Insureds can't recover for claims they won't discuss under oath
The insureds in this Alabama case owned a convenience store. They bought an insurance policy for it that had a coverage period commencing March 13, 2001. The insureds submitted claims arising from burglary and vandalism at their store on three separate occasions in July and August. At the time they made these claims, the insurer had not yet sent them a copy of their policy. It arrived in September. Meanwhile, the insurer contracted with an independent adjuster to investigate and adjust the claims.

The policy contained several conditions pertaining to the insureds' recovery for their losses. One read as follows: “We may examine any insured under oath, while not in the presence of any other insured and at such times as may be reasonably required, about any matter relating to this insurance or the claim, including an insured's books and records. In the event of an examination, an insured's answers must be signed.”
On five occasions in the latter half of 2002, the insurer, through an attorney, scheduled the insureds to appear for examinations under oath. They failed to appear on any of these occasions, despite the fact that the insurer's attorney, at least initially, coordinated the examination dates with the insureds' attorney.
In 2005, the insureds sued the insurer, its agent, the independent adjusting firm and its adjuster for breach of contract, bad faith and professional negligence.
In response, the carrier and its agent filed a motion to dismiss the action. They asserted that the insureds were not entitled to recover because they had failed to submit to the required examinations under oath, thus violating a condition precedent to coverage under the policy.
In their response, the insureds argued that because they were not given a copy of their insurance policy until after they had made their claims, “they had no idea what the duties and responsibilities were” under the policy. They also asserted that the insurer failed to furnish them with a copy of their policy in a timely manner, in violation of an Alabama statute providing that “every policy shall be mailed or delivered to the insured or to the person entitled thereto within a reasonable period of time after its issuance.”
The insureds also argued that before an insurer can avoid coverage because of its insured's failure to cooperate in a claims investigation, the failure must be material and substantial, and must result in prejudice to the insurer. They argued that the insurer had not shown that it had been prejudiced by their actions. They also contended that whether an insured has breached the duty to cooperate is usually a question of fact for a jury.
The trial court, however, found for the insurer. “Pursuant to Nationwide Insurance Co. v. Nilsen, 745 So. 2d 264 (Ala. 1998), an insured's duty to submit to an examination under oath as required in an insurance policy is a condition precedent to his or her recovery under an insurance contract,” the court noted. “Moreover, the Alabama Supreme Court determined that such an obligation was a 'strict' condition precedent. The Plaintiffs in this case have provided no case law indicating that mistake, confusion or lack of knowledge of such a strict condition negated their obligation to comply.”
The decision was upheld on appeal. The appeals court noted that the insureds received a copy of their insurance policy more than 10 months before the insurer asked them to submit to the examinations their policy called for. It concluded that the insureds were not prejudiced by their failure to receive their insurance policy before they filed their claims.
As previously mentioned, the insureds also sued the independent adjusting firm and its adjuster, claiming they owed a duty to the insureds. The appeals court noted that this was a question of first impression in Alabama. It noted, however, that most courts in other jurisdictions that had considered the issue found that an adjuster owes a duty only to the insurance company that hires it.
“Having reviewed the foregoing cases and the rationales employed therein, we agree with those courts that have refused to find that an independent adjuster or investigator that was hired by an insurance company to investigate or adjust the claim of one of its insureds owes a duty to the insured,” the appeals court said. “Thus, we affirm the trial court's entry of a summary judgment in (the adjusting firm and the adjuster's) favor on the (insureds') negligence claim.”
Akpan v. Farmers Insurance Exchange Inc., No. 2050420 (Ala.Civ.App. 01/12/2007) 2007.AL.0000039 (www.versuslaw.com).
Court upholds intrafamily exclusion in supplemental auto insurance policy
A man rented a car from a car rental company. As part of the transaction, he bought mandatory auto liability insurance from one insurance company. He also elected $1 million in supplemental auto liability insurance from a second carrier.
The man drove the rental car to Florida, with his wife and their two children as passengers. He was driving approximately 100 miles per hour when the car left the roadway and struck a concrete barrier. All four occupants of the car were killed.
The administrator of the wife's estate filed a claim for wrongful death against the husband's estate. The insurer of the mandatory liability policy responded, paying its $25,000 limit. The insurer of the $1 million supplemental liability policy declined to defend or indemnify the man's estate, however, citing its policy's exclusion for claims brought by an insured's family members.
The administrator filed a request for declaratory judgment against the insurer to establish that it had a duty to provide both indemnification and a defense to the husband's estate. A trial court ruled in the insurer's favor. The administrator appealed, claiming that the insurance policy's intrafamily exclusion did not justify dismissal of the complaint and that the exclusion was contrary to public policy.
The appeals court, citing another case, said an intrafamily exclusion will be upheld if it does not unfairly penalize an innocent victim or expose the insured to unanticipated liability. Moreover, even in the absence of a policy containing an intrafamily exclusion, it said, the doctrine of inter-spousal tort immunity may prohibit a suit between spouses, or the estates of spouses, as a matter of public policy.
Enforcing the intrafamily exclusion in this case did not conflict with Georgia's compulsory insurance law, the appeals court said, because the wife's estate has been compensated (under the husband's mandatory auto liability policy) for the full amount required under such law. While the administrator could contend that the state-set compulsory minimum insurance amount was inadequate compensation for the loss of the wife's life, that did not mean the supplemental policy's intrafamily exclusion violated public policy, the appeals court said.
The administrator also argued that the supplemental policy's intrafamily exclusion clause was invalid because the policy did not explicitly inform policyholders that public policy would invalidate the exemption only to the extent required to ensure compliance with Georgia's compulsory insurance law. The appeals court rejected that argument, however. It said the state Supreme Court had ruled that an “insurer is entitled to rely on the (intrafamily) exclusion as to sums above those required by our compulsory insurance law.” Such entitlement is not conditioned on the inclusion of an additional clause in the insurance policy, like the one cited by the administrator, the court said.
If the husband or his wife objected to the exclusion in the supplemental liability policy, the appeals court said, they could have negotiated to have it removed or could have bought supplemental insurance from an insurer that did not require the exclusion. The trial court's decision was upheld.
Hoque v. Empire Fire & Marine Insurance Co., No. A06A1313 (Ga.App. 10/06/2006) 2006.GA.0001442 (www.versuslaw.com).
Mad cow embargo does not constitute 'direct physical loss' to beef product
A Minnesota food company sold cooking oil and shortening containing beef tallow from which the cholesterol had been removed. On May 20, 2003, the U.S. Department of Agriculture prohibited the importation of ruminants or ruminant products from Canada after a cow in that country tested positive for bovine spongiform encephalopathy, commonly known as mad cow disease.
At the time the border was closed to the importation of beef, the food company's sole supplier of beef product was a company in Ontario, Canada. That company manufactured and packaged the beef product in Canada, using the Minnesota food company's patented process for removing cholesterol from beef tallow.
Just prior to the embargo, the food company placed an order for beef product with its Canadian provider. It manufactured, packaged and loaded the product into a truck, but it wasn't shipped because of the USDA's order.
Since the food company was unable to import the beef product from Canada, it was unable to fill orders and was forced to find a new supplier. This led the food company's best customer to terminate its contract with the company seven months early.
The food company submitted a business-income claim to its insurer, claiming damages for extraordinary operating expenses and loss of profits based on the early termination of its contract with its best customer. It also cited the cost of obtaining an alternative product with cholesterol from an Arkansas supplier and later, when the necessary manufacturing equipment was installed, removing the cholesterol from that product.
The food company's insurance policy stated, in relevant parts:
“We will pay the actual loss of 'business income' you sustain due to the necessary suspension of your 'operations' during the 'period of restoration.' The suspension must be caused by direct physical loss to Property … including Property Off Premises, and result from any Covered Cause of Loss.” (Emphasis added.)
“Action by Civil Authority. We will pay for the actual loss of 'business income' you sustain and necessary 'extra expense' caused by action of civil authority that prohibits access to the described premises due to direct physical loss to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.” (Emphasis added.)
The insurance policy, however, did not define the phrase “direct physical loss to property.”
The insurer denied the claim, contending there was no direct physical loss to the food company's property. The food company then sued the insurer, contending that the consequences of the USDA order constituted direct physical loss to its property.
Eventually the case wound up in a federal district court. It determined that the food company suffered no direct physical loss to property and granted summary judgment in favor of the carrier.
The food company appealed to the 8th U.S. Circuit Court of Appeals, arguing that the closing of the border caused direct physical loss to its beef product because it was treated as though it were physically contaminated by mad cow disease and consequently lost its function. It cited two cases, General Mills Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147 (Minn. Ct. App. 2001), and Marshall Produce Co. v. St. Paul Fire & Marine Ins. Co., 98 N.W.2d 280 (Minn. 1959), to support its position that a government regulation's impairment of a food product's function and value amounts to direct physical loss to insured property.
The appeals court, however, found both the cited cases, as well as a third (Sentinel Mgmt. Co. v. New Hampshire Insurance Co. 563 N.W. 2nd [Minn. Ct. App. 1997]), distinguishable from the one at hand. In the cited cases, the court noted, coverage was found to be triggered by actual physical contamination of insured property. In General Mills, 16 million bushels of raw oats were treated with a pesticide not FDA-approved for use on oats. Although consumption of the contaminated oats was deemed not hazardous to human health, the oats were in violation of FDA regulations and could not be used in General Mills' oat-based products. Because the contamination rendered the oats unusable, General Mills was entitled to coverage for “direct physical loss or damage to property.”
The claim in Sentinel was based on the release of asbestos fibers and resulting contamination of apartment buildings. The Minnesota Court of Appeals held that the asbestos contamination constituted direct physical loss to the properties because “a building's function may be seriously impaired or destroyed and the property rendered useless by the presence of contaminants.”
In contrast to these cases, in which actual physical contamination was established, the food company conceded that the beef product inside the truck in Canada was not physically damaged or contaminated in any manner.
The insurance policy at issue in Marshall Produce did not cover just “direct physical loss” as in the food company's policy but rather “all loss or damage by fire.” The supplier in this case manufactured drums of egg powder and other goods for the U.S. Army. After smoke from a nearby fire penetrated the manufacturing plant, the Army rejected the drums because they violated its contract's sanitation requirements, which stated that the “processing and storing of eggs and egg products must be done in an area free from odors, dust, and smoke-laden air.”
Shortly after the fire, an inspector “examined the packaging around the cans (and)…found smoke contamination, a very strong odor from the smoke throughout the package and around the border of the package.” Although it was not established that the egg powder was physically contaminated by the smoke, the Minnesota Supreme Court determined that the supplier was entitled to coverage because its policy covered “all loss or damage by fire,” and the rejection of the goods was a loss caused by the smoke from the fire. In contrast, the food company's policy provided coverage only for direct physical loss to property, and the company's product suffered no physical loss or contamination.
In Pentair, Inc. v. Am. Guarantee & Liab. Ins. Co., 400 F.3d 613 (8th Cir. 2005), a case applying Minnesota law and discussing the same Minnesota insurance cases, the appeals court had rejected an argument similar to that made by the food company. When an earthquake caused a loss of power to two Taiwanese factories, the factories could not supply products to a subsidiary of Pentair for two weeks. Pentair argued that the property of the Taiwanese factories suffered “direct physical loss or damage” when the power outages prevented the factories from performing their function.
“We distinguished Sentinel and General Mills, explaining that 'in those cases, insured property was physically contaminated-a building by the release of asbestos fibers in Sentinel, and grain by application of an unapproved pesticide in General Mills.' Although we noted that 'once physical loss or damage is established, loss of use or function is certainly relevant in determining the amount of loss, particularly a business interruption loss,' we refused to adopt the position that 'direct physical loss or damage is established whenever property cannot be used for its intended purpose' and noted that our holding was also consistent with Marshall Produce.”
To characterize the food company's inability to transport its truckload of beef product across the border and sell it in the U.S. as direct physical loss to property would render the word “physical” meaningless, the court said. Moreover, the policy's use of the word “to” in the phrase “direct physical loss to property” was significant, the court added. The food company's argument might have been stronger if “of” had been used instead, as in “direct physical loss of property” or even “direct loss of property.” But the policy's use of the words “to property” further undermined the food company's argument that a border closing triggers coverage. The food company did not experience direct physical loss to its property, the court said; therefore, it could not recover for the business-income loss resulting from the embargo on beef products. It upheld the district court's summary judgment in favor of the carrier.
Source Food Technology, Inc. v. United States Fidelity and Guaranty Co., No. 06-1166 (8th Cir. 10/13/2006) 2006.C08.0001569 (www.versuslaw.com.)
Don Renau is a retired agent and practicing attorney in Louisville, Ky. As an attorney, he consults on a variety of issues, including business formation and estate planning, for agencies and businesses in Kentucky. He can be reached at [email protected] or by fax at (502) 805-0702.