Insurance Defense Blog

Maryland federal court decision on broker's failure to procure insurance

 In a recent case, a homeowner brought suit in Maryland federal court against her insurance broker for negligence, breach of fiduciary duty, negligent misrepresentation, intentional misrepresentation, and fraud, after her house sustained fire damage when the contents of the house were not insured.  The Court threw out the breach of fiduciary duty and fraud counts, but held that the defendants had not submitted enough evidence to prevail on the affirmative defense that insurance would not have been available on the property.

 

The house had been insured by Chubb, but Chubb cancelled the policy for nonpayment after having insured it for years.  Subsequently the bank holding the mortgage ordered lender-placed insurance coverage on the house.  The bank notified the homeowner that the lender-placed insurance would not only cost more, but does not provide any coverage for loss or damage to personal property and provided limited coverage in other respects.

 

A couple of months later, the homeowner, who had been traveling, and having realized that the Chubb policy had been canceled, asked her insurance broker, whom she had known for several years and had become good friends with her, to see what could be done, and send him a package of materials concerning the lender-placed insurance.  Upon receipt of the package, the broker passed it to a customer service representative of his firm, and gave instructions to find a new insurance policy for the client.  The customer service representative initiated steps to find a new insurance policy, but delayed on following up.  Unfortunately, 27 days after the broker received the package from the client, a fire broke out in the homeowner's garage and caused extensive damage to the house and its contents.  The lawsuit followed.

 

The defendants moved for summary judgment on the breach of fiduciary duty claim.  The Court agreed that in this case, the breach of fiduciary duty does not constitute a stand alone nonduplicative cause of action.  The Court held that any purported breach of fiduciary duty for monetary damages cannot, standing alone, constitute a separate and distinct cause of action under Maryland law for a tort called breach of fiduciary duty.  The Court stated that the broker may have owed a fiduciary duty to the homeowner, and the alleged breach of fiduciary duty may buttress plaintiff's negligence claim; but it simply does not rise to a cause of action of its own.

 

The defendants also moved for summary judgment on the grounds that given the underwriting rating of the house and Chubb's previous cancellation for nonpayment, no insurer would have provided plaintiff with an insurance policy, and therefore the defendants' actions were not the cause of the homeowner's injuries.

 

The Court denied the motion for summary judgment on those grounds.  The Court noted that under Maryland law, a plaintiff does not need to show that an insurance policy was obtainable in order to prove that a broker's failure to procure such a policy caused her loss.  Instead, the availability of insurance is assumed unless the defendant proves its unavailability as an affirmative defense.  The Court stated that the burden of proof on the issue of nonavailability of insurance coverage is on the defendants.  Further, in order to discharge that burden, the defendants must do more than show that a particular insurer cannot supply insurance.  Finally, if a reasonable fact finder can draw an inference that insurance was available, even if plaintiffs do not provide any evidence on the point, summary judgment for the defendants is inappropriate. 

 

Here, the defendants did not foreclose the possibility that the homeowner could have secured an insurance policy, because the house had been insured for years with Chubb, insurance might have been available from AIG, and finally, a jury could have inferred that the homeowner would have been able to secure a policy from the fact that the bank was able to obtain lender-placed insurance.

 

The Court also raised an issue concerning the negligent misrepresentation count.  A cause of action for negligent misrepresentation may arise when a defendant misrepresents past or existing facts, however, a promissory statement, such as a promise to obtain insurance, generally cannot form the basis of a negligent misrepresentation claim. 

 

The Court granted summary judgment as to the homeowner's fraud claims.  When a plaintiff bases a fraud claim on a defendant's unfilled promise, the plaintiff must prove at trial that the defendant made the promise with a present intention not to perform it.  The homeowner could not meet that burden here, because the defendant broker did initiate steps to replace the insurance.

 

The Court also granted summary judgment on the homeowner's claims for emotional distress.  Generally, emotional distress attendant to property damage is not compensable under Maryland law.  This is because the courts consider injury resulting from a mere damage to property as an unusual and extraordinary result and not contemplated as a natural and probable consequence of the tortious act to the property.  In Maryland, a plaintiff cannot ordinarily recover for emotional injuries sustained solely as a result of negligently inflicted damage to the plaintiff's property.

 

Waiver of indemnification claim in settlement agreement sways decision in coverage reallocation suit

In Interstate Fire and Casualty Co. v. Washington Hospital Center Corp., No. 10-1193 (D.D.C. March 28, 2012), the Court was faced with a dispute between two insurers as to the proper allocation of the cost of a multi-million dollar settlement of a medical malpractice action.  The Court awarded summary judgment to Interstate, thus requiring the Washington Hospital Center's insurer to reimburse Interstate for a settlement of $3,055,000, plus fees and expenses.

To understand the dispute, a brief discussion of the underlying claim is required.

The underlying action was a medical malpractice claim brought in Superior Court by a patient against the Washington Hospital Center and two doctors.  The Washington Hospital Center filed a third-party complaint against a temporary nurse staffing agency, Progressive Nursing Staffers of Virginia, Inc., and a temporary nurse involved in the plaintiff's post-op care.  The third-party complaint was based, in part, on a contractual indemnification clause in Progressive's contract with WHC (the "Temporary Staffing Agreement").  The Washington Hospital Center was insured by Greenspring Financial Insurance Limited ("GFIL").  The nursing staff agency and the temporary nurse were insured by Interstate Fire and Casualty Company ("Interstate").  The medical malpractice action was settled for a total of $4,105,000, of which Interstate paid $3,055,000 and GFIL paid the remainder.  The settlement agreement, however, was drafted to as to preserve Interstate's rights to seek reallocation of the settlement.

Following the settlement, Interstate filed a declaratory judgment action in D.C. federal court to pursue reallocation of the settlement.  Interstate's arguments, in essence, were that the temporary nurse it supplied to WHC was, for purposes of GFIL's insurance, an employee of WHC, and that under the "other insurance" clauses of the GFIL policy and the Interstate policy, GFIL was primary and Interstate was excess.  After some discovery, the parties filed cross motions for summary judgment.

The District Court awarded summary judgment to Interstate, finding that the temporary nurse was an employee within the meaning of the GFIL policy.  This finding was based on the fact that it was undisputed that WHC had the right to control the temporary staffing nurse's conduct while working at WHC.  This included the right to determine and ascertain what the assignment of the individual nurse would be, and what kind of medical care or attention to give to a particular patient. Although Court did not find all the relevant factors governing the employee/employer relationship weighed against WHC, the power to control the servant's conduct is the most important factor, and along with the weight of some other factors, was enough to lead the Court to find that the temporary nurse and WHC had an employee/employer relationship.

Interestingly, the Court noted that the Temporary Staffing Agreement specified that Progressive nurses remain Progressive employees.  The Court found that that was parol evidence that it could not consider when interpreting the insurance contract between WHC and GFIL, and secondly, that nothing in D.C. law would prohibit the finding that the temporary nurse was en employee of both Progressive and WHC at the time of her alleged negligence.

The District Court also found that under the competing "other insurance" clauses, Interstate was clearly in an excess position. 

The District Court did not find it necessary to reach the question whether the responsibility for covering the temporary nurse's liability was determined by the indemnification agreement in the Temporary Staffing Agreement, because the Court found that WHC had given Progressive a complete general release of any liability under the Temporary Staffing Agreement. 

The Temporary Staffing Agreement included an indemnification clause under which Progressive was required to "indemnify WHC for claims arising from the negligence of Progressive or its registered nurse employees who were provided to WHC", and the indemnification clause served as the basis for the third-party complaint filed by WHC in the underlying action.    The District Court found that "the indemnification clause was waived by the broad language of the Settlement Agreement . . . [in the medical malpractice action]." 

Consequently, as a result of the Settlement Agreement, GFIL lost its right to step into WHC's shoes to sue for indemnification. Thus, the Court rejected GFIL's argument against circular litigation, i.e., that if the Court finds it liable, GFIL through subrogation, could file suit against Progressive for indemnification, and Progressive would then seek reimbursement from Interstate, resulting in Interstate being ultimately responsible.

Impact:  This decision underscores that in any case where a settlement agreement is drafted so as to "carve out" one side's rights to pursue a coverage reallocation action, the other side must be equally careful to preserve its position in the anticipated coverage action.

Allstate takes a former adjuster to court

In Allstate Insurance Company v. Warns, No. CCB 11-1846 (D. Md. Feb. 29, 2012), Allstate brought suit against one of its former adjusters who left the company and a short time later was hired by a plaintiffs' law firm with litigation pending against Allstate insureds.  This opinion, which denied most of the defendant's dispositive motions, marks the conclusion of an initial skirmish in what promises to be a quite a battle.

The defendant adjuster had worked for Allstate for 33 years, and for at least the last five years of that allegedly had handled only lead paint poisoning cases.  About a month after her resignation, she started working for a plaintiffs' law firm which specializes in lead paint cases.  Allstate alleged in its lawsuit that the adjuster removed confidential information from the company before she left, and that 68 new lead paint cases had been filed against Allstate's insureds in the year following the adjuster's departure. 

Represented by the law firm  of SNR Denton, Allstate in its complaint alleged breach of fiduciary duty, and breach of contract based on the language in Allstate's Code of Ethics.  Allstate sought compensatory and punitive damages, as well as injunctive relief, including an injunction ordering the adjuster to cease working for the plaintiffs' law firm or any other attorney representing plaintiffs in lead paint litigation.

The adjuster filed a motion to dismiss or for summary judgment, denying all the allegations, and averring that at the plaintiffs' law firm, she only works on cases in which Allstate does not provide insurance coverage for the defendant.

The Court granted the motion for summary judgment on the punitive damages claims, and denied the motion as to all other claims.

Concerning the breach of fiduciary duty claim, the Court stated that although there is no authority which expressly creates an independent cause of action for a breach of the duty not to misappropriate or disclose confidential information after the termination of the employment relationship, the weight of authority in both Maryland and other states suggests that such a cause of action may lie.  However, the Court observed that under the leading Maryland precedent, Kann v. Kann, 690 A.2d 509, 521 (Md. 1997), and its progeny, courts have limited independent causes of action for breach of fiduciary duty to those seeking equitable relief.  Thus, as a result of a successful common law breach of fiduciary duty, Allstate may be given injunctive relief, but punitive damages are not available, and any claim for compensatory damages will have to be supported by a successful breach of contract action.

The Court recognized, but did not reach, the issue whether the Maryland Uniform Trade Secrets Act (MUTSA) preempts at least some common law claims for breach of fiduciary duty, as it is the exclusive remedy for civil claims based on misappropriation of trade secrets. 

The Court found that there were enough factual allegations concerning the Allstate Code of Ethics for the breach of contract claim to survive the defendant's dispositive motion at this stage of the proceedings.  However, the Court pointedly observed that there was no allegation that the defendant adjuster had ever signed the Code of Ethics or that the Code of Ethics had been incorporated by reference into a contract of employment.

Finally, the Court denied Allstate's motion for a preliminary injunction, and denied Allstate's motion to place record materials under seal since redaction provides sufficient protection.

Impact: As a result of this lawsuit, Plaintiffs' law firms will likely be a little more cautious about hiring former insurance adjusters.  Insurers, for their part, may take a look at their employment contracts to tighten up the restrictive convenants. 

A plaintiffs' lawyer, Ron Miller, Esq., has an interesting take on this case on the Maryland Injury Lawyer Blog.

Statutory waiver of insurer's late notice defense in Virginia

I've previously posted about Va. Code § 38.2-2226, which states that in order to disclaim coverage based on an insured’s breach of a policy condition, an insurer has to give notice to the claimant or claimant’s counsel within 45 days after discovery by the insurer of the breach of the condition. Failure to give such notice within 45 days will result in a statutory waiver of the defense. 

The importance of compliance with this statute cannot be overstated in a Virginia claim involving a potential late notice defense. 45 days has a way of slipping past.

This same statute came up in a relatively recent decision from the Virginia Supreme Court, Dabney v. Augusta Mutual Insurance Co., which is discussed here.

The Dabney opinion was also usefully discussed in Zalma on Insurance, from a different perspective. 

Professional reading - recent blog posts of note

From the Electronic Discovery Law Blog, an interesting summary of a San Diego legal ethics opinion barring an attorney from making an ex parte "friend request" to a represented party. Seems to be common sense.

The Drug and Device Law Blog has a good discussion of recent Supreme Court decisions concerning personal jurisdiction in products liability cases based on stream of commerce. This is required reading.

While there, also catch their post about the status and rights of private insurers who are Medicare Advantage Organizations as secondary payers.

From the Blog of the Legal Times, we have an article about how Wilmer Cutler may or may not be facing a contingent claim of $214 million arising from a patent matter. One of the managing partners of that firm says no problemo. Move along folks, there's nothing to see here.

Brian Krebs has published a story about cutting-edge litigation relating to the liability of a bank to a commercial customer for fraudulent wire transfers from the business's account by cyber-criminals. Cyber fraud is a huge problem and it remains to be seen how legislatures and courts deal with it.

A DRI Today post provides a helpful checklist in The Top Ten Mistakes To Avoid When Preparing Coverage Opinions.

The Insurance Defense News blog has a report concerning a successful defense of a retail store in the E.D. of Virginia against the claims of a customer who banged her head on a shelf. It was an open and obvious condition, held Judge Ellis.

In a case described by the Maryland Court of Appeals as a procedural nightmare, the Court reviews the proper procedures for settling a wrongful death case.

 

Pollution exclusion enforced by E.D. of Va. in Chinese Drywall case

In a recent decision, the U.S. District Court for the E.D. of Virginia enforced a pollution exclusion in the context of claims arising from "off-gassing" Chinese drywall. A summary of the decision, as well as a link to the full text of the decision, can be found here.

List of ten most significant insurance decisions of 2010

Hat tip to Point of Law blogfor linking to the Maniloff's article on the ten most significant insurance law decisions of 2010.

Here is the link to the Maniloff and Mooney article in Mealey's.

The authors liken allegations against the insured to "greenwashing" in their discussion of Haryleysville Mutual Insurance Company v. Buzz Off Insect Shield, LLC.   I hadn't heard that term used before, and found this definition.

[T]he rise of green branding brings with it the temptation of "greenwashing," making false or misleading claims regarding environmentally friendly products, services or practices.

Somehow I am reminded of that Seinfeld episode in which fat free frozen yogurt that tastes really good turns out to have very high fat content. 

 

The case for banning contingent commissions

Daniel Schwarcz, a Fellow at Harvard Law School who is going to teach at the University of Minnesota, has written an article making The Case for Banning Contingent Commissions.

Maryland allows named driver exclusion in commercial auto policy

The Maryland Court of Appeals has issued an opinion that holds that a named driver exclusion endorsement is not prohibited by Maryland law in a commercial automobile liability policy.  This opinion is discussed in the relatively new Maryland Injury Law Blog.  I am sure I will be a regular reader of Miller & Zois' blog.

I previously wrote here about the intermediate appellate court's opinion in this matter.  Because it found that the named driver exclusion endorsement is valid in the context of a commercial auto policy, the Court of Appeals did not address the second issue that it had before it, namely, "whether a declaratory judgment that there is no coverage for a particular claim, entered in an action between the insurance company and its insured, binds a person who (1) has filed a claim against the insured, but (2) was not a party to that action." 

Damages due to defective construction material are held not to be "occurrences" for purposes of coverage

In OneBeacon Insurance v. Metro Ready-Mix, No. AMD 05-1530 (D. Md. 4/18/2006),the Court granted the insurer's motion for summary judgment in a case involving construction defects.  The insured was alleged to have provided defective grout to a contractor for use on a construction project in Baltimore.  Consequently, the contractor was required to demolish and reconstruct pilings that had been constructed employing the grout.  When the insured filed suit against the contractor for unpaid invoices, the contractor filed a counterclaim alleging a breach of contract and breach of express warranty in conection with the defective grout as to the one project.

The insurers filed a declaratory judgent action to determine whether they were obligated to defend and indemnify on the counterclaim.

The insurers raised the familiar argument that since the insured failed to meet its contractual obligations in failing to provide conforming grout, it was expected and foreseen that the contractor would request and be entitled to corrective action and reimbursement for the costs of the same, for the defect and that therefore there was no "occurrence."

The Court agreed that the damages sought by the contractor in its counterclaim were plainly related to the satisfaction of the insured's contract and that therefore no "occurrence" gives rise to the insured's liability.  As the grout's only purpose was to support the pile caps and columns, and was an integral component of them in relation to the structure, the contractor's damages relate to the satisfaction of the insured's contractual obligations to construct its product.