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from MEALEY'S LITIGATION REPORT: Insurance November 4, 2003 9th Circuit Reverses, Says Additional Insureds Owed Complete Defense PASADENA, Calif. -- In an unpublished Oct. 21 opinion, the Ninth Circuit U.S. Court of Appeals reversed a decision limiting the extent of a defense owed to additional insureds against construction defect claims (Fred G. Rice, et al. v. Safeco Property & Casualty Insurance Co., et al., No. 02-55199, 9th Cir.; 2003 U.S. App. LEXIS 21399). (Opinion. Document #03-031104-104Z.) Fred Rice and Suntree Co. appealed from an order in favor of Safeco Property & Casualty Co. and American States Insurance Co. and denial of a motion for reconsideration of that order. The insurers failed to defend Rice and Suntree in connection with their development of a Santa Maria, Calif., project. The insurers insured only 10 subcontractors working on the project. The U.S. District Court for the Central District of California agreed that the insurers' duty to defend was limited to work done by those 10 subcontractors. Thus, Rice and Suntree were not entitled to a full defense, the court ruled. "In so ruling, however, the district court did not have the benefit of the California Court of Appeal decision in Presley Homes Inc. v. American States Insurance Co. (90 Cal. App. 4th 571, 108 Cal. Rptr. 2d 686 [Cal. Ct. App.], rev. denied [2001])," the Ninth Circuit said. The Presley Homes court held that an additional insured listed under subcontractors' policies is entitled to a full defense even if indemnity for some claims were potentially barred under the "your work" exclusion. The Supreme Court denied review in that case and has not yet addressed the issue. Here, the insurers failed to demonstrate that the high court would stray from Presley Homes, which is consistent with other high court decisions such as Buss v. Superior Court (16 Cal. 4th 35,65 Cal. Rptr. 2d 366, 939 P.2d 766, 775 [Cal. 1997]), the Ninth Circuit said. Reversing, the Ninth Circuit ruled that the lower court erred in denying reconsideration in light of the new decision. Copyright 2003, LexisNexis, Division of Reed Elsevier Inc., All Rights Reserved This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.
______________________________________________________________ from MEALEY'S LITIGATION REPORT: Insurance Insolvency October 23, 2003 Reliance Liquidator Amends Complaint To Allege That Deloitte Hid Documents PHILADELPHIA -- A Pennsylvania federal court on Oct. 16 allowed the liquidator of Reliance Insurance Co. to amend a malpractice complaint against the accounting firm Deloitte & Touche (M. Diane Koken v. Deloitte & Touche, No. 02-1231, E.D. Pa.). The original complaint, filed in the U.S. District Court for the Eastern District of Pennsylvania, accuses Deloitte and its chief actuary, Jan A. Lommele, of causing a billion-dollar overstatement of Reliance's surplus in financial statements for the year ended Dec. 31, 1999. Pennsylvania Insurance Commissioner M. Diane Koken says the defendants turned a blind eye to Reliance's rapidly deteriorating financial health. The amended complaint includes allegations regarding a February 2002 reserve analysis conducted by Deloitte for Kohlberg Kravitz Roberts & Co. (KKR). Koken says Deloitte violated a court discovery order and deliberately concealed documents relating to the KKR analysis. The liquidator also added a new cause of action to recover allegedly preferential property from Deloitte. (Order and amended complaint available. Document #10-031023-006C.) KKR retained Deloitte to conduct a review of Reliance's reserves as part of KKR's due diligence in connection with a contemplated $400 million capital investment into Reliance and/or its parent company, Reliance Group Holdings Inc. Deloitte concluded that Reliance's reserves were deficient by at least $350 million. KKR engaged a second actuary, Am-Re Consultants Inc., to conduct an additional independent analysis of Reliance's reserves. Am-Re reported that the reserves were understated by about $500 million as of Dec. 31, 1999. In July 2003, Deloitte informed the liquidator that additional documents relating to KKR's due diligence activities were "just brought to its attention," Koken says. This was 15 months after the District Court ordered Deloitte to produce all documents relating to the accounting and auditing of Reliance, she contends. "Deloitte recently
indicated that it will finally produce these relevant and discoverable
documents on Sept. 8, 2003," the liquidator charges. "These
documents are believed to be highly relevant and likely contain potentially
damaging information relating to the February 2000 due diligence activities,
analyses and conclusions developed on behalf of KKR relating to the
adequacy of Reliance's reserves as of Dec. 31, 1999." This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.
______________________________________________________________ from MEALEY'S LITIGATION REPORT: Reinsurance November 3, 2003 7th Circuit: Film Financing Suit Should Stay In Federal Forum CHICAGO -- A case involving a film financing reinsurance program should be resolved in Illinois federal court, the Seventh Circuit U.S. Court of Appeals ruled Oct. 17 (AXA Corporate Solutions, et al. v. Underwriters Reinsurance Co., Nos. 02-3795 & 02-3959, 7th Cir.). The panel ruled that no exceptional circumstances would warrant abstention and, therefore, the plaintiff is entitled to litigate in a federal forum. (Opinion. Document #12-031103-101Z.) In 1994, Chase Manhattan Bank created insurance-backed film financing programs under which it provided loans to borrowers whose collateral was based on the business risk of the film's success. Chase secured these loans through film insurance revenue policies. At issue in this case is a loan to George Litto Pictures Inc. (GLP) organized by Sawtantar Sharma, an insurance broker employed by Stirling Cooke Brown Reinsurance Brokers Ltd. In early 1997, AXA Corporate Solutions sought to participate as a reinsurer for a five-picture master facility. Underwriters Reinsurance Co. (URC) was approached to insure the transaction. As part of the proposed GLP transaction, URC insisted that the reinsurers each sign a loss payee endorsement, which allowed Chase to deal directly with AXA. AXA informed URC that it wanted New York law to govern the agreements and that any dispute would be tried in New York courts. But URC was not licensed to issue insurance in New York. URC proposed issuing the policy in Texas. In 1999, Chase agreed fund two motion pictures. Sharma asked AXA to reinsure a two-picture deal, which would later be rolled into the five-picture master facility. The Texas Department of Insurance would not approve the two-picture cash flow insurance policy and loss payee endorsement providing for New York law and jurisdiction. So URC, without informing AXA, filed a revised version with the department that contained a forum selection clause giving Texas courts jurisdiction and providing for the application of Texas law. AXA refused to accept the contract and told URC that it would go forward with the GLP transaction only if the insurer agreed to file the cash flow insurance policy and the loss payee endorsement in Illinois. URC agreed to do so, and AXA signed the loss payee endorsement with the amended forum selection clause. In July 1999, URC informed Sharma that it would no longer agree to amend the loss payee endorsement as AXA requested. Chase and URC entered into a separate "side-agreement" under which URC would finance only one film, which was budgeted at approximately $21 million. URC also insisted that Chase waive claims for punitive damages against URC and that Chase not sue URC without naming the reinsurers as parties. URC also demanded that the reinsurers be liable to URC for damages in excess of policy limits and for punitive damages that may be imposed on URC. When AXA refused to accept URC's changes, URC did not file the contracts with the Illinois Department of Insurance. Chase later made a claim against URC and AXA under the insurance agreements. AXA sued URC in the U.S. District Court for the Northern District of Illinois. URC moved to stay or dismiss the complaint, pursuant to the Colorado River abstention doctrine, which says a federal court may stay or dismiss a suit when there is a concurrent state court proceeding and it would promote "wise judicial administration." Copyright 2003, LexisNexis, Division of Reed Elsevier Inc. All rights reserved. This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.
______________________________________________________________ from MEALEY'S Emerging Insurance Disputes November 4, 2003 4th Circuit Finds No Duty To Defend Policyholder For Handgun Litigation RICHMOND, Va. -- In a one-paragraph, unpublished per curiam opinion, the Fourth Circuit U.S. Court of Appeals on Oct. 27 affirmed a South Carolina federal judge's grant of summary judgment to insurers of Ellett Brothers Inc. that there is no duty to defend the policyholder for underlying handgun litigation (United States Fidelity & Guaranty Co., et al. v. Ellett Brothers Inc., No. 03-1306, 4th Cir.). (Order available. Document #13-031104-013R.) In February, U.S. Judge Margaret B. Seymour of the District of South Carolina granted summary judgment to United States Fidelity & Guaranty Co., Fidelity & Guaranty Insurance Underwriters Inc. and St. Paul Mercury Insurance Co. on the duty to defend but granted Ellett Brothers' motion to dismiss an indemnity claim because the issue was not ripe for adjudication Ellett Brothers has been named in an underlying action in New York state court that alleges that Ellett and other handgun manufacturers and wholesalers produce, market and distribute handguns in a way they know supplies unlawful demand for handguns. The underlying action, filed by the people of the State of New York, also alleges that by contributing to the volume of illegal guns in that state, the manufacturers and wholesalers have created and maintained a public nuisance in violation of New York laws. The District Court judge noted that the parties previously litigated the same issue in an action filed by Ellett Brothers against its insurers for underlying actions in California (Ellett Brothers Inc. v. United States Fidelity & Guaranty Co., No. 3:00-1269-19, D. S.C. [Ellett I]). In that case, the Fourth Circuit affirmed another South Carolina federal judge's finding that damages do not include equitable relief. Judge Seymour said the Fourth Circuit's precedent in that action is controlling. In its April 1 brief on appeal, Ellett argued that the District Court ruling and the Fourth Circuit's decision in Ellett I are erroneous. However, the insurers maintained that the District Court correctly held that its policies unambiguously provide coverage for legal damages but not for the equitable relief sought in the underlying action. (Appellant's brief available. Document #13-031104-016B. Appellee's brief available. Document #13-031104-017B.) The Circuit Court found "no reversible error. Accordingly, we affirm for the reasons stated by the District Court." Copyright 2003, LexisNexis, Division of Reed Elsevier Inc., All Rights Reserved This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.
______________________________________________________________ from MEALEY'S LITIGATION REPORT: Insurance Fraud October 22, 2003 NEW YORK -- The federal health care fraud statute applies to the participation of individuals as passengers in staged accidents seeking to take advantage of the state's no-fault automobile insurance laws, the Second Circuit U.S. Court of Appeals held Oct. 14, ruling on an issue of first impression (United States of America v. Jean Maxon Lucien, et al., Nos. 02-1228, 02-1266, 02-1395, 2nd Cir.; 2003 U.S. App. LEXIS 20906; 2003 U.S. App. LEXIS 20905). (Opinion and Summary Order. Document #20-031022-112Z.) "We recognize that this holding authorizes the application of the federal health care fraud statute to circumstances that are atypical of the health care fraud case law, which to date has concerned itself more exclusively with conduct within the medical community. Despite this factual twist, it is clear that defendants' conduct falls squarely within the unambiguous terms of the statute and therefore the statute applies in the circumstances presented by this case," the court said. Yves Baptiste, Policia Baptiste and Guerline Dormetis appealed on various grounds from judgments of the U.S. District Court for the Eastern District of New York convicting them of health care fraud in violation of 18 U.S. Code Section 1347. Yves Baptiste was sentenced to 30 days' incarceration, three years of supervised release, restitution of $46,701 and a special assessment of $100; Policia Baptiste was sentenced to five months in prison, three years of supervised release, restitution of $41,065 and a special assessment of $100; and Dormetis was sentenced to 21 months' incarceration, three years of supervised release, restitution of $56,172 and a special assessment of $100. The Second Circuit affirmed in two opinions. Addressing the applicability of the federal health care fraud statutes to the defendants, who defrauded health insurers by faking accidents and injuries, the court noted that the appeal raised issues of first impression because "case law interpreting the 1996 federal health care fraud statute is, so far as we can discover, virtually non-existent." Copyright 2003, LexisNexis, Division of Reed Elsevier Inc., All Rights Reserved This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.
______________________________________________________________ from MEALEY'S LITIGATION REPORT: Insurance Bad Faith October
15, 2003 Verdict Inconsistent; New Trial Warranted, California Appeals Court Rules SACRAMENTO, Calif. -- A jury that found that an insurer was not liable for breach of contract based on an oral modification to a homeowners insurance policy yet found that the insurer handled the claim in bad faith reached an inconsistent verdict, the Third District California Court of Appeal ruled in an unpublished Sept. 26 opinion, finding that a new trial is warranted (Lee Racicot v. CalFarm Insurance Co., No. C038839, C039769 & C040590, Calif. App., 3rd Dist.). (Opinion. Document #07-031015-106Z.) Lee Racicot was insured under a homeowners policy with CalFarm Insurance Co. Racicot's home, except for the foundation, was destroyed by an accidental fire. Racicot and CalFarm orally modified the policy to provide for advance payment for the costs of reconstruction, up to $521,000, upon documentation of the construction expenses. CalFarm eventually paid additional replacement costs up the agreed upon amount but only after Racicot was forced to sell his house before reconstruction was completed. CalFarm argued that the delay in payment was because Racicot had failed to submit sufficient documented expenses. Racicot sued CalFarm for breach of contract and bad faith. The case was submitted to a jury, which found that CalFarm did not breach its contract by delaying payment of benefits. However, the jury did find that CalFarm breached its implied covenant of good faith and fair dealing. The Nevada County Superior Court denied CalFarm's request for a new trial and later awarded $225,000 in attorneys' fees to Racicot. CalFarm appealed. Copyright 2003, LexisNexis, Division of Reed Elsevier Inc., All Rights Reserved This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.
______________________________________________________________ from MEALEY'S LITIGATION REPORT: California Insurance October
21, 2003 SAN JOSE, Calif. -- A California appeals court held Oct. 15 that environmental response costs are not covered under standard liability policies issued in the 1980s (CDM Investors, et al. v. American National Fire Insurance Co., et al., No. H024142, Calif. App., 6th Dist.). (Opinion available. Document #03-031021-103Z.) Insureds CDM Investors and Ralph Borelli were ordered by the California Water Quality Control Board to investigate commercial property that they leased to tenants as a possible source of soil and groundwater contamination. They spent approximately $230,000 to respond. The board ultimately determined that the insureds' property was not the source of contamination. Their liability insurers denied coverage and refused to reimburse the amount of the response costs. In 2000, the insureds sued the insurers. The Santa Clara County Superior Court sustained demurrers of American National Fire Insurance Co., American Alliance Insurance Co., Great American Insurance Co., Travelers Casualty & Surety Co. and Transamerica Insurance Group. Affirming, the Sixth District Court of Appeal examined relevant case law and policy language of each of the policies at issue. The plaintiffs conceded that policies issued in 1984 do not provide coverage pursuant to case law. These policies pay for "all sums" the insured becomes obligated to pay "by reason of the liability imposed by law upon the insured, or assumed by the insured under any contract, for damages because of bodily injury, personal injury, advertising injury or property damage to which this policy applies arising out of an occurrence as defined herein." Nevertheless, the plaintiffs argued that the insurers waived their right to deny coverage on the ground that the board order does not constitute a "suit" because the insurers' reservation of rights was not made on that ground. The appeals court rejected the argument, saying the plaintiffs allege no more than an implied waiver. The appeals court likewise rejected their claim for detrimental reliance. The plaintiffs asserted that had the insurers raised the "suit" defense, the plaintiffs would have refused compliance to force the board to sue them.
Copyright 2003, LexisNexis, Division of Reed Elsevier Inc., All Rights Reserved This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.
______________________________________________________________ from MEALEY'S Insurance Pleadings October 28, 2003 Insurer Argues Debris Pile Not Covered Property For Business Interruption Loss Case: RLI Insurance Co. v. Wood Recycling Inc., No. 03-CV010196, D. Mass. Memorandum of Law in Support of Motion for Summary Judgment filed Oct. 20 by RLI Insurance Co. Brief available. Document #50-031028-025B. Background: RLI Insurance Co. issued a first-party property insurance policy to Wood Recycling Inc., effective Aug. 1, 2001, through Aug. 31, 2002. Wood Recycling operates a waste management and recycling facility in Southbridge, Mass. Wood Recycling receives construction debris and collects tipping fees from its customers. On July 26, 2002, Wood reported to RLI that there was a fire in its construction and demolition (C&D) debris pile at the facility. Wood made claims to RLI for equipment repairs and sue and labor related to the fire suppression activities. RLI calculated a covered loss for equipment repairs and sue and labor of $190,000. As a result of the fire, Wood was not able to receive construction debris from its customers for a number of days. Wood made a claim for business interruption loss based on its inability to collect tipping fees. Wood maintains that RLI made false representations of fact and defrauded Wood when it denied coverage and failed to pay its coverage claim. Wood claims that the denial of coverage resulted in more than $2 million in damages. Arguments: There can be no recovery for business interruption losses unless the interruption of Wood Recycling's business was caused by loss or damage to covered property. The C&D debris pile is not covered property under the policy's Commercial Output Program. A covered location under the Commercial Output Program means any location where Wood Recycling has buildings, structures or business personal property covered under the program. Memorandum in Support of Summary Judgment filed Oct. 20 by Wood Recycling Inc. Brief available. Document #50-031028-024B. Arguments: Southbridge is a covered location, even as defined by RLI. Covered property from another location was transferred to Southbridge during the policy term; Wood Recycling's contractor's equipment qualifies Southbridge as a covered location; and flood and earthquake coverage endorsements qualify Southbridge as a covered location. Copyright 2003, LexisNexis, Division of Reed Elsevier Inc., All Rights Reserved This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.
______________________________________________________________ from MEALEY'S Business Interruption Insurance October 23, 2003 Likelihood Of Renewal Existed In WTC Tenant's Lease Agreement, Judge Finds NEW YORK -- It is more likely than not that a World Trade Center tenant's lease agreement would have been renewed, thereby extending the period of restoration beyond Dec. 31, 2007, a federal judge ruled Sept. 23 (Duane Reade, Inc. v. St. Paul Fire & Marine Insurance Co., Inc., No. 02 Civ. 7676, S.D. N.Y.). (Transcript. Document #51-031023-106Z.) Ruling from the bench, U.S. Judge Jed S. Rakoff of the Southern District of New York held that policyholder Duane Reade Inc. had met its burden in establishing the likelihood that its lease for its store in the World Trade Center would have been renewed. Judge Rakoff entered a final judgment on behalf of Duane Reade. In an Aug. 20 ruling, the judge defined the period of restoration as the time in which it takes Duane Reade to resume functionally equivalent operations in the location where its World Trade Center store once stood. Judge Rakoff further found that the method of calculating a period of restoration surrounding a claim for business interruption damages falls within the purview of an appraiser. On Oct. 10, St. Paul Fire & Marine Insurance Co. filed a notice of appeal with the Second Circuit U.S. Court of Appeals. At press time, a briefing schedule had not been established. Judge Rakoff rejected St. Paul's argument that Duane Reade failed to carry its burden because making a prediction as to the likelihood of renewal is nothing more than speculation. Before Sept. 11, 2001, Duane Reade operated a drugstore in the World Trade Center in downtown Manhattan. When the World Trade Center and the plaintiff's store were destroyed in the terrorist attack, the plaintiff sought coverage for business interruption losses under an insurance policy issued by St. Paul. Copyright 2003, LexisNexis, Division of Reed Elsevier Inc., All Rights Reserved This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.
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