Tenants Occupying Insured Property Not Entitled to Coverage for Loss of Home by Fire Where Insured Did Not Reside In Premises – Court of Appeals Issues 2-1 Decision Holding Insurer Did Not Owe Coverage for Claim

This is an interesting insurance coverage decision issued by the Court of Appeals involving a claim for coverage involving a residential property destroyed by fire, which was not occupied by the insured.

In Null v. Auto Owners, et al.COA.Opinion.10.22.2013, a 2-1 decision (Judges Fitzgerald and O’Connell, Shapiro, J. dissenting), the Court of Appeals holds an insurer did not owe coverage on the basis of the “residency clause” in the policy.  The owner and insured of the house was not living in the house; in fact, he was living in Indiana.  The insurer had an Indiana address to which it was sending bills for the premiums.

The Plaintiffs in the underlying lawsuit occupied the house under a land contract.  The insurer paid two prior minor claims for damage due to a leaking roof in the past, even though the land contract arrangement had already been executed and the insured was not occupying the premises.  Thus, Plaintiffs argued the policy provided coverage and, in any event, even if the residency clause applied, the insurer had waived and/or was equitably estopped from denying coverage due to its apparent knowledge the home was not actually occupied by the insured and because it had paid the two prior minor claims during the time the plaintiffs were living in the home.  The trial court initially denied the insurer’s motion for summary disposition, but after holding a bench trial granted judgment in its favor.

This is a 2-1 decision with a notable dissent from Judge Shapiro.  The majority cites well-established Supreme Court precedent demonstrating the residency requirement in such a clause is mandatory and that an insured will not be entitled to coverage for lost, damaged or destroyed property due to fire if he or she does not actually occupy the insured premises.  The majority also notes ambiguity in the record as to whether the insurer actually had notice of the insured’s residency status and ruled that ambiguity favored the insurer.  The majority also ruled equitable estoppel could not apply to the claim because the elements had not been established.

Judge Shapiro dissents.  He argues there were questions of fact concerning whether Auto Owners knew or should have known the insured was not residing in the premises.  The fact it paid two prior claims and sent the bills to an out-of-state address was significant to establish the plaintiff’s waiver and estoppel arguments and those should have been addressed.  (Note, the trial court did not address the equitable estoppel argument even though it was raised by plaintiff below).

The fact this is a 2-1 decision (albeit unpublished), I would anticipate the plaintiffs will at least attempt to file an Application for Leave to Appeal in the Supreme Court.  The only possible avenue plaintiffs have for a consideration by the Supreme Court is the extent to which there were facts that might lead a trier of fact to assess the equitable estoppel argument.  Recall the issue was presented to the trial court but never thoroughly addressed; the trial court first ruled in plaintiff’s favor and denied the insurer’s motion for summary judgment, but then, ultimately granted the insurer judgment after holding a full bench trial.  There was no opinion or analysis of the plaintiff’s equitable estoppel argument.  The plaintiffs’ attorney filed a motion for reconsideration bringing this to the trial court’s attention (obviously intending to appeal), but the trial court simply denied reconsideration without addressing the argument.  Thus, although the majority gets the law right, Judge Shapiro at least has a tangible point about having a court of first instance(the trial court) at least analyze the claim.

For more information about this and other similar cases contact Carson J. Tucker, Chair of the Appeals and Legal Research Group at Lacey & Jones, LLP, a Birmingham law firm serving clients since 1912.  Mr. Tucker can be reached at (248) 283-0763.

Continuing its tradition of providing highly specialized and unique legal services to an exclusive clientele, Lacey & Jones, LLP, works with insurance companies and businesses to develop comprehensive insurance coverage strategies for all lines of coverage.  From the simplest review (second look) of an in-house counsel’s coverage determination to complete coverage analysis involving high-exposure, multi-party, multi-jurisdiction, multi-claim events, the firm is capable of assisting its clients in making valuable choices and advising them on the proper course of action.  The firm’s coverage counsel and litigation team is also capable of pursuing coverage determinations and indemnity or subrogation in courts by filing declaratory judgment actions or indemnity and subrogation actions, respectively.

Our attorneys have successfully navigated coverage cases in state and federal courts, involving multiple insurers, multiple claimants and multiple forums to arrive at favorable resolutions for our clients in eight figure exposure cases, including, but not limited to, environmental liability claims, construction claims, professional liability claims, catastrophic personal injury claims, and product liability claims.  Our coverage lawyers speak the language of insurers and understand the intricacies of policy coverage involving multiple insurers, multiple policy forms, and multiple layers and years of coverage.

    • Declaratory Judgment Actions
    • Coverage Analysis and Strategy
    • Property and Casualty Claims
    • General Liability Claims
    • Professional Liability Claims
    • Business Risk
    • Indemnity and Subrogation
    • Product Liability Claims
    • Construction Defect Claims
    • Government and Municipal Liability Claims
    • Workers’ Compensation Claims

RICO Not Applicable To Employee’s Workers’ Compensation Dispute and Claims Holds En Banc Panel of Sixth Circuit

In a significant opinion that is bound to be pushed up to the Supreme Court by the plaintiffs, the Sixth Circuit today issued an en banc decision reversing its previous holding in this case and overruling Brown v. Cassens Transport, 675 F.3d 946 (2012) (Brown II), in which the Court had previously allowed claims against employers and third-party administrators to proceed under the federal Racketeering Influenced and Corrupt Organizations (RICO) act, 18 U.S.C. sec. 1962(c).

The plaintiffs pursued a theory that through a conspiracy to defraud or otherwise bar the payment of workers’ compensation benefits, employers, third-party claims administrators and medical personnel (esp. doctors) cut off and/or denied claims for continuing workers’ compensation benefits.

The Sixth Circuit originally held the claims could go forward.  The defendants in this case moved for rehearing, en banc, so the entire Sixth Circuit could be impaneled to determine the viability of a RICO claim under these circumstances.

As the majority opinion points out, the Michigan Workers’ Disability Compensation Act provides for a complete system of review, including claims of alleged fraudulent denial of benefits, including appeals and review.  As the majority notes:  “The process for disputing benefits therefore contains multiple tiers of review that are designed to prevent benefits decisions from being tainted by fraud.”  Slip Op. at p. 6.

Further basis for the majority’s holding is that RICO has been interpreted to require damage to business or property interests, not personal injuries, including pecuniary losses therefrom.  Id. at 12.  The Court holds that alleged loss of workers’ compensation benefits to which the plaintiffs claim they were entitled are precisely the type of pecuniary loss of benefits arising out of personal injuries compensation for which is not allowed or recoverable by the RICO scheme.

The majority thereby rejected the reasoning in the Brown II case that workers’ compensation benefits, once decided, become a property right and are no longer pecuniary losses suffered as a result of personal injury.  Id. at p. 13.  As is foreshadowed in the beginning of its opinion, the Court here returns to its discussion that the Workers’ Compensation system is an intricate and complex set of bargains and trade offs between injured employees and employers that allows the employee to receive compensation for personal injuries arising out of and in the course of employment.  Id. at 14.  The Court concludes “racketeering activity leading to a loss or diminution of benefits the plaintiff expects to receive under a workers’ compensation scheme does not constitute and injury to ‘business or property'”.  Id. at 14-15.

The Court shores up its holding by reasoning that concerns about federalism are particularly strong where a collateral attack is made under federal law (here RICO) against a state administrative scheme created to supplant personal injury tort claims.  Id. at 15.  There is no clear statement by Congress in RICO of an intent to supplant state law administrative schemes.  Id.

Judge Clay writes a very balanced concurrence.  He sympathizes with the dissent’s position that the claims by employees they are being prevented from seeking fair adjudication might be cognizable under RICO.  Yet, ultimately, he agrees with the majority on the basis of the majority’s citation to the “clear statement rule”, i.e., the rule that Congress must speak with precision if it intends a statute to intrude upon subject matters of the law traditionally reserved to the states.  Judge Clay points out the growing number statements from the U.S. Supreme Court strengthening this notion and identifying its parameters.

Judge Nelson Moore, who authored the initial decision (see post below), dissents.  She believes the plaintiffs have stated an interest (or a damage to) an interest in property sufficient for their RICO claims to survive.

The opinion is attached here:  Jackson v. Sedgwick et al.09.24.13

My previous post provides some background context to these cases as well.  Sixth Circuit Allows RICO Claims by Workers’ Compensation Claimants

If anyone has questions about the consequences of this case, and potential future claims of this nature call Carson J. Tucker at Lacey & Jones, LLP, (248) 283-0763

New York’s Highest Court Holds Insurer Responsible Up to Policy Limits Where It Refused to Defend Attorney in Underlying Suit Alleging Professional Malpractice for the Lawyer’s Conduct Acting in His Capacity as a Principal of a Business and Insurer Could Not Invoke Policy Exclusions to Coverage

This is a rather unremarkable case from the point of view of the legal rules expressed by the opinion, but I wanted to highlight a few significant points for clients to consider when addressing the parameters of an insurer’s duty and the risk involved in not taking affirmative action if a dispute arises or, better yet, is anticipated.

The facts are somewhat peculiar, bringing into question a professional liability insurer’s duty to defend and indemnify claims regarding a business deal engaged in by its insured (an attorney) in which there appears no doubt the attorney was acting as a businessman and not an attorney in the endeavors that gave rise to the underlying claims.

The opinion, K2 Inv Group LLC v American Guarantee And Liability Ins Co, N.Y. Court of Appeals, No. 106, June 11, 2013, was released by New York’s highest court in June.  It demonstrates intolerance courts usually have where an insurer disclaims a duty to defend the insured in an underlying lawsuit and later claims it had no duty to do so because the policy would have precluded or excluded coverage.  There are some other important takeaways from the decision, as explained below.

The defendant in the underlying suit was an attorney.  He was part owner of a company (the borrower) that engaged in a loan transaction for $2.83 million with the plaintiffs in the underlying suit (the lender), which was comprised of two separate companies.  The lender’s loan was  to be secured by mortgages, the recording of which was to be the responsibility of the borrower.  However, the borrower failed to record the mortgages and subsequently defaulted on the unsecured loan.  The lenders filed suit against the borrower and its two principals, including the attorney.  Each of the lender companies included counts alleging legal malpractice against the attorney.

The attorney notified his malpractice insurer of the suit.  The policy limit was $2.5 million.  The insurer disclaimed a duty to defend the attorney and indemnify him for the claims against him, concluding, in part, the claims in the underlying suit were not “based on the rendering or failing to render legal services for others” and did not constitute the type of professional malpractice for which its policy provided coverage.  After the insurer issued its disclaimer, the plaintiffs made a settlement demand against the defendants in the underlying suit in the amount of $450,000.  After it was presented with the demand, the insurer again rejected it on the same bases that it had disclaimed a duty to defend and indemnify the attorney.

A default judgment in excess of the policy limits was entered in the underlying suit against the attorney.  All the remaining claims against the other parties were discontinued.  The attorney then assigned his claims against his malpractice insurer to the plaintiffs in the underlying lawsuit.  The plaintiffs stepped into the attorney’s shoes and sued the malpractice insurer alleging bad faith and breach of contract.

The malpractice insurer moved for summary judgment, invoking two exclusions in the professional liability policy.  The first excluded coverage of claims based on or arising out of, in whole or in part, the insured’s capacity or status as a member, partner, employee, etc., of a business enterprise.  The second exclusion applied to claims based upon or arising out of the alleged acts or omissions of the insured while engaged in or for a business enterprise.  The insurer argued the claims in the underlying suit against its insured had arisen out of his capacity or status as a business owner and out of his acts or omissions on behalf of the business.

The plaintiffs filed a cross-motion for summary judgment.  The trial court denied the insurer’s motion and granted the plaintiffs’ motion on the breach of contract claim, while dismissing the bad faith claim.

The trial court reasoned the insurer had breached its duty to defend and was therefore responsible up to the limits of its policy for the judgment that had been entered against the attorney in the underlying lawsuit.  On appeal, the court affirmed, holding that the exclusions relied on by the insurer were inapplicable.  Two justices dissented on the basis that questions of fact existed as to whether the exclusions would apply – essentially the dissent would have allowed the insurer to re-apply the provisions of the policy (here the specific exclusions) to the dispute despite is refusal to extend a defense to the attorney in the underlying suit.

The insurer appealed.  The New York Court of Appeals affirmed.  The Court held that where a liability insurer breaches its duty to defend (or disclaims that duty), it cannot later rely on any specific provisions of the policy’s coverage terms (or exclusions) to escape its duty to indemnify the insured for a judgment obtained against the latter.

The opinion restates some familiar principles that are adhered to in a number of jurisdictions.  First, the duty to defend is broader than the duty to indemnify (the duty embraces claims alleged in the underlying complaint no matter how baseless they are if there is any reasonable chance the insuring agreement provides coverage).  An insurer that either disclaims its duty to defend (without a reservation) and fails to affirmatively seek a declaration concerning that disclaimer (by filing a declaratory judgment action), puts itself at risk that it will be responsible, at least, for any good faith settlement entered into between the insured and the plaintiff / claimant in the underlying suit, or, worse, as in the instant case, for the amount of a judgment obtained in that suit up to the limits of its policy.

On this latter point, it should be noted that some jurisdictions would not even allow an insurer the benefit of invoking its policy limits where it has breached its duty to defend without reservation and without seeking a declaration of its rights.  This is because once the insurer essentially disclaims that the insuring agreement provides the basis of any assessment of claims lodged against its insured, it takes itself out of the contractual terms of that agreement and puts itself at the mercy of the law of the jurisdiction controlling the dispute.  So, if a jurisdiction allows a quasi-contractual claim – such as estoppel, unjust enrichment, or bad faith (or some equivalent) – against the insurer by the insured (or the plaintiff who has been assigned the latter’s claims against the insurer as in this case), the insurer could face liability that actually exceeds its policy limits.  In other words, the insurer could be liable for the total amount of the judgment entered against the insured or a settlement entered into by the parties.  Here, that would have resulted in a judgment that exceeded the insurer’s policy limits by $300,000.

On this point, the Court quoted from another opinion:

It is well settled that an insurance company’s duty to defend is broader than its duty to indemnify.  Indeed, the duty to defend is exceedingly broad and an insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage.  If, liberally construed, the claim is within the embrace of the policy, the insurer must come forward to defend its insured no matter how groundless, false or baseless the suit may be.

The duty remains even though facts outside the four corners of the pleadings indicate that the claim may be meritless or not covered…. Thus, an insurer may be required to defend under the contract even though it may not be required to pay once the litigation has run its course.

Further, the act of disclaiming a duty to defend without reservation and without seeking a declaration as to its rights under the policy also prevents the insurer from allowing a determination of coverage.  It may be, as the dissent in the lower appellate division noted, that a question of fact existed concerning whether the exclusions in the policy did indeed absolve the insurer of a duty to indemnify.  And, it appears from the facts presented that the attorney’s acts and conduct did fall within either or both of these exclusions.  The crucial point however was the underlying complaint did also allege acts of malpractice because of the attorney’s company’s responsibility to record the mortgages that secured the loans to his company.  Thus, the insurer could not rely on the obviousness of the true nature of the transaction, but rather its conduct was dictated by the allegations in the underlying complaint.

The Court noted it was indeed curious that the lenders in a loan transaction would have retained a principal of the borrower’s company to serve as an attorney to act as their lawyer, but that did not absolve the insurer from defending the claims alleging malpractice in the underlying lawsuit.

The Court does give some important guidance on ways in which an insurer may be able to yet challenge its failure to defend.  Noting the possibility that a court might absolve the insurer if it could be shown the underlying transaction implicated a reason to deny coverage based on public policy.  On this point, the Court noted that in the proper case an insured’s disclaimer of its duty to defend its insured in the underlying action may not bar it from asserting that its insured engaged in intentional wrongdoing for which it should not be provided insurance.

The court also alludes to the possibility that if the insurer can prove collusion between its insured and the plaintiffs in the underlying case to devise a plan whereby the latter could seek compensation from the former’s insurer, the insurer might have been able to escape its primary duty to defend.  However, no such facts were alleged or apparent from the case.

This case has been out for over a month and has gotten widespread attention.  Although, that may be the result of the forum from which it issued rather than its statements of law, which, again are fairly typical.  For insurers and business owners though there are takeaways from this case that teach important, simple lessons when approaching a claim for insurance arising out of any incident.

  • An insurer that disclaims a duty to defend without a reservation of its rights and without seeking a declaration as to its coverage obligations under the policy, cannot rely on the policy’s terms or exclusions, which might otherwise allow it to avoid coverage of the underlying claims if it has disclaimed its duty to defend.
  • When an insurer breaches its duty to defend, it is liable to the insured (and his or her assignee) for, at least, the full amount of the policy’s limits, to cover the liability resulting from the underlying lawsuit.
  • It is important to assert any defenses to coverage (terms and exclusions) in the policy at the outset, even while agreeing to provide a defense.
  • It may be wise to seek a second-look coverage opinion from able counsel to determine what strategies are advisable.  Here, the underlying complaint alleged malpractice.  Regardless of the suspicious nature of the underlying transaction involved, the insurer would have been wise to provide a defense under a reservation of rights and then seek a declaration of its rights from an independent source (usually the filing of an declaratory judgment action in court, although there may be alternate ways to resolve the dispute).
  • It is also advisable to consider whether any evidence of fraud or collusion might exist between the parties in the underlying dispute (as the court noted in this case, the transaction itself was rather curious and although it pointed out there was no evidence of it, the court made sure to note the possibility that intentional wrongdoing, fraud or collusion might have absolved the insurer from having to defend the claim).
  • Presumably, the insurer in this case could have paid the $450,000 settlement offered and would have been done with the case.  Not to say that concession is always advisable.
  • From a practical perspective, I believe the insurer was rightly skeptical of the nature of the transactions underlying this case; however, agressive claims handling rather than simply disclaiming a duty to defend may have been the wisest choice in this case.

If you would like more information about this case contact Carson J. Tucker, Chair of the Appeals and Legal Research Group at Lacey & Jones, LLP

Continuing its tradition of providing highly specialized and unique legal services to an exclusive clientele, Lacey & Jones, LLP works with insurance companies and businesses to develop comprehensive insurance coverage strategies for all lines of coverage.  From the simplest review (second look) of an in-house counsel’s coverage determination to complete coverage analysis involving high-exposure, multi-party, multi-jurisdiction, multi-claim events, the firm is capable of assisting its clients in making valuable choices and advising them on the proper course of action.  The firm’s coverage counsel and litigation team is also capable of pursuing coverage determinations and indemnity or subrogation in courts by filing declaratory judgment actions or indemnity and subrogation actions, respectively.

Our attorneys have successfully navigated coverage cases in state and federal courts, involving multiple insurers, multiple claimants and multiple forums to arrive at favorable resolutions for our clients in eight figure exposure cases, including, but not limited to, environmental liability claims, construction claims, professional liability claims, catastrophic personal injury claims, and product liability claims.  Our coverage lawyers speak the language of insurers and understand the intricacies of policy coverage involving multiple insurers, multiple policy forms, and multiple layers and years of coverage.

    • Declaratory Judgment Actions
    • Coverage Analysis and Strategy
    • Property and Casualty Claims
    • General Liability Claims
    • Business Risk
    • Indemnity and Subrogation
    • Product Liability Claims
    • Construction Defect Claims
    • Government and Municipal Liability Claims
    • Workers’ Compensation Claims

“Pay If Paid” Provision in General Contractor/Project Manager’s Contract with Subcontractor Upheld in Face of Claims of Fraudulent Concealment of Financial Status of Project Owner

In Walbridge Aldinger v. Iafrate Constr., et al.07.25.2013, the Michigan Court of Appeals upheld a “pay if paid” provision in the contractual agreement between the general contractor and project manager and a subcontractor.  Anticipating the pending difficulties with its subcontractors in light of the financial status of the project owner, the general contractor filed a declaratory judgment action in Oakland County, Michigan seeking a declaration concerning its liability to subcontractors under the contract, which contained a “pay if paid” provision – essentially guaranteeing payment to the subcontractors only if the general contractor / project manager were paid for the project by the project’s owner / developer.

After addressing several preliminary challenges regarding choice of law, choice of forum and venue (all of which were explicitly provided for in the contractual agreements and specified Oakland County, Michigan as the forum for any litigation (the project was in Indiana)), the Court of Appeals addresses the main substance of the underlying arguments.

The subcontractor filed a motion for summary disposition alleging that the “pay if paid” provision was void due to fraudulent concealment by the general contractor / project manager of the true financial condition of the project owner.  The argument was had the subcontractor known about the shaky financial status of the project’s owner / investors, it may not have entered into a contractual agreement in which it accepted payment only if the general contractor / project manager was paid by the site owner.

The Court of Appeals affirmed the trial court’s rejection of this argument.  In a commercial setting, contracting parties are expected to exercise that degree of diligence necessary to protect their own rights vis-a-vis the other parties.  The Court of Appeals points out there was ample opportunity and information to glean the financial status of the project owner without having to rely on any representations or alleged misrepresentations of the general contractor.  Indeed, the subcontractor explicitly agreed to the contract’s terms, which acknowledged it had considered the site owner’s solvency and ability to pay.  The explicit language of the contract prevented the subcontractor from arguing the contract contemplated only a “reasonable delay” in payment.  In fact, the contract shifted the entire risk of nonpayment to the subcontractor.  There was no question the parties agreed to transfer the risk of upstream default or insolvency.

In short, contracting parties are expected to (1) read and understand the contract’s provisions, and (2) perform due diligence in the event payment for services rendered is conditioned on payment of a superior contractor.

To be sure, the primary argument regarding forum and jurisdiction may very well have resulted in a different outcome as the courts in Indiana are inclined to favor the insured, even in commercial settings like the present, and have allowed movement away from entire risk shifting contractual agreements.

In any event, this is an interesting case which teaches important lessons to the advocates of contractors and subcontractors.