E&O coverage ruled inapplicable to agent's viatical-settlement claim
(Note: Agents and brokers are often advised to expand their business to include new services. This case serves as warning to check with your E&O carrier before going down a new path.)
From approximately July 1, 1998, through October 1999, a Texas insurance agency served as a "marketing licensee" for a viatical settlement broker. The case report noted that a viatical settlement is defined as an agreement under which a person pays anything of value that is: (a) less than the expected death benefit of a policy insuring the life of an individual who has a catastrophic or life-threatening illness or condition; and, (b) paid in return for the policy owner's or certificate holder's assignment, transfer, bequest, devise, or sale of the death benefit under or ownership of the policy."
The case report said that the viatical settlement process works in the following way: "An investor acquires an interest in a life insurance policy of a terminally ill person-typically an AIDS victim-at a discount of 20% to 40%, depending on the insured's life expectancy [Securities and Exchange Commission vs. Life Partners, Inc., 87 F.3d 536, 537 (D.C. Cir. 1996)]. When the insured dies, the investor receives the benefit of the insurance. The investor's profit is the difference between the discounted purchase price paid to the insured and the death benefits collected from the insurer, less transaction costs, premiums paid and other administrative expenses.
The broker procured various viatical settlements from terminally ill people who owned life insurance. After negotiating the purchase price of the life insurance with such persons, the broker prepared the necessary documentation to establish the viatical settlements. Investors then responded to a series of solicitations, prepared by the broker, for investing in the viatical settlements to take advantage of the advertised 14% to 18% percent rate of return. Throughout this process, the insurance agent acted as the viatical settlement broker's agent to "market the investments."
After investors paid for their shares of one viatical settlement, they discovered their investments were worthless because the life insurance company that initially issued the policies to the terminally ill insureds cancelled them after it ascertained the policies were fraudulently obtained. Although the viatical settlement broker had contracted with the investors to supply a replacement viatical settlement of the same value in such an event, it failed to make the loss good. The investors then sued the insurance agent, asserting claims for negligence, violations of the state's deceptive-trade-practices act, fraud and violations of the state's insurance code, among other things.
The agency asked its professional liability insurer to defend it against these claims. The carrier defended under a reservation-of-rights letter and settled some of the claims, subject to a right of reimbursement from its insured. The agency then sued the carrier, seeking a declaratory judgment that the investors' claims were covered under its professional liability policy.
The relevant policy section afforded coverage for damages caused by: "(a) any negligent act, error or omission of the Insured or any person for whose acts the Insured is legally liable, or (b) any claim for libel or slander or invasion of privacy against the Insured, arising out of the conduct of the business of the Insured in rendering services for others as a general insurance agent, insurance agent or insurance broker, and including activities as an insurance consultant or notary public and any advertising activities." The trial court granted summary judgment for the insurance agency, declaring that the coverage clause in its policy "included coverage for claims arising from viatical settlement agreements." The carrier appealed. The question was whether the selling of viatical settlements should be considered the "business of insurance." The appeals court defined insurance as "a contract by which one party, for consideration, assumes particular risks on behalf of another party and promises to pay him a certain or ascertainable sum of money on the occurrence of a specified contingency."
"In other words," the court said, "the buyer of an insurance policy forgoes current consumption in order to protect against future risk." [See Life Partners, Inc., 87 F.3d at 541-42.] Another essential characteristic of insurance, the court added, is risk-pooling.
"None of these characteristics which define insurance are present in the viatical settlement agreement between (the viatical settlement broker) and the individual investors. The terminally ill person, who was the insured, did not forgo current consumption; in fact, he opted for current consumption. This is diametrically opposed to the concept of insurance because in a viatical settlement, the insured immediately receives the protection for which he initially contracted, albeit at a discounted amount. Furthermore, any risk involved when the policy was purchased was removed as a result of the terminal illness and shortened life span. Finally, the individual investors did not risk-pool. There is no evidence in the record that the individuals who invested in the viatical settlements pooled the financial risk that the seller will live longer than expected. Therefore, a viatical settlement is not an insurance policy, and the business of selling fractional interests in insurance policies is no part of the 'business of insurance.'"
The justices found no federal or state authority holding or mandating that selling viatical settlements constitutes "the business of insurance." The agency argued otherwise, because it was "receiving and collecting consideration for insurance, including a premium." In this process, the agency contended that the life insurance company sold the terminally ill person the life insurance policy, collecting or receiving consideration for that sale, that it (the viatical settlement broker) stepped into the terminally ill person's shoes to pay the premiums, and that those premiums ultimately went to the life insurance company. The higher court disagreed, saying the viatical settlement broker received a commission from the total amount invested by the viatical settlement investors and did not receive premium payments from them. Therefore, the viatical settlement broker's separate payment of premiums to the life insurance company did not result in the agency "receiving or collecting consideration for insurance" as contemplated by the Texas Insurance Code. The court said the insurance commissioner of the state described viatical settlement brokers as "non-insurance entities," adding, "the insurance commissioner does not consider (the viatical settlement broker) to be an insurer; therefore we also decline (the defendant's) invitation" to treat it as one. The court also didn't find the language of the professional liability insurer's policy ambiguous, as the agency argued. The trial court's summary judgment was reversed.
Employers Reinsurance Corp. vs. Threlkeld & Co. Insurance Agency, No. 12-03-00036-CV (Tex. App. Dist. 12 11/19/2003) 2003.TX. 0008975 (www.versuslaw.com).
Evidence ruled insufficient to judge whether roof suffered a 'collapse' A company that sold camshafts operated out of a one-story, flat-roofed building. The roof was constructed of tar and asphalt and had 4-foot by 8-foot ceiling sections; there was no separate suspended ceiling. In February 1997, heavy rains and accumulated snow damaged the roof. At one point, a 4-foot by 8-foot ceiling section of the roof crashed to the floor. The company used plywood to cover the hole and metal drums to catch the leaking water. Employees also ran hoses to a floor drain and used tarps to protect the company's equipment. Eventually, more roof panels collapsed, resulting in damage to some of the company's equipment, and humidity rusted the grinders and steel camshafts.
After the insured submitted a property loss notice to the carrier, it sent an adjuster to inspect the damage. He walked on the roof and observed that it had not lost its support and that the structural framing remained intact and did not give way. The adjuster considered the roof "firm and secure" and contacted an engineer to determine the cause of the damage. The engineer ultimately determined that a number of roof leaks had occurred over a long period of time.
"The cause of the damage to the roof is long-term infiltration of rain water through the roof covering into the underlying structure," the engineer said in his report. "The building was constructed with inadequate roof slope to properly relieve rain water from the structure. Although the roof was maintained annually, the lack of slope has caused rain water to pond on the roof covering. The long-term ponding conditions eventually affected the structural integrity of the roof deck."
Initially, the carrier didn't respond to the insured's calls about the loss. The insured retained several contractors to supply estimates for the necessary repairs. One referred to the damage as "broken and collapsed roof panels." On July 17, the insured sent its insurance agent two quotes for roof repairs and asked for the insurer's position on the matter. The carrier denied the claim, contending the loss was excluded because of wear and tear to the roof, decay, deterioration and defective design. The carrier determined that the damage was not a "collapse," for which there was coverage, because the structural framing of the roof remained intact and was still functioning.
In response, the insured filed a complaint for breach of contract, claiming the carrier "breached its duties and obligations . . . by refusing to provide coverage for the repair of (the insured's) principal place of business and the repair and/or replacement of (the insured's) business personal property." The insured also charged the carrier with lack of good faith and fair dealing because it "unreasonably relied upon ambiguous language in the insurance policy regarding the definition of 'collapse' as well as the alleged defective condition of the roof of the building in denying the claim." The insured requested an award of punitive damages. Both the carrier and the insured moved for summary judgment.
The trial court determined that the carrier had breached its contract because the damage constituted a "collapse" under the policy. The insured's motion for summary judgment was granted and the case proceeded to trial on the issues of damages and bad faith. The jury found for the insured, ruling that the carrier acted in bad faith by failing to explain to its insured why it denied coverage. The jury awarded the insured $5.1 million, $4 million of which constituted punitive damages for the carrier's bad-faith handling of the claim. The carrier appealed.
The appeals court said that while the policy provided "collapse" coverage in some circumstances, that term was not defined. "Instead, the policy merely lists those instances that do not amount to a collapse," the appeals court noted. "Thus, the crux of the problem here necessarily involves the definition of this term under the policy."
Since the state's courts had not yet been called upon to define "collapse," the carrier argued that the court should follow a "traditional" definition; i.e., that it should be limited to an event that occurs suddenly and results in complete disintegration [Dominick vs. Statesman Ins. Co., 692 A.2d 188, 191-92 (Pa. Sup. Ct. 1997)]. This definition typically allows for no coverage under an insurance policy when only "part of a part" of a building falls.
The appeals court replied: "When considering both the traditional and modern views as to whether a 'collapse' of a building has occurred, we think the modern view is compelling and should be applied here. Although only nine jurisdictions have followed the traditional definition-which none have adopted since 1970-at least 15 jurisdictions have adopted the broader rule. [See annotation, What Constitutes "Collapse" of a Building Within Coverage of Property Insurance Policy, 71 A.L.R.3d 1072 ? 3 (1976 & Supp. 2002).] Moreover, seven of those jurisdictions have adopted this view since 1995, and the most recent adoption of the modern definition occurred in 2002. As one case noted, 'The clear modern trend is to hold that collapse coverage provisions . . . which define collapse as not including cracking and settling, provide coverage if there is substantial impairment of the structural integrity of the building or any part of a building.'"
The insurer pointed out that photographs of the insured's building clearly showed that the roof did not fall in, cave in or lose its shape in any fashion; that most of the roof remained intact; that all of the steel support beams remained in place; and that the roof withstood the adjuster's weight when he inspected it. Since the insured remained in business and never completely repaired the roof, the carrier contended that there could not have been a "collapse" under the policy.
The appeals court concluded there was not enough evidence to make the case either for or against a collapse and that a grant of summary judgment in the insured's favor was not warranted. "Because neither party provided the ample designated evidence for the trial court to draw a legal conclusion that the damage was a 'collapse,' as a matter of law, we must reverse the summary judgment for (the insured) and remand this cause for trial."
Monroe Guaranty Insurance Co. vs. Magwerks Corp., No. 49A02-0208-CV-622 (Ind. App. 09/24/2003) 2003.IN. 0000630 (www.versuslaw.com).
Readers may fax Don Renau at (502) 897-1533. His e-mail address is drenau@thepoint.net.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.