UM Claim, Notice Provision, and Prejudice to Insurer

This case involves a policy for uninsured motorist (UM) coverage issued by State Farm that contained a 30-day notice provision regarding hit-and-run motor vehicle claims. This case is DeFrain v. State Farm Mutual Automobile Insurance Company, 2012 WL 1948768.

A hit-and-run driver ran his vehicle into a pedestrian, DeFrain, who sustained severe head injuries as a result. DeFrain had an auto policy with State Farm that had UM coverage for the insured. The policy also required a claimant to notify State Farm of a claim for those UM benefits and provide all the details as soon as reasonably possible after the insured is first examined or treated for the injury. The policy also required the claimant seeking UM benefits to report the accident to the police within 24 hours and to the insurer within 30 days. State Farm did not receive notice that DeFrain had been the victim of a hit-and-run accident until almost 90 days after the accident.

DeFrain filed a complaint seeking UM benefits but then died soon after from his injuries at which time his estate took over the complaint. State Farm moved for summary judgment, arguing that the failure to comply with the 30-day notice provision required dismissal of the complaint. The trial court agreed with the insured's estate and concluded that the 30-day notice provision contained an ambiguity and there was no evidence that the failure to comply prejudiced the insurer. The insurer appealed and that court affirmed the trial court's ruling. The case then went to the Supreme Court of Michigan.

The Supreme Court noted that the case required it to interpret a policy for UM coverage that includes a 30-day notice provision regarding hit-and-run motor vehicle claims. Because providing UM coverage is optional and not statutorily mandated under the no-fault statute, the court said that the policy language alone controls the circumstances entitling a claimant to an award of benefits.

In this instance, the court said, the policy unambiguously required DeFrain to notify State Farm about the hit-and-run accident within 30 days of its occurrence; whether the failure to comply with the provision prejudiced State Farm was irrelevant. State Farm was entitled to summary disposition because a condition precedent to the policy's enforcement was not satisfied. The lower courts' rulings in favor of the insurer were reversed.

Editor's Note: The Michigan Supreme Court held that the 30-day notice provision was an unambiguous contractual provision and it was to be enforced as written unless the provision would violate the law or public policy. In this case, the court found that the insured failed to present persuasive arguments that enforcement of the notice provision would violate either the law or public policy.

The court did agree that a vast majority of jurisdictions have imposed some form of a prejudice requirement in determining whether to enforce a condition precedent in an insurance contract, but it refused to extend that legal holding to notice provisions setting forth a specified time (that is, 30 days) within which notice must be provided. DeFrain's estate was aware of the clearly stated 30-day notice provision and did not abide by it, so its case was lost.

Escape Clause and Sharing of Defense Costs

Two insurers argued over the costs of defense for an insured that operated a haunted house where a worker was injured. This case is Western World Insurance Company v. Markel American Insurance Company, 2012 WL 1592970.

Hodges was working the twilight hours checking tickets at the Bricktown Haunted House. Hodges went looking for a replacement of his flashlight and in the darkness stepped into an elevator shaft. He fell 20 feet down the shaft and was severely injured. One of the insurers of the haunted house admitted coverage and proceeded to defend the insured, Brewer Entertainment. The case was settled. However, the participating insurer, Western World Insurance Company, wanted the other insurer, Markel American Insurance, to share the costs of defense. Markel declined and Western World sued.

Before the district court, Western World pointed out that Markel's policy covers Brewer for its haunted house operation and the very sort of accident that occurred. Markel replied that its policy had an escape clause that Markel said allowed it to elude the liability that would otherwise arise from the terms of its policy. The district court agreed with Markel and entered summary judgment for Markel. Western World appealed.

The U.S. Court of Appeals noted that both insurers agree that if the escape clause does not apply, Markel's policy affords coverage for the Hodges accident and requires Markel to reimburse Western World for its fair share of the attorney fees and the cost of the settlement. This is because of the state doctrine of equitable contribution, which apportions a loss between two or more insurers that cover the same risk so that each pays its fair share of a common obligation, and that one con-insurer does not profit at the expense of the others. The appeals court said that the only issue then is whether the escape clause lets Markel escape liability.

Viewed in isolation, the court said, the clause seems to suggest that Markel is correct in its interpretation. The clause states that “this insurance shall not apply to any entity that is already an insured under any other insurance provided by any company”, a statement that clearly disclaims liability in the very circumstances in this case. However, the court went on, when viewed in context, Markel's argument faces serious problems.

The escape clause did not actually appear in Markel's general liability policy; it was added by a later endorsement with the actual following language: “this insurance shall not apply to any entity that is already an insured under any other insurance provided by any company or that would be an insured but for the exhaustion of its limits of insurance”. Moreover, this clause is stated to amend paragraph 2 of the “who is an insured” clause and the court said this means the escape clause can be read as applying only to entities in that particular paragraph.

Specifically, it was not clear to the court what “this insurance” and “any entity” referred to; the terms might refer to the insurance provided to any of the entities covered by paragraphs 1 and 2 of the who is an insured section of the policy, or they might refer to the insurance provided to entities identified in paragraph 2, and only paragraph 2. To the court, this meant serious problems for Markel because Brewer and its haunted house were insured not under paragraph 2 but under paragraph 1.

The “other insurance” clause also was a source of problems for Markel. The court said that the provision states that Markel's insurance provides primary coverage and adds that if another insurance policy is also primary, the two carriers will share the cost of coverage. In other words, the other insurance clause states the general rule that Markel will provide co-insurance. If the court were to accept Markel's position in this dispute, the escape clause would absolve all liability when another insurer exists, and this would render the other insurance provision more apparitional than corporeal, said the court.

The lower court's ruling granting summary judgment to Markel was reversed and the case was remanded.

Editor's Note: The U.S. Court of Appeals analyzed the escape clause in the Markel policy and found it ambiguous as to its applicability, and at odds with the policy's other insurance clause. In such an instance, the court held that, “when an escape clause is less a clearly marked exit than it is a hidden trap door, the reasonable expectations of an insured who has read and become familiar with the policy language supplies the rule of decision”. Applying the reasonable expectations doctrine to this case, the court had no doubt that a reasonable insured in Brewer Entertainment's shoes would have expected coverage from Markel. And, that is what the court approved.

Pollution Exclusion Examined by U.S. Court

The insurers filed a declaratory judgment action seeking a determination that they had no duty to defend or indemnify the insured for a pollution liability claim. This case is Scottsdale Indemnity Company v. Village of Crestwood, 673 F.3d 715 (2012).

Crestwood's mayor and the village officials learned from the state environmental authorities that one of the wells from which the village water is supplied was contaminated by PCE, a carcinogen. Hundreds of Crestwood residents, having learned of the contamination sued the village and village officials seeking damages for injury to health. The insurers filed a declaratory judgment action against coverage and the U.S. District Court ruled in favor of the insurers. This appeal followed.

The United States Court of Appeals noted that the case required it to interpret the pollution exclusion as found in the common general liability policy. The court held that, under Illinois law, the claims against the village for knowingly distributing water from a contaminated well fell within the scope of the pollution exclusion. The court found that PCE is a definite contaminant and by distributing the water to the residents of Crestwood, the village caused the PCE to migrate throughout the village and inflict (alleged) widespread personal injuries, along with contamination of soil and structures.

The ruling of the district court was affirmed.

Editor's Note: This case is presented to offer the appeals court's discussion and analysis of the pollution exclusion, its rationale, and its scope of coverage.

The court said that a literal reading of the pollution exclusion would exclude coverage for acts remote from the ordinary understanding of pollution harms and unrelated to the concerns that gave rise to the exclusion. The court then offered examples of how the pollution exclusion could be interpreted and coverage denied if the exclusion were taken literally. As an example: a tanker truck filled with PCE crashing into abridge abutment, spilling its liquid cargo and then another vehicle skidding on the wet surface, injuring the driver. The court said that it would be absurd to argue that a claim arising from such an accident would be within the pollution exclusion since in no reasonable sense of the word “pollution” was the driver a victim of pollution.

Then, the court cited case law from many jurisdictions (Massachusetts, Oregon, Louisiana, and Wisconsin , for example) that offered their interpretation of the pollution exclusion.

TCPA Violation is not Property Damage

The plaintiff brought a class action lawsuit against the insured alleging that it had sent unsolicited facsimile advertisements to the plaintiff in violation of the Telephone Consumer Protection Act (TCPA). Following a $4,917,500 settlement, the plaintiff brought a garnishment action against the commercial general liability insurer. This case is Olsen v. Siddiqi, 2012 WL 1699322.

Olsen filed the class action lawsuit against Global BizDimensions alleging violations of the TCPA. Global tendered the lawsuit to its insurer, American Family, which refused defense claiming that there was no coverage under Global's policy. Global settled the underlying lawsuit agreeing that the judgment would be recovered from the proceeds of Global's insurance policy only.

Olsen then brought a garnishment action against American Family. The insurer filed a motion for summary judgment but the trial court entered judgment in favor of Olsen. This appeal followed.

American Family cited a number of errors by the trial court for the appeals court to consider. However, the appeals court found that the issue of property damage was dispositive of the case and it addressed that issue only. The court said, in a matter of first impression in the state, that the question it must address was whether the statutory damages awarded in the underlying lawsuit constitute property damage as defined in the liability policy of Global. The court noted that Olsen elected to pursue the statutory damages of $500 for each unsolicited fax that the TCPA provides as a remedy for a violation of its provisions. The court said that if these statutory damages are in the nature of fines or penalties, they are not covered by Global's policy since they are not property damage as defined.

Missouri law distinguishes between remedial and penal statutes. A penal statute is a law that inflicts a forfeiture of money or goods by way of penalty for beach of its provisions. The court concluded that the TCPA is penal when an individual seeks the statutory damages of $500 for each violation, and since Olsen opted to recover statutory damages, those damages were penal in nature. Thus, they did not constitute property damage under the terms of the policy and the policy provided no coverage for the damages awarded in the settlement agreement. The ruling of the trial court was reversed.

Editor's Note: The Missouri Court of Appeals, Eastern District, Division Two, rules that the $500 statutory damages awarded for violation of the TCPA provisions do not equate with property damage as defined in the commercial general liability policy. This was a case of first impression for the Missouri court.

It is worth pointing out that the dissent in this case said that when one receives an unsolicited fax, one loses paper and toner and the use of the fax machine. To the dissenting judge, these losses are property damage as defined, that is, physical injury to tangible property and loss of use of tangible property. Of course, since the current CGL form excludes coverage for property damage arising directly or indirectly out of any action that violates or is alleged to violated the TCPA, perhaps the dissent is irrelevant

In any case, the bottom line is that it is not the intent of the CGL form to provide coverage for violations of the TCPA. This ruling by the appeals court reinforces that intent.