Deduction of Collateral Benefits at Trial

Brown v. Campbell, (2012) 109 O.R. (3rd) 306 (S.C.J.)

After a jury trial where the plaintiff was awarded damages for past income loss, the defendant asked the judge to reduce the amount by long term disability benefits received the plaintiff. The plaintiff was self-employed and had purchased a long term disability policy for himself. The request for the deduction had not been made at trial, and had first arisen when the final judgment was being taken out. Both parties had addressed the issue in their evidence. The jury award for past income loss did not match either the amount suggested by the plaintiff or the defendant. Justice Nolan refused to make a deduction post trial. She held the defendant should have made be request at trial so she could have charged the jury on it. In addition, since the jury's verdict was less than the amounts submitted by both parties, it appeared the jury had in fact made the deduction in their assessment of the damages.

One issue left open by the Court is whether the disability benefits would have been deductible in any event, given that the plaintiff was self-employed and Justice Nolan noted the law is not settled with respect to whether LTD benefits purchased privately are captured by s. 267.8 of the Insurance Act.

Pennsylvania Court Considers Designated Premises or Project Limitation

In its recent decision in Western Heritage Ins. Co. v. Darrah, 2012 U.S. Dist. LEXIS 71768 (M.D. Pa. May 23, 2012), the United States District Court for the Middle District of Pennsylvania had occasion to reconsider the effect of a designated premises or project limitation endorsement.

Western Heritage insured Darrah’s Automotive and Recyling under a general liability policy.  The policy’s declarations, as originally issued, described Darrah’s business as “Auto Sales/Salvage & Repair Garage.”  This description, however, was amended by a subsequently issued endorsement titled “Limitation of Coverage to Designated Premises or Project.”  The endorsement contained two boxes: one for designating a “Project” and another for designating a “Premises.”  No information was entered in the “Premises” box, but in the “Project Box,” the insured’s operations were described as “Auto Dismantling and Recycling Operations.”  The endorsement further stated “If no entry appears above, information required to complete this endorsement will be shown in the Declarations as applicable to this endorsement.” Finally, the endorsement limited the policy’s coverage to:

“bodily injury”, “property damage” . . . and medical expenses arising out of:

1.   The ownership, maintenance or use of the premises shown in the Schedule and operations necessary or incidental to those premises; or

2.   The project shown in the Schedule.

The insured, Darrah’s Automotive and Recycling, sought a defense and indemnification in connection with an underlying suit brought by an individual who claimed to have suffered scarring and disfigurement while working at Darrah’s premises.  Plaintiff’s initial complaint alleged that he was injured while repairing a vehicle in the repair/body shop.   Western Heritage denied coverage for the suit on the ground that the policy’s coverage was limited to “auto dismantling and recycling operations,” and that plaintiff claimed that he was injured while repairing a vehicle.  In a 2010 decision, the district court agreed with Western Heritage, finding that the effect of the endorsement was to limit coverage under the policy to a specific area of work, and that premises was not a consideration.  See, W. Heritage Ins. Co. v. Darrah, 2010 U.S. Dist. LEXIS 121533 (M.D. Pa. Nov. 17, 2010).  In so ruling, the court rejected Darrah’s argument that the endorsement also provided coverage for injuries happening at the premises identified in the declarations because of the empty “Premises” box, noting that the endorsement limited coverage by operations or by premises.  Thus, because the “Project” box contained information, and the “Premises” box was empty, the endorsement only applied to Darrah’s operations, not its premises.

Following the court’s November 2010 ruling, plaintiff amended his complaint to allege that the premises where is was injured was used for auto dismantling and recycling operations, and that he was injured “while working on repairing a vehicle in the repair/body shop in use in auto dismantling and recycling operations.”  Although the amended complaint did not allege that plaintiff was injured while performing auto dismantling or recycling operations, Darrah’s nevertheless argued that a duty to defend was triggered, since the new allegations demonstrated that “the repair/body shop business was an integral part of the Darrah Defendants auto dismantling and recycling operation.”  Western Heritage argued, on the other hand, that the new allegations only described the premises, but did not alter the fact that plaintiff was injured while performing work outside the scope of the policy’s coverage.

The court rejected Darrah’s interpretation of the amended complaint, observing that merely alluding to the fact that the premises was used in auto dismantling and recycling operations did not mean that “every activity that took place in the repair/body shop was part of that operation.”  The court further observed that Darrah’s argument in effect would circumvent the endorsement by determining coverage based on premises rather than operations – a conclusion the court already had rejected.  As the court explained:

… we infer that the repair/body shop was not being used at that time as part of the dismantling and recycling operation. If the latter operation were happening at the time of Stine's injury, he should certainly have been able to make the necessary allegations, even if he himself was just repairing a vehicle. In fact, if we were to accept Defendants' approach to the coverage issue, coverage would be for the premises where the dismantling and recycling operation took place, but coverage is not for premises or any particular location, as Plaintiff points out, but for a work operation, the dismantling and recycling of automobiles

 

Duty to Defend - Exclusion Clause did not Apply

Durham District School Board v Grodesky 2012 ONCA 270 (C.A.)


This appeal highlights the importance of carefully crafted exclusions in insurance policies.

In the underlying action, the school board alleged the appellants' son intentionally set fire to the school. The appellants were added as defendants based on allegations that they failed to impose a curfew and to supervise their son. Their insurance company refused to defend them based on the following exclusion in their home owner’s policy:

We do not insure your claims arising from (6) Bodily injury or property damage caused by any intentional or criminal act or failure to act by: (a) any person insured by this policy; or (b) any other person at the direction of any person insured by this policy.


The motion judge held there was no duty to defend. He relied on G.P. v. D.J., 26 C.C.L.I. (3d) 76 (Ont. S.C.), a case interpreting the same exclusion clause, which held any tortious failure to act (not just an intentional or criminal one) triggered the exclusionary clause.

The Court of Appeal allowed the appeal. The exclusion clause could be read in two ways: 1) where the words “intentional” or “criminal” modify the phrase “act or failure to act”, or 2) excluding an intentional or criminal act, or any failure to act. Juriansz J.A. held the exclusion could have been read as excluding a mere negligent failure to act; however, such an interpretation would have the effect of excluding almost every negligence action, rendering coverage useless. He cited Non-Marine Underwriters, Lloyd’s of London v. Scalera, [2000] 1 S.C.R. 551, where the Supreme Court considered a similar clause and held that reading the clause to exclude negligent failures to act would lead to absurd consequences.

The Court also considered whether the negligence claim was derivative of the intentional tort claim in order to determine whether it was excluded by the clause. Juriansz J.A. held that the negligence claim was not derivative of the intentional tort claim as the elements alleged against the parents were distinct. As a result, the exclusion did not apply and the parents were entitled to a defence.

Second Circuit Affirms Duty to Defend Under Professional Liability Policy

In its recent decision in Westport Ins. Corp. v. Hamilton Wharton Group, Inc., 2012 U.S. App. LEXIS 9888 (2d Cir. May 17, 2012), the United States Court of Appeals for the Second Circuit had occasion to consider whether a professional liability carrier had a duty to defend its insured in connection with several underlying lawsuits relating to mismanagement of a workers’ compensation trust.

The underlying suits were brought by former members of the New York Healthcare Facilities Workers' Compensation Trust (the “Trust”), comprised of nursing homes, health care agencies, and hospitals required under New York law to maintain workers’ compensation insurance for their employees or to participate in a self-insured plan.  Certain members brought several lawsuits, in New York state court, against Hamilton Wharton Group, Inc. (and its owner) relating to Hamilton’s management of the Trust.  The suits alleged, among other things, that Hamilton failed to exercise due diligence and/or mismanaged the Trust.  The suits alleged causes of action for negligence, as well as breach of fiduciary duty, breach of contract, and fraud. 

Westport, as Hamilton’s professional liability carrier, took the position that the suits did not trigger Hamilton’s coverage, primarily on the basis that the suits did not arise out of “professional services,” defined by its policy as “the insured's activities for others as a managing general insurance agent, general insurance agent, insurance agent, or insurance broker.”  Thus, Westport argued, the policy’s coverage was limited to the insured’s professional services involving “issuing, procuring, renewing, or processing of insurance products to third-party clients,” and did not encompass Hamilton’s administration of a  workers’ compensation trust.  Westport nevertheless agreed to defend Hamilton in connection with the underlying suits, and brought suit against Hamilton in federal district court seeking a declaration that it had no duty to defend or indemnify Hamilton in the underlying suits.

Prior to taking any discovery, Hamilton moved for summary judgment on the basis that the Westport’s lawsuit was premature.  Hamilton also sought summary judgment as to Westport’s duty to defend the underlying suits.   Westport argued that the underlying complaints did not allege a wrongful act in connection with Hamilton’s performance of insurance procurement services, or at the very least, there was an issue of fact that precluded summary judgment. In a 2011 decision, the Southern District of New York held that Hamilton was entitled to a defense since there was a reasonable possibility that the underlying lawsuit implicated the insured’s professional services, as that term was defined.  Westport Ins. Corp. v. Hamilton Wharton Group, Inc., 2011 U.S. Dist. LEXIS 20535 (S.D.N.Y. Feb. 23, 2011).  The lower court further agreed that Westport’s lawsuit relating to the duty to indemnify should be dismissed on the basis that it was premature.

On appeal, the Second Circuit agreed that the underlying complaints at least had the potential to involve the insured’s professional services, explaining:

Here, the claims asserted against Westport may rationally be said to fall within the Policy's coverage. The "professional services" contemplated by the Policy encompass at least some of the activities alleged in the State Actions, which included, inter alia, allegations that the Defendants were negligent in handling their funds by: continuing to sign up new participants to join the trust; failing to hire an accountant; offering unwarranted discounts to trust members; failing to implement safety audits; and failing to conduct payroll audits.

Thus, the Second Circuit, as did the Southern District of New York, at least implicitly interpreted the policy’s definition of “professional services” in a broader fashion than did Westport.  The Second Circuit further held that the lower court’s ruling concerning prematurity of the duty to indemnify was correct, as the “State Actions have numerous unresolved issues in common, including whether the Defendants were negligent or breached fiduciary or contractual obligations.”

Enforcing Settlement

Amyotte v. Wawanesa, [2012] ONSC 2072 (S.C.J.)


The issue on this motion was whether a settlement entered into by counsel could be upheld.

The defendant served a r. 49 offer to settle the plaintiff's accident benefits claim shortly before trial. The offer was sent by email in the following terms: "Payment to the Plaintiff of the sum of $15,000.00 inclusive of interest in full and final settlement of all accident benefits claims of the Plaintiff and all claims as against the Defendant in the within action" and partial indemnity costs. Plaintiff counsel responded with “We accept the offer and the action is settled…”. Defence counsel asked plaintiff counsel what was wanted for costs. Plaintiff counsel e-mailed back “15 k all in”. The next day, defence counsel e-mailed “How would you like the settlement broken down for Release purposes? $10,000 past and future rehab and $5,000 for costs and disbursements?” The reply was “Yes thx”.

Upon receiving a release and settlement disclosure notice from the defendant, the plaintiff took the position that the settlement did not include all accident benefits and that she was entitled to rescind the offer under the rescission provisions of the SABS. The Court disagreed, holding that if the plaintiff meant to restrict the settlement she should have done so rather than unconditionally accepting it. Once she chose to pursue litigation she could not avoid the consequences of r. 49 by falling back on the rights afforded by the SABS.

The settlement was upheld.

- Tara Pollitt

Eighth Circuit Addresses Personal Injury Offense of Malicious Prosecution

In its recent decision in Genesis Ins. Co. v. City of Council Bluffs, et al., 2012 U.S. App. LEXIS 9577 (8^thCir. May 11, 2012), the United States Court of Appeals for the Eighth Circuit, in a matter of first impression under Iowa law, considered when the tort of malicious prosecution occurs for the purpose of personal injury coverage under a general liability policy.

In 1977, underlying plaintiffs were arrested and convicted for the murder of a retired police officer.  Their convictions were vacated in 2003 based on evidence that the prosecution had withheld of exculpatory evidence.   Plaintiffs were released from prison and later brought suit against the City of Council Bluffs, the City’s Police Department, and certain police officers.  In addition to alleging civil rights violations, their suits alleged the tort of malicious prosecution.  The City tendered its defense to Genesis Insurance Company, its general liability carrier for the period January 1, 2002 to January 1, 2003 and for the renewal period January 1, 2003 through January 1, 2004.  Genesis disclaimed coverage on the basis that the alleged personal injury offense of malicious prosecution happened when plaintiffs were originally prosecuted, not when their convictions were later vacated.

The Eighth Circuit acknowledged that there was no controlling Iowa law on the issue of when the tort of malicious prosecution occurs for insurance coverage purposes.  Looking to case law from across the country, the court observed that “although there is no agreement on when the tort of malicious prosecution occurs for insurance coverage purposes, the clear majority of courts have held the tort occurs when the underlying criminal charges are filed.”  The court further noted that in Royal Indemnity Co. v. Werner, 979 F.2d 1299 (8^th Cir. 1992), the Eighth Circuit, in addressing the issue under Missouri law, held that a malicious prosecution claim accrues with the filing of suit.  The court found no meaningful reason why its decision in Royal Indemnity is inconsistent with Iowa law, explaining that under Iowa law, the occurrence happens when the claimant sustains damages, not when the act or omission causing the damage takes place.   Because a claimant is damaged upon the filing of a criminal complaint, observed the court, it necessarily followed that the occurrence happened at that time.

In reaching its decision, the court considered and rejected the insured’s argument that the Genesis policies were triggered based on allegations of “continuing misconduct and continuing personal injury” through the time underlying plaintiffs were released from prison.  The court refuted the contention that “the tort of malicious prosecution constitutes a continuing injury,” and concluded instead that a claim for malicious prosecution does not trigger multiple policies, but instead triggers only the policy in effect at the time the charges are filed.  

New York Court Rejects $90 Million D&O Settlement

In In re Lehman Brothers Securities and ERISA Litigation, 2012 U.S. Dist. LEXIS 65167 (S.D.N.Y. May 3, 2012), Judge Lewis A. Kaplan, for the United States District Court for the Southern District of New York considered the reasonableness of a settlement between various former Lehman Brothers directors and officers and their insurers.

Beginning his opinion with a reference to Kenny Rogers’ The Gambler, Judge Kaplan observed that when it comes to litigation, one must know when to hold ‘em and when to fold ‘em.  In the context of a class action, he noted, a court must act as the surrogate for the plaintiff class in determining whether a settlement is reasonable, and as such, it fell on him to determine whether to allow the parties “to fold ‘em.”

The class action in In re Lehman Brotherswas brought on behalf of investors that had purchased or otherwise held Lehman Brothers securities.  Because Lehman Brothers is in bankruptcy, the defendants were former individual officers and directors and directors of the company.  Before Judge Kaplan was a $90 million settlement between these directors and officers and Lehman Brothers’ insurer, which would be paid to the plaintiff class.  If approved, all claims against the directors and officers would be released, with these individuals paying no amounts from their own pockets.

Lehman Brothers originally had $250 million in available insurance limits.  As a result of defense costs, however, this amount had been reduced to $180 million by the end of 2010.  The insurer took the position that it would contribute to a settlement only on the condition that it resolved all claims against the individual defendants.  The individual defendants took the position that they would not contribute any amounts toward a settlement other than through available insurance funds.  In other words, they would not pay any amounts out of their own pockets.  Notwithstanding, the individual defendants agreed to hire a consultant, a retired judge, to determine whether their combined “liquid” and certain limited “non-liquid” assets exceeded $100 million.  The consultant concluded that these assets were indeed less than $100 million.

With this background in mind, Judge Kaplan considered whether a $90 million settlement was reasonable under the circumstances.  He acknowledged that if the settlement was not approved, the available insurance funds likely would be erode rapidly through payment of defense costs in the various lawsuits pending against Lehman Brothers and their directors and officers.  Should that happen, the directors and officers would be forced to rely on their individual assets, whether liquid or illiquid, to defend and/or settle the litigations.  The amount sought in these suits, he observed, could easily reach billions of dollars.  Judge Kaplan observed that looking only to the individual defendants’ liquid assets did “not permit the Court fully to consider the factors pertinent to approving or rejecting the settlement,” nor was the asset inquiry “as informative as necessary and appropriate for this Court” to consider the reasonableness of the settlement.  Accordingly, Judge Kaplan directed that further inquiry be had into the entirety of the individual defendants assets, liquid and non-liquid, so that the court could determine the reasonableness of the settlement.