed in the roof’s shingles created a direct path for water to penetrate the shingles, which was considered a construction defect.

Garcia opposed the motion for summary judgment and submitted a report by a professional engineer, Alfredo Brizuela, who also inspected the property. Brizuela found there was insufficient evidence to rule out that the damages were caused by hail impact or wind uplift damage caused by a one-time occurrence. He also opined the damage was not age-related or long term in nature. Instead, there was evidence that the damage was caused by high rain and/or wind. The trial court granted First Community’s motion and entered final judgment.

On appeal, it was noted that in ruling on summary judgment, the trial court may neither adjudge the credibility of the witnesses nor weigh the evidence. The court agreed with Garcia that the trial court erred in granting summary judgment in favor of First Community where the conflicting reports of the parties’ experts established that there was a genuine issue of material fact as to the cause of the loss. Given the conflict in the material evidence as to the cause of the loss, the trial erred in entering final judgment in favor of First Community.

Post-Menchaca: Is the Independent Injury Rule Dead or Alive?

Kay Morgan | Property Insurance Coverage Law Blog | June 17, 2018

Having undertaken to write about “all things Menchaca,” this month is a review of five cases post-Menchaca which contradict one another in deciding whether the independent injury rule is dead or alive. Looking at the first set of cases post-Menchaca, it appears that the answer to that question is a long way off.

In my last blog post, The Independent Injury Rule is Dead, the Fifth Circuit Court of Appeals in Aldous v. Darwin National Assurance Company, cited the April 13, 2018, USAA Tex. Lloyds Company v. Menchaca opinion and declared,

Menchaca repudiated the independent injury rule, clarifying instead that “‘an insured who establishes a right to receive benefits under an insurance policy can recover those benefits as ‘actual damages’ under the statute if the insurer’s statutory violations causes the loss of benefits.’”1

Aldous involved a legal malpractice suit with a multitude of issues, counterclaims and cross-appeals.2 The underlying suit concerned litigation over two trusts and following the finality of that litigation, Aldous’ client brought a malpractice suit against Aldous which triggered her professional liability insurer, Darwin’s involvement. Aldous was successful in the malpractice suit but then sued Darwin alleging that Darwin did not pay enough to fully cover the costs of her malpractice defense. Aldous alleged against Darwin breach of contract, breach of the duty of good faith and fair dealing and violations of the Texas Insurance Code, among others. The court found that Aldous’ Chapter 541 Texas Insurance Code claims were barred as a matter of law under Parkans International LLC v. Zurich Insurance Company3 because Aldous had not established an injury independent of the injury that would have resulted from a wrongful denial of policy benefits. Aldous appealed the results of her suit against Darwin and in particular, asked the Fifth Circuit to reverse Parkans. After finding that “Menchaca repudiated the independent injury rule” as quoted above, the Fifth Circuit wrote: “[p]ut simply, Parkans’s categorical bar does not hold up in the face of Menchaca.4

Subsequent to Aldous, the Amarillo Court of Appeals in Turner v. Peerless Indemnity Insurance Company,5 declared the opposite of the holding in Aldous by the Fifth Circuit. The Turner court held: “[t]he independent injury rule is alive and well, as reiterated by the Texas Supreme Court in its recent Menchaca opinion and recognized by us in Abdalla, 2018 Tex. App. LEXIS 3358, at *9-10.” Turner is the first appraisal case that has applied the April 13, 2018, Menchaca opinion. Following appraisal, as is the routine with all insurance companies, Peerless moved for summary judgment on all of Turner’s claims and the court granted it. The Amarillo Court of Appeals affirmed the trial court’s dismissal by summary judgment of Turner’s breach of contract and extra-contractual claims. In affirming the dismissal of the extra-contractual claims, the court determined that Turner had failed to provide any evidence of an independent injury upon which to base his extra-contractual claims aside from the damages represented by supposedly lost policy benefits. In affirming the trial court’s granting of summary judgment on Turner’s extra-contractual claims, the Turner court made an extensive review of Menchaca’s discussion of the independent injury rule.6 The court rejected Turner’s contention that the damages in the policy benefits he lost due to Peerless’ statutory violations can be recovered under the bad faith statute, and instead found:

As can be seen, his [Turner’s] argument remains focused on the benefits recoverable under the policy, which benefits have already been paid. But, under what we perceived to be Menchaca’s explanation of the independent injury rule, his injury cannot be so predicated. It must be independent of what he claims he lost ‘out on’ under the policy. Thus, the decision to grant summary judgment upon the extra-contractual claims urged by [Peerless] has the support of at least one ground, and we overrule the second issue.7

Thus, the Amarillo Court of Appeals in Turner finds that the independent injury rule is alive and well. The same panel of Amarillo judges in Turner wrote the opinion in Abdalla, another appraisal case, and in relevant part, stated:

The need of an independent injury to support extra-contractual causes of action was reaffirmed in Menchaca. After discussing its own precedent, the Supreme Court first reiterated that ‘an insured can recover actual damages caused by the insurer’s bad faith conduct if the damages are separate from and…differ from benefits under the contract.’” [Cites omitted.] Then, it observed that damages were recoverable ‘only if [they] are truly independent of the insured’s right to receive policy benefits.’8

Two more opinions citing Menchaca were handed down on June 6, 2018: another Fifth Circuit opinion, Certain Underwriters at Lloyd’s of London v. Lowen Valley View,9 and another Texas Supreme Court case, State Farm Lloyds v. Fuentes.10

In Lowen Valley, the insurer brought a declaratory judgment action that it owed no benefits under a commercial property insurance policy and the insured, Lowen Valley, counterclaimed for declaratory judgment, breach of the insurance contract, and violations of the Texas Insurance Code. The district court granted summary judgment in favor of the insurer on all claims and the Fifth Circuit affirmed. In reaching that decision, the Fifth Circuit found that Lowen Valley’s Texas Insurance Code claims were based on unpaid coverage benefits rather than some independent injury and when Lowen Valley’s breach of contract claim fell, so did its extra-contractual claims. The appellate court wrote:

See USAA Tex. Lloyds Co. v. Menchaca, 14-0721, 2018 WOL 1866041, at *5 (Tex. 13, 2018) (“[A]n insured cannot recover any damages based on an insurer’s statutory violation if the insured had no right to receive benefits under the policy and sustained no injury independent of a right to benefits.”).11

The final case this blog, State Farm Lloyds v. Fuentes, was a Hurricane Ike suit and following a trial, the trial court disregarded two jury’s findings that the Fuenteses had breached the insurance contract as well as State Farm and that the Fuenteses had breached it first. The trial court rendered judgment for the Fuenteses, awarding them $18,818.39 for amounts owed under the policy, $27,000 for mental-anguish damages, $7,527 in statutory penalties, and more than $300,000 in attorney’s fees. State Farm appealed. Houston’s Fourteenth Court of Appeals affirmed the trial court judgment. State Farm appealed again. The Texas Supreme Court held:

[We] conclude simply that the considerations that led us to remand for a new trial in Menchaca similarly dictate that State Farm’s first issue—whether the trial court properly disregarded some of the jury’s findings—should be remanded to the court of appeals for reconsideration in light of MenchacaSee TEX. R. APP. R. 60.2(f).12

Interestingly, both Fuentes and Menchaca involved a trial court’s disregarding specific jury findings in reaching their judgments and both have been remanded for new trial. In Fuentes, the trial court disregarded two jury findings that Fuentes breached the contract and breached it first before State Farm, who was also found to have breached the contract. The Fuentes court remanded the suit to the court of appeals in light of Menchaca. In Menchaca, the trial court disregarded jury question No. 1 in which the jury found that USAA had not failed to comply with its obligations under the policy. The supreme court found that that the trial court erred in disregarding the jury’s answer to question No. 1. The court also held that a plaintiff does not have to prevail on a separate breach of contract claim to recover policy benefits for a statutory violation. Menchaca was remanded to the trial court for a new trial.

In addition to these two appeals, more new cases relying on Menchaca will continue to trickle down and, no doubt, that trickle will bring more new interpretations. It is still too early to definitively declare whether the independent injury rule is dead or alive.
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1 Aldous v. Darwin National Assurance Co., No. 16-10537 (5th Cir. May 11, 2018)(emphasis added).
2 See Aldous v. Darwin National Assurance Co., 851 F.3d 473 (5th Cir. 2017).
3 Parkans International LLC v. Zurich Ins. Co., 299 F.3d 514 (5th Cir. 2002).
4 Id. (emphasis added).
5 Turner v. Peerless Indemnity Ins. Co., 2018 WL 2709489 (Tex. App.—Amarillo June 5, 2018).
6 Id. at 2018 WL 2709489, at ** 3-5.
7 Id. at 2018 WL 2709489, at *5.
8 Abdalla v. Farmers Ins. Exch., 2018 WL 2220269, at * 5 (Tex. Civ.—Amarillo, May 14, 2018).
9 Certain Underwriters at Lloyd’s of London v. Lowen Valley View, LLC, No. 17-10914 (5th Cir. June 6, 2018).
10 State Farm Lloyds v. Fuentes, No. 16-369, 2018 WL 274919 (Tex. June 6, 2018).
11 Lowen Valley at 8. (emphasis in the original).
12 Fuentes, 2018 WL 2749719, at *2.

California Supreme Court Rights the “Occurrence” Ship: Unintended Harm Resulting from Intentional Conduct Triggers Coverage Under Liability Insurance Policy

Scott S. Thomas | Payne & Fears | June 6, 2018

SUMMARY

In a ruling that bodes well for policyholders, the California Supreme Court provides much-needed clarity on the question of when a so-called “intentional act” may give rise to insurance coverage under a liability insurance policy. In Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., Case No. S23765 (Cal. June 4, 2018), the Court holds that an employer’s potential liability for negligent hiring, after its employee allegedly abused a 13-year old student, is the result of an “occurrence” and is thus covered under the employer’s liability insurance policy.

COURT OPINION

The court’s opinion dispels the misguided notion that an intentional act resulting in unintended harm is never an “occurrence” and can never trigger coverage. What matters, according to the Court, is that, from the insured’s point of view, the consequences of its conduct are “unexpected, unforeseen, or undesigned” – even if the conduct is intentional. And in a concurring opinion, Justice Liu rightfully questions the legitimacy of the notion that intentional conduct cannot trigger coverage, even when it produces an unintended result, unless, in the words of a 1989 appellate court decision, some “additional, unexpected, independent, and unforeseen happening occurs that produces the damage.” As Justice Liu explains, this intervening “happening” may be something as simple as the insured’s mistaken belief that he was acting in self-defense, or that the victim had consented to the insured’s conduct. This much-needed clarification restores vitality to the fundamental principle that injuries are “accidental” when they are “unexpected, unforeseen, or undesigned,” regardless of their cause.

KEY TAKEAWAYS

This ruling will apply in many contexts: For example, contractors who “intentionally” build things; competitors who “intentionally” disparage another’s product; employers who “intentionally” hire employees who do bad things. The Court’s decision restores the law’s fidelity to fundamental principles enunciated in the seminal California “occurrence” case: Gray v. Zurich, 65 Cal. 2d 263 (1966). And it ought to dampen insurers’ enthusiasm for denying claims on the spurious ground that the insured’s conduct – even though it resulted in bodily injury or property damage that the insured did not expect or intend to cause – was “intentional.”

How To Lose the Right To Arbitrate In One Easy (Mis)Step

Jonathan Bank and Matthew Murphy | Locke Lord LLP | May 25, 2018

The recent decision of Nielsen Contracting, Inc. v. Applied Underwriters, Inc., 232 Cal.Rptr.3d 282 (Cal. App. 4 Dist. 2018) provides a cautionary tale of the failure to comply with insurance regulatory filing requirements of collateral agreements to insurance policies.

Nielsen Contracting, Inc. and T&M Framing, Inc. (collectively Nielsen) signed a “Request to Bind” with Applied Underwriters, Inc. and Nielsen was issued a worker’s compensation policy by an Applied subsidiary. Nielson also signed a separate Reinsurance Participation Agreement (RPA) with another Applied subsidiary, which included an arbitration provision and a delegation clause that granted the arbitrator the authority to rule on disputes concerning the enforceability of the arbitration provision. This language is customarily construed by the courts as permitting the arbitrator to determine enforceability of arbitration agreements – but not in this case.

In 2016, the California Insurance Commissioner issued an administrative decision in a case involving a different insured that had challenged the same insurance program offered by Applied. The Insurance Commissioner found that the RPA was void as a matter of law for various reasons, including that it had neither been filed nor approved by the Insurance Department.

In 2017, Nielsen filed an action against Applied and its subsidiaries, alleging the collateral agreements to the policy contained a requirement to arbitrate that was neither filed with nor approved by the California Insurance Department.

The defendants moved to compel arbitration, but the court agreed with Nielson that the court must first resolve Nielson’s challenge to the enforceability of the delegation clause, adding:

The delegation and arbitration provisions qualify as collateral agreements which modify the obligation of the underlying CIC [insurance] policy that should have been attached to the original CIC policy as endorsements and filed with the Insurance Commissioner for approval. Because they were not filed and approved, they are unenforceable as a matter of law pursuant to [section] 11658 and [Regulations section] 2268.

Id.

The Court of Appeals held that the court, and not the arbitrator, should rule on the enforceability of the delegation clause, noting that, although the general rule is that courts will decide challenges to the validity of an arbitration clause unless the parties have “clearly and unmistakably” agreed to delegate the issue to the arbitrator (which Applied did in a separate agreement but failed to file with the Department), the “court is the appropriate entity to resolve challenges to a delegation clause nested in an arbitration clause when a specific contract challenge is made to the delegation clause.” Id. at 289-90.

In doing so, the Court of Appeals rejected the defendants’ contention that the lower court could only rule on the delegation clause if the challenge to the delegation clause was different than the challenge to the RPA or the arbitration clause. Instead, Nielsen had made a “specific, substantive challenge” to the delegation clause that was separate from its challenge to the arbitration clause, and therefore it was proper for the court to rule on the challenge of the enforceability of the delegation clause.

Having reached this conclusion, the Court of Appeals agreed with the lower court’s finding that the provisions of the collateral agreements were unenforceable because they had not, as required, been filed with the Insurance Department.

This case presents a cautionary tale to insurers that where insurance policy forms are required to be filed and approved by the applicable insurance department, the insurers should make sure that any collateral agreements be appended to the policy and subjected to the filing and approval requirements. If not, the insurer may well lose the right to arbitrate the dispute – in one easy (mis)step.

What is a Collapse? Crumbling Concrete Case is Catalyst for Coverage Query Certified to State Supreme Court

Verne Pedro | Property Insurance Coverage Law Blog | May 29, 2018

Recognizing the public policy implications of an unsettled, recurring coverage issue involving crumbling concrete foundations in thousands of Connecticut homes, U.S. District Court Judge Stefan Underhill recently certified the following insurance coverage question to the Supreme Court of Connecticut:

What constitutes a “substantial impairment of structural integrity” for purposes of applying the “collapse” provision of this homeowners’ insurance policy?1

The situation in Karas is one shared by approximately 34,000 homeowners whose foundations were built with concrete from the J.J. Mottes Concrete Co. (“Mottes”). Mottes concrete contains a mineral called pyrrhotite. Over time the iron sulfide in the pyrrhotite reacts with oxygen and water, causing the concrete to expand, crack and turn into rubble.

In October 2013, the Karases discovered their basement walls were deteriorating in the manner typical of Mottes concrete. On November 15, 2013, they reported a claim to their homeowners’ insurer. The insurer denied the claim the same day, asserting the loss described was “deterioration” and therefore not ocvered under the policy.

On December 11, 2013, the Karases sued the insurer, seeking coverage for their foundation as a covered “collapse” under Connecticut law. They alleged it was only a question of time until their basement walls fell in due to exterior pressure from the surrounding soil.

The Karases’ policy contains familiar language pertaining to collapse events:

Collapse. We insure for direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following:

* * * * *

b. Hidden decay;

c. Hidden insect or vermin damage;

d. Weight of contents, equipment, animals or people;

e. Weight of rain which collects on a roof; or

f. Use of defective material or methods in construction, remodeling or renovation.

* * * * *

Collapse does not include settling, cracking, shrinking, bulging or expansion.

The Karases relied on the material-impairment standard articulated in an earlier Connecticut Supreme Court case, which held that the term collapse in a homeowners’ policy was ambiguous if not defined, and any “substantial impairment of structural integrity” of a building was covered.2While the Beach decision rejected the argument that “collapse” requires a sudden and complete falling in of a structure,” it did not define the parameters of “substantial impairment of structural integrity.”3

Judge Underhill explained in the Karas Certification Order that he applied the Beach standard in other rulings on concrete-collapse cases. For instance, in Roberts v. Liberty Mutual Insurance Company, Underhill interpreted Beach to require that a ‘collapse’ (i.e., a substantial impairment of structural integrity) must be proved by evidence that a building “would have caved in had the plaintiffs not acted to repair the damage.”4

Judge Underhill also noted his belief that the standard enunciated in Beach is relatively clear. Nevertheless, on these facts, and because this “unsettled question of state law raises important issues of public policy,” and is “likely—indeed, almost certain—to recur,” Judge Underhill decided at this juncture to seek further guidance from the Connecticut Supreme Court.

The Judge further wrote:

Connecticut’s highest court should have the opportunity to decide whether my interpretation of Beach was correct …. Determining the extent to which the substantial loss should fall on homeowners or on their insurers entails value judgments and important public policy choices that the Connecticut Supreme Court is better situated to make.

There are currently a dozen or more federal lawsuits pending along with over forty crumbling concrete cases in state court. It will be interesting to see how the Connecticut Supreme Court resolves this unsettled issue of policy construction and insurance law.
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1 Karas v. Liberty Mutual Ins. Co., No. 3:13-cv-01836, 2018 WL 2002480 (D. Conn. April 30, 2018).
2 Beach v. Middlesex Mutual Assurance Co., 205 Conn. 246, 252 (1987).
3 Id.
4 Roberts v. Liberty Mutual Ins. Co., 264 F. Supp. 3d 394, 410 (D. Conn. 2017); see Sansone v. Nationwide Mut. Fire Ins. Co., 47 Conn. Supp. 35, 39 (Conn. Super. Ct. 1999)(observing that whether a plaintiff has proven a substantial impairment is a question of fact).