Insureds can't recover for claims they won't discuss
under oath
The insureds in this Alabama case owned a
convenience store. They bought an insurance policy for it that had
a coverage period commencing March 13, 2001. The insureds submitted
claims arising from burglary and vandalism at their store on three
separate occasions in July and August. At the time they made these
claims, the insurer had not yet sent them a copy of their policy.
It arrived in September. Meanwhile, the insurer contracted with an
independent adjuster to investigate and adjust the claims.
The policy contained several conditions pertaining to the
insureds' recovery for their losses. One read as follows: “We may
examine any insured under oath, while not in the presence of any
other insured and at such times as may be reasonably required,
about any matter relating to this insurance or the claim, including
an insured's books and records. In the event of an examination, an
insured's answers must be signed.”
On five occasions in the latter half of 2002, the insurer, through
an attorney, scheduled the insureds to appear for examinations
under oath. They failed to appear on any of these occasions,
despite the fact that the insurer's attorney, at least initially,
coordinated the examination dates with the insureds'
attorney.
In 2005, the insureds sued the insurer, its agent, the independent
adjusting firm and its adjuster for breach of contract, bad faith
and professional negligence.
In response, the carrier and its agent filed a motion to dismiss
the action. They asserted that the insureds were not entitled to
recover because they had failed to submit to the required
examinations under oath, thus violating a condition precedent to
coverage under the policy.
In their response, the insureds argued that because they were not
given a copy of their insurance policy until after they had made
their claims, “they had no idea what the duties and
responsibilities were” under the policy. They also asserted that
the insurer failed to furnish them with a copy of their policy in a
timely manner, in violation of an Alabama statute providing that
“every policy shall be mailed or delivered to the insured or to the
person entitled thereto within a reasonable period of time after
its issuance.”
The insureds also argued that before an insurer can avoid coverage
because of its insured's failure to cooperate in a claims
investigation, the failure must be material and substantial, and
must result in prejudice to the insurer. They argued that the
insurer had not shown that it had been prejudiced by their actions.
They also contended that whether an insured has breached the duty
to cooperate is usually a question of fact for a jury.
The trial court, however, found for the insurer. “Pursuant to
Nationwide Insurance Co. v. Nilsen, 745 So. 2d 264 (Ala.
1998), an insured's duty to submit to an examination under
oath as required in an insurance policy is a condition precedent to
his or her recovery under an insurance contract,” the court noted.
“Moreover, the Alabama Supreme Court determined that such an
obligation was a 'strict' condition precedent. The Plaintiffs in
this case have provided no case law indicating that mistake,
confusion or lack of knowledge of such a strict condition negated
their obligation to comply.”
The decision was upheld on appeal. The appeals court noted that the
insureds received a copy of their insurance policy more than 10
months before the insurer asked them to submit to the examinations
their policy called for. It concluded that the insureds were not
prejudiced by their failure to receive their insurance policy
before they filed their claims.
As previously mentioned, the insureds also sued the independent
adjusting firm and its adjuster, claiming they owed a duty to the
insureds. The appeals court noted that this was a question of first
impression in Alabama. It noted, however, that most courts in other
jurisdictions that had considered the issue found that an adjuster
owes a duty only to the insurance company that hires it.
“Having reviewed the foregoing cases and the rationales employed
therein, we agree with those courts that have refused to find that
an independent adjuster or investigator that was hired by an
insurance company to investigate or adjust the claim of one of its
insureds owes a duty to the insured,” the appeals court said.
“Thus, we affirm the trial court's entry of a summary judgment in
(the adjusting firm and the adjuster's) favor on the (insureds')
negligence claim.”
Akpan v. Farmers Insurance Exchange Inc., No. 2050420
(Ala.Civ.App. 01/12/2007) 2007.AL.0000039 (www.versuslaw.com).
Court upholds intrafamily exclusion in supplemental auto
insurance policy
A man rented a car from a car rental company. As part of the
transaction, he bought mandatory auto liability insurance from one
insurance company. He also elected $1 million in supplemental auto
liability insurance from a second carrier.
The man drove the rental car to Florida, with his wife and their
two children as passengers. He was driving approximately 100 miles
per hour when the car left the roadway and struck a concrete
barrier. All four occupants of the car were killed.
The administrator of the wife's estate filed a claim for wrongful
death against the husband's estate. The insurer of the mandatory
liability policy responded, paying its $25,000 limit. The insurer
of the $1 million supplemental liability policy declined to defend
or indemnify the man's estate, however, citing its policy's
exclusion for claims brought by an insured's family members.
The administrator filed a request for declaratory judgment against
the insurer to establish that it had a duty to provide both
indemnification and a defense to the husband's estate. A trial
court ruled in the insurer's favor. The administrator appealed,
claiming that the insurance policy's intrafamily exclusion did not
justify dismissal of the complaint and that the exclusion was
contrary to public policy.
The appeals court, citing another case, said an intrafamily
exclusion will be upheld if it does not unfairly penalize an
innocent victim or expose the insured to unanticipated liability.
Moreover, even in the absence of a policy containing an intrafamily
exclusion, it said, the doctrine of inter-spousal tort immunity may
prohibit a suit between spouses, or the estates of spouses, as a
matter of public policy.
Enforcing the intrafamily exclusion in this case did not conflict
with Georgia's compulsory insurance law, the appeals court said,
because the wife's estate has been compensated (under the husband's
mandatory auto liability policy) for the full amount required under
such law. While the administrator could contend that the state-set
compulsory minimum insurance amount was inadequate compensation for
the loss of the wife's life, that did not mean the supplemental
policy's intrafamily exclusion violated public policy, the appeals
court said.
The administrator also argued that the supplemental policy's
intrafamily exclusion clause was invalid because the policy did not
explicitly inform policyholders that public policy would invalidate
the exemption only to the extent required to ensure compliance with
Georgia's compulsory insurance law. The appeals court rejected that
argument, however. It said the state Supreme Court had ruled that
an “insurer is entitled to rely on the (intrafamily) exclusion as
to sums above those required by our compulsory insurance law.” Such
entitlement is not conditioned on the inclusion of an additional
clause in the insurance policy, like the one cited by the
administrator, the court said.
If the husband or his wife objected to the exclusion in the
supplemental liability policy, the appeals court said, they could
have negotiated to have it removed or could have bought
supplemental insurance from an insurer that did not require the
exclusion. The trial court's decision was upheld.
Hoque v. Empire Fire & Marine Insurance Co., No. A06A1313
(Ga.App. 10/06/2006) 2006.GA.0001442 (www.versuslaw.com).
Mad cow embargo does not constitute 'direct physical loss'
to beef product
A Minnesota food company sold cooking
oil and shortening containing beef tallow from which the
cholesterol had been removed. On May 20, 2003, the U.S. Department
of Agriculture prohibited the importation of ruminants or ruminant
products from Canada after a cow in that country tested positive
for bovine spongiform encephalopathy, commonly known as mad cow
disease.
At the time the border was closed to the importation of beef, the
food company's sole supplier of beef product was a company in
Ontario, Canada. That company manufactured and packaged the beef
product in Canada, using the Minnesota food company's patented
process for removing cholesterol from beef tallow.
Just prior to the embargo, the food company placed an order for
beef product with its Canadian provider. It manufactured, packaged
and loaded the product into a truck, but it wasn't shipped because
of the USDA's order.
Since the food company was unable to import the beef product from
Canada, it was unable to fill orders and was forced to find a new
supplier. This led the food company's best customer to terminate
its contract with the company seven months early.
The food company submitted a business-income claim to its insurer,
claiming damages for extraordinary operating expenses and loss of
profits based on the early termination of its contract with its
best customer. It also cited the cost of obtaining an alternative
product with cholesterol from an Arkansas supplier and later, when
the necessary manufacturing equipment was installed, removing the
cholesterol from that product.
The food company's insurance policy stated, in relevant
parts:
“We will pay the actual loss of 'business income' you sustain due
to the necessary suspension of your 'operations' during the 'period
of restoration.' The suspension must be caused by direct
physical loss to Property … including Property Off Premises,
and result from any Covered Cause of Loss.” (Emphasis added.)
“Action by Civil Authority. We will pay for the actual loss of
'business income' you sustain and necessary 'extra expense' caused
by action of civil authority that prohibits access to the described
premises due to direct physical loss to property, other
than at the described premises, caused by or resulting from any
Covered Cause of Loss.” (Emphasis added.)
The insurance policy, however, did not define the phrase “direct
physical loss to property.”
The insurer denied the claim, contending there was no direct
physical loss to the food company's property. The food company then
sued the insurer, contending that the consequences of the USDA
order constituted direct physical loss to its property.
Eventually the case wound up in a federal district court. It
determined that the food company suffered no direct physical loss
to property and granted summary judgment in favor of the
carrier.
The food company appealed to the 8th U.S. Circuit Court of Appeals,
arguing that the closing of the border caused direct physical loss
to its beef product because it was treated as though it were
physically contaminated by mad cow disease and consequently lost
its function. It cited two cases, General Mills Inc. v. Gold
Medal Ins. Co., 622 N.W.2d 147 (Minn. Ct. App. 2001), and
Marshall Produce Co. v. St. Paul Fire & Marine Ins. Co., 98
N.W.2d 280 (Minn. 1959), to support its position that a
government regulation's impairment of a food product's function and
value amounts to direct physical loss to insured property.
The appeals court, however, found both the cited cases, as well as
a third (Sentinel Mgmt. Co. v. New Hampshire Insurance Co. 563
N.W. 2nd [Minn. Ct. App. 1997]), distinguishable from the one
at hand. In the cited cases, the court noted, coverage was found to
be triggered by actual physical contamination of insured property.
In General Mills, 16 million bushels of raw oats were
treated with a pesticide not FDA-approved for use on oats. Although
consumption of the contaminated oats was deemed not hazardous to
human health, the oats were in violation of FDA regulations and
could not be used in General Mills' oat-based products. Because the
contamination rendered the oats unusable, General Mills was
entitled to coverage for “direct physical loss or damage to
property.”
The claim in Sentinel was based on the release of asbestos
fibers and resulting contamination of apartment buildings. The
Minnesota Court of Appeals held that the asbestos contamination
constituted direct physical loss to the properties because “a
building's function may be seriously impaired or destroyed and the
property rendered useless by the presence of contaminants.”
In contrast to these cases, in which actual physical contamination
was established, the food company conceded that the beef product
inside the truck in Canada was not physically damaged or
contaminated in any manner.
The insurance policy at issue in Marshall Produce did not
cover just “direct physical loss” as in the food company's policy
but rather “all loss or damage by fire.” The supplier in this case
manufactured drums of egg powder and other goods for the U.S. Army.
After smoke from a nearby fire penetrated the manufacturing plant,
the Army rejected the drums because they violated its contract's
sanitation requirements, which stated that the “processing and
storing of eggs and egg products must be done in an area free from
odors, dust, and smoke-laden air.”
Shortly after the fire, an inspector “examined the packaging around
the cans (and)…found smoke contamination, a very strong odor from
the smoke throughout the package and around the border of the
package.” Although it was not established that the egg powder was
physically contaminated by the smoke, the Minnesota Supreme Court
determined that the supplier was entitled to coverage because its
policy covered “all loss or damage by fire,” and the rejection of
the goods was a loss caused by the smoke from the fire. In
contrast, the food company's policy provided coverage only for
direct physical loss to property, and the company's product
suffered no physical loss or contamination.
In Pentair, Inc. v. Am. Guarantee & Liab. Ins. Co., 400
F.3d 613 (8th Cir. 2005), a case applying Minnesota law and
discussing the same Minnesota insurance cases, the appeals court
had rejected an argument similar to that made by the food company.
When an earthquake caused a loss of power to two Taiwanese
factories, the factories could not supply products to a subsidiary
of Pentair for two weeks. Pentair argued that the property of the
Taiwanese factories suffered “direct physical loss or damage” when
the power outages prevented the factories from performing their
function.
“We distinguished Sentinel and General Mills,
explaining that 'in those cases, insured property was physically
contaminated-a building by the release of asbestos fibers in
Sentinel, and grain by application of an unapproved
pesticide in General Mills.' Although we noted that 'once
physical loss or damage is established, loss of use or function is
certainly relevant in determining the amount of loss, particularly
a business interruption loss,' we refused to adopt the position
that 'direct physical loss or damage is established whenever
property cannot be used for its intended purpose' and noted that
our holding was also consistent with Marshall
Produce.”
To characterize the food company's inability to transport its
truckload of beef product across the border and sell it in the U.S.
as direct physical loss to property would render the word
“physical” meaningless, the court said. Moreover, the policy's use
of the word “to” in the phrase “direct physical loss to property”
was significant, the court added. The food company's argument might
have been stronger if “of” had been used instead, as in “direct
physical loss of property” or even “direct loss of property.” But
the policy's use of the words “to property” further undermined the
food company's argument that a border closing triggers coverage.
The food company did not experience direct physical loss to its
property, the court said; therefore, it could not recover for the
business-income loss resulting from the embargo on beef products.
It upheld the district court's summary judgment in favor of the
carrier.
Source Food Technology, Inc. v. United States Fidelity and
Guaranty Co., No. 06-1166 (8th Cir. 10/13/2006) 2006.C08.0001569
(www.versuslaw.com.)
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