After Underwood dies in a fire caused when the truck he was driving veered off the road and into a ditch, his estate sued the company for whom he was driving. The company asked its insurer, Gramercy Insurance Company to defend the lawsuit, but the insurer filed a declaratory judgment action seeking a judgment that it had no duty to defend or indemnify. This case is Gramercy Insurance Company v. Expeditor's Express, 2014 WL 3843836.

The insurance contract between Gramercy Insurance and Expeditor's Express provided liability coverage for the trucking business. The policy did not apply to bodily injury to Expeditor's employees arising out of and in the course of employment. The policy defined an employee to include a leased worker. The truck that Underwood was driving at the time of the accident was leased from Littlefield by Expeditor's, and Underwood was transporting magazines for Expeditor's Express.

So, the question arose: was Underwood an employee of Expeditor's Express at the time of the accident? The district court concluded that he was and granted judgment to Gramercy. This appeal followed.

The United States Court of Appeals, Sixth Circuit, said that as far as the pleadings show, it was not clear what the status of Underwood was and so, the case cannot be resolved one undisputed way or the other.

The insurer tried to overcome this issue by invoking the broad definition of employee from the Motor Carrier Act of 1980. (This Act requires carriers like Expeditor's Express to carry a minimum level of liability insurance and does permit carriers to exclude employees from insurance coverage.) The Act supplies a broad definition of employees that includes any operator of a commercial motor vehicle who directly affects commercial motor vehicle safety in the course of employment.

The Court of Appeals noted that using an endorsement in the contract, the insurer tried to get from point A (the contract's definition of employee, which Underwood might, but does not conclusively, meet) to point B (the Act's definition of employee, which Underwood conclusively would meet). The court said that the relevant language of the endorsement does not incorporate the Act's definition of employee into the contract. The endorsement instead acts as a form of extra insurance for the insurance contract. In this instance, the contract covers more than the Act requires. The insurance contract uses a narrower definition of employee than the Act permits, so the contract covers more people. Nothing in the language of the endorsement suggests it operates to amend the more generous coverage of the insurance contract down to the minimum requirements of the Act.

The judgment of the district court was reversed and the case was remanded for further proceedings.

Editor's Note: In hopes of strengthening its position in this coverage dispute, the insurer tried to use the language in the Motor Carrier Act of 1980 to supply a definitive definition of “employee” since the definition in the insurance contract lacked such certainty. The U.S. Sixth Circuit Court of Appeals did not find the insurer's arguments very persuasive.

Consequential Damages Attributable to the Insurer

This case presents two questions of West Virginia law pertaining to the enforcement of insurance contracts. The first is whether an insured may recover damages for aggravation and inconvenience where his insurer has refused to defend him from potential liability arising from a lawsuit. The second question is whether prejudgment interest should accrue on the attorney fees incurred by the insured who was forced to obtain alternative representation when the insurer declined defense. This case is Graham v. National Union Fire Insurance Company of Pittsburgh, PA, 2014 WL 350147.

Graham was the executive director of two nonprofit corporations that used state and federal funds to provide services to senior citizens. The state of West Virginia sued Graham and his employers, maintaining that Graham had manipulated the members of each corporation's board of directors to pay himself exorbitant salaries and benefits. National Union was the insurer for Graham and the corporations but denied coverage and refused to defend. Graham then defended himself against the lawsuit at his own expense. Graham won his arguments and then filed a lawsuit against National Union, alleging that the insurer had breached its duty to defend under the insurance contract. The district court determined that certain policy exclusions supported the denial of coverage and ruled in favor of National Union. This appeal followed.

The United States Court of Appeals, Fourth Circuit, noted that the issues on appeal are confined strictly to the proper interpretation of West Virginia law.

According to West Virginia precedent, the court found that whenever a policyholder must sue his own insurance company over any property damage claims, and the policyholder substantially prevails in the action, the company is liable for the payment of the policyholder's reasonable attorneys' fees. The court found that the insured is also entitled to additional consequential damages in the form of an award for aggravation and inconvenience. Therefore, from the insured's perspective, he is bound to suffer the same aggravation and inconvenience regardless of how the insurer breaches the policy: either by unjustifiably refusing to provide a defense against liability, or by wrongfully withholding indemnification from property loss. And, there is no logical reason to authorize an award for one item of consequential damages (attorney fees) while simultaneously denying recovery for aggravation and inconvenience, which are merely other items in the same category. Accordingly, the court ruled, Graham may be compensated for aggravation and inconvenience, subject to adequate proof thereof.

On the second question, the court said that West Virginia law authorizes an award of prejudgment interest for special or liquidated damages from the date of their accrual; Graham maintained that the attorney fees he incurred in defending against the lawsuit are subject to prejudgment interest. However, the court said, attorney fees, particularly those earned on a contingency basis, are unliquidated and unsettled until the court issues its ruling. Only after the court approves the policyholder's attorney's fees does the amount become liquidated and established; at that point, posy judgment interest will begin to accrue.

The facts in this case showed that Graham became liable for his attorney fees as they were incurred, up to the entry of judgment. But, the claim remained unliquidated beyond the entry of judgment until, on remand following the first appeal in this enforceable action, National Union stipulated to the precise amount due. The Circuit Court concluded that the absence of liquidation is enough to exclude attorney fees from the reach of the West Virginia prejudgment interest statute.

In summary, the Circuit Court affirmed the district court's ruling in denying to award prejudgment interest on Graham's attorney fees. As for the consequential damages issue, the court vacated the district court's ruling and allowed Graham to prove consequential damages in the form of aggravation and inconvenience attributable to National Union's breach of the insurance contract.

Editor's Note: The U.S. Court of Appeals rules that, under West Virginia law, consequential damages are part and parcel of the remedies obtainable in a bad-faith action against an insurer; the insured just has to prove the damages by a preponderance of the evidence. As for when prejudgment interest should accrue on attorney fees incurred by the insured in defending himself, the court found that until the fees become liquidated and established, the insured is not entitled to prejudgment interest.

Insurer's Duty to Defend

The insured filed a declaratory judgment action against the insurer claiming that the insurer breached its duty to defend and indemnify the insured in an underlying action. This case is Steel Supply & Engineering Company v. Illinois National Insurance Company, 2014 WL 4080469.

The insured, Steel Supply, contracted with the city of Carmel to supply and erect steel structures as part of a larger project in the city. The city discovered defects in the structural steel, in the type of bolts used to connect structural components, in the substitution of an inferior part for one called for in the drawings, and a subsequent deformation of a component used to support a dome-shaped palladium structure made of pre-cast roof panels. The city sued the insured and the insured sought defense and indemnification from its insurer, Illinois National.

The insurer investigated the incident and denied coverage because, in its opinion, the damages claimed by the city are not an occurrence of property damage as defined in the policy. The insured filed this action in the U.S. District Court.

The district court noted that this dispute is whether the damage for which the insured seeks defense and indemnity is the result of an occurrence. The insurer argued that the damages claimed in the city's complaint are for costs associated with remediation and delays caused to other parts of the construction process by the insured's faulty workmanship. The insured countered that the damage caused by the alleged defects is not limited to the erected steel structure but to property of another in that, at the very least, the precast roof panels of the palladium were damaged due to the allegedly defective workmanship.

The court reviewed the complaint filed by the city against Steel Supply. The complaint alleged that the defects caused the city to call into question the overall structural safety, the project faced imminent failure because of the defects, the city had to engage a civil engineer to assess the damage and form a remediation plan, the remediation efforts delayed the scheduling of other contractors and caused the city financial damages, and that the discovery of additional flaws in the steelwork required ongoing remediation. The court found that these allegations relate solely to the insured's allegedly deficient workmanship.

The court said that the insurer's duty did not extend to looking beyond the allegations in the complaint. The insurer did not have to look to all claims a third party could bring against an insured; rather, the duty to defend merely required the insurer to see if, under the facts as alleged in the complaint, any theory of liability that would be covered under the terms of the policy could attach to the insured. The insured argued that facts outside the complaint are an occurrence within the meaning of the policy, but the court answered that just because the city could bring a lawsuit that would trigger the duty to defend does not mean that it has.

The insurer's duty to defend, said the court, requires the insurer to ascertain if there are theories of liability supported by the facts alleged in the complaint, but not specifically pled. In this case, the complaint alleges no facts that support a theory of recovery that would trigger the duty to defend. Summary judgment was therefore granted to the insurer.

Editor's Note: This is one more case wherein a court compares the language of the complaint against the insured with the language of the policy and does not find the duty to defend. The insurer's duty to defend is broader than the duty to indemnify but the complaint against the insured must allege a theory of liability against the insured that may be covered by the policy before the duty applies; in this instance, the United States District Court for the Western District of Michigan found that the allegations in the complaint did not meet that threshold.

A lawsuit could be brought against the insured that could allege facts covered by the policy language that would require the duty to defend, but that did not happen here and the court would not allow possible future speculative allegations to enter into this coverage dispute.