Recent Court Decisions
Stempel, Jeff, Journal of Risk and Insurance
HEALTH PLANS EXCLUSION FOR ORGAN TRANSPLANTS DOES NOT EXCLUDE COVERAGE FOR HIGH DOSE CHEMOTHERAPY WITH PERIPHERAL STEM CELL RESCUE To ATTACK BREAST CANCER
Simkins v. NevadaCare, Inc., 229 EM 729 (9th Cir. 2000) (applying federal common law)
Ruby Simkins worked for M & K Enterprises, her husband's company. In October 1996, she was diagnosed with Stage I breast cancer, which her doctors treated with radiation. The treatment was initially successful, but she was advised that she would not be considered "cured" unless she remained free of cancer for five years. In late 1997, M & K switched healthcare providers and signed on with NevadaCare, with Simkins enrolling as a participant effective January 1, 1998. In 1998, Simkins was diagnosed with Stage IV breast cancer, as doctors discovered "at least 12 nodules in her lungs and a plum-sized mass on her liver." She went to UCLA Medical Center for treatment. 229 F.3d at 731.
Simkins's doctor recommended that she undergo high dose chemotherapy with peripheral stem cell rescue (HDC/PSCR). Stem cells are immature cells in bone marrow that mature to produce blood cells that then circulate throughout the body. Under the HDC/PSCR procedure, a patient is given an injection of drugs to stimulate stem cell reproduction and mobilization out of bone marrow and into circulating blood.
Then, through a series of transfusions, blood is removed from the patient's body and, after passing through a machine that filters out the stem cells, it is returned to the body. This "harvesting" procedure may be performed multiple times to collect enough stem cells. During the next phase of the procedure, the patient is given extremely high doses of chemotherapy (HDQ to try to kill off all of the cancer cells, a process that also kills off many of the patient's healthy cells. To help the patient recover more rapidly from the HDC, she is given a transfusion of the previously collected stem cells, which will migrate through the bloodstream into the bone marrow with the hope that they will take hold, grow, and produce mature red and white blood cells and platelets. 229 F.3d at 732.
Simkins sought coverage of the HDC/PSCR treatment from NevadaCare, which denied coverage, invoking the exclusion in the group health plan for "organ transplants." In the wake of the denial, she secured other funds, underwent the procedure, and was doing well as of the time of the court's opinion. Her suit was one for reimbursement of treatment costs under the NevadaCare plan. The trial court granted summary judgment for NevadaCare, but the court of appeals reversed, finding coverage for Simkins.
The health policy in question specifically provided coverage for blood transfusions and chemotherapy but excluded coverage for most organ transplants (except for limited exceptions set forth in the policy). The policy stated that "[t]issue transplant coverage is limited to allogenic bone marrow only." Simkins argued that she was not seeking an organ transplant but rather a transfusion of her own stem cells, which was akin to only a blood transfusion or bone marrow infusion. See 229 RM at 735. The Court of Appeals concluded as follows:
We hold that the district court erred in not considering whether a person of average intelligence and experience would construe the term "tissue transplant" to encompass HDC/PSCR. We believe the average person would not understand the term "tissue transplant" to encompass HDC/ PSCR, because she would not understand stem cells to be "tissue." Instead, the average person would focus on the fact that stem cells in this procedure are a component of the patient's blood. Indeed, the research study consent form Simkins signed specifically mentions that the stem cells would be collected from her blood stream. The average person is not likely to understand blood to be tissue .... Because stem cells would not be understood to be tissue, the average person would have no reason to believe the tissue transplant exclusion extended to HDC/PSCR. Accordingly, it is improper for the district court to grant summary judgment in favor of NevadaCare on this ground.
229 EM at 735.
NevadaCare had also argued that the Simkins treatment was not covered because of a general "catch-all" exclusion in the policy that stated that there is no coverage for "any services or supplies not specifically listed in this Evidence of Coverage [a/k/a the NevadaCare policy] as covered benefits, services, or supplies." 229 F.3d at 735. The Court of Appeals also rejected this defense to coverage, finding that it provided insufficient notice to policyholders of the insurer's potential resistance to treatment such as HDC/PSCR.
As we have noted previously, "the insurer should be expected to set forth any limitations on its liability clearly enough for a common layperson to understand; if it fails to do this, it should not be allowed to take advantage of the very ambiguities that it could have prevented with greater diligence." Kunin v. Benefit Trust Life Ins. Co., 910 F.2d 534, 540 (9th Cir. 1990). Ruby Simkins knew there was a risk her cancer would return, and she made an effort to ensure that her transfer to a NevadaCare insurance plan would not limit her potential treatment options in the event of such an unfortunate recurrence. If NevadaCare wishes to exclude coverage of a procedure such as HDC/PSCR from its insurance plans, it should do so conspicuously and unambiguously so a reasonable insured can determine this fact by looking at her policy. Its subsequent reliance on an exclusion for "tissue transplants"-and worse, a "catch-all" exclusion to exclude coverage for HDC/PSCR is not at all compelling.
229 RM at 736.
EMPLOYEE ON LEAVE REMAINS A "FULL-TIME" EMPLOYEE FOR PURPOSES OF BENEFIT PLAN AND WAS ENTITLED TO DEATH BENEFIT COVERAGE
Tester v. Reliance Standard Life Insurance Company, 228 F.3d 372 (4th Cir. 2000) (applying federal common law)
Annie Ruth Tester began working for Bibb Company as a full-time employee on June 1, 1993. In August 1993, Bibb obtained group accident coverage for its employees, with death benefit coverage of $50,000 provided through a group policy with Reliance. The policy provided that it covered full-time and part-time employees, with "part-time" defined as working at least 20 hours per week; temporary or seasonal workers were excluded. On January 8, 1995, Tester took an approved medical leave because of health problems. On February 15,1995, she died from injuries sustained in an automobile accident (she was a passenger, and the accident was not related to her health problems).
Reliance refused to pay the accidental death benefit to Tester's husband, arguing that she was no longer covered under the policy because she was not actively working at the time of the accident. The U.S. Court of Appeals for the Fourth Circuit (which covers Maryland, Virginia, North Carolina, South Carolina, and West Virginia) rejected the insurer's defense and found coverage for the Testers. Applying the federal common law of contract interpretation applicable to employee benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA), the court found that the policy was ambiguous as to whether the taking of a leave made the employee "inactive" and therefore ineligible for coverage.
The policy's eligibility provision, however, does not include the phrase "actively at work" or "active work," and we will not read those terms into that provision. The policy does contain provisions that incorporate the phrases "actively at work" and "active work." But they are used with respect to effective date, not eligibility .... Thus the policy incorporates "actively at work" and "active work" to establish when an individual's coverage initially will begin. It does not incorporate those terms to determine if an employee is eligible for coverage. These terms have specific meanings within the provisions that include them, but they are absent in the eligibility provision, and thus do not control in defining "active."
228 RM at 376.
The Fourth Circuit's decision makes sense, not only in terms of the language of the policy and the likely expectations of the Bibb Company employees, but also in terms of the purpose of the eligibility requirements of the policy. To avoid adverse selection, group insurers issuing policies to employers seek to define eligibility so that persons likely to need insurance will not be signing on with the company for the insurance coverage. Rather, the insurer seeks to cover a group of persons who just happen to be working at the company, with insurance being a fringe benefit. Requiring that employees be full-time or of significant connection to the company helps to accomplish this underwriting goal. Workers who sign on for a week or a month are not included because they may be shopping for insurance as much as or more than a job. The "engaged in continuous employment" requirement also makes it easier for the insurer to assess its risk because the number of employees covered is ascertainable and stable in a way it is not if temporary or sporadic workers are covered. Seen in this light, coverage of Annie Ruth Tester hardly undermines the insurer's legitimate need to define the covered group. Tester signed on as a full-time employee and worked as such for nearly two years. All evidence in the case indicated that she expected to return to full-time work after her medical leave. Her death did not result from any health problems that could have motivated adverse selection on her part; she was simply the tragic victim of a car accident. Under these circumstances, the case for coverage was overwhelmingly persuasive, and the insurer's resistance to payment was difficult to understand.
EMPLOYERS FAILURE To DISCLOSE COMPANY'S CONSIDERATION OF "VOLUNTARY SEPARATION PROGRAM" DOES NOT QUALIFY AS BREACH OF FIDUCIARY DUTY CLAIM UNDER ERISA; HENCE, CLAIM DOES NOT ARISE UNDER ERISA AND FEDERAL COURT HAS No SUBJECT MATTER JURISDICTION
Young v. Washington Gas Light Company, 306 F.3d 1200 (D.C. Cir., 2000)
Ronald Young and other employees of Washington Gas Light retired during 1996 while restructuring of the company was under consideration but before a final plan was adopted. The company was considering adoption of a program it eventually implemented offering retirement or "voluntary separation" incentives to employees that were better than the retirement package Young received. Young and his co-plaintiffs sued under the Employee Retirement Income Security Act of 1974 (ERISA), alleging that Washington Gas violated its duties as an ERISA fiduciary in not disclosing this to Young before his retirement. The U.S. Court of Appeals for the District of Columbia Circuit rejected this claim and therefore found-because Young had not made out a claim under ERISA-that Young's claim did not "arise under" federal law. Hence, the federal courts lacked jurisdiction over the controversy and could not hear Young's complaint (although Young might have had a tort or contract claim under state law).
The Court of Appeals found that the employer's consideration of a one-time early retirement incentive plan was not an employee benefit plan under ERISA. Consequently, even if the employer had duties to disclose the consideration of the incentive program to its workers, these were not duties arising under ERISA. The appeals court distinguished the case from the U. S. Supreme Court's decision in Varity Corp. v. Howe, 516 U.S. 489 (1996), in which the Court found that a claim of fiduciary breach could be made out under ERISA where the complaint alleged misrepresentation to workers about ERISA plan benefits. Where the employer misrepresents non-ERISA matters, ERISA does not apply. Federal courts may hear cases only if they involve federal law or disputes between citizens of different states. Because it did not involve either, Young's complaint was dismissed from federal court.
FEDERAL APPEALS COURT FINDS THAT POLICYHOLDER'S REFUSAL To UNDERGO EXAMINATION UNDER OATH DOES NOT VOID COVERAGE UNLESS INSURER IS PREJUDICED
Talley v. State Farm Fire & Casualty Company, 223 F.3d 323 (6th Cir., 2000) (applying Tennessee law)
George Talley, like many Americans, had a homeowners insurance policy with State Farm. After a fire damaged his house, he submitted a claim. In response, State Farm asked him to submit to an examination under oath, as required by the policy. The examination is designed to permit insurers to obtain information and test the bona fides of the policyholder's claim. It is not routinely imposed but is frequently used when the insurer regards the claim as questionable in either source or amount of loss. Talley, through his attorney, refused to submit to an examination "because of an ongoing criminal investigation of the fire and its cause.... He states that he would not give the statement under oath unless State Farm would guarantee that it would not share the information with law enforcement officials or others." 223 F.3d at 325.
On the basis of Talley's refusal, State Farm denied his claim, arguing that the refusal to undergo an examination under oath was a breach of the policy. The federal district court in Tennessee granted judgment as a matter of law to State Farm when Talley sued over the claim. The U.S. Court of Appeals for the Sixth Circuit (which includes Tennessee, Kentucky, Michigan, and Ohio) vacated the judgment and remanded the case for further trial proceedings. The court of appeals ruled that the failure to participate in the examination under oath would void coverage only if the insurer could demonstrate that it suffered prejudice because of the refusal of the policyholder to be examined.
The Sixth Circuit made an analogy between the examination under oath provision of the policy and the "cooperation" clause and related clauses in the policy (such as notice and proof of loss requirements). 223 E3d at 325-27. The overwhelming majority rule regarding cooperation holds that an insured's failure to cooperate with the insurer (or to give timely notice or provide a sufficiently detailed proof of loss) will vitiate coverage only if the insurer is prejudiced by the policyholder's failures of cooperation. Most states also place the burden of proving prejudice on the insurer, although several states require the policyholder to prove lack of prejudice. New York is essentially a minority rule of one in that it permits insurers to use the defenses of late notice and inadequate proof of loss even without a showing of prejudice. See generally Jeffrey W. Stempel, Law of Insurance Contract Disputes (sec)9.01 (2d ed., 1999 & Supp. 2001).
Tennessee state courts have long followed the majority rule regarding cooperation, late notice, and proof of loss. Although the Sixth Circuit found no on-point Tennessee case addressing examination under oath (a relatively new provision that took overwhelming hold in property insurance policies during the 1980s and 1990s), it reasoned that the Tennessee Supreme Court, if faced with the case, would require a showing of prejudice for examination under oath deficiencies as well as for other cooperation deficiencies by the policyholder. See 223 EM at 327.
One can certainly question the Sixth Circuit's analysis. Other jurisdictions have tended to construe the examination under oath strictly in view of its origins and importance. It is by no means clear that Tennessee would take as relaxed a view of the provision as did the Sixth Circuit. The examination under oath provision is included in property policies because of the traditional difficulty insurers have faced regarding arson and other fraudulent claims. In Talley, there was a fire of sufficiently suspicious origin that criminal proceedings were in progress and the policyholder was sufficiently concerned about these proceedings to cite this as a reason for refusing to be examined under oath. The case was thus practically tailor-made for such an examination so that State Farm could better determine whether Talley's claim was too suspicious to be paid. Instead, the court essentially told State Farm to start digging elsewhere for evidence of arson or fraud.
Furthermore, the examination requirement of the policy stands quite well on its own and has somewhat different purposes than the other cooperation provisions. The notice and cooperation provisions of a liability policy exist to facilitate adjustment and defense of third-party claims. In property policies, they serve a similar purpose for permitting accurate valuation of losses more than to thwart insurer fraud. The proof of loss form in property insurance also serves the former purpose more than the latter purpose (although "false swearing" on a proof of loss may be evidence of fraud an insurer will use to seek to deny coverage). By contrast, the main reason for the examination clause is to discourage and apprehend fraudulent claims by first-party property insureds. Arson remains a particular target of the examination clause. Because of these different origins and purposes, a court would be justified in taking a stricter view of the examination clause.
In addition, the examination clause is subject to more objective verification than other cooperation sections of a policy. It may, for example, be difficult to determine whether a policyholder who is slow to furnish documentation is failing to cooperate or is simply slow, distracted, or a poor record-keeper. In contrast, determination of compliance with the examination under oath provision is relatively easy: either the policyholder submits to the examination or he doesn't (although once the examination starts, tougher questions can arise about whether the examinee is sufficiently candid and forthcoming). Consequently, courts would probably be wise to treat examination provisions differently from the cooperation clause and related notice and documentation clauses. The Talley court can be accused of unfairly limiting the insurance industry's use of an effective anti-fraud tool.
MURDER OF TENANT Is "ACCIDENT" UNDER LANDLORDS LIABILITY POLICY
Agoado Realty Corporation v. United International Insurance Company, 95 N.Y.2d 141, 733 N.E.2d 213,711 N.Y.S.2d 141 (New York Court of Appeals, 2000)
Agoado Realty owns apartment buildings. In 1996, a tenant in one of them was murdered by an unknown assailant. The decedent's estate sued Agoado as landlord, alleging that the tenant's wrongful death occurred because of the landlord's negligence in maintaining premises security. The landlord's liability insurer raised a number of defenses to coverage, including an argument that the death was not an "accident" within the meaning of the policy because of the murder. The Court of Appeals (the highest state court in New York) rejected this defense as inconsistent with basic principles of insurance and a common sense reading of the policy.
The court reviewed state law on fortuity-based exclusions such as the exclusion for injury that is "expected or intended" by the insured and concluded that the apt way of interpreting the "accident" requirement in a liability policy (which covers accidental occurrences) is to exclude coverage only where intentional losses are inflicted by the insured, not where those losses are inflicted by persons beyond the control of the insured: "[I]n deciding whether a loss is the result of an accident, it must be determined, from the point of view of the insured, whether the loss was unexpected, unusual and unforeseen ..... Moreover, if a coverage exclusion is intended that is not apparent from the language of the policy, it is the insurer's responsibility to make its intention clearly known." 733 N.E.2d at 215. However, the court did suggest that specific exclusions of negligent security claims, assault and battery claims, or other specific claims for relief would be enforced in liability policies if the insurer used clear language known to the policyholder. 733 N.E.2d at 215-16.
The Court of Appeals reversed the trial court's determination in favor of the insurer on the "accident" issue. The trial court had also ruled in favor of the insurer's late-- notice defense. The Court of Appeals remanded this issue to the trial court for further fact finding on whether the policyholder had given notice to the insurer "as soon as practicable" as required under the policy. The murder took place on May 19, 1996. The wrongful death action was commenced on February 10,1997, but Agoado Realty did not receive a copy of the summons and complaint until June 20,1997. On June 20, 1997, the insurer received the summons and complaint and notice of the occurrence. Although this was a whopping 397 days after the murder, the Court of Appeals determined that notice may be considered timely in view of the fact that the insurer received notice two weeks after receipt of the complaint against the policyholder. However, issues remained about whether the policyholder had sufficient information to have informed the insurer before June 1997.
NEW YORK RULES THAT GENERAL POLLUTION EXCLUSION DOES NOT BAR COVERAGE FOR LEAD PAINT CLAIMS AGAINST BUILDING OWNER
Westview Associates v. Guaranty National Insurance Company, 95 N.Y.2d 334, 740 N.E.2d 220, 717 N.Y.S.2d 75 (New York Court of Appeals, 2000)
Gabriella Humphrey is an infant whose parents claimed she suffered injuries from exposure to lead paint in the building they rented. They sued the owner for failure to maintain safe premises. The owner looked to its liability insurer for coverage. The insurer raised various defenses under both a primary and an umbrella policy. The primary policy and the excess coverage of the umbrella policy both contained an exclusion for claims arising out of lead paint exposure. However, Coverage B of the umbrella policy, which "provides additional primary coverage for injuries not covered in the underlying policy," did not contain a lead paint exclusion or incorporate by reference the lead paint exclusion found elsewhere in the umbrella policy. Coverage B did, however, contain a standard exclusion for pollution-related claims. The New York Court of Appeals, the state's highest court, found the lead paint exclusion controlling where it was found but refused to read it into Coverage B, the "gap-- filling primary insurance" portion of the umbrella policy.
Exclusions must be specific and cannot be extended by mere interpretation or implication.
Moreover, the umbrella policy contains specific exclusions for other types of injuries including alcohol, asbestos, and pollution claims, but not for lead paint. Those provisions would be completely unnecessary if, as defendant argues, all the exclusions in the underlying policy are incorporated by reference into the entirety of the umbrella policy's coverage ..... At the very least, defendant's interpretation presents an ambiguity in the umbrella policy which must be resolved against the insurer, as drafter of the agreement. 740 N.E.2d at 222 (citations omitted).
The Court of Appeals also found that the general pollution exclusion did not bar lead paint-related claims. Lead is considered a pollutant in many quarters, and several courts have read the exclusion with broad literalism to apply the pollution exclusion to lead paint claims. New York in Westview v. Guaranty National has implicitly rejected this reasoning and this line of cases and has expressly found that a disjunction between the general pollution exclusion and specific exclusions can create ambiguity requiring coverage.
The insurer has not established that lead paint, in "clear and unmistakable language," is included in the pollution exclusion clause. Moreover, both policies contain the general pollution exclusion while only the underlying policy contains a specific lead paint exclusion. Unless different meanings are to be ascribed to the pollution exclusion clauses in these policies, defendant's position that lead paint injuries are excluded under the pollution exclusion, would render the specific lead paint exclusion in the underlying policy meaningless, in violation of settled canons of construction. It is at least ambiguous as to whether lead paint claims are excluded pursuant to the umbrella policy's pollution exclusion. That ambiguity in the policy must be construed against the insurer.
740 N.E.2d at 223 (citations omitted).
FEDERAL APPEALS COURT FINDS CGL POLLUTION EXCLUSION To BAR COVERAGE FOR LEAD PAINT CLAIMS
Auto Owners Insurance Company v. City of Tampa Housing Authority, 231 F.3d 1298 (11th Cir., 2000) (applying Florida law)
As noted earlier in the discussion of the Westview v. Guaranty National decision in New York, coverage of lead paint and other arguable pollution claims hinges significantly on the state law to be applied. Although New York found the CGL's general pollution exclusion not applicable to lead paint claims as a matter of law, the U.S. Court of Appeals for the Eleventh Circuit (Florida, Georgia, and Alabama) came to a directly opposite conclusion applying the law of Florida, which has taken abroad view of the pollution exclusion.
A claim had been made against the Tampa Housing Authority alleging injury resulting from exposure to lead paint in an authority building. The authority sought coverage from its insurer, which denied coverage, citing the pollution exclusion. The insurer contended that injury from lead exposure was injury from exposure to a pollutant. Both the federal district court and the court of appeals accepted this contention, reasoning that "lead is a 'pollutant' under the policy because it is a chemical, and the pollution exclusion clause specifically lists 'chemicals' in its definition of 'pollutants.' Moreover, lead is specifically recognized as a pollutant under Florida laws governing pollutant discharge prevention and removal." 231 F.3d at 1300.
RHODE ISLAND SUPREME COURT LINES UP ON SIDE OF POLICYHOLDER REGARDING CONSTRUCTION OF FIRE- 1986 QUALIFIED OR "SUDDEN AND ACCIDENTAL" POLLUTION EXCLUSION; FOCUSES BOTH ON DICTIONARY AND DRAFTING HISTORY OF EXCLUSION
Textron, Inc. v. Aetna Casualty and Surety Company, 754 A.2d 742 (Rhode Island Supreme Court, 2000)
Although the qualified pollution exclusion has not been part of the standard commercial liability policy (CGL) for 15 years, it continues to generate litigation and division among jurisdictions. Furthermore, not every state supreme court has taken a position on its application. In Textron v. Aetna, the Rhode Island Supreme Court finally faced the issue and determined that the exclusion does not apply to bar coverage for claims against a policyholder where the claimant was allegedly injured by pollution discharges that were gradual but unintentional. The qualified exclusion, in effect in most CGL policies between 1970 and 1986, provides that the CGL does not apply to pollution claims unless the alleged pollution damage stemmed from a discharge of pollutant that was "sudden and accidental." As is now well known, courts have divided nearly evenly on the question of whether the discharge of pollutant must be abrupt in order to provide coverage or whether a policyholder may be covered where it did not intend to pollute or expect to pollute.
From 1960 to 1973, Textron leased an 80-acre site in New York from Bell Aircraft, purchasing the site in 1973 and operating it until 1987 for the manufacture of aerospace-related equipment.
During its long-term use of the site, Textron's manufacturing processes generated toxic chemical wastes. To capture, contain, treat, and neutralize these wastes, it employed an artificial holding pond at the site as a waste receptacle and depository. After treating these wastes, Textron would release them into the site's sanitary drainage system. However, unbeknownst to Textron, some of this toxic waste gradually seeped from the pond and, over the years, contaminated or contributed to the contamination of the surrounding groundwater.
754 A.2d at 744.
The U. S. Environmental Protection Agency (EPA) eventually charged Textron with polluting various sites across the country, including the New York site that had been owned by Bell. The EPA sued Textron under Superfund, seeking to force Textron to clean up the land or pay the EPA for its cleanup. Textron sought coverage from various insurers, settling most claims except that with Insurance Company of North America (INA), which case reached the Rhode Island Supreme Court. The trial court granted partial summary judgment for INA. The supreme court reversed.
Acknowledging that courts have divided closely on this issue,' the supreme court found the term "sudden" in the "sudden and accidental" exception to the pollution exclusion to be sufficiently ambiguous to warrant construction in favor of the policyholder. According to the court:
Giving the word "sudden" its "plain everyday meaning" is no easy task. Both sides muster dictionary support of their respective positions, half of which accord a temporal meaning to the word and the other half of which give it the meaning of unexpected. This diversity proves only that the word's meaning is legitimately subject to different interpretations-in other words, that it is ambiguous .... Here, a multitude of cases exists on both sides. Furthermore, a slim but persuasive majority of other jurisdictions holds that the word "sudden" in this type of clause is ambiguous; that is, it is susceptible to more than one reasonable interpretation, as Textron argues.
754 A.2d at 748-49 (footnote omitted and citations omitted).2
Consequently, the standard Rhode Island law of construing ambiguous policy language in favor of the nondrafting policyholder counseled reversal. "Here, a genuine issue of material fact exists concerning whether Textron tried, albeit unsuccessfully to contain the contaminants safely in the neutralization pond." 754 A.2d at 750.
In addition, the court went beyond decision solely on the basis of policy language and ambiguity analysis. The court also considered the impact of the drafting history of the exclusion on the meaning of the exclusion in application. It found itself in agreement with Morton International, Inc. v. General Accident Insurance Co. of America, 134 N.J. 1, 629 A.2d 831, 851, 875-76 (N.J. 1993) and Alabama Plating Co. v. United States Fidelity and Guaranty Co., 690 So. 2d 331,335-36 (Ala. 1996), both of which found it relevant to the meaning of the provision to consider the drafting history and representations by the insurance industry about the intended effect of the exclusion and the purpose of the exclusion. 754 A.2d at 751-53.
Unfortunately, this sort of use of such background information as indicia of meaning has frequently been given the term "regulatory estoppel," a term that misleadingly implies that reference to such contextual information might bind an entire industry solely because of statements made by a particular insurer to a single regulator. Framed in that manner, regulatory estoppel has not been widely accepted. See Jeffrey W. Stempel, Law of Insurance Contract Disputes (sec)14.11[b] (2d ed., 1999 & Supp. 2001).
However, when such information is characterized simply as evidence of contract meaning, courts may be more receptive to it, as was the Rhode Island Supreme Court in Textron. There, the court found it instructive that the insurers characterized the exclusion as one to prevent coverage for intentional or reckless pollution rather than solely as an exclusion designed to avoid coverage for gradual pollution. For example, the court cited statements made by INA's president that focused on the pollution exclusion as seeking to avoid coverage for intentional pollution. 754 A.2d at 753.
In addition, the court found that the overall purpose of the CGL-protecting policyholders from the consequences of "accidents"-augured in favor of finding coverage under the exception to the exclusion as long as the policyholder had not expected or intended to pollute. See 754 A.2d at 752. The court also stressed that issues of policyholder intent and knowledge were not appropriate for summary judgment where significant factual dispute existed between the parties. 754 A.2d at 754-55.
LOSSES FROM ERRONEOUSLY UNDERPRICED PRODUCTS DUE TO MISLABELING NOT COVERED AS PROPERTY Loss CLAIM UNDER COMMERCIAL LIABIL,ITY POLICY Wisconsin Label Corp. v. Northbrook Property & Casualty Ins. Co., 607 N.W.2d 276, 233 Wis., 2d 314 (Wisconsin Supreme Court, 2000)
Marketing promotions such as a "2 for 1" sale or "buy one, get one free" can often serve as a "loss leader" for businesses interested in getting consumers to try products they have not previously used. But where mishaps in labeling the product promotion lead to more losses than anticipated, this is an uninsured event, not one for which the mislabeling company can obtain standard liability insurance coverage.
In 1992, Ameripac (a subsidiary of Wisconsin Label) contracted with Personal Products Company (PPC) to assemble two separate PPC products (Stayfree Maxi-Pads and Carefree Panty Shields) into a single promotional package for retail sale. Under the promotion, "a consumer who purchased a box of Maxi-Pads would also receive at no additional charge a box of Panty Shields." The two products were to be packaged together, and the bar codes for the two different products were to be covered with a bar code reflecting only the price of the Maxi-Pads ($2.47), which sold for approximately twice the price of the Panty Shields ($1.16).
More than 350,000 of the packages were assembled and distributed to various WalMart stores for retail sale-then the trouble began. Wal-Mart claimed that Ameripac had botched the labeling so that many of the packages, when scanned at the cash register, rang up the lower price of the Panty Shields rather than the higher price of the Maxi-Pads. Unhappy at having undercharged and lost money on this inventory, Wal-Mart sought compensation from PPC, which paid Wal-Mart approximately $200,000. Having paid Wal-Mart, PPC turned to Ameripac to reimburse it for the faulty labeling. In addition to the $200,000 claim, PPC sought $25,000 in reinspection costs and offset against this claim $125,000 in unpaid invoices to Ameripac.
The remaining PPC claim for $100,000 had not been actively litigated, but Wisconsin Label, parent company of Ameripac, sought insurance coverage for the claim under its commercial general liability policy (CGL) with Northbrook after the insurer denied coverage. The Wisconsin Supreme Court unanimously upheld the insurer's position, ruling that the claim for lost income due to mislabeled products was not a claim for "property damage" under the standard CGL language employed by Northbrook. 607 N.W.2d at 276, 279.
Standard CGL language provides coverage to a policyholder or another insured when a claim is made against it for bodily injury or property damage caused by an occurrence of negligence or oversight. Although Ameripac's mislabeling was an occurrence bringing about a claim for damages, the court found that there was no "property damage" within the meaning of the CGL. Property damage is defined in the CGL as "physical injury to tangible property" or "loss of use of tangible property that is not physically injured." Wisconsin Label's claim for damages failed to meet both prongs of the property damage definition.
First, the mislabeled products were not physically injured. The maxi-pads and pantyshields sold as part of this promotion were in factory issue condition when sold and were presumably used by the purchasers. No one had complained about the quality of the products, not even dented boxes or torn comers of the package. The problem was not one of injury to the items sold. The problem was that these perfectly acceptable and physically unaltered products had been unintentionally "priced" too low because of the mislabeling. 607 N.W.2d at 284. Interestingly, the court applied the notion of the objectively reasonable expectations of the insured against Wisconsin Label, a bit of a twist because the reasonable expectations approach is generally viewed as a doctrine favoring policyholders. "No reasonable insured would concluded that PPC's undamaged, saleable products suffered 'physical injury' simply because Wisconsin Label improperly placed the labels on the packages." 607 N.W.2d at 284.
Second, no one had suffered any "loss of use" of the products. Purchasers apparently used them just fine. In fact, purchasers were probably happy to have gotten the two items for the price of only the cheaper item. According to the court, loss-of-use property damage takes place only if "property is diminished in value or made useless." However, the PPC products "were still useable and therefore were not rendered useless by the mislabeling." The PPC products were "not diminished in value because the mislabeling did not change the character of the products but merely caused lost profits." 607 NW.2d at 282.
The Wisconsin court took pains to distinguish the case from Eljer Manufacturing, Inc. v. Liberty Mutual Insurance Co., 972 F.2d 805 (7th Cir. 1992), a U. S. Court of Appeals case applying Wisconsin law, in which the Seventh Circuit found that CGL coverage was "triggered" by an occurrence and that property damage allegedly took place at the time defective plumbing was incorporated into homes. Homeowners had sued the manufacturer of the plumbing systems, and the manufacturer had, in turn, sought coverage from its CGL carrier. In Eljer, property damage under the CGL was alleged because the claimants argued that their homes were immediately physically injured by the presence of defective (and hard to remove without knocking out the walls) plumbing systems. By contrast, in Wisconsin Label, the court found that, regardless of whether the alleged injury occurred at the time of mislabeling or erroneous ringing up at the register, there was still no tangible physical injury to the mislabeled products. By comparison, the homes in Eljer Manufacturing were saddled with defective plumbing (even if the plumbing had not yet leaked) throughout the life of the homes. "Moreover [in Wisconsin Label's case], there was no possibility that physical injury would occur in the future because the only injury that the mislabeling could ever cause was lost profits." 607 N.W.2d at 281, 284-85.
The court also distinguished at some length Western Casualty & Surety Co. v. Budrus, 112 Wis. 2d 348,332 N.W.2d 837 (Ct. App. 1983), which found coverage for loss of use of farmland which was planted with the wrong seed because of mislabeling. See 607 N.W.2d at 288-89. See also 607 N.W.2d at 285-87 (reviewing "property damage" precedent under CGL); Sola Basic Industries, Inc. v. United States Fidelity & Guaranty Co., 90 Wis. 2d 641, 644, 280 N.W.2d 211 (1979) (finding coverage for "loss of use" claim occasioned by need to remove and replace transformer and inability to run furnace during this time period because of industrial accident, even though furnace itself was not physically injured); Laurie Vasichek, Note, liability coverage for "damages because of property damage" under the comprehensive general liability policy, 68 Minn. L. Rev. 795 (1984) (reviewing history and case law under CGL provision).
The Wisconsin Supreme Court, having decided that coverage was precluded because of lack of property damage, did not address the applicability of the CGL's "impaired property" exclusion, which Northbrook had also raised as a defense to coverage. Northbrook urged the court to apply Illinois law, but the court determined to apply Wisconsin law, largely because "there is no genuine difference between the two laws in this case." See 607 N.W.2d at 282, n. 2. In fact, the Wisconsin Label holding and analysis should control under the law of virtually any jurisdiction. The policyholder was seeking to obtain coverage for lost profits due to inadvertent mispricing of its products. This type of "business risk" is not typically covered under the standard CGL, which is designed to protect businesses from tort suits alleging bodily injury or property damage.
"The [CGL] coverage is for tort liability for physical damages to others, and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained." See 607 N.W.2d at 383 (citing Weedo v. Stone-E-Brick, Inc., 81 N.J. 233,405 A.2d 788,791 [N.J. 1979]). Only an unusual policy would be likely to provide coverage in these circumstances. Even errors & omissions (E & 0) or professional liability policies, although designed to protect against negligent business operations by the insured, generally do not cover income lost through improper billing and other activity similar to the mislabeled pricing that took place in the Wisconsin Label case.
WORKERS COMPENSATION STATUTE UNCONSTITUTIONAL TO THE EXTENT IT REQUIRES LIVE TESTIMONY IN CLAIMS OF MENTAL IMPAIRMENT BUT ACCEPTS DOCUMENTARY EVIDENCE ALONE IN CASES OF PHYSICAL IMPAIRMENT
Esser v. Industrial Claim Appeals Office of the State of Colorado-Colo.-, 8 P.3d 1218 (Colo. App., 2000, modified on denial of rehearing, March 23, 2000, cert. granted, August 21, 2000).
Colorado's workers compensation statute provides that, where a worker claims injury and mental impairment, this must be "proven by evidence supported by the testimony of a licensed physician or psychologist." Mental impairment is defined as existing where there is no evidence of physical injury to the claimant. However, for claims of physical injury, a worker may prove up the claim without use of live expert testimony through use of medical records and other documentary evidence. A claimant asserting mental impairment challenged the statute's treatment as unfairly uneven regarding mental and physical injury claims. The Colorado Court of Appeals agreed, holding that differential evidentiary treatment of the two sorts of claims was a violation of the equal protection of laws guaranteed in the state constitution. The court of appeals found that there was no rational reason to require live testimony for mental impairment claims but to deem documentary proof sufficient for physical injury claims. 8 P.3d at 1221-23. The court of appeals did, however, stress that the legislature was within its prerogatives in requiring sufficient evidence of mental impairment; the legislature erred in resolutely requiring different minimum forms of evidence for different injury claims.
We have attempted to discover some rational reason for requiring a mental impairment claimant to produce live testimony from his or her expert in every instance, even if the opposing party does not elect to cross-examine, while allowing all other claimants to submit expert reports as evidence and requiring that they produce the expert only if the opposing party seeks to cross-examine that expert. We have been unable to divine any rational basis for that distinction, and the respondents have suggested none.
The very real purpose of requiring proper verification of the claim is met once an appropriate expert report is received. And, in all cases in which the employer chooses to examine that expert, an opportunity for such examination must be provided, even if that expert is not initially called as a witness in the claimant's case.
Given these considerations, therefore, we conclude that the further requirement that a mental impairment claimant produce a live witness in the first instance achieves no legitimate purpose ....
8 P.3d at 1222-23.
TWO STATE SUPREME COURTS INVOKE INCONTESTABILITY STATUTE To BAR LIFE INSURER FRom DENYING CLAIMS THROUGH DEFENSE OF PREEXISTING CONDITION Galanty v. Paul Revere Life Insurance Company, 23 Cal. 4th 368, 97 Cal. Rptr. 2d 67, 1 P.3d 658 (2000); Marie Deonier & Associates v. Paul Revere Life Insurance Company, 9 P.3d 622 (Mont., 2000)
The incontestability clause has been a part of life insurance policies for perhaps 150 years. Legislation mandating such clauses became common in the 20th century. Later, the provision spread to disability clauses through either legislation or contract drafting by the insurer. Incontestability provisions state that after a policy has been in force for more than two years, an insurer may not rescind the policy on grounds of misrepresentation in the application. In effect, the incontestability provision creates a two-year "statute of limitations" for insurers to investigate statements made and the underwriting facts surrounding an application. After the "statute" expires, the insurer is "stuck" with the policy unless the misrepresentation was intended to deceive or was otherwise fraudulent. However, the clear majority rule is also that the incontestability provision of a policy (whether voluntary or statutorily imposed) does not prevent an insurer from asserting other defenses such as lack of coverage or applicability of an exclusion.
But what happens when these two principles clash because of particular language in an incontestability statute or the particular context of a loss claim? The California and Montana supreme courts recently resolved these conflicts in favor of the policyholder, holding that two disability insurers could not use preexisting condition limitations in their policies to deny coverage because of conflicts with state incontestability law.
In June 1987, Californian Mark Galanty had his blood tested, and the result was HIV positive. He was told to take another test to check the accuracy of this test but never did. In May 1988, he was treated for flu symptoms, and his doctor apparently knew about the blood test results. In Fall 1988, he applied for disability insurance and answered "no" to the application questions asking whether he had any "disorder of the circulatory system" or was "currently receiving any medical advice or treatment" for such problems. He mentioned his treatment for "flu" but did not talk about his blood test. The Paul Revere application did not ask whether Galanty was HIV positive or had AIDS. 1 P.3d at 659-60.
Things were uneventful until 1994, when Galanty presented a disability claim to Paul Revere, claiming total disability due to AIDS and accompanying problems of numbness in the arms and legs that made it impossible for Galanty, a court reporter, to continue to work in that capacity. Revere initially accepted the claim and paid benefits but then challenged the claim, arguing that the disabling disease had first manifested itself before the policy was issued. Galanty sued for coverage in 1996. Both the trial court and the intermediate appellate court found for the insurer, holding that the claim was barred because of the problems arising before the inception of coverage. Galanty argued that he was covered because state law provides a required incontestability period preventing the insurer from reducing or denying a claim because of preexisting conditions. 1 P.3d at 661-62.
The California Supreme Court unanimously reversed, finding that Galanty was covered because state law required that incontestability clauses in disability policies not only bar misrepresentation defenses but also defenses based on preexisting conditions once the policy had been in effect more than two years. The court provided a lengthy historical review of the incontestability clause and incontestability legislation for both life insurance and disability insurance. 1 P.3d at 665-67. See also Note, AIDS and the Incontestability Clause, 66 N.D. L. Rev. 267 (1990) (reviewing history of incontestability clauses). It also noted the degree to which courts in other states have divided over the issue. 1 P.3d at 662-64 (noting that state courts in Delaware, Hawaii, Maryland, Minnesota, and New York and federal courts applying the law of Georgia, Indiana, Michigan, and Wisconsin have sided with policyholders in similar circumstances, while the law of New Jersey, Arizona, Florida, Massachusetts, Mississippi, Tennessee, and Washington has sided with the insurer).
The Galanty court's analysis is consistent with the decisions of other states finding for the policyholder, but Galanty itself was focused on construction of a California statute, albeit one commonly found in the states because it is based on a uniform law promulgated by the National Association of Insurance Commissioners (NAIC). California Civil Code 10350.2 requires all disability policies sold in the state to contain either Form A or Form B of the incontestability clause. Although Form A was read by the court as more favorable to the insurer than Form B, which was contained in the Paul Revere policy (Form B does not permit challenges based on intentionally fraudulent misrepresentation; Form A does), both clauses are subject to the following statutory language:
No claim for loss incurred or disability (as defined in the policy) commencing after two years from the date of issue of this policy shall be reduced or denied on the ground that a disease or physical condition not excluded from coverage by name or specific description effective on the date of loss had existed prior to the effective date of coverage of this policy. 1 P.3d at 662.
This type of statutory language "beefing up" the incontestability statute is common regarding disability policies, but life insurance incontestability legislation generally only strips the insurer of misrepresentation defenses. See 1 P.3d at 668. However, the average life insurance policy does not contain the same restrictions on pre-inception injuries or problems found in the typical disability policy.
The Paul Revere policy defined covered "sickness" as a problem that "first manifests itself after the Date of Issue," and the policy contained a similar preexisting condition exclusion. However, neither was considered effective to defeat Galanty's coverage in view of the strong California statutory language stating that claims from preexisting conditions could not be reduced or denied after the policy had been in effect for more than two years. 1 P3d at 662-64. In effect, the court stated that the statute trumps any inconsistent language contained in the disability policy itself. 1 P.3d at 669.
Although California law thus seriously limits the insurer's defenses after a disability policy has been in force two years, the court noted that the law does not preclude the insurer from tailoring policy coverage to exclude particular types of diseases or injury-the statute only precludes the insurer from invoking pre-policy manifestation of otherwise covered problems. Thus, an insurer can in California draft a policy that does not cover AIDS or HIV-related illnesses. 1 P.3d at 671. However, other laws, such as the Americans with Disabilities Act, may limit such restrictions on coverage (although most reported cases on this controversy currently favor insurers).
The Montana case began when Kathryn Vestal sought to recover under her Paul Revere disability policy, suing the insurer and its agent, Marie Deonier & Associates. Vestal settled with Revere, leaving cross-claims ongoing between Deonier and Revere, who were realigned by the courts as plaintiff and defendant in view of their dispute. Vestal, a University of Montana law student, sought medical care in May 1989 regarding insomnia and was prescribed low-dose antidepressants, which she took for several months. In 1990, she began work in the Billings, Montana, office of the Social Security Administration. In June 1991, she contacted Deonier about insurance and was applied for a Paul Revere policy. Deonier completed the form based on Vestal's interview. The application disclosed the insomnia episode. Revere issued the policy in June 1991.
Vestal's policy with Revere contained an incontestability clause providing that "[n]o claim for Disability beginning after two years from the Date of Issue will be reduced or denied because of a disease or physical condition that existed before the Date of Issue unless it is excluded by name or specific description." 9 P.3d at 624. The policy stated that Revere "will not pay benefits for a Pre-Existing Condition if it was not disclosed on Your application," and covered sickness was defined as beginning after the inception of the policy. 9 P.3d at 624-25. In particular, a preexisting condition was defined as something for which
a. Symptoms existed that would cause an ordinarily prudent person to seek diagnosis, care, or treatment; or
b. Medical advice or treatment was recommended by or received from a Physician.
9 P.3d at 625.
In February 1992, Vestal was admitted to a hospital emergency room with problems of depression. In September 1993, she was diagnosed with major depression and was unable to work. She was awarded Social Security benefits and in November 1993 filed a claim against Paul Revere for disability benefits. As in Galanty, Revere initially paid and then balked, asserting the preexisting condition restrictions on coverage and arguing that Vestal had been treated for depression-related problems as a law student in 1989 but that she had failed to adequately disclose this in her 1991 insurance application. Vestal sued for coverage in 1995.
Vestal and Revere settled in 1998, but Deonier and Revere continued to litigate, with Deonier alleging that Revere breached its duties to Deonier as agent in contesting the Vestal claim without having told Deonier that it would dispute such claims notwithstanding the incontestability clause of the policy. Further, Deonier asserted that Revere should have known that its position was at odds with Montana law but pressed on nonetheless. 9 P.3d at 626-27. Revere asserted that its position was reasonable and that it was entitled to assert it under the law. The trial court agreed and entered judgment for Revere.
The Montana Supreme Court reversed, finding that Revere had a duty to warn Deonier about this matter and the likely consequences if it litigated the issue of coverage under these circumstances and should not have denied the Vestal claim. The incontestability language of the policies, as in California, was required by state statute. Under the Montana statute (Montana Stat. Ann. 33-22-202) and the policy, an insurer cannot attempt to reduce or deny a claim because of a preexisting condition after the policy has been in force for more than two years. 9 P.3d at 630-32. In reaching this decision, the Deonier court cited Galanty with favor and followed a similar analysis. 9 P.3d at 628-29. Like the Galanty court in California, the Montana Supreme Court in Deonier concluded that statutory language trumps inconsistent portions of the policy. 9 P.3d at 630. Deonier also engaged in considerable review of precedent regarding the incontestability clause. 9 P.3d at 625-26.
Both sides claim to hold the majority view, but the numbers are close enough that any slight preponderance of one position over the other is not particularly meaningful. As one court has colorfully described it, "The cases swim in the reporters like fish in a lake. The Defendants would have this court pull up its line with a trout on the hook, and argue that the lake is full of trout only, when in fact the water is full of bass, salmon and sunfish too." See 754 A.2d at 748, citing Pepper's Steel & Alloys, Inc. v. United States Fidelity and Guaranty Co., 668 F. Supp. 1541, 1549-50 (S.D. Fla. 1987).
2 Readers interested in judicial approaches to use of a dictionary might enjoy the court's discussion in footnote 1 of its opinion. See 754 A.2d at 749.
Jeff Stempel University of Nevada-Las Vegas…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Recent Court Decisions. Contributors: Stempel, Jeff - Author. Journal title: Journal of Risk and Insurance. Volume: 68. Issue: 2 Publication date: June 2001. Page number: 349+. © 2009 American Risk and Insurance Association, Inc. Provided by ProQuest LLC. All Rights Reserved.