Articles Posted in General Insurance Dispute Information

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Those living in low-lying areas and near rivers often seek, and often obtain, flood insurance. Many of the policies granted come from insurance providers that have opted into the National Flood Insurance Program (NFIP). Under this program, property owners are issued flood insurance through the Federal Emergency Management Agency (FEMA). The federal government, in an effort to expand the NFIP, created the Write Your Own program. These policies provide identical coverage as regular NFIP insurance, except they are administered through local insurance companies. These insurance companies increase community awareness of the NFIP in return for expenses related to claims written and processed. FEMA retains all responsibility for claim losses.

These policies, like any other insurance policy, are only active for the policy period. However, once the policy period has expired, FEMA and Write Your Own insurers typically extend a grace period of thirty days. This means that if the policy holder pays a renewal premium within thirty days of the policy’s expiration, the renewal will be retroactive, essentially covering the gap between the policy expiration and the payment of the premium. If the policy holder fails to pay the renewal premium before the grace period ends, then the policy terminates at its original expiration date and no grace period claims can be processed under it.

This retroactive policy renewal was the issue in Campo v. Allstate Insurance Company. Here, Campo’s flood insurance expired and Allstate sent him notice of the expiration along with the option of retroactive renewal. During this grace period Campo’s property was damaged by Hurricane Katrina. Due to the excessive number of claims arising from Katrina, FEMA increased NFIP grace periods from thirty days to ninety. Campo contacted Allstate and procured an insurance check to cover his living expenses. No further discussion of policy renewal took place. Campo’s ninety day grace period expired without any renewal premium payment. Therefore, when Campo filed his insurance claim it was denied as the policy was not retroactively renewed to cover the damage caused during the grace period. Campo sued Allstate claiming that Allstate had negligently misrepresented the status of his policy.

The only way to succeed on a claim of negligent misrepresentation by an insurance company is to show that the insurance company had a legal duty to supply correct information, that that duty was breached, and that damages resulted from justifiable reliance on that misrepresentation. In most cases, as in Campo’s, the third prong of this test is the most difficult to satisfy. The reasoning behind this is simple: policy holders have access to correct information through the policy contract that they possess. Thus, courts may find damages flowed from an unjustified reliance on the misstatement because the policy itself is clear.

Yet, under this test, Campo succeeded on his damages claim in district court. The U.S. Court of Appeals for the 5th Circuit, on the other hand, reversed in favor of Allstate. The reasoning behind this decision is that Campo was fully aware that he was required to pay a premium in order to obtain the retroactive renewal of his policy. In conversations with Allstate, Campo failed to discuss the renewal, and, in addition, the check provided by Allstate during the grace period was not a promise that it would pay Campo’s claim. In short, the court viewed Campo as being responsible for knowing the terms of the insurance policy he held. Insurance policy holders have access to the terms of their policy and are therefore in a position to familiarize themselves with relevant provisions.

Since much of Louisiana is prone to flooding, it is important to protect yourself by obtaining flood insurance. However, once a policy is issued, be sure to read through the terms and know the conditions of renewal. When a policy expires, it is the policy holder’s responsibility to take action for renewal.

Insurance disputes such as these are complex and best left to an experienced practicing attorney.

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When litigation involves multiple parties, all of which are big national or international organizations, there is a higher likelihood that something is going to end up in the litigation process. The unfortunate nature of insurance coverage is that companies will try to find little nuances to try to argue their case, or will add little nuances to make any future case more difficult for opposing parties. One party to a contractual agreement may cite to these nuances to find a loophole to escape from any potential liability and, subsequently, leave someone who believed they had full coverage with nothing. Despite these loophole efforts, a court can still look at the realities of the circumstances and come to real life conclusions to the exclusion of the argument of either party. This is true in the case of Federal Insurance Company v. New Hampshire Insurance Company, when the court ultimately looked at the reality of a contractual agreement and decided that no matter what the terms of the contract were, the whole contract was in regard to a personal injury case.

Our previous blog post discussed this case but a brief summary is as follows:
The case began when Wayne Robinson was unfortunately hurt by an explosion at a chemical plant. The explosion occurred because there were certain chemicals used by the plant that reacted with each other to cause the explosion. One of the defendants in Mr. Robinson’s case was Thomas and Betts Corporation (hereinafter T&B). T&B allegedly manufactured a product that contributed to the explosion that caused Mr. Robinson’s injuries. T&B had liability insurance from both New Hampshire Insurance Co., which was the primary insurance provider, and Federal Insurance Co., which was the secondary, or excess insurance provider. Ultimately, Mr. Robinson settled with T&B.

The interest of discussing policy nuances hinges upon the terms of the agreement were between T&B and Mr. Robinson. In that agreement, T&B would give Mr. Robinson $5 million for bodily injuries and an additional $1.2 million for a potential breach of contract claim another plaintiff may have had against Mr. Robinson. In fact, by settling with T&B, Mr. Robinson was breaching his agreement with the plaintiff company. After Mr. Robinson reached his agreement with T&B the other plaintiff sued Mr. Robinson for breach of contract. This breach of contract was supposed to be covered by his settlement agreement with T&B. However, soon after the settlement, Mr. Robinson received a letter from New Hampshire Co., T&B’s primary insurer, that it was going to cover his $5 million settlement, but would not cover his $1.2 million settlement because it was for a breach of contract and therefore, outside the scope of its policy covering T&B.

As a separate issue, the court discussed whether the New Hampshire policy covered contractual agreements. However, it came to the conclusion that the use of the phrase “legally obligated to pay” rendered the policy to cover tortious actions. However, the court went on to explain that the entire settlement between T&B and Mr. Robinson did in fact relate to and cover the bodily injury claim. The settlement could only cover the bodily injury claim because the only action for which T&B was liable to Mr. Robinson was the bodily injury. Therefore, the settlement could not be for any breach of contract claim.

The $1.2 million settlement was a by-product of T&B inducing Mr. Robinson to settle his bodily injury claim against T&B. The court held that even though this separate amount is categorized as reimbursement for a breach of contract claim, it is still within the bodily injury claim because the settlement was made in consideration for the bodily injury claim. Therefore, because the bodily injury claim was covered by the New Hampshire policy, New Hampshire was liable for the entire settlement. Mr. Robinson received money from Federal, T&B’s secondary insurer, therefore Federal stepped into T&B’s shoes in its claim for reimbursement from New Hampshire. Therefore, New Hampshire owed Federal the money it paid to Mr. Robinson.

Even in cases where a contract defines things in a certain manner or when the law defines different terms, the realities of a contract are the ultimate facts that define a contract. Although, the New Hampshire policy only covered tortious actions and even though the settlement between Mr. Robinson and T&B defined two different amounts, one for bodily injury and the other for a breach of contract, the reality was that both amounts were in consideration for the bodily injury claim and therefore the reality was that New Hampshire owed the entire amount as per its policy with T&B.

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The terms in a contractual agreement between parties can have the effect of changing entire meanings of contracts. This is especially true in more complex litigation and more complex business agreements. If a business agreement requires the participation of multiple partners or parties, an ambiguously defined contract can have the effect of increasing the amount of litigation which will occur every time there is a legal dispute between any or all of the parties. The clear practical effect of writing clear-cut and well defined contracts is that, in the long run, there will be less of a chance that any dispute will require a long, drawn-out litigation process which has the effect of draining the wallets of all the parties involved.

This is most important where one or more of the parties is a single individual with limited resources, and in some situations, is represented by smaller firms that have much less financial resources compared to bigger business entities with more resources and financing at their disposal. As a legal practice, any person that becomes part of a contractual agreement should clearly define any type of ambiguous terminology in an effort to save the agreement from getting the definitional application of common law or practice. Never is this more necessary than when an individual is pushed up against an insurance agency that holds their financial future in their hands. The importance of defining a contract can be clearly seen in the case of Federal Insurance Company v. New Hampshire Insurance Co.

Both Federal and New Hampshire insurance companies became involved in litigation because they both insured Thomas and Betts Corporation (hereinafter T&B). T&B made a product which contributed to an explosion at an aluminum processing plant in Gramercy, Louisiana, leaving employee Wayne Robinson with injuries. Ultimately, Mr. Robinson sued T&B, which had liability insurance from both Federal and New Hampshire. Thus, when the suit began, Federal and New Hampshire’s policies kicked into effect. New Hampshire was the “first insurer” for T&B. Federal, on the other hand, was T&B’s second layer excess insurer. On the eve of the trial, Mr. Robinson came to an agreement with T&B which had the effect of potentially extinguishing the law suit. T&B was going to pay Mr. Robinson $5 million dollars in damages for his unfortunate bodily injuries, and an additional $1.2 million in consideration for a potential breach of contract claim by another plaintiff company against Mr. Robinson. Subsequent to this settlement, New Hampshire notified Mr. Robinson that it was going to pay him the $5 million, but that it would not pay him the $1.2 million promised by T&B. When Mr. Robinson then received a letter from the plaintiff company, he sent the notice to Federal to show the demand made of him. Federal ended up giving Mr. Robinson $990,000 for the potential breach of contract claim against Mr. Robinson. The pertinent part of the agreement between T&B and Mr. Robinson is as follows:

“Thomas and Betts and Its Insurers agree to hold harmless, indemnify and defend Wayne Robins, et al, The Fields law Firm and Cleo Fields for any amount owed to AXA, Kaisers Subrogated Property Reinsurers, Caleb Didriksen and the Didriksen Law Firm, not to exceed 1.2 million dollars.”

Eventually, Federal sought the $990,000 from New Hampshire arguing that the amount should have been given to Mr. Robinson as part of T&B’s policy with New Hampshire. New Hampshire argued that this amount was not within T&B’s policy with it. The pertinent part of T&B’s policy with New Hampshire was that New Hampshire, “becomes legally obligated to pay by reason of liability imposed by law or assumed by [T&B] under an Insured Contract because of Bodily Injury.” This seems simple enough, however there was no definition of “legally obligated to pay.” In the world of contracts, the contracting parties have the ability to define things in any manner they see fit. These definitions should, however, be included in the contract itself in the index of terms. When a contract does not define any of the material terms, the terms should be filled in by the court. In this case, the court decided that since the phrase was not defined, it should be filled in with what was commonly used in Louisiana. It Louisiana, it was well settled that the use of the phrase was for damages arising out of tortious actions and not from a contractual obligation. Therefore, on the face of the assertion, Federal would be out of luck because it sought money from New Hampshire for money it gave Mr. Robinson due to a breach of contract. Even though the court sided with Federal for other reasons, Federal would have been dealt a strict blow because it did not read the policy between T&B and New Hampshire clearly enough to see that the term was not defined.

Therefore, before taking any action any party should clearly read any existing agreement between relevant parties and should make sure any contract it signs has clearly defined terms that will not lead to unnecessary litigation which will only serve to drain resources.

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In order to avoid extreme costs incurred from accidents, some businesses purchase two types of insurance policies. The first and most common type of insurance is primary insurance. Under this policy, business assets and liabilities are covered in exchange for the payment of a premium. This coverage, however, is capped in order to protect the insurance company from excessive claims. For this reason, many businesses, especially those dealing with expensive equipment and goods, will carry a second insurance policy that provides coverage beyond what is offered through the primary insurer. These policies are known as excess insurance. Premiums for these excess policies are often lower and provide a much higher cap on claim amounts. Excess insurers are able to provide such cheap, yet extensive coverage because the chance of such a catastrophic accident occurring that exhausts the primary insurance cap is minimal. However, as is evident in Indemnity Insurance Company of North America v. American Commercial Lines, L.L.C., where multiple boats collided on the Mississippi River, maritime accident costs sometimes extend beyond primary insurance coverage, bringing questions of how excess insurance money should be handled by courts.

When insurance disputes arise, many times the insurance company will concede the full policy amount, deposit it with the court, withdraw from the proceedings, and leave the claiming parties to battle out their rights to the money in court. Statutory provisions guide the timeline for when primary insurance policies must be deposited with the court, but what is the protocol for an excess insurer that wants to follow the primary insurer’s footsteps? This was the main question in the American Commercial Lines case. The plaintiffs sued the excess insurers claiming that the excess insurers deposited the policy amount with the court too late, resulting in the loss of hundreds of thousands of dollars in interest that could have been distributed amongst the victims. In deciding the case the court had to analyze a couple different issues.

The first issue dealt with determining what law applies to the case. Since the case involves maritime insurance, the court had to decide between maritime law and state law. Statutes provide that if no federal maritime law controls the issue, then state law applies. Because no specific maritime provision covers when an excess insurer should deposit policy amounts with the court, Louisiana court applies. This means, as mentioned above, that excess insurance will not kick in until after all primary insurance funds have been exhausted. This essentially answers the question the second issue poses: when does the excess insurer need to deposit policy amounts with the court?

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U.S. Court of Appeals affirms that maritime insurance policy covering collision on the Mississippi River included defense costs in coverage limits. In a case of insurance contract interpretation, the U.S. Court of Appeals for the Fifth Circuit determined that defense costs were included in the policy limits set by a maritime insurance policy. The court admitted that this interpretation erodes policy limits.

Gabarick v. Laurin Maritime (America) Inc., Nos. 09-30549, 09-30809 (5th Cir. 8/10/11) arose out of a collision on the Mississippi River. Laurin Maritime and related parties owned the ocean-going tanker M/V Tintomara. In the early hours of July 23, 2008, the ship collided with a barge carrying heavy fuel oil. The impact split the barge in half, and heavy oil spilled into the river. American Commercial Lines, LLC (barge owner) owned the tug, barge, and cargo, but D.R.D. Towing Co., LLC (towing company) provided the crew that ran the tug pushing the barge. It’s the towing company’s insurance policy that raised issues of policy interpretation.

A protection and indemnity (or P&I) policy issued by Indemnity Insurance Company of North America (insurer) covered the towing company. The policy is a standard maritime policy, except for modifications the parties made to the SP-23 Form. The policy provided a single occurrence limit of liability of $1 million, with a $15,000 deductible. The towing company and the barge owner demanded that the insurer indemnify and defend them. Not knowing which of the numerous parties rightfully should receive the insurance proceeds, the insurer deposited $985,000 into the registry of the U.S. District Court for the Eastern District of Louisiana for the court to make the decision. That court held that the insurer’s deposit for the interpleader action was proper and that the funds would reimburse defense costs. The barge owner and Laurin Maritime appealed.

The appellate court explained that Louisiana law forms the basis for the court’s independent review of the District Court’s interpretation of the insurance policy. Even before it entered into this analysis, the court cautioned that marine insurance commentators agree that defense costs are typically included within such insurance policy limits. The P&I insurer usually has no duty to defend: indemnification is the basis for coverage. Louisiana law agrees. Legal expenses incurred in defending a liability covered by an insurance policy are treated as part of the overall claim. Payment of legal expenses falls within the policy limits. Because the barge owner is a sophisticated commercial entity, it bore the burden that this policy should be interpreted differently.

The collision triggered coverage under the policy’s collision and towers liability and protection and indemnity coverage. Although the policy was mostly standard, a “manuscript provision” (modification) added a collision and towers liability clause. The standard language for the relevant coverage stated, “Liability hereunder in respect to any one accident or occurrence is limited to the amount hereby insured.” The court found no ambiguity.

The barge owner argued that the policy was ambiguous. It pointed to the modification language that the insurer “will also pay the costs which the Insured shall thereby incur or be compelled to pay.” The barge owner argued that Exxon Corporation v. St. Paul Fire & Marine Insurance Co., 129 F.3d 781 (5th Cir. 1997) had interpreted the clause to exclude defense costs from the policy cap. This argument did not work for three reasons. The cited case involved personal injury, not collision, placing the “also pay” language in the P&I policy, unlike the towing company’s policy. Second, the claims mentioned by the barge owner are excluded from the collision coverage. “[A]ny recovery must come under the standard P&I section of the policy,” the court explained. Finally, any ambiguity from the clause, were it applicable, would not extend to the relevant coverage sections of the standard policy language because the modification was a separate contract entered into by sophisticated parties.

The court summarized that “the policy is clear that defense costs were intended to be included within the policy limits. This P&I policy is unambiguously written against the backdrop of traditional principles of maritime law that defense costs erode P&I limits of liability.”

The barge owner also appealed the District Court’s denial of insurance proceeds. The appellate court explained, “The district court did not permanently deny funds to the barge owner but rather stated, ‘payment to [the barge owner] at this time would not be equitable.'” (Alterations in original.) Therefore, the District Court’s decision was not a final judgment and could not be appealed.

Coverage limits and defense from an insurer are crucial issues in evaluating a claim when you have been harmed. Insurance policies differ between consumer and business and by industry. This case demonstrates the specificity of insurance coverage. A lawyer independent of your insurance company can help you understand your policy, its coverage limits, and the extent of an insurer’s duty to defend.

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Previously on the Insurance Dispute blog, we have reviewed cases where the court analyzied various policy provisions that are intended to limit the scope of the insurer’s coverage. One recent example was a clause in a hazard insurance policy that limited the insurer’s responsibility for certain economic damages that resulted from a covered loss. Coverage limitations are common features in other types of policies, as well. For instance, a workers compensation insurance policy will typically include provisions that define the type of injuries that fall under the policy and specify the timeframe in which claims must be made. The recent case of Continental Holdings, Inc. v. Liberty Mutual Insurance Co. offers an example of a court’s analysis of such a provision. Continental Holdings purchased a Workers Compensation/Employers’ Liability Policy from Liberty Mutual on October 1, 1964. The policy’s term ended on July 1, 1973. It covered two kinds of work-related injuries: bodily injury “by accident,” and bodily injury “by disease.” The policy specifically excluded coverage for claims of “bodily injury by disease unless prior to thirty-six months after the end of the policy period written claim is made or suit is brought against the insured for damages because of such injury or death resulting therefrom.” In 2009, a group of former employees, certified as a class, sued Continental for hearing loss caused by their long-term exposure to industrial noise while working for the company. In their complaint, the employees alleged that the hearing loss “was painless, and occurred gradually over a long period of time as a result of their continuous long term exposure to hazardous industrial noise at [Continental’s] facility.” Continental filed suit against Liberty Mutual seeking indemnity for the employees’ claims in the hearing loss suit, arguing that the policy purchased in 1964 covered the workers’ hearing loss. Liberty Mutual filed a motion for summary judgment asserting that it was not required to indemnify Continental because noise-induced hearing-loss was not an “accident” and therefore was subject to the 36-month exclusion under the policy. The district court granted Liberty Mutual’s motion, and Continental appealed.

The U.S. Court of Appeals for the Fifth Circuit relied on Louisiana law to guide its analysis. At the time the policy was taken out, the Louisiana Worker’s Compensation Act (“LWCA”) was in effect and was incorporated by reference in the policy. The LWCA included the following definition of “accident”: “an unexpected or unforeseen event happening suddenly or violently with or without human fault and producing at the time objective symptoms of an injury.” Continental asserted that the industrial noise the workers were exposed to created an “objective injury” and therefore fell under Louisiana’s then-existing statutory definition of “accident.” It backed up its position with the affidavit of Dr. Robert Dobie, which explained that noise-induced hearing loss can be measured at the moment a noise is heard through an audiogram test. The court noted, however, that “the vast majority of Louisiana cases,” including one that held “gradual hearing loss resulting from occupational noise exposure … cannot meet the definition of an ‘accident’ under any version of the LWCA,” reach[es] a contrary conclusion.” The court observed that the Continental workers did not claim that a single event caused their hearing loss. Nor did they experience any symptoms during the period of time that the Liberty Mutual policy was in effect. These facts were contrary to the court’s own prior holding that Louisiana’s definition of “accident” requires “at least … some identifiable event or incident within the policy term where the employee can demonstrate a palpable injury.” By way of example, the court recalled a case that involved “a sudden, acute, and identifiable injury during the period of employment.” The employee-plaintiff complained of ear pain immediately after exposure to noise, requested and was denied a transfer, and then over the course of a few months experienced nearly total deafness. The court concluded, therefore, that the gradual, noise-induced hearing loss that the Continental workers suffered was “not an ‘accident’ under the LWCA.” Therefore, the court affirmed the district court’s finding that the workers’ injuries must be classified as “bodily injury by disease,” thus triggering the 36-month exclusion.

It is important to note that the Fifth Circuit’s decision did not necessarily create a negative outcome for the workers themselves. Indeed, their suit (filed in state court) was merely put on hold until the conclusion of this action, which only served to determine that Liberty Mutual would not be responsible for any damages due the workers if they ultimately prevailed against Continental.

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Insurance companies do not always make recovery of benefits easy when a worker is injured on the job. The insurance recovery process can be overwhelming, and may be complicated by the often necessary instigation of litigation. Many different provisions governing recovery are involved in insurance contracts. Insurance negotiations can be complicated by differing interpretations of these policy provisions, often standing as the core principles upon which the sides dispute in a case. The interpretation of the language of the contract by the court plays a pivotal role in deciding who is liable for the costs associated with on the job injury. In fact, benefits can be delayed in disputes over the meaning of a single term contained in an insurance contract.

In Bayou Steel Co. v. National Union Fire Ins. Co., two insurance companies, New York Marine and General Insurance Company (NYMAGIC) and National Union Fire Insurance Company of Pittsburgh, Pennsylvania (NUFIC-PA), disagreed over which company was liable for an on the job injury. Both companies provided insurance coverage to the Bayou Steel Corporation when Ryan Campbell, an employee of Bayou Steel’s stevedoring contractor, was injured unloading cargo. A dispute arose as to whether Campbell’s employer was a contractor or a subcontractor of Bayou Steel under NYMAGIC’s “policy that excludes coverage of Bayou’s liability for bodily injury incurred by ‘[e]mployees of … [Bayou’s] sub-contractors’ but does not exclude coverage of such injuries incurred by employees of Bayou’s contractors.” If the court found that Campbell was a subcontractor, NUFIC-PA would be held liable for his injuries, but if they found he was a contractor, NYMAGIC would be liable. The lower court held that Campbell’s employer was a subcontractor of Bayou Steel, and NYMAGIC was not liable for his injury under their insurance agreement. An appeal by NUFIC-PA followed.

On appeal, the U.S. District Court for the Eastern District of Louisiana in New Orleans reversed the lower court’s decision. Based on principles of contract interpretation, the court held that Campbell’s employer was a contractor and not a subcontractor, thus NYMAGIC was liable for the payment of benefits to the injured. When a term in a contract is not specifically defined it is to be given its “generally prevailing meaning.” A terms generally prevailing meaning is determined by the court in examining a myriad of different sources including statues and prior court opinions, as well as various dictionaries. The lower court determined that a subcontractor was “simply some person hired to do part of another person’s work.” The appellate court held that Campbell’s employer could not be defined as a subcontractor because it was the party paying for the work and not the party actually performing the work. The decision of the lower court was reversed, and liability was ultimately determined, based entirely on this judicial interpretation of a single word.

Knowledge of the interpretation of insurance contract provisions can be pivotally important when negotiating an insurance settlement or in litigation for recovery of damages. If you or a loved one has a claim that could involve negotiating with an insurance company, then you need an experienced law firm to help you navigate those negotiations and to represent you in court should it be necessary. The Berniard Law Firm has experience negotiating with insurance providers.

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When an insurance company provides coverage to a business, the contract typically includes a duty to defend the inured business against any coverage claims. If an insurer refuses to provide the insured with claim defense, then the insured business may sue the insurance company for indemnification of defense fees. However, a question often arises as to how much an insurance company is required to pay for indemnification. This issue was brought to light in a recent Supreme Court of Louisiana case when insurance company Continental was sued for indemnification by a manufacturing company, T&L.

When an insurance company is sued for indemnification, several options exist for a defense. One defense, which was used in the Continental case, is policy exclusion. Under this defense, the insurance company claims that the individuals seeking damages from the insured business fall outside the policy coverage and thus outside the realm requiring the insurer to defend the insured business. In the Continental case, for example, Continental refused to defend T&L against claims brought by T&L employees because certain time frames of T&L’s policy did not cover injuries sustained by employees.
One way to defeat a policy exclusion defense is to prove that the insurance company waived its right to the defense. Typically, a waiver occurs when an individual, or in this case a company, has an existing right, knowledge of its existence, and an intention to relinquish that right. However, even if there is no intention to give the right up, conduct that creates a reasonable belief that the right has been relinquished will constitute a waiver of that right. Therefore, if an insurance company undertakes a defense on behalf of its insured against claims that the insurance company knows do not fall under the insurance policy, and does not reserve its rights to withdraw defense, then it is likely that the insurance company has waived its right to a policy exclusion defense. This means that if the insurance company was to back out of the defense it would be held liable for indemnification to the insured because the insured relied on the insurer’s actions to defend them.

However, it is important to make a distinction between waiver and breach of duty to defend in the insurance context. While a waiver involves an insurer relinquishing its rights to deny coverage under a policy, a breach of a duty to defend expressly denies coverage under a policy. In essence, the two are complete opposites. If an insurance company waives its right to deny coverage, then the insurance company, if they withdraw from defense, is likely to be forced to indemnify the insured for all defense costs for all claims. On the other hand, as was the holding in the Continental case, a breach of a duty to defend falls under contract law, and would find the insurance company liable for reasonable defense costs. In addition, if the breach was made in bad faith, statutory penalties will be imposed upon the insurer. Liability for such claims is also allocated on a pro rata basis between all insurance policies. This lowers the costs incurred upon insurers, which, for Continental, decreased from over four million dollars to just shy of two-hundred thousand dollars.

If your business is at odds with an insurance company over policy claim defense, be sure to consider whether or not the insurance company has waived its right to a policy exclusion defense. If the insurer has, then it is likely that the insured will be able to recoup costs paid to all claimants. If, on the other hand, the insurer has simply breached a duty to defend, you may only be able to recoup reasonable defense costs.

Even if you find this article helpful, insurance law is a complicated matter that should not be approached without consultation from a practicing insurance attorney.

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In a prior post, we examined the case of Berk-Cohen Associates, L.L.C. v. Landmark American Insurance Company, which concerned a dispute over an insurer’s coverage of lost revenue suffered by the Forest Isle Apartments complex in New Orleans in the aftermath of Hurricane Katrina. The district court found that the lost revenue experienced by the apartment’s owner, Berk-Cohen, was covered under the policy issued by Landmark. Based on this finding, it assessed Landmark penalties and attorney’s fees for its misinterpretation of its policy and refusal to pay Berk-Cohen for the lost revenue that it deemed covered under the policy. Landmark appealed the assessment (along with the district court’s finding on the coverage issue); although the Court of Appeals for the Fifth Circuit affirmed the district court’s holding as to insurance coverage, it reversed on the issue of the penalty.

Under Louisiana law, an insurance company generally has 30 days after receiving a demand letter and written proof of loss to pay a claim. A court can assess a penalty against an insurer that fails to pay within 30 days “when such failure is found to be arbitrary, capricious, or without probable cause.” La. Rev. Stat. Ann. § 22:1892(B)(1). The penalty is calculated as 50 percent of difference between the amount actually paid and the amount due. Attorney’s fees and costs can also be part of the assessment. No penalty is available “when there is a reasonable and legitimate question as to the extent and causation of a claim.” In the case of Louisiana Bag Co. v. Audubon Indemnity Co., the Louisiana Supreme Court assessed penalties against an insurer that failed to pay the uncontested portion of a claim and refused coverage for a loss that was clearly included in the policy. The court found that “no reasonable uncertainty existed as to the insurer’s obligation to pay,” and so its position was “arbitrary and without probable cause.”

The Fifth Circuit concluded, however, that the Forest Isle Apartments case was unlike the situation in Louisiana Bag. “The scope of the flood exclusion,” reasoned the court, “with its reference to all damage ’caused directly or indirectly’ by flooding, is susceptible to different interpretations.” Landmark, therefore, was “neither arbitrary nor capricious” in refusing to pay Berk-Cohen for lost revenue based on the favorable business conditions brought on by hurricane flooding. The court also found it important that Landmark had already paid out more than $20 million on undisputed portions of Berk-Cohen’s claims. In light of this, Landmark’s dispute over the lost revenue claim could reasonably be considered a “good-faith error” in interpreting the policy. In addition, the court noted that under Louisiana jurisprudence, an unfavorable judgment does not necessarily call for the statutory penalty. Thus, the court reversed the district court’s assessment of penalties against Landmark.

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In insurance, an assignment is the transfer of legal rights under an insurance policy to another party. The legality of assignments became a major issue in the aftermath of hurricanes Katrina and Rita. During this period, the federal government, in an effort to aid rebuilding efforts, issued money through the Road Home program to homeowners who held underinsured properties. In exchange, these homeowners were required to assign their rights to insurance claims under their policies to the the state of Louisiana. The purpose of this assignment was to prevent homeowners from fraudulently receiving duplicate payments. However, the program incentivized insurance companies to estimate damages too low, which in turn forced homeowners to take the higher amount offered through the Road Home program.

The shortfall created within the Road Home program forced the state of Louisiana to bring suit against insurance companies through the policy rights assigned to the state by homeowners. In essence, the state sought to recoup actual insurance claim damages that the homeowners were rightfully owed had they not opted into the Road Home program. Though most, if not all, of the homeowner insurance policy contracts contained an anti-assignment clause, the state maintained that it had the right to post-loss assignment. Therefore, it is critical to distinguish between a pre-loss assignment and a post-loss assignment.

A pre-loss assignment occurs when one transfers a legal right under an insurance policy to another before the injury or loss occurs. An example of a type of pre-loss assignment is found in cases when life insurance is assigned to a bank as collateral for a loan. Here, the assignment has occurred before the loss, in this case the death of the original policy holder, and any benefits that accrue at the time of death are used to repay the bank first. These types of assignments typically require consent from the insurer, but are usually barred by anti-assignment clauses.

A post-loss assignment, on the other hand, is the transfer of a legal right under an insurance policy to another party after the injury or loss occurs. Post-loss assignments frequently give the third party transferee the ability to file a claim against the insurance company for any loss accrued by the original policy holder. Many insurance companies try to block such assignments through broad anti-assignment clauses found in policy contracts. Such clauses were found in most Katrina and Rita policies, and insurance companies pointed to these sections in an attempt to avoid paying actual damage costs homeowners thought they rightfully assigned to the state.

While national jurisprudence holds that pre-loss anti-assignment clauses are valid in favor of contract law and public policy, anti-assignment clauses related to post-loss assignments are held to be invalid. The reasoning behind this difference primarily lies with public policy considerations. A pre-loss assignment, for example, may increase the risk beyond the point that the insurance company had originally contracted for and with a party the insurance company had not originally contracted with. A post-loss assignment, on the other hand, simply assigns an accrued right to payment after a loss has already occurred. There is no change in risk as the loss has already occurred, and since payment is to be made it matters none to whom the payment is made.
The Supreme Court of Louisiana holds that such public policy concerns are better suited for the legislature. However, the Court does state that clauses prohibiting post-loss assignment must be written in clear and unambiguous language. If the language in the policy contract is unclear, then, in accordance with laws regarding contracts of adhesion, the language will be construed against the insurance company and in favor of the insured. If you have entered into a contract with an insurance company and are looking to assign your rights under the policy to a third party, turn to the language in the contract itself. Though there is not specific set of words or test used to determine “clear and unambiguous,” your own judgment is a good starting point in determining whether or not you have the right to assignment.

Though your own judgment is an excellent place to start, insurance law is very complicated and is best suited for a practicing attorney.

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