TOP STORIES - Tressler LLP

January 2016
Volume 13
Issue 1
Extracontractual Liability and Claims Handling
Meet Our Editors
KATHERINE K. LINER, Partner
Orange County | [email protected]
TOP STORIES
MOHAMMED S. MANDEGARY, Partner
Orange County | [email protected]
>> INSURED’S CLAIM HITS TURBULENCE – COURT REJECTS CLAIMS
FOR BREACH OF FIDUCIARY DUTY AND NEGLIGENCE ASSERTED
AGAINST INSURER
By Jennifer S. Perdigao, Partner in the Los Angeles Office....................................... P2
>> COURT FINDS ALLSTATE ACTS IN BAD FAITH ON PROPERTY
LOSS CLAIM WHEN RELYING SOLELY ON INCONSISTENT
STATEMENTS FROM A SEPARATE BANKRUPTCY PROCEEDING
By Reginald D. Cloyd III, Associate in the Chicago Office............................................ P3
>> TOO LITTLE TOO LATE – INSURED’S BELATED OFFER TO
SUBMIT TO EUO BARRED BREACH OF CONTRACT AND
BAD FAITH ACTIONS
By Katherine K. Liner, Partner in the Orange County Office ....................................... P4
>> FIRM NEWS ............................................................................................................. P6
>> FIRM EVENTS .......................................................................................................... P7
CALIFORNIA | ILLINOIS | NEW JERSEY | NEW YORK
Insured’s Claim Hits Turbulence – Court Rejects Claims
for Breach of Fiduciary Duty and Negligence Asserted
Against Insurer
By Jennifer S. Perdigao, Partner in the Los Angeles Office
In Central Flying Service, Inc. v. StarNet Ins. Co., et al., 2015 WL 7854316 (E.D. Ark. 2015), StarNet Insurance
Company (StarNet) prevailed on a motion to dismiss claims for breach of fiduciary duty and negligence in
connection with its denial of coverage for the defense of wrongful death lawsuits arising out of an airplane crash.
Central Flying Service (CFS) was the owner
and operator of a 1998 Beech Bonanza A36
aircraft (Aircraft) that crashed in Louisiana,
resulting in four fatalities. CFS tendered the
defense of three wrongful death suits to StarNet under its aircraft
policy. StarNet denied coverage. CFS retained its own attorney
to investigate and defend the wrongful death suits. CFS invited
StarNet to participate in the settlement negotiations, but StarNet
refused. CFS subsequently settled the suits.
the court rejected the application of Parker on the grounds that
the insurer’s fiduciary duty only arises when the insurer accepts
coverage and takes control of the defense of the insured, thus
requiring the insurer to put the insured’s interests before its own.
In contrast, where the insurer denies coverage and the insured
controls its own defense, there is no fiduciary duty. Therefore,
because it had not assumed the defense and taken control of
settlement negotiations, the court held that StarNet was not in a
fiduciary relationship with CFS.
CFS filed suit against StarNet, asserting claims for breach of
contract, breach of fiduciary duty, bad faith and negligence.
StarNet brought a motion to dismiss the claims for breach of
fiduciary duty and negligence.
StarNet filed its motion to dismiss the negligence claim on
the grounds that Arkansas does not recognize a tort for
nonperformance of a contract by an insurance carrier. CFS argued
that StarNet committed misfeasance because it was negligent
in its investigation of the claim. However, the court rejected the
argument because the negligence claim was based on StarNet’s
alleged failure to exercise its contractual duties, which was
nonfeasance. Since contractual nonfeasance does not give rise
to claims for negligence in tort under Arkansas law, the court
dismissed the negligence claim against StarNet.
CFS argued that StarNet had breached its fiduciary duty by failing
to defend and settle the claims against CFS and by failing to put
CFS’ interests before its own. CFS relied on Southern Farm Bureau
Cas. Ins. Co. v. Parker, 341 S.W. 3d 26 (Ark. 1960) for the proposition
that an insurer owes a fiduciary duty to the insured. However,
Tressler Comments
This case makes an important distinction between an insurer that defends and an insurer that denies coverage under Arkansas
law. Here, StarNet disclaimed coverage, therefore, it did not have a fiduciary relationship with the insured. Further, CFS’ socalled negligence claim is premised on a failure to perform its alleged obligations under the insurance contract, which is simply
nonfeasance. An insured cannot re-characterize a breach of contract claim as a negligence claim.
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Court Finds Allstate Acts in Bad Faith on Property Loss Claim
When Relying Solely on Inconsistent Statements From a Separate
Bankruptcy Proceeding
By Reginald D. Cloyd III, Associate in the Chicago Office
In Ussery v. Allstate Fire & Casualty Ins. Co., 2015 WL 8773291 (M.D. Ga. 2015), the U.S. District Court for the Middle
District of Georgia found Allstate Fire and Casualty Insurance Company (Allstate) to have acted in “bad faith” under
O.C.G.A. § 33-4-6, which authorizes statutory damages and an award of attorneys’ fees when, “in the event of a loss
which is covered by a policy of insurance,” the insurer refuses in “bad faith” to pay the covered loss.
Allstate issued a dwelling and personal
policy to the plaintiffs, Albert Ussery and
the Estate of Miriam Ussery. After a fire
completely destroyed the Ussery home and personal property,
they submitted a claim to Allstate to recover the full policy limit.
Allstate denied the claim in its entirety based on its discovery of
a bankruptcy petition where the Usserys list a significantly lower
personal property valuation of $2,700 than set forth in the sworn
statement, $205,608, in support of the property loss.
Although coverage for the home and personal property was not
disputed, Allstate took the position that the discrepancy between
the two valuations of plaintiffs’ personal property conclusively
established a breach of the policy’s misrepresentation clause.
The misrepresentation clause stated Allstate does “not cover any
loss or occurrence in which any insured person has concealed or
misrepresented any material fact or circumstance.”
Following the denial of their insurance claim, but before
receiving a bankruptcy discharge, the Usserys amended their
bankruptcy petition to reflect the same value of the personal
property listed in their insurance claim. The bankruptcy judge
allowed the amendment. Thereafter, the Usserys submitted
a letter to Allstate demanding payment of their insurance
claim, but Allstate maintained the denial in light of the initial
misrepresentations.
The Usserys argued that Allstate acted in bad faith by unreasonably
refusing their claim, because Allstate’s only basis for denying their
claim was the meritless belief that judicial estoppel applied based
on the plaintiffs’ statements in a bankruptcy petition. The court
rejected Allstate’s judicial estoppel argument, finding that based
on the amended bankruptcy filing, they were no longer taking
inconsistent positions regarding the valuation of their personal
property. Further, with respect to whether Allstate met its burden
of proving a material misrepresentation, the court stated that
“although the unamended Bankruptcy Petition can serve as
evidence that Plaintiffs materially misrepresented the value of
their personal property in their [insurance claim], it cannot serve
as conclusive proof of such.”
Ultimately, based on Allstate’s failure to submit any other evidence
or arguments to defend itself, other than the judicial estoppel basis
that the court rejected, the court found Allstate to have been in
“bad faith.” The court noted that “an insurer cannot abdicate its
contractual duties simply because it believes it might have some
legal authority to deny an insured’s claim, and then offer no
evidence or defense when a plaintiff makes a claim of bad faith.”
Tressler Comments
This case illustrates that there may be challenges for insurers in solely relying on judicial estoppel to support denying an insured’s
claim. The Georgia court considered the timing of the bankruptcy amendment, the bankruptcy judge’s holding, the impact of
Allstate’s denial on the plaintiffs’ creditors and Allstate’s lack of investigation into the validity of the claim. The court further noted
that the insurer could not relieve itself of the obligation to pay a covered claim by relying on a material misrepresentation plaintiff
made to anyone, but rather it must be a material misrepresentation made to the insurer with the intent to defraud the insurer.
This ruling is a reminder that courts will not have sympathy for an insurer that cannot adequately show it investigated the insured’s
claims, when evaluating the “reasonableness” of the insurer’s conduct.
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Too Little Too Late – Insured’s Belated Offer to Submit to EUO
Barred Breach of Contract and Bad Faith Actions
By Katherine K. Liner, Partner in the Orange County Office
In a recorded phone call, Krikor Karamanoukian reported a claim to United Financial Casualty Company (UFCC) for
vehicle property damage, which the insurer later found to be similar to a prior loss. During UFCC’s investigation,
the Karamanoukians retained counsel, who advised that any request by UFCC for their statements would be
“deferred” and claimed UFCC was acting in bad faith when an authorization for an accident reconstructionist to
inspect the vehicle was requested.
UFCC sent a reservation of rights
letter, requiring statements from the
Karamanoukians so the information about how the damage
allegedly occurred could be obtained. The Karamanoukians’
counsel demanded a transcript of the initial phone call, which
UFCC agreed to provide following its coverage determination. In
response to the attorney’s repeated rejection of UFCC’s request
for a statement, UFCC hired counsel to request an Examination
Under Oath (EUO).
The Karamanoukians refused to submit to an EUO and filed a
complaint for breach of good faith and fair dealing, fraud, and
intentional and negligent misrepresentation (Karamanoukian I).
During discovery, the transcript of the initial phone call was
produced by UFCC. At that point, the Karamanoukians’ attorney
offered to produce the Karamanoukians for EUO. UFCC responded
that the Karamanoukians had forfeited coverage by previously
refusing to give the EUOs, which were a prerequisite to coverage.
Summary judgment in favor of UFCC was granted in the litigation.
The ruling was affirmed by the California Court of Appeal, which
found that UFCC was not required to provide a transcript of the
initial call and the request for EUOs was reasonable. UFCC declined
counsel’s subsequent offers to allow the Karamanoukians EUOs to
be obtained.
The Karamanoukians filed a second suit for breach of contract
on the same claim (Karamanoukian II), alleging that they fulfilled
their obligations, including an agreement to provide additional
information. UFCC filed a motion for summary judgment on the
grounds that the second suit was barred by the claim preclusion
doctrine. The court rejected the Karamanoukians argument that
the first suit involved the UFCC’s refusal to provide a transcript
of the statement, while the second suit involved UFCC’s refusal
to take the EUOS after they were offered. The California Court of
Appeal, in an unpublished opinion, again affirmed the ruling in
favor of the insurer on December 15, 2015, in Karamanoukian v.
United Financial Casualty Company, 2015 WL 8821427.
The court found that both suits involved UFCC’s alleged failure to
pay the claim for damage to the vehicle. While Karamanoukian I
did not seek a declaration of the parties’ rights and obligations
under the policy, the court found that the “gravamen of the action
was to obtain payment of damages for their claim.” The breach
of contract claim made in Karamanoukian II was, therefore,
encompassed in Karamanoukian I. Because Karamanoukian II
sought damages for the same claim, which was determined to
have been forfeited in Karamanoukian I, the trial court properly
concluded Karamanoukian II was barred.
Tressler Comments
An EUO is an important tool in evaluating an insured’s first-party claim. When required as a condition of coverage, the insured’s
failure to provide an EUO can allow the insurer to decline coverage for the claim. In this case, the insureds’ subsequent offers to
submit to EUOs, after the court ruled in the insurer’s favor that the EUO was a precedent condition, were ineffective to resurrect
coverage forfeited by the initial refusal.
Tressler LLP
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NEW BLOG
thepropertyline.lawyer
Tressler LLP is pleased to announce the launch
of the firm’s latest blog, The Property Line. To
keep up with the changing digital landscape, The
Property Line will replace the firm’s traditional
e-newsletter First-Party Property Insurance Law
Alert. The blog will continue where the newsletter
left off and will address recent developments in
first-party property claims and provide a practical
analysis of how such developments may impact
an insurer’s claims handling procedures.
Below are samples of our recent blog posts:
»» Minnesota Prejudgment Interest Statute
Does Not Apply to Appraisal Awards Without
an Underlying Breach of Contract or Bad
Faith Claim
»» Arkansas Supreme Court Holds ACV
Calculations Should Not Include Depreciation
of Labor
Visit the blog at ThePropertyLine.Lawyer to
become a subscriber.
About Tressler’s Property Team
Tressler LLP’s Property Team is focused on protecting the
interests of our insurer-clients and helping them to avoid
overpaying claims and/or paying fraudulent claims. At the
same time, we recognize that first-party investigations
must be handled carefully since the insured’s perception of
how the claim is being handled is important. Our attorneys
are adept at maintaining this delicate balance.
We have many years of experience in the investigation of
first-party property claims. Our in-depth knowledge of bad
faith and unfair claims practices on a state-by-state basis
contributes to minimizing extracontractual exposure. Our
established procedure for investigating first-party property
claims is designed to generate as much information as
possible about a claim and an insured within the limits
of the rights afforded an insurer under the policy. This
approach gives the insurer the information it needs to
determine how it will respond to a claim without creating
extracontractual liability.
Our attorneys have considerable experience with claims
involving complicated financial analysis, enabling them
to either determine the extent of a loss or to conclude
whether there is a financial motive on behalf of an insured
to submit a fraudulent claim. We know what information
to request from an insured. We have conducted
many examinations under oath. In short, we conduct
investigations thoroughly and urgently, and report the
results immediately.
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FIRM NEWS
Jan. 14, 2016
Tressler LLP is Pleased to Announce the Formation of
a Strategic Business Alliance With Chatt & Prince P.C.
The newly formed strategic business alliance with Chatt & Prince P.C., effective January 14, 2016,
will support Tressler’s Bolingbrook-based Condominium and Common Interest Community
Association Law and HOA practice.
Jan. 7, 2016
Advisen Front Page News Publishes Rowe Article on
Uber and Lyft
Tressler Chicago partner Todd Rowe published the article, “Uber and Lyft demonstrate how
cybersecurity changes business interactions,” in Advisen Front Page News. The article first
appeared in Tressler’s Privacy Risk Report blog.
Jan. 5, 2016
Law360 Covers Tressler Win for Nova Casualty
Tressler received a win for Nova Casualty in federal court in New Mexico in the case of Taos Ski
Valley, Inc. v. Nova Casualty Company. The court granted our motion to dismiss with prejudice
on a $1 million-plus environmental contamination claim on the grounds that the owned
property exclusion in our policies barred coverage. Tressler Orange County attorneys Linda
Bondi Morrison and Ryan Luther served as leads on this case. More on the case can be found
in Law360’s article (subscription required), “NM Ski Resort Not Covered For Enviro Cleanup,
Court Says.”
Jan. 4, 2016
Tressler LLP Promotes Jennifer S. Perdigao to Partner
Jennifer S. Perdigao has been promoted to partner at Tressler LLP. Perdigao is a member of the
Insurance practice in the firm’s Los Angeles office.
Dec. 30, 2015
Formeller Published in E&O Weekly Prevention
Tressler Chicago associate Kathryn Formeller’s article, “Insured v. Insured Exclusion Applied to
Preclude Coverage for Lawsuit Where Plaintiffs Included Both Insureds and Non-Insureds Under
D&O Policy,” was republished by E&O Weekly Prevention for AgentsofAmerica.org. The article,
first published in Tressler’s Specialty Lines Advisory covers the Jerry’s Enterprises, Inc. v. U.S.
Specialty Ins. Co. case.
P. 6
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FIRM EVENTS
Feb, 24, 2016
Emerging & Complex Insurance Claims Forum
HB Litigation Conferences | The Los Angeles Athletic Club
Tressler Orange County partner Linda Bondi Morrison is Co-Chair for the Emerging & Complex
Insurance Claims Forum that will be held in Los Angeles on February 24-26, 2016. Linda will
also be co-presenting the session, “Tempted by the Fruit of Another: Additional Insureds,
Indemnity Agreements and Risk Transfer,” with Lisa Unger of Markel Corp. and Steve Palley of
Palley Law PLLC on February 24 at 9:15 a.m.
Apr. 17-20, 2016 Navigating Other Insurance Disputes
2016 PLRB National Claims Conference | Henry B. Gonzalez Convention Center
Tressler Orange County partner Linda Bondi Morrison will speak on the topic of, “Navigating
Other Insurance Disputes,” at the 2016 PLRB National Claims Conference in San Antonio, Texas.
The session runs twice, first Monday, April 18 at 1:30 p.m. and then Wednesday, April 20 at
8:30 a.m.
Apr. 21, 2016
Cyber Risks: Litigation Concerns and Insurance
Annual Association for Defense Trial Attorneys (ADTA) Conference | Monterey, California
Tressler Chicago partners Ken Sullivan and Todd Rowe will present “Cyber Risks: Litigation
Concerns and Insurance,” at the 75th Annual Association for Defense Trial Attorneys (ADTA)
Conference on April 21, 2016 in Monterey, California.
Tressler LLP
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By following us, you will receive recent updates and have access to company information. Stay informed of current
events and newsletters that contain up-to-date articles and commentary on various legal areas that we focus on. This
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AUTHORS
Jennifer S. Perdigao
Partner
Los Angeles Office
[email protected]
LOCATIONS
>> CHICAGO (HEADQUARTERS)
Willis Tower: 233 South Wacker Drive, 22nd Floor, Chicago, IL 60606
312.627.4000 | Fax: 312.627.1717
Reginald D. Cloyd III
Associate
Chicago Office
[email protected]
>> CALIFORNIA
Orange County: 18100 Von Karman Avenue, Suite 800, Irvine, CA 92612
949.336.1200 | Fax: 949.752.0645
Los Angeles: 1901 Avenue of the Stars, Suite 450, Los Angeles, CA 90067
310.203.4800 | Fax: 310.203.4850
>> NEW JERSEY
Newark: 744 Broad Street, Suite 1510, Newark, NJ 07102
973.848.2900 | Fax: 973.623.0405
>> NEW YORK
One Penn Plaza, Suite 4701, New York, NY 10119
646.833.0900 | Fax: 646.833.0877
>> OTHER ILLINOIS
Bolingbrook: 305 West Briarcliff Road, Suite 201, Bolingbrook, IL 60440
630.759.0800 | Fax: 630.759.8504
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our headquarters are Tressler LLP, 233 S Wacker Drive, 22nd Floor, Chicago, IL 60606, 312.627.4000. Prior
results described herein do not guarantee a similar outcome. The information contained in this newsletter
may or may not reflect the most current legal developments. The articles are not updated subsequent to their
inclusion in the newsletter when published. | Copyright © 2016
CALIFORNIA | ILLINOIS | NEW JERSEY | NEW YORK
Katherine K. Liner
Partner
Orange County Office
[email protected]