United States: Insurance Law - Week Of October 21, 2022

PANDEMIC UPDATE

The Ninth Circuit has issued an unpublished decision in BA LAX LLC v. Hartford Fire Ins. Co., No. 21-55109 (9th Cir. Oct. 21, 2022), declaring that the plaintiff had not pleaded any "physical alteration" of its property so as to satisfy the policy's requirement of "direct physical loss," nor did the California District Court judge abuse his discretion in refusing to defer ruling until the insured had more time to pursue discovery.

In the wake of the Washington Supreme Court's recent unanimous declaration in Hill & Stout v. Mutual of Enumclaw, the Ninth Circuit has affirmed the dismissal of a dentist's COVID BI suit, ruling in Caballero v. Massachusetts Bay Ins. Co., No. 21-35510 (9th Cir. Oct. 17, 2022) that the claims were not for "direct physical loss," civil authority coverage did not apply because the governmental shut down orders were issued due to health concerns and not because of dangerous property conditions and that these claims were, in any event, subject to the policy's virus exclusion.

NEW CASES OF CONSEQUENCE

SEVENTH CIRCUIT Procedure/"Damages Splitting"/Claim Preclusion (IL)

In what is hopefully one of the concluding chapters of an insurance coverage dispute of Dickensian length and byzantine procedural complexity, the Seventh Circuit has ruled that notwithstanding the doctrine of claim preclusion, an insured's prior litigation in state court did not preclude it from attempting to seeking punitive damages in federal court. While emphasizing its view that the outcome in this case was somewhat anomalous, the Court of Appeals held in Creation Supply, Inc. v. Selective Ins. Co. of the Southeast, No. 21-3171 (7th Cir. October 20, 2022) that Illinois courts recognize an exception to the general rule of claim preclusion where, as here, the court in the first action expressly reserved the plaintiff's right to maintain the second action. The court expressed dismay at this outcome, however: "Why Creation Supply did not resolve all its disputes in one forum—especially after receiving a favorable decision on the duty-to-defend question in state court—is beyond us. Still, we must respect and accept the Illinois circuit court's express decision to reserve Creation Supply's breach-of-contract claim for federal court."

ELEVENTH CIRCUIT Fireworks Exclusion (WI)

The Eleventh Circuit has ruled that the liability insurer of a fireworks manufacturer had no duty to defend, or indemnity personal injury suits brought by volunteers at the Land O' Lakes municipal July 4th fireworks show. Applying Wisconsin law, the court held in T.H.E. Ins. Co. v. Olson, No. 22-1143 (11th Cir. Oct. 17, 2022) that the claims were clearly subject to a "Shooters Endorsement" exclusion "for any claims arising out of injuries or death to shooters or their assistants hired to perform fireworks displays or any other persons assisting or aiding in the display of fireworks..." In rejecting the claimants' argument that the exclusion only applied to volunteers who were assisting paid "shooters," the Court of Appeals found that that the exclusion plainly applied both to hired "shooters" as well as "any other persons" assisting or aiding in fireworks displays and thus applied here, where the individual lighting ("shooting") the fireworks was also a volunteer.

ARIZONA First Party Bad Faith/Waiver/Mitigation

The Arizona Supreme Court has ruled in Cavallo v. Phoenix Health Plans, Inc., No. CV-21-0051 (Ariz. Oct. 20, 2022) that a trial court erred in giving a waiver instruction in a health insurance bad faith case where there was no evidence that the insured had ever intentionally relinquished his rights. In remanding the case for further proceedings, the court also declared that an instruction on mitigation of damages should follow Section 918 of the Restatement (Second) of Torts to the effect that "one injured by the tort of another is not entitled to recover damages for any harm that he could have avoided by the use of reasonable effort or expenditure after the commission of the tort."

KENTUCKY Prior Events Exclusion/Recoupment

The Kentucky Supreme Court has ruled in Ashland Hospital Corp. v. Darwin Select Ins. Co., 2020 SC 0260 (Ky. Oct. 20, 2022) that the state's intermediate appellate court erred in granting summary judgment to a D&O insurer based on a "prior notice of events" exclusion. The court focused on the fact that Darwin had argued that a 2011 subpoena did not constitute circumstances giving notice of a potential claim under the policy and could not therefore now rely on these same circumstances to seek relief under this exclusion. Further, the court found that although it was now clear in hindsight that the Justice Department was investigating the insured, its 2011 subpoena was insufficiently specific to put the insured on notice of the detailed facts required by this exclusion. Furthermore, the Supreme Court ruled that the Court of Appeals lacked jurisdiction to order the insured to repay Darwin since the issue of recoupment had not been the subject of any final order from the trial judge.

MINNESOTA First Party/Pre-Judgment Interest

Where a homeowner's policy stated that the insurer would pay the amount of loss in excess of the insured's deductible, "not to exceed the applicable limit of insurance" but made no mention of pre-judgment interest, the Minnesota Supreme Court has ruled that the Appeals Court erred in holding that a homeowner's right to recover pre-judgment interest for a covered fire loss was capped by the policy limit. In concluding that the Minnesota standard fire insurance policy (Minnesota Statutes Section 65A.01) entitles insureds to prejudgment interest on the full amount of the insured loss even if that results in a total recovery that exceeds the policy limit, the court ruled in Else v Auto-Owners Ins. Co., A20-476 (Minn. Oct. 5, 2022), that the inclusion of language in Section 65A.01, Subdivision 3, allowing awards "with interest thereon from the time when the loss shall become payable" shows that the Legislature did not intend to cap insurer liability at "the sum insured." Further, in cases where the insurer has denied coverage altogether, the court ruled that pre-judgment interest should run from 60 days after the insured submitted a proof of loss, even though the loss had not by then been "ascertained." Writing in dissent, Justice Thissen (joined by Chief Justice Gildea and Justice Anderson) argued that Else should not have recovered any pre-judgment interest because his loss was not "ascertained" until the trial court found coverage for his fire loss and Auto-Owners had paid the full amount of his loss within the 60-day safe harbor provision of Section 65A.01.

OTHER DEVELOPMENTS OF NOTE

Inside the Insurance Industry

An investor has sued Argo Group claiming that it overstated the prospects for underwriting results that resulted in a 60% share price drop when the truth came to light.

Florida Governor Ron DeSantis has asked the state legislature to return for a special session in December for further action on the Sunshine State's property insurance crisis as well as new issues presented in the wake of Hurricane Ian.

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