August 2008 Dec Page
Question of the Month
Reinsurance is an integral part of the property/casualty insurance industry, but its principles may be confusing to those who do not work directly in this area. However complex reinsurance may appear, it is basically a means by which the exposures of insurers are redistributed to other insurers. An insurer (the primary or ceding company) transfers some or all of its exposures and premium to a reinsurer. The reinsurer, in turn, then agrees to indemnify the ceding company for a predetermined type and amount of loss sustained.
Reinsurance also can be used as a back-up for self-insurance and risk retention group programs. It is used in such programs to guard against a catastrophic single occurrence or large aggregate losses, and caps the amount the self-insurer or risk retention participant or group must retain.
Regardless of its use, reinsurance can raise many questions. What are the principles behind reinsurance? What do the terms “utmost good faith” and “follow the fortunes” mean? What is the role of the reinsurer if the primary insurer declares insolvency? How do courts view the relationships between the insured, the primary insurer, and the reinsurer?
Garage Operations at Issue in Auto Liability Case
The insurer sought a declaration that its auto liability policy afforded no coverage for an auto accident. The decision turned on whether or not the driver of the auto was engaged in garage operations at the time of the accident. The case is Colony National Insurance Company v. Omer, 2008 WL 2309005 (D.Kan.). This is a slip copy.
Omer was the operator of a 2000 Acura that was involved in an accident on November 14, 2004. The car was owned by Omer and he was driving the auto on his way home from a night of partying and drinking with his girlfriend. The passengers in the car were injured and they sued Omer and First Class Auto Shop. Colony Insurance Company had issued an insurance policy to First Class Auto Shop that covered owned autos and vehicles not owned by First Class if they were being used in the garage business of First Class. The policy read that any auto not owned by the named insured (First Class Auto Shop) used in connection with the garage business was considered a covered auto for liability coverage purposes.
The court found that the uncontroverted record demonstrated that Colony was entitled to the determination that, as a matter of law, its policy affords no coverage for the accident of November 14, 2004. The car was definitely not owned by the named insured, First Class Auto Shop, and at the time of the accident, the vehicle was not being used for garage operations. Summary judgment for the insurer was granted.
Effect of Insureds' Failure to Give Insurer Required Notice of Suit Against Tortfeasor
Steffensmeier v. Le Mars Mut. Ins. Co., 276 Neb. 86 ( Neb. 2008) originated from an automobile accident in which Mary Steffensmeier's vehicle was struck by a vehicle driven by Dustin Graham. Graham had an auto insurance policy with Allstate Insurance Company that had a liability limit of $50,000 per person. The Steffensmeiers had an auto policy with Le Mars with underinsured motorist coverage of $100,000 per person. The Steffensmeiers notified Le Mars of the accident, then, after contacting Allstate representative and being advised that Graham's policy limits were adequate to cover the Steffensmeiers' claim, Le Mars determined that the Steffensmeiers would not have a claim for underinsured motorist coverage.
The Steffensmeiers filed suit against Graham but did not give Le Mars notice that they had filed the suit. At trial, the court entered judgment based on a jury verdict in favor of Steffensmeier in the amount of $175,000. Allstate subsequently paid the $50,000 limit of
Graham's policy plus interest and court costs.
Because the payment from Allstate fell short of the judgment, the Steffensmeiers made demand on Le Mars for the limit of the underinsured motorist coverage in the Le Mars policy. Le Mars denied the claim on the basis that contrary to the policy, the Steffensmeiers had failed to give Le Mars notice that they had filed the earlier suit against Graham.
Although the Steffensmeiers admitted that they gave no written notice to Le Mars until after the verdict was rendered and judgment entered, they asserted that such failure “was in no way prejudicial” to Le Mars and therefore was not a valid reason to deny coverage. Le Mars answered and alleged as an affirmative defense that the Steffensmeiers had failed to provide reasonable notice of the suit as required by the policy and that it did not have a reasonable opportunity to protect its interests in the action against Graham. The Steffensmeiers asserted that they did not have a duty to notify Le Mars at the time they filed the suit against because they did not know this earlier suit would result in a judgment in excess of Graham's coverage limits until after the jury returned its verdict and that they promptly gave notice to Le Mars after the judgment was entered.
The district court sustained Le Mars' motion for summary judgment as there was no dispute that the Steffensmeiers failed to provide notice that they had filed suit against Graham, and an insurance company was deemed to have been prejudiced as a matter of law when a policy holder fails to notify the insurance company that the policy holder has filed a lawsuit. The court therefore dismissed the Steffensmeiers' action, concluding that Le Mars was entitled to judgment as a matter of law.
In reaching its decision, the court first looked at the language of the policy to determine what notice was required under the policy. The policy required the Steffensmeiers give “reasonable notice of the pendency of the suit” and to promptly send copies of legal papers if suit were brought.
The Steffensmeiers argued that there was an issue of fact as to whether the notice they gave was “reasonable,” and that reasonable persons would not have given notice of a claim for underinsured motorist coverage until after they knew with certainty that they had such a claim. The court disagreed, stating that with respect to the underinsured feature of the policy, the policy required reasonable notice not of a claim for underinsured motorist coverage but of “notice of the pendency of the suit resulting in the judgment.” Further, the policy defined what notice was reasonable where it provided that Le Mars must be given “a reasonable opportunity to protect [its] interests in the suit” and where it further provided that the insured must “promptly” send Le Mars “copies of the legal papers if suit is brought.” The notice provisions of the policy, taken together, indicated that the required reasonable notice was prompt notice of the pendency of the suit, if suit was brought prior to judgment, and notice that gives the insurer the opportunity to protect its interests in the suit.
Therefore, the court rejected the Steffensmeiers' argument that they did not need to give notice until after they knew that their judgment against Graham exceeded the limits of his policy. And, because Le Mars did not learn of the suit until after a judgment had been obtained, the notice given by the Steffensmeiers was not “prompt” and did not give Le Mars the opportunity to protect its interests in the suit. Thus, because the Steffensmeiers did not give notice that was reasonable under the policy, the court also rejected the argument that there was a genuine issue of material fact regarding whether they gave reasonable notice of the suit.
The Steffensmeiers further argued that even if they failed to give the required notice, there remained a genuine issue of material fact as to whether Le Mars was prejudiced by the failure. The court concluded that in the present case Le Mars was prejudiced as a matter of law because it was not given notice of the suit against Graham in time for it to intervene in the suit and did not have a reasonable opportunity to protect its interests.
The court explained that Le Mars, upon reasonable notice, could have intervened in the action between the Steffensmeiers and Graham in order to protect itself on the issues of liability and damages under the policy Le Mars issued to the Steffensmeiers. However, because the Steffensmeiers failed to give Le Mars reasonable notice of the suit, Le Mars did not learn of the suit until after a judgment had been entered which exceeded the tortfeasor's policy limits. Le Mars therefore did not have the opportunity to intervene in the Steffensmeiers' case against Graham in order to protect its interests and was prejudiced as a matter of law.
Further, the notice required by the policy relative to Le Mars' underinsured obligations was notice of the suit, not notice of the accident, and notice of an accident did not give notice that a suit had been or will be filed.
The Supreme Court of Nebraska therefore upheld the district court's order granting summary judgment in favor of Le Mars and dismissing the complaint
Insured Responsible for SIRs under Two Policies Need Only Pay One to Satisfy Requirement for Both
Bordeaux, Inc. v. American Safety Ins. Co., 2008 WL 2636817 (Wash.App. Div. 1,2008.), concerned the nature of the SIR provisions in the CGL policies American Safety Insurance Company issued to condominium developers Bordeaux, Inc. and Cameray, Inc. Because the SIRs were not “insurance” in any traditional sense, the appeals court affirmed the trial court's holding that they were not primary insurance for purposes of subrogation and the developers were entitled to be made whole before American Safety could recover funds from third-party settlements. Also, the court explained that because an insurer was not entitled to apportion defense costs between two policies where the insured's duty to defend was triggered under both policies, Bordeaux satisfied its obligation under the American Safety SIR to pay $100,000 in defense costs and expenses, as well as its identical obligation to another insurer, by paying that amount once, and it was therefore entitled to reimbursement of its second $100,000 payment toward the settlement of construction defect claims.
In its decision, the court rejected American Safety's argument that the claims arose from “at least two occurrences,” with occurrences covered separately under its policy and the Zurich policy. Instead, the court observed that the American Safety policy simply stated that American Safety would pay covered damages above the amount of the SIR. The policy said nothing about whether or not Bordeaux 's obligation to pay the SIR was satisfied when that payment also fulfilled a similar obligation under another policy.
The court further explained that the defense costs incurred by Bordeaux were necessarily related to damages covered by both the American Safety and Zurich policies, and because Washington did not provide an insurer a right of allocation for defense of non-covered claims where they were “reasonably related” to the defense of covered claims, American Safety had no right to allocate some costs to the Zurich SIR and none to American Safety. Thus, where the defense costs paid under the Zurich SIR were also reasonably related to the claim covered under the American Safety policy, American Safety had no right to apportion defense costs.
The court also held that the SIR was not “insurance,” such that the insured must be made whole and recoup its SIR payments before the insurer's right to subrogation arose. The SIR clause in the policy did not indicate that the SIR was primary insurance, and thus, insurer's subrogation rights were not superior to the insureds' with respect to third-party settlement funds. The insureds were not “insurers” in the business of making contracts for insurance, and the SIR merely indicated that the insureds chose to retain the risk of paying up to $100,000 for construction defect claims.