Indemnification

Does An Insurance Company Have The Duty To Indemnify A Policyholder Against Criminal Activity? (PA)

When a policyholder is sued and seeks coverage from their insurance company, it can become complicated when that insurance company refuses coverage. It can become even more complicated when the underlying cases concern a crime. In Samsung Fire and Marine Insurance Co. Ltd (US Branch) v. UFVS Management Company LLC, (E.D. Pa. 2023), the insurance company Samsung Fire and Marine Insurance, Co. LTD., U.S. Branch (“Samsung”) brought a declaratory judgment against UFVS Management Company, LLC (“UFVS”), Roosevelt Motor Inn, Inc. (“Roosevelt Inc.”), Roosevelt Inn, LLC (“Roosevelt LLC”), and Yagna Patel (“Patel”) (collectively, “Policyholders”) seeking a declaration that Samsung did not have a duty to defend or indemnify Policyholders in four state court actions brought against them. The underlying state court actions were brought by four different women, who alleged that they were victims of human sex trafficking at the Roosevelt Inn in Philadelphia, owned by Policyholders, and covered under Samsung’s policy at the time of the alleged incidents. Subsequently, when the women brought suit against Policyholders, they sought coverage against the claims. The relevant provisions of both the Nationwide and Samsung policies were those providing coverage for bodily injury and property damage (Coverage A) and personal and advertising injury (Coverage B). Samsung alleged in their declaratory judgment that they did not have a duty to indemnify the Policyholders, because there was an exclusion for abuse or molestation in the insurance policy. Additionally, Samsung, along with the other insurance companies (collectively, “Providers”) involved in the relevant third-, fourth-, and fifth-party claims to this matter, argued that providing coverage to Policyholders went not only against the respective policies, but also against Pennsylvania public policy. Providers further asserted that even if their policies were found by a court to cover Policyholders, public policy would bar coverage, and would require the Court to award declaratory judgment. The Court ruled in favor of the Providers, opining that “shielding Policyholders from the consequences of their criminal conduct would be against the safety, morals, and welfare of the Commonwealth.” Therefore, Samsung’s Motion for Judgment on the Pleadings was granted, and Policyholders’ was denied. Thanks to Haley Matthew for her contribution to this article. Should you have any questions, please contact Andrew Gibbs.Read More

District of NJ Denies Insurer’s Attempt to Dismiss Claims for Sexual Abuse Coverage

In School Excess Liability Joint Ins. Fund v. Illinois Union Ins. Co., the United States District Court for the District of New Jersey recently considered whether the plaintiffs, School Excess Liability Joint Insurance Fund (“SEL”), Diploma Joint Insurance Fund (“Diploma”), and School Alliance Insurance Fund’s (“SAIF”) sufficiently pled that they have incurred losses that eroded their retained risk and triggered coverage under the excess insurance policies issued by the defendant, Illinois Union Insurance Company (“Illinois”). The plaintiffs sought defense expenses and liability costs for defending sexual abuse claims.

By way of brief background, the plaintiffs are joint insurance funds, i.e., public entities composed of “members” who pool resources to self-insure against losses for claims up to a specific amount, and purchase excess insurance from insurance companies to cover losses that exceed that amount. Defendant Illinois issued multiple excess insurance policies to the plaintiffs. Specifically, the excess policies provided Illinois will pay the “Ultimate Net Loss in excess of the Underlying Coverage that the Insured becomes legally obligated to pay as damages because of the injury or damage to which this insurance applies.”

In their complaint, the plaintiffs averred that the policies provide coverage for general liability, which encompasses sexual abuse claims, as the policies specifically identify limits of insurance for “sexual abuse” in the Schedule of Underlying Coverage. Therefore, plaintiffs claimed that Illinois breached its contractual duty and duty of good faith and fair dealing by failing to indemnify the plaintiffs for defense expenses and amounts paid for liability and defense expenses for sexual abuse claims.

Upon analyzing whether the plaintiffs asserted a valid breach of contract claim, the court the held that, since the plaintiffs are “self-insured”, i.e., without insurance, pursuant to N.J.S.A. 18A:18B-1 et seq., the plaintiffs have no Underlying Coverage as defined by the insurance policies. Therefore, the court reasoned that, by self-insuring, the plaintiffs bore the burden of paying defense expenses.

With respect to whether the sexual abuse claims were covered under the policies, the court compared the averments of the complaint with the policies and, treating the factual averments as true and construing the complaint in the light most favorable to the plaintiffs, held the plaintiffs sufficiently pled the sexual abuse claims were covered by the policies and the plaintiffs payments towards those claims eroded their retained risk and triggered Illinois’ indemnification obligation. In denying Illinois’ motion with respect to the breach of contract claim, the Court focused on the policies’ definition of sexual abuse, which the plaintiffs pleaded fell within the ambit of “General Liability”, and identification of aggregate limits for sexual abuse claims.

It is important to note that, upon rendering its decision, the court did not take a position as to whether the plaintiffs would ultimately succeed on the merits of their claims, as this determination could only take place after the completion of discovery.

Thanks to Lauren Berenbaum for her contribution to this post. Please contact Heather Aquino with any questions.

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Third Circuit Court of Appeals Affirms District Court’s Finding (PA)

In Republic Franklin Square Insurance Company v. Bethren Mutual Insurance Company, Republic Franklin brought a declaratory judgment and equitable subrogation action in the Eastern District of Pennsylvania against Brethren Mutual seeking reimbursement of $175,000 it paid on behalf of its insured Paul Lamb to settle a personal injury action. In the underlying case, the plaintiff brought suit against against the property owner Lamb after slipping and falling in a commercial lot owned by Lam and leased to Shree Ram Enterprises (SRE).

Republic Franklin filed a declaratory judgment action arguing that it was entitled to additional insured coverage from Brethren Mutual, the insurer for the lessee. The Brethren Mutual policy included an endorsement listing Lamb as an additional insured “only with respect to liability arising out of the ownership, maintenance or use of that party of the premises leased to [SRE]”. The Court concluded that but for SRE’s “maintenance or use”, the underlying plaintiff would not have fallen and sustained injuries. As such, the Court granted Republic Franklin’s Motion for summary judgment.

Thereafter, Brethren Mutual appealed the District Court’s Order, contending that the slip-and-fall did not “arise out of” the “use” of the leased premises. The Third Circuit noted the well-established Pennsylvania law that “arising out of” does not mean “proximately caused by”, but rather “causally connected”. The Third Circuit found that it was established that the use of the property “depended on customers’ ability to ingress and egress through the attached parking lot.” The Third Circuit held that the underlying plaintiff would not have been injured in the parking lot but for her patronage of the store. Accordingly, on October 6, 2020, the Third Circuit affirmed the Eastern District’s ruling, finding that the additional insured endorsement afforded coverage.

This case demonstrates how courts applying Pennsylvania law broadly interpret additional insured endorsement language when determining coverage.

Thanks to Rachel Thompson for her contribution to this post. Please contact Heather Aquino with any questions.Read More

No Coverage for Negligent Supervision Claim (PA)

In Michele Kahana v. Allstate Vehicle and Property Ins. Co., the U.S. District Court for the Eastern District of Pennsylvania analyzed whether an auto insurer had a duty to defend and indemnify a claim of negligence per se arising out of an auto accident. The claim was asserted against Kahana, the mother of the minor decedent who was struck while walking alone after midnight while dressed in dark clothing. It was asserted that Kahana failed to supervise her minor child, leading to the accident.

Kahana subsequently tendered her defense to her auto insurer, GEICO Casualty Insurance (“GEICO”). After GEICO denied her claim for coverage, Kahana commenced the instant action seeking a declaration requiring GEICO to defend and indemnify her with respect to the negligent supervision claim.

GEICO filed a motion to dismiss Kahana’s claims, arguing that Kahana failed to state a claim for defense and indemnification under the unambiguous language of the insurance policy. To determine whether the auto policy provided coverage under the policy, the court applied long-standing Pennsylvania principals regarding insurance policy interpretation.  In doing so, the court determined that the language of the auto policy was unambiguous.

Through this context, the court next analyzed whether the claims in the underlying lawsuit were covered by the policy. The court noted that the claim did not assert that Kahana “owned, maintained, or used a car involved in the fatal collision” as required by the plain and unambiguous language of the auto policy. Therefore, the court granted GEICO’s motion to dismiss. This case is an example of the importance of evaluating the plain language of the policy when determining coverage.

Thanks to Lauren Berenbaum for her contribution to this post. Please contact Heather Aquino with any questions.Read More

Made-Whole Doctrine Does not Apply to Deductibles or Self-Insured Retentions (NJ)

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New York Contractor Battles For Coverage (NY)

Queens Pioneer Construction Corp. (“Queens Pioneer”) commenced a breach of insurance contract action in the United States District Court for the Eastern District of New York seeking damages and a declaratory judgment associated with insurer Illinois Union’s coverage disclaimer and withdrawal from the defense of a civil suit.

The underlying lawsuit was initiated by Juan Algeria Reyes, an employee of Queens Pioneer, who was allegedly injured while working on a construction project. Mr. Reyes brought a personal injury action against ILE Construction Group, the general contractor who was responsible for hiring Reye’s employer, Queens Pioneer, to perform work at the project. In turn, ILE impleaded plaintiff’s employer, Queens Pioneer.

Queens Pioneer tendered to its liability insurer, Illinois National, who initially assumed the defense of the claims against Queens Pioneer. However, they later sent a follow-up letter stating, “we regret to inform you that no coverage exists.” Queens Pioneer states in their Complaint, that as a result of their reliance on Illinois National initially controlling the defense, Queens Pioneer did not hire personal counsel or pursue early resolution.

Illinois National’s decision to revoke the defense coverage stemmed from language in the policy limiting the type of work that can qualify for coverage when an incident occurs. Queens Pioneer asserts in their complaint that the specific type of work they perform falls under the policy’s covered classifications – including carpentry, wall installation, door assembly, dry wall, painting, flooring, siding and masonry.

Queens Pioneer’s breach of contract action against its insurer illustrates the challenges both construction companies and insurers face when a contractor’s trade is not clearly documented in the construction agreements, scope of work, certificates of insurance, or by policy endorsement. Notwithstanding the current pandemic, the construction industry in New York has maintained a relatively stable pace of production, without any signs of slowing down. Accordingly, now, more than ever, it is incumbent on both owners and general contractors to take into account a prospective contractor’s general liability coverage to the same degree as they would consider costs and reputation.

Thanks to James Papadakis for his contribution to this post. Please email Heather Aquino with any questions.

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Is There a New Requirement for Reservation of Rights Letters in Pennsylvania?

A recent case from the Pennsylvania Superior Court reiterates the impact of poorly crafted reservation of rights letters on future coverage defenses. In Selective Way Insurance Company v. MAK Services, Inc. et. al., 2020 PA Super 103 (Pa. Super. Ct. Apr. 24, 2020), the insurer sought a declaration that it owed no duty to defend or indemnify its insured, MAK Services, in an underlying case arising out of a slip and fall on ice in a parking lot.

On April 9, 2013, MAK Services was sued for negligent removal of snow and ice in the parking lot. Selective Way appointed defense counsel and sent a reservation of rights letter to MAK Services. The May 1, 2013, reservation of rights letter provided:

One of the benefits of your insurance policy from Selection is that we will provide you with a legal defense when potentially covered claims are made against you. Since this case meets that standard, I have referred your file to [a] law firm …. They will represent you in this case. You should be hearing from that firm shortly. Please give them your full cooperation and refrain from discussing this loss with anyone other than your attorney or a properly identified representative of Selection.

In addition, please be aware that you always have the right to consult an attorney of your choice, at your own expense, to discuss this matter or to coordinate your defense with the attorney we have retained for you.

In the meantime, please be aware that Selective will be handling this matter under a reservation of rights. This means that Selective reserves all rights reserved to it under applicable law, insurance regulations and policy provisions that may become relevant as this matter continues to develop. Those rights include, but are not limited to, the rights to decline coverage for this claim and to withdraw assigned defense counsel.

On November 13, 2014, eighteen months later, Selective Way filed suit seeking a declaration that it does not owe a duty to defend or indemnify MAK Services because the underlying lawsuit “is based solely upon ice and snow removal activity, and the Policy specifically excludes a defense and indemnity for any damages arising from snow and ice removal activity.” However, Selective Way’s reservation of rights letter made no reference to the snow and ice removal exclusion. The trial court granted summary judgment in favor of Selective Way.

The issue on appeal concerned the sufficiency of Selective Way’s reservation of rights and the timeliness of the coverage challenge. The Court found that the reservation of rights letter was submitted in a timely fashion, but took issue with the sufficiency of the notice. The Court found the absence of any reference or identification to emergent coverage issues problematic. The Court was also critical of the clause attempting to incorporate any issues “that may become relevant as this matter continues to develop.” The Court ultimately reversed the trial court’s grant of summary judgment to Selective Way, holding that the reservations of right letter here failed to provide notice of the existing coverage issues, namely the snow and ice removal exclusion, which should have been obvious to the insurer given language of the underlying complaint.

The Court noted that insurers have a duty to conduct a thorough investigation to preserve coverage defenses. Although an insurer is not required to state every potentially relevant coverage defense in a reservation of rights, “some level of specificity is necessary.” In reversing the summary judgment ruling, the Court held that Selective Way was estopped from asserting the snow and ice exclusion for the first time eighteen months after the reservation of rights letter was issued because the reservation of rights letter did not provide the insured with sufficient notice of the insurer’s coverage position.

This decision is a cautionary tale, and should serve as a reminder to insurance carriers of their obligation to conduct a thorough and timely investigation; to identify potential coverage issues; and to provide the insured with sufficient notice of said coverage positions.

Thanks to Emily Finnegan for her contribution to this post. Please contact Heather Aquino with any questions.

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Judicial Panel Considers Motions to Consolidate All COVID-19 Business Interruption Claims

COVID-19’s impact has reverberated through almost every aspect of American life. The impact has been political, social, and economic. For businesses deemed “non-essential,” such as restaurants, hair salons, and gyms, the impact has been felt even greater. Governmental authorities on the national, state, and local levels have implemented various “stay at home” orders. These orders have, in turn, caused many businesses to lose significant income. As such, several businesses have filed actions seeking recovery of losses they sustained as a result of the orders. The businesses allege that they are entitled to recovery of their losses through their business interruption insurance policies.

As few states have lifted their respective “stay at home” orders, it is likely more claims for business losses will come soon. Anticipating the influx of related litigation, counsel representing multiple policyholders in COVID-19 related lawsuits have filed motions with the Judicial Panel on Multidistrict Litigation for transfer and consolidation of the cases.

The first motion, MDL No. 2942, filed April 20, 2020, seeks transfer and coordination or consolidation of two class-action suits filed in the U.S. District Court for the Eastern District of Pennsylvania with nine “Related Actions” filed in federal courts throughout the country. All actions referenced in the motion seek a finding that the “stay at home” orders trigger coverage under the plaintiffs’ business interruption insurance policies.

The second motion, also MDL No. 2942, filed April 21, 2020 by counsel for the “Related Actions” referenced above, seeks to transfer pending and similar business interruption coverage litigation to the Northern District of Illinois before the Honorable Matthew F. Kennelly. This motion asserts that all of the pending actions involve the questions of whether COVID-19 causes “physical damage or loss to property” and whether COVID-19 was present on the insured property, or on property sufficiently connected to the insured property, to trigger coverage. In support, the motion asserts that claimants will present expert evidence on epidemiological modeling of COVID-19’s spread to determine its presence and impact.

Both motions argue that consolidation is appropriate since the panel has consolidated other widespread cases litigated around the country. Specifically, the motions reference the panel’s consolidation of the 2,700 lawsuits related to the opioid crisis, which spanned several states and were brought against more than a dozen pharmaceutical companies. The motions maintain that consolidation is necessary because, regardless of the different insurers, policies are relatively standard.

Although the panel has yet to decide a factually similar case, it has not hesitated to consolidate cases involving multiple districts and diverse defendants in the past. If the panel consolidates the business interruption claims, the future of business interruption claims—as a whole—will have much at stake in the court that hears the consolidated actions. The insurance defendants are due to respond to the MDL panel in May.

Thanks to John Lang for his contribution to this post. Please email Heather Aquino with any questions.

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When “An Insured” Excludes Coverage For All Insureds (PA)

Recently, in Carrasquillo, Individually and as Administratrix of the Estate of Rafael Santiago, Deceased v. Nancy Kelly and Nationwide Mutual Fire Insurance Company, the Superior Court of Pennsylvania considered whether Nationwide Mutual Fire Insurance Company (“Nationwide”) had a duty to defend and indemnify its insured, Nancy Kelly (“Kelly”) in an action involving the death of Anna Carrasquillo’s son, Rafael Santiago (“Santiago”).

Santiago was staying at the home of (“N. Kelly”) when he was fatally shot inside of her home by James Kelly (“J. Kelly”).  At the time of the shooting, J. Kelly and N. Kelly were insured under a homeowners’ insurance policy issued by Nationwide (“policy”).  Ultimately J. Kelly pled guilty to criminal charges.  Soon thereafter, Carrasquillo commenced a wrongful death and survival action (“Underlying Lawsuit”) against N. Kelly and J. Kelly.  Simultaneously, Carrasquillo requested that Nationwide defend N. Kelly in the Underling Action.  After Nationwide disclaimed coverage, Carrasquillo filed the instant declaratory judgment action seeking an order that the Policy provided coverage to N. Kelly for the allegations contained in the Underlying Lawsuit.

Nationwide filed a motion for summary judgment, seeking an order that it had no duty to defend N. Kelly in the Underlying Lawsuit because the Policy’s intentional and criminal act exclusions barred coverage.  Carrasquillo disagreed – arguing Carrasquillo’s complaint in the Underlying Lawsuit triggered coverage because the complaint sounded in negligence.  The trial court denied Nationwide’s motion for summary judgment, effectively providing that Nationwide had a duty to defend, and potentially indemnify N. Kelly in the Underlying Lawsuit; subsequently, Nationwide appealed.  On appeal, the Superior Court based its analysis on longstanding Pennsylvania case law regarding the interpretation of insurance policies, which the Court noted, is a question of law.  The fundamental question on appeal was whether the trial court erred in determining that the Policy’s criminal act exclusion, which excludes coverage for, inter alia, bodily injury “caused by or resulting from an act or omission which is criminal in nature and committed by an insured” regardless of whether the insured is convicted of a crime, did not apply to bar coverage.

Although the Court noted it was required to only consider the allegations contained in Underlying Lawsuit, the Court determined Carrasquillo “artfully pled” her complaint to avoid the Policy’s exclusions, as the complaint omitted any reference to J. Kelly’s criminal conviction and only alleged J. Kelly who had “dangerous propensities” “attacked . . . and fatally shot” Santiago.  Accordingly, the Court held it was required to consider J. Kelly’s criminal conviction.  In doing so, the Court determined that J. Kelly’s conviction triggered the criminal act exclusion, which automatically precluded coverage to J. Kelly.

However, the pertinent question on appeal was whether the criminal act exclusion barred coverage to N. Kelly.   The Policy’s criminal act exclusion excludes coverage for the criminal act of “an insured”, as opposed to exclusions excluding coverage to “the insured”.  Based on the plain language of the Policy and precedential Pennsylvania law, the Court determined J. Kelly was “an insured” under the Policy and committed a criminal act, it held the criminal act exclusion also barred coverage to N. Kelly.  Therefore, the Court reversed the trial court decision and granted Nationwide’s motion for summary judgment.  Ultimately, this case is a reminder of the importance between exclusions that refer to “an insured” versus “the insured”.

Thanks to Lauren Berenbaum for her contribution to this post.  Please email Vincent F. Terrasi with any questions or comments.Read More

Language Must Be Crystal Clear To Get Indemnity (NJ)

The New Jersey courts have long emphasized the need for precision when drafting indemnification agreements.   The principals of indemnification clause construction were recently re-visited in the unreported decision of Grandview At Riverwalk v. K. Hovnanian At Port.   In that case, the defendant K. Hovnanian appealed the trial court’s denial of their motion seeking contractual indemnification from a third-party defendant architect for a $3 million jury verdict awarded to the plaintiff in a construction defect case.

The Appellate Court emphasized that, under New Jersey case law, the first and foremost rule of interpretation of an indemnity provision is to determine the parties’ intent. Additionally, any ambiguities are to be strictly construed against the indemnitee.  Lastly, an indemnity clause purporting to shift liability for one’s own negligence to an indemnitor is especially narrowly construed and  requires “explicit language” to include losses within the scope of the indemnity if they arose from the proposed indemnitee’s own negligence.

In this particular case, the plain language of the indemnification clause made clear beyond any doubt that the third-party defendant architects only agreed to assume responsibility and liability for losses caused by the architects’ own negligence.  Accordingly, the architects were not responsible for indemnifying Hovnanian for Hovnanian’s own negligence, and the trial court’s decision was affirmed. This case highlights the importance of provision in indemnification clauses.

Thanks to Heather Aquino for her contribution to this post.  Please contact Georgia Coats with any questions.

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