Insurance Coverage Newsletter
You know, it's almost time to turn back the clock. That's right, the Supreme Court's back in session. - Jay Leno, American Comedian.
Most of us in the South look forward to autumn not because of the cooler weather or beautiful foliage, but because it brings us some great college football. And in the midst of the college rivalries, the United States Supreme Court began its 2010 term of court on Monday, October 5th. While it will never replace the following of the Clemson vs. South Carolina game, GWB will be following the court's docket this year.
The advent of the new Supreme Court term is a good time to look backward, as well. In this issue of GWB's Insurance Coverage newsletter, we feature eight cases which we hope will be of interest to you as insurance carriers, agents and independent adjusters. In keeping with our new format, the cases are classified by jurisdiction and include a topic summary, so you can read them all or only those that pertain to your area of expertise. Our feature article summarizes the South Carolina Supreme Court's decision in Mitchell v. Fortis Insurance Company. As well as discussing South Carolina law on bad faith denial of benefits, this case changed South Carolina law with regard to punitive damages. The other cases deal with topics as diverse as construction of a policy's "coverage territory" in the context of the abuses at Abu Ghraib prison in Iraq to several cases interpreting what constitutes an "occurrence" under various policies, including a case finding that use of a gun is an inherently intentional act.
We hope that you'll find this newsletter useful and that you'll give us a call or send us an email if you have any questions about the cases we reviewed or any other matter of insurance law. We also wish your favorite college team a successful season - so long as it isn't playing ours!
SOUTH CAROLINA - BAD FAITH
In a unanimous opinion, the South Carolina Supreme Court affirmed in part and reversed in part a bad faith verdict for an insured in the amount of $150,000 in actual damages and $15 million in punitive damages. In Mitchell v. Fortis Insurance Co., No. 26718, (S.C.Sup.Ct. September 14, 2009) (Shearouse Adv.Sh. No. 40 at 28), the insured purchased a health insurance policy (not governed by ERISA) following application in which he denied ever having been diagnosed or treated for a immune deficiency disorder. Approximately a year later, while attempting to donate blood, the insured was informed for the first time that his blood tested positive for HIV. After receiving this information, he saw his family doctor who erroneously dated the visit in the insured's records to reflect a date one day prior to the insured's heath insurance application. The insurer, believing this record to be evidence of application fraud, denied the claim and rescinded the policy.
Although the insured, his mother, his health care providers and, ultimately, an attorney attempted to convince the insurer that the single medical record it based its denial upon was erroneous and the claim valid, the insurer continued to deny the claim. After suit was filed, the insurer reinstated the policy and began affording the insured benefits. However, the insured was allowed to introduce evidence that the decision to deny the insured's claim was made at a referral committee meeting at which forty-six claims were considered during the course of the two-hour meeting. The insured argued that the rescission was made on an approximately three-minute review. He also argued that the insurer failed to note its phone conference with the insured's health care provider and twice sent him illegible copies of an internal document which acknowledged that the insurer's investigation had revealed no evidence of diagnosis or treatment of HIV prior to the issuance of the policy.
The South Carolina Supreme Court summarily dealt with issues concerning the admission of unfavorable evidence against the insurer, holding that evidence of the number of cases reviewed in the referral committee meeting, "post-claim underwriting" investigation, the insurer's litigation conduct, the value of the insured's free medical treatment and future medical expenses and the insured's risk of death without appropriate medical treatment was admissible. Of most concern to insurers in this list of evidence deemed admissible, is the evidence of the insurer's conduct following the initial rescission of the policy. The court held that evidence of the insurer's conduct in connection with an appeal of the rescission was probative based on its relevancy to the bad faith cause of action and that the insurer had waived any prejudice by (1) repeatedly emphasizing its own "good act" of reinstating the policy following what it termed a "temporary" rescission and (2) arguing that the insured was negligent in failing to submit additional information for review.
The majority of the opinion constitutes an important decision by the South Carolina Supreme Court on the issue of punitive damages. Based on an actual verdict of $150,000, the insurer argued that the $15 million punitive damage verdict violated South Carolina law and the United States Constitution in its excessiveness. The Court had previously held that courts reviewing the appropriateness of punitive damage awards must weigh both the Gore (BMW of North America v. Gore, 517 U.S. 559 (1996)) and Gamble (Gamble v. Stephenson, 305 S.C. 104, 406 S.E.2d 350 (1991)) factors. In Mitchell, the Court clarified that the Gore factors are determinative and that the Gamble factors are relevant only where they add substance to the Gore factors.
In its review of the punitive damages verdict, the Court held that ample evidence supported the finding that the insurer's conduct was reprehensible. In connection with a comparative penalty analysis, it acknowledged that the ratio of punitive damages to actual damages in insurer bad faith cases in South Carolina was traditionally low, but held that nothing in either the state or federal constitution required a low ratio where the evidence of reprehensibility was so great.
The most significant aspect of the punitive damages review was the Court's analysis of the ratio factor. Citing the United States Supreme Court opinion in TXO Production Corp. v. Alliance Resources, 509 U.S. 443 (1990), the South Carolina court held that it was not limited to review of the ratio of actual damages to punitive damages, but could consider the "potential harm to the insured" to punitive damages. Thus, instead of comparing the punitive damage award to the jury's verdict of $150,000, the court compared it to the present value of cost for the minimal evaluation and treatment of HIV over the insured's lifetime - $1,081,189.40. While the court was forced to conclude that, even taking into account the potential harm to the insured, the $15 million punitive damages verdict exceeded due process, it merely remitted the verdict to $10 million. That verdict resulted in a ratio of 9.2 to 1, if compared to the "potential harm" figure of $1,081,189.40.
* This opinion is important to insurers on many levels. First, it is a reminder that South Carolina courts will allow the admission of evidence of the internal processes used to evaluate claims. Not only will the court admit the insurer's records, the court will allow evidence of what the insurer chose not to document. Second, the insurer's conduct following the initial decision to deny the claim and rescind the policy was admitted, and insurers should be conscious that their actions will continue to be scrutinized post-denial unless protected by a valid privilege. Third, the South Carolina court's willingness to look beyond the actual damage award, which even it deemed "substantial," and consider the "potential harm" to the insured in analyzing the ratio of punitive damages is troubling and may not comport with federal guidelines. We are not aware at this time whether the parties will seek federal review of this decision.
For a copy of this case, click here.
The Fourth Circuit upheld a Virginia district court's grant of summary judgment to the insurer in a case involving whether claims of prisoner abuse at Iraq's Abu Ghraib prison were covered by the insured's umbrella liability policies. In CACI International, Inc. v. St. Paul Fire and Marine Insurance Co., No. 08-1885, slip op. (4th Cir. May 14, 2009), CACI, which held contracts with the United States government to provide screening and interrogating of detainees at Abu Ghraib, was sued by several detainees for alleged torture and abuse at the prison. The insurer denied coverage and CACI brought a declaratory judgment action to determine its rights under the policies. Affirming the district court's summary judgment, the Fourth Circuit held that the policy limited coverage to covered injury or damage caused by events which occur in the "coverage territory" which was further defined to include only the United States, its territories and possessions, Canada and Puerto Rico. Since the alleged abuse of Abu Ghraib's prisoners took place in Iraq, the claims fell outside the policies' coverage. Further, allegations of negligent hiring and supervision did not specify that the hiring or supervision took place within the coverage territory and, even if they had, the Fourth Circuit rejected a causal test, explaining that it "would create a windfall for the insured and render the insurer responsible for a liability for which it had not contracted." Id. at 6 (citation omitted). "If domestic policies could be stretched to this extent, global policies would become superfluous and territorial coverage limitations would lose their meaning." Id. at 6.
CACI argued that an exception to the coverage territory limitation for "the activities of a person whose home is in the coverage territory, but is away from there for a short time on your business," the "short time exception," applied to restore coverage. The Fourth Circuit found that the short time exception was not ambiguous and could not be applied to the alleged facts of the Abu Ghraib prison cases which alleged a pattern of activities that spanned several years. CACI also argued that it was possible that one of its employees involved in the alleged abuse was only in Iraq for a short time, creating the possibility of coverage under the policy. The court rejected this argument, noting no such allegations in the complaints and declining to extend coverage on such a remote possibility.
* Opinions construing "coverage territory" are rare, and this one should be favorable to insurers faced with a dispute over their limits. Although the policy did not expressly set forth such limitations, the Fourth Circuit held that domestic policies cover only damages that occur within the domestic coverage territory, regardless of whether the claimant alleged wrongful conduct that occurred within the coverage territory but resulted in damages outside it.
For a copy of this case click here.
The Illinois Supreme Court addressed the burden of proof on the issue of number of occurrences and adopted a "time and space test" for determining whether an event resulted in a single or multiple occurrences in Addison Insurance Co. v. Fay, 232 Ill.2d 446, ___ N.E.2d ___ (2009). The case involved the tragic deaths of two boys in a water-filled sand pit. The boys' families sued the property owner and ultimately settled for the limits of the owner's liability insurance, recognizing the there was a dispute over whether there was a single or multiple occurrences. The property owner's policy contained a $1 million per occurrence limit and a $2 million aggregate limit. The insurer brought a declaratory judgment action to determine whether its policy limits were capped at the "per occurrence" limit or the aggregate limit.
The Illinois Supreme Court first held that the burden of proof on the issue of the number of occurrences rests with the insurer, characterizing the insurer's effort to advance the per occurrence limit as a policy limitation on which insurers traditionally bear the burden of proof. Next, the court addressed a method by which it could determine whether the events surrounding the boys' deaths constituted one or two occurrences. Declining to construe the policy's definition of "occurrence," the court discussed the applicability of two competing tests: the "cause test," which holds that all injuries arising from one cause should be considered as parts of a single occurrence, and the "time and space test," which holds that multiple injuries should be considered as a single occurrence only where they are so closely linked in time and space that the average person would consider them to be a single occurrence. The court held that in cases of "active negligence," the "cause test" was appropriate; but for cases alleging "negligent omission," such as the case before the court, the "time and space test" was appropriate. Applying the "time and space test" to the facts of the case, the court held that the insurer had failed to establish how closely in time the two boys had become trapped in the sand pit. Thus, the insurer did not meet its burden of proof and the deaths of the boys were considered to be multiple occurrences subject to the policy's $2 million aggregate limit.
* This opinion should prompt insurers to closely investigate losses with potentially multiple occurrences. The court not only engaged in a fact-intensive analysis to determine whether the death of two boys was a single or multiple occurrence, it placed the burden on the insurer to present facts supporting a single occurrence.
For a copy of this case, click here.
The United States District Court for the District of South Carolina held that a South Carolina insured who shot a Colorado resident during the course of an altercation in Colorado was not entitled to a defense and indemnification under his homeowner's policy in State Farm Fire and Casualty Insurance Company v. Reed, No. 7:07-2958, slip op. (D.S.C. March 19, 2009). Distinguishing cases involving self-defense, the court held that the act of shooting someone is intentional, not accidental, and therefore not an "occurrence" under the policy. It further held that the insured's shooting of the claimant "cannot be the accidental cause of [the claimant's] bodily injury 'when it is so inherently injurious that it cannot be performed without causing the resulting injury.'" Id. at 4 (citing Manufacturers and Merchants Mut. Ins. Co. v. Harvey, 330 S.C. 152, 161, 498 S.E.2d 222, 227 (Ct.App. 1998)). Finally, the court held that the intentional act exclusion was applicable, finding that the act of shooting a gun at the claimant necessarily resulted in the injuries the claimant suffered. The court granted summary judgment to the insurer and held that the claim against the insured was outside the coverage of the homeowner's policy.
* This opinion finally provides some acknowledgment in South Carolina for the argument that assault with a gun is inherently intentional, not accidental, for purposes of determining liability coverage. However, expect insureds with savvy counsel to argue that any shooting was an act of self-defense to avoid exclusion of coverage.
The United States District Court for the District of South Carolina upheld the validity of a sexual abuse exclusion in a homeowner's policy in Banker's Insurance Company v. Russell, 2:08-2061, slip op. (D.S.C. April 28, 2009). A lawsuit alleging sexual abuse was brought against the insured and her husband, alleging that the husband engaged in the sexual molestation of a minor at the insured's residence and that the insured was negligent in failing to warn or protect the minor based on her knowledge of her husband's sexual propensities and the facts that he had twice been convicted of child sexual abuse and was a registered sex offender. The insured argued that she was entitled to coverage because the complaint against her alleged negligence, not intentional acts, and constituted a covered occurrence. However, the court held that a sexual abuse exclusion which excluded any damages arising out of sexual molestation, physical or mental abuse expressly included damages negligently inflicted by the insured. Therefore, the court held that the policy provided no coverage to either the insured or her husband arising out of the husband's alleged sexual abuse of minors.
* The South Carolina District Court enforced a sexual abuse and molestation exclusion in a homeowner's policy. While such exclusions are not standard, this decision, which validated exclusion of even negligent conduct, suggest that insurers should consider making sexual abuse and molestation exclusions standard in homeowners' and CGL policies.
Answering certified questions posed by the United States District Court for South Carolina, the South Carolina Supreme Court determined that trademark infringement could constitute a covered "advertising injury" as defined in many CGL policies using ISO forms or similar language. Super Duper Inc. v. Pennsylvania Nat'l Mut. Cas. Ins. Co., Op. No. 26717 (S.C. Sup. Ct. filed September 14, 2009) (Shearouse Adv. Sh. No. 40 at 14). Specifically, the Court held that trademark infringement qualifies as an injury arising out of the offense of "misappropriation of advertising ideas or style of doing business." It held that the term "misappropriation" was not limited to common law misappropriation but was expansive enough to include trademark infringement. It further held that a trademark can constitute an advertising idea or a style of doing business. Analogizing a trademark to an advertising slogan, the court also held that trademark infringement qualifies as an injury arising out of the offense of "infringement of copyright, title or slogan." Building on the idea of a trademark as an advertising idea, the court held that trademark infringement qualifies as an injury arising out of the offense of "use of another's advertising idea in your advertisement." Finally, the court held that while the term "trade dress" refers to a product's packaging, a trademark may be an element of a product's overall trade dress. Accordingly, it held that trademark infringement qualifies as an injury arising out of the offense of "infringing [upon] another's copyright, trade dress or slogan in your advertisement."
* The South Carolina Supreme Court has rarely had an opportunity to address coverage of advertising injury outside allegations of defamation and invasion of privacy. It is notable that it broadly construed the coverage to include violations of trademark and trade dress in connection with an insured's advertisement.
For a copy of this case click here.
The South Carolina Supreme Court further altered the circumstances under which the duty to defend is triggered in City of Hartsville v. South Carolina Municipal Insurance & Risk Financing Fund, Op. No. 26625 (re-filed May 18, 2009). In this case, a Hartsville landowner seeking to develop and sell land designated a National Historic Landmark by the National Park Service, sued the City, among others, for negligent misrepresentation and inverse condemnation for allegedly frustrating his attempts to develop and sell the property. The City tendered the suit to its general liability insurer which undertook its defense and obtained summary judgment as to the negligent misrepresentation claim. The insurer then withdrew its defense based on an exclusion applicable to the remaining inverse condemnation claim. The City, funding its own defense, moved for and was granted summary judgment as to the inverse condemnation claim, but the landowner argued that he had a conspiracy claim against the City, though it had never been pled, and the trial court specifically denied summary judgment to the City on the unpled conspiracy claim. Later, the trial court dismissed the City as a defendant citing sovereign immunity as a basis for dismissal of the conspiracy claim.
The City brought an action against the insurer to recoup its defense costs incurred after the insurer withdrew its defense. The trial court held that the insurer owed a continuing defense and the Supreme Court upheld the decision. Though the conspiracy claim was never pled, either in the original complaint or in amended complaints, the court held that the insurer was on notice of allegations which could be read to assert a conspiracy. Moreover, the court held that while the object of the conspiracy was uncertain because it was never specifically pled, it was conceivable that the object of the conspiracy was not to constitute an inverse condemnation. Thus, the insurer could not deny the duty to defend based on the inverse condemnation exclusion.
* This opinion may expand the insurer's duty to defend under South Carolina law to include defense of complaints which could, though do not specifically, include claims which create a possibility of coverage under the policy. It appears to put the burden on the insurer to look beyond the causes of action pled in the complaint and to offer a defense to the insured if the allegations of the complaint could be read in any way to allege a covered cause of action. Given the already persistent problem of vague complaints filed by the plaintiffs' bar to try to trigger coverage, this opinion will likely be used to attempt to frustrate an insurer's attempts to deny the duty to defend even where the complaint asserts uncovered causes of action.
For a copy of this case click here.
The South Carolina Supreme Court differentiated the meaning of "cause" in an insurance policy and "legal causation" and upheld an anti-concurrent causation provision in South Carolina Farm Bureau Mutual Insurance Co. v. Durham, 380 S.C. 506, 671 S.E.2d 610 (2009). Durham involved a claim for damage to a swimming pool and deck caused when hydrostatic pressure "floated" the pool above the ground surface after the homeowners drained it without releasing the drain plug. The policy contained exclusions for water damage to a swimming pool or deck, including damage caused by sub-surface water pressure. However, the homeowners contended that the "proximate cause" of the damage was their failure to release the drain plug, not hydrostatic pressure. The Supreme Court concluded that the meaning of "cause" in an insurance policy is not to be determined by the "but-for" test used to determine legal or proximate cause and held that hydrostatic pressure was at least one "cause" of the damage. Further, the court upheld the policy's anti-concurrent causation provision and held that the water damage exclusions in the policy were applicable regardless of whether South Carolina would follow the "efficient proximate cause" doctrine or the "concurrent cause" rule. Finally, the court held that the fact that hydrostatic pressure was a condition that existed at the time the policy was issued did not void the water damage exclusions since the language of the exclusions suggested that an existing condition was contemplated.
* This decision appears to favor property insurers by (1) applying an expansive definition to causation exclusions and (2) upholding the validity of anti-concurrent clauses in property policies.
For a copy of this case click here.