The article of the month discusses the scope of symbol 1, the “any auto” issues, coverage suspension, and auto leasing. Court cases are noted for informational purposes. See BAP Symbol 1—Any Auto.

Use of a Vehicle

This insurance case arises out of a dispute over whether an insured vehicle was in use when the insured's employee got out of the vehicle, assaulted a pedestrian rendering him unconscious, and then dragged him to the side of the road before fleeing the scene. This case is Wincor Nixdorf v. Discover Property & Casualty Insurance Company, 2015 WL 2374113.

Discover Property and Casualty Insurance Company provided auto insurance coverage for Wincor Nixdorf and its employees. Kane, an employee, was driving in the service of his employer when he came to an intersection. A pedestrian crossed in front of Kane against the light and the two started arguing. Kane got out of the car and punched the pedestrian, knocking him to the ground. Kane then got back into his car but felt bad about leaving the pedestrian laying in the street. So, Kane got out of the car and picked up the unconscious pedestrian and moved him to the side of the road. Kane dropped the man in the gutter, causing him to hit his head. Kane then drove away. The pedestrian sustained a broken eye socket and a fracture to the back of his head.

Kane was criminally convicted of felony assault and battery. The pedestrian sued Wincor and Kane and the insured tendered the lawsuit to its insurer. Discover declined coverage and the insured sued. The district court ruled in favor of the insurer and this appeal followed.

The United States Court of Appeals, Ninth Circuit, ruled that Discover did not owe a duty to defend Wincor against the lawsuit by the pedestrian. The court said that the claim arose out of Kane's assault and subsequent dragging of the pedestrian to the side of the road rather than out of the use of the vehicle. Basing its decision on California law, the court pointed out that the California Supreme Court left open the exact nature of the required causal connection to show a vehicle was in use for purposes of the insurance code. However, a majority of California Courts of Appeal have held that the predominating cause/substantial factor test should apply.

In this instance, there was no causal connection, predominating, substantial, minimal, or otherwise, between the use of the vehicle and the injuries suffered by the pedestrian when he was moved off the street. At most, the car provided transportation to the situs of the tort, but it remained an innocent bystander thereafter. Therefore, the court agreed with the district court and held that there was no possibility of coverage here and thus, no duty to defend.

Editor's Note: The question of whether injuries arise out of the use of an auto remains unsettled, depending on the individual judicial climate and policy interpretation. In this instance, the U.S. Court of Appeals applied California jurisprudence and found that the facts of the case determined that the injuries did not arise out of the use of the vehicle.

Lost Policy and Reasonable Expectation of Coverage

A private school commenced a declaratory judgment action against the insurer to adjudicate and decree the existence of, and its rights under, a commercial general liability policy. This case is Cardigan Mountain School v. New Hampshire Insurance Company, 2015 WL 3393771.

The school sought to prove that nearly fifty years ago, New Hampshire Insurance issued the school an insurance policy that covers a claim that the school recently received concerning events occurring during the 1967-1968 academic year. The school can document that it had a policy with the insurance company at some point, but it cannot find a copy of the policy for the year in question. The insurer told the school it cannot confirm the existence of the policy and so, the insurer contends that it is not obligated to cover the claim.

The district court ruled that the insurer was correct and dismissed the lawsuit. This appeal followed.

The United States Court of Appeals, First Circuit, noted that Cardigan School received a demand letter asserting a claim based on events that occurred during the 1967-1968 school year. The insurer declined coverage due to lack of evidence that a policy existed during this time period. The court said that the sole legal question in this dispute concerns the existence of the policy and not whether that policy covers the claim.

The court found that the school's complaint did not include a direct allegation that the insurance policy existed. The complaint alleges that the insurer's representative noted that she searched for the policy but was unable to find it and so, the search would continue. The court also noted that the complaint by the school relied on circumstantial evidence, namely, the school's complaint alleged that an accounting firm audit report stated that the school had a special multi-peril insurance policy from New Hampshire Insurance Company from 1970 to 1971; the coverage was for $1,000,000. Moreover, the audit report did not note any change in insurers from previous years.

The insurer argued that, except for the audit report, the complaint sets forth nothing more than speculation and conjecture, and so, the court is not obligated to accept the allegations of the school as true. The appeals court disagreed.

The court said that the allegations in the school's complaint are specific and factual. The complaint refers to individuals with relevant knowledge (the auditors) and the allegations are not just bare recitations of a legal conclusion. The court concluded that the allegations are entitled to the presumption of truth.

The court also said that nearly every lost-policy case it was aware of concerns what showing must be made to survive summary judgment. In this instance, the court held that the school's allegations do make a plausible showing that the insurer issued an insurance policy for the 1967-1968 school year. The court admitted that the allegations are circumstantial but there is no requirement for direct evidence. Rather, the allegations need only be enough to nudge the claim across the line from conceivable to plausible, thus raising a reasonable expectation that discovery will reveal evidence of the lost policy. Whether the school can elicit the evidence that will be required to make the more demanding showing the school will need to make as the lawsuit moves is a different question that the court saw no need to address at this time.

The ruling of the district court was reversed and remanded.

Editor's Note: The U.S. Court of Appeals found that circumstantial evidence often suffices to render an asserted claim plausible. In this instance, the insured raised a reasonable belief that an insurance policy existed during the year of the claim and so, it was entitled to a presumption of truth and a reasonable expectation of coverage.

Reverse Bad Faith

The insurer brought an action to declare the insured's policy void, based on allegations that the insured intentionally set fire to her home. The insured asserted counterclaims for breach of contract and for bad faith. This case is State Auto Property and Casualty Insurance Company v. Hargis, 785 F.3d 189 (2015).

Hargis's home was insured by State Auto under a standard homeowners policy when it burned to the ground in 2007. It was determined that the fire was intentionally set. When Hargis filed a claim, the insurer commenced this action to declare the policy void. The United States District Court for the Western District of Kentucky ruled that State Auto had no obligations under the policy and that the policy was void ab initio. State Auto had also sought a ruling for reverse bad faith against the insured, but the district court rejected this claim. State Auto appealed.

The United States Court of Appeals, Sixth Circuit, noted that it was not aware of any jurisdiction that has recognized a cause of action for reverse bad faith. State Auto insisted that there is no reason to conclude that the Kentucky Supreme Court would not decide to allow tort recovery for an insured's bad faith since the implied covenant of good faith and fair dealing imposes contractual obligations on both the insured and the insurer. The insurer argued that it was unjust for Kentucky law to allow Hargis to assert a common law tort claim for bad faith without having to face the threat of a reciprocal tort claim for reverse bad faith. State Auto complained that without reverse bad faith, insureds can take a no-risk gamble by seeking punitive damages, while their insurers bear the burden of high investigation and defense costs associated with those claims.

The appeals court said these arguments must be analyzed in the context of Kentucky law.

The court noted that Kentucky law implies a covenant of good faith and fair dealing in all contracts that impose on the parties thereto a duty to do everything necessary to carry them out. The court also said that under Kentucky law, an independent tort claim for breach of the duty to act in good faith is only permitted where there is a special relationship between the parties and where distinct elements are present, such as: unequal bargaining power, vulnerability, and trust among the parties; nonprofit motivations for contracting; and inadequacy of standard contract damages. To the court, this indicated a willingness to conclude that insureds are in need of protection that insurers are not. Therefore, the court predicted that the Kentucky Supreme Court would reject State Auto's invitation to adopt a common law tort claim for reverse bad faith.

The judgment of the district court was affirmed.

Editor's Note: The U.S. Court of Appeals noted that a common law tort claim for reverse bad faith has not been recognized in any jurisdiction, although it is true that only a handful of jurisdictions have addressed the issue. In this instance, the court predicted that Kentucky would most probably not recognize a common law tort of reverse bad faith.

Defective Workmanship and an Occurrence

This matter involves a dispute over insurance coverage between the insurer and the insured under a commercial general liability policy. This case is Westfield Insurance Company v. Miranda & Hardt Contracting Service, 2015 WL 1477970.

Sometime during 2004 through 2005, Miranda & Hardt constructed a home pursuant to a contract with Fenwick Ventures. In 2006, the Pfautz family purchased the home from Fenwick. Approximately six years after the purchase, the homeowners contacted Fenwick to report defects in the construction. Then, the homeowners filed a lawsuit against Fenwick and Miranda & Hardt.

Miranda & Hardt notified its insurer, Westfield, and requested defense and indemnification. The insurer declined coverage, contending that it had no duty to defend or indemnify because there was no occurrence to trigger such duties. The insurer said the only allegations in the underlying complaint are for defective workmanship and this means there was no occurrence as defined in the policy. Westfield filed a motion for declaratory judgment.

The Superior Court of Delaware noted that the policy applies to property damage caused by an occurrence, and an occurrence is defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. The insurer contended that a claim for defective workmanship was not an occurrence. The insured argued that it was entitled to an inference that there was no defective workmanship based on its denial of the allegations in the underlying lawsuit and that defective workmanship had not yet been proven in the underlying lawsuit. The insured also claimed that structural issues were the result of construction defects arising out of pilings and the insured is not liable for those defects because the pilings were in place before Miranda & Hardt entered into the construction contract with Fenwick to build the home.

The Delaware court said that the decisions of the United States District Court for Delaware would be instructive in this decision. The U.S. court held that an occurrence requires an accidental or unexpected event. Moreover, an accident is an event happening without human agency, or if happening through such agency, an event that is unusual and not expected by the person to whom it happens. The court found that these definitions are in accordance with the principle that defective workmanship does not constitute an occurrence for purposes of a commercial general liability policy, because such action is within the control of the worker and not a fortuitous circumstance happening without human agency.

The court decided that a commercial general liability policy such as at issue here was not intended to serve as a performance bond or guaranty of goods or services. As such, an allegation of defective workmanship does not constitute an occurrence for which the policy grants coverage or triggers the insurer's duty to defend or indemnify the insured in the underlying lawsuit.

In this instance, there was no dispute that the underlying lawsuit alleged defective workmanship and other conduct not covered by the policy. The language of the policy compared with the complaint in the underlying lawsuit contractually does not provide the insured with coverage for property damage that results from its own defective workmanship or property damage that results from the work of another. Accordingly, the court ruled that there was no occurrence to trigger a duty to defend or indemnify the insured.

The motion of the insurer was granted.

Editor's Note: The Superior Court of Delaware joins other jurisdictions in finding that defective workmanship is not an occurrence as defined in the commercial general liability policy. This finding is not unanimous throughout the country.

This idea that faulty workmanship is not an occurrence means that the insuring agreement is not met and coverage is not applicable. However, in jurisdictions that do not adhere to this point, insurers often rely on exclusions to deny coverage. In doing so, insurers need to know the basic rule, namely, damage to the insured's work caused by the insured's work is not covered by the CGL form; damage to another's property caused by the insured's work is covered (barring any other applicable exclusion).