Court decisions

Court decisions

INSURANCE-RELATED COURT CASES

Digested from case reports published in the North Eastern Reporter 2d, West Publishing Co., St. Paul, MN

Company sues agent over “replacement costs”

Machon & Machon, Inc., were representatives of Indiana Insurance Company under an agency contract. In April 1998, Indiana filed suit against the agency seeking reimbursement. The complaint alleged that Indiana had issued a fire policy to Kishor Bhatt providing “actual cash value” coverage for any fire loss. After the policy was issued, Indiana alleged the agency sent a letter to the insured indicating his building was covered for “replacement costs.” Indiana alleged the agency was without authority to do so, and Indiana was damaged in the amount of $31,281.18-the difference between the “actual cash value” and “replacement costs.”

The policy was issued on February 15, 1995, and was effective for one year. The agency sent the letter to the insured within that period and prior to the fire on July 13, 1995. Indiana contended the statute of limitations started to run when it paid the claim in June 1996.

The trial court entered judgment against Indiana, and it appealed.

The higher court decided the question before it was whether the Illinois law (ILCS 5/13-214.4) governed. That section provides for a two-year statute for claims against insurance producers. The court believed it encompassed claims by an insurance company against its agent. The court then had to decide when the statute started to run. Indiana argued the statute in question was limited to actions brought by insureds against their insurance brokers or agents. The court disagreed.

The court found that Indiana had failed to meet its burden of proof, in that it did not specify the date of the agent’s letter, or when it first discovered the facts, or when the insured filed his claim. The court said the letter was sent during the policy period and prior to the fire loss. Therefore, Indiana’s claim accrued sometime between February and July of 1995, and the statute began to run during that time. Indiana’s claim was filed almost a year late.

The judgment entered in the trial court in favor of the agency was affirmed.

Indiana Insurance Company, Appellant, v. Machon & Machon Inc.-No. 1– 99-1034-Appellate Court of Illinois, First District, First Division– June 29, 2001– 753 North Eastern Reporter 2d 442.

Court finds policy language ambiguous

In November 1997, James A. Ryder applied for insurance covering his 1987 Buick, and the policy was issued by Sagamore Insurance Company. At that time, James’ son, Scott, was not a resident of his home, and he was not shown as an insured, but he was not excluded. On June 24, 1999, Scott was living with his father and was a member of his household. The policy provided coverage for a relative, and relative was defined as “a person living in your household and related to you by blood, marriage or adoption….” The next definition was “resident, means a person, other than a relative, living in your household and listed on the application.” The policy excluded coverage of losses “arising out of the use of your insured car by a person without your express permission.”

At the time of the accident, Scott was a permanent resident of his father’s household. He was driving his father’s car, without his permission, when he collided with a car driven by Bruce Bedwell. Sagamore denied liability and filed its complaint for declaratory judgment to determine liability, if any. The record showed that neither James nor Sagamore intended to provide coverage for Scott. On the other hand, he was not shown on the policy as an excluded driver.

The trial court entered summary judgment in favor of Sagamore, and Bedwell appealed.

Bedwell contended that the policy covered Scott, since he was a blood relative of James and was living in his household. Sagamore argued that Scott did not have the insured’s permission to drive the vehicle, and it was not liable. The lower court agreed with Sagamore.

The higher court found that the policy was ambiguous, and had to be construed in favor of the insured. It stated that the terms “relative” and “any person” as used in the policy created an ambiguity.

In this case, the lower court erred in granting summary judgment in favor of Sagamore, and the judgment was reversed and remanded to the trial court with instructions to deny Sagamore’s motion for summary judgment.

Bruce W. Bedwell, Appellant, v. Sagamore Insurance Company-No. 90A02-0102-DV-83-Court of Appeals of Indiana-August 23, 2001-753 North Eastern Reporter 2d 775.

HO policy not applicable to former mortgagee/new owner

On July 18, 1990, Michael Zichelle and his wife, Linda, executed a first mortgage on their home for $170,000 to Ideal Financial Services. They defaulted on the mortgage payments and Ideal purchased the property at foreclosure sale. Ideal recorded the foreclosure deed on December 8, 1994. The Zichelles were still living in the property two months later when the house was badly damaged by fire. The Zichelles had secured a Massachusetts standard HO policy from Hingham Mutual Fire Insurance Company with loss payable to Ideal as mortgagee, and Ideal filed a claim for the fire damage with Hingham Mutual. It denied liability. The policy was still in force at the time of the fire; the Zichelles had paid the renewal premium of $525.00.

Under Massachusetts law, a transfer of title is given to the purchaser at the foreclosure sale. Ideal secured a deficiency judgment against the Zichelles for $50,286.37. Hingham Mutual had not been notified of the foreclosure sale or foreclosure deed to Ideal, and Hingham Mutual had not consented to an assignment of the policy to IdeaL In August 1996, Ideal filed suit against the Zichelles and Hingham Mutual, seeking to recover under the loss payable clause. The trial court ruled that Ideal could not recover as “mortgagee” since it was the owner. Further, the policy required notice of any change of ownership. The Zichelles had submitted a claim to Hingham Mutual, seeking recovery for personal damage from the fire, but did not pursue it. They did not bring suit against Hingham Mutual, and the two– year statute of limitations barred them from future claim. Ideal appealed on the ground that its purchase of the property at the foreclosure sale did not constitute a “change of ownership” requiring notice to the insurance company and did not extinguish coverage.

The court, on appeal, stated that if “the loss follows foreclosure and the mortgagee’s purchase of the property, the former mortgagee no longer has the same insurable interest in the property, which no longer secures a mortgage debt. The purchase price at the foreclosure will have been applied to the debt, and any deficiency that may remain can be reduced to an unsecured deficiency judgment against the former mortgagor…”

In conclusion, the court modified the judgment of the trial court in favor of the insurance company to show that at the time of the fire loss, Ideal was not a mortgagee within the meaning of the fire policy and could not recover from Hingham for the loss.

Ideal Financial Services, Inc., Appellant, v. Michael Zichelle et al.-No. 99-P– 368-Appeals Court of Massachusetts, Worcester-July 11, 2001-750 North Eastern Reporter 2d 508.

Insurer not guilty of bad faith despite jury’s high award

On December 1, 1989, Debra O’Leary-Alison was rear-ended after she stopped at a red light. The driver, who was insured by Metropolitan Property & Casualty Insurance Company, had bodily injury coverage of $100,000. The rubber bumper guard on Debra’s car sustained $150 in damages. Metropolitan ascertained that its insured was at fault. Debra did not appear to be injured, but several hours later she went to an emergency room and complained of back and neck pain. In August 1990, she stopped working as a secretary because of alleged back pain. In June 1991, she filed a claim with Metropolitan for $70,000, and Metropolitan offered $9,000. She filed suit against the insured and alleged damages of less than $25,000. By February 1993, after her doctor determined that she had sustained a 30% disability, she increased her demand to $75,000.

In April 1993, Metropolitan offered to settle for $20,000. Debra refused. By that time Metropolitan had established a reserve of $35,800 to cover the claim.

On February 7, 1994, the jury returned an award of $125,000 (less PIP benefits of $8,000), plus interest and court costs-a total judgment of $151,028.55. Metropolitan appealed but before the case was heard, the parties settled for the policy limit of $100,000. Debra, however, still maintained her action against Metropolitan for unfair settlement practices.

The higher court found that Metropolitan’s offer of $20,000 was reasonable in view of the medical expenses of $13,146. Debra’s complaint indicated that her damages amounted to less than $25,000. Furthermore, Metropolitan was unable to predict Debra’s ultimate damages, and there was no evidence to support a claim of bad faith. The court decided that Metropolitan had reason to be skeptical of Debra’s damage since the medical reports did not show any abnormalities. She had continued to work several months after the accident. Metropolitan’s offer was made in good faith since its liability was not clear. Metropolitan’s erroneous valuation of Debra’s injuries did not constitute a statutory violation. The court decided that Metropolitan’s offers of settlement were reasonable and made in good faith, despite the jury’s higher award.

The judgment entered in the lower court finding Metropolitan did not act in bad faith was affirmed.

Debra O’Leary-Alison v. Metropolitan Property & Casualty Insurance Co.-No. 99-P-638-Appeals Court of Massachusetts, Norfolk– August 2, 2001-752 North Eastern Reporter 2d 795.

Attorney cannot recover fees from Illinois common fund

Patricia Johnson was injured in an accident with an uninsured motorist, and incurred medical expenses of more than $12,000. Her auto policy, from State Farm Mutual Automobile Insurance Company, provided for a limit of $5,000 medical payments as well as UM coverage. Johnson asked for arbitration and was granted an award of $22,000. After deducting the $5,000 already paid her, State Farm sent a check for $17,000.

Johnson and her attorney then filed this action under Illinois common-fund doctrine. She contended that she was entitled to the full amount of the arbitration award; and her attorney alleged that under that doctrine he was entitled to his fees. The trial court found in favor of State Farm and decided that Johnson could not recover under the common-fund doctrine. It further stated that State Farm was correct in deducting from the arbitration award the $5,000 it had already paid. Both parties appealed.

The higher court found that State Farm was entitled to deduct the $5,000 from the arbitration award, and that count of her complaint should have been dismissed with prejudice.

That court also pointed out that the common-fund doctrine is based upon the concept that an attorney who performs services in creating a fund should be allowed compensation out of the fund from those who would benefit from it. In this case, the insured and her attorney alleged that through the latter’s efforts, a fund had been created and State Farm had benefited. The arbitration provision in the policy did not provide for any setoff or nonduplication of payments.

The court ruled that (1) the arbitrators could consider all elements of the insured’s damages, including medical expenses; (2) State Farm was entitled to deduct its payment of $5,000 for medical expenses from the total arbitration award; and (3) the insured’s attorney was not entitled to payment of his fee from the common find.

The judgment entered in the trial court was affirmed in part; reversed in part, and the case dismissed.

Patricia Johnson, et al., v. State Farm Mutual Automobile Insurance Company-No. 5-99-0597-5-99-0599– Appellate Court of Illinois, Fifth District-July 13, 2001-752 North Eastern Reporter 2d 449.

Suburban Insurance Services, Inc., an insurance broker, sold insurance for several companies, including Virginia Surety Company, Inc. This action was filed for renewal commissions on insurance policies Suburban sold pursuant to a sub-producer agreement between Suburban and Virginia. George Zoscak, the president and director of Suburban, owned 50% of its stock. The remaining stock was owned by John Oremus. Jacqueline Livingston was the general manager. The two largest insurance customers of Suburban were Prairie Material Sales and Prairie Administration (Prairie). Oremus was a shareholder, officer, and director of Prairie.

On November 1, 1992, Suburban and Virginia entered into an agreement allowing Suburban to submit applications, for which Suburban would receive commissions. No reference was made to renewals. The agreement remained in effect until September 24, 1997. Before October 1993, Suburban secured workers compensation coverage for Prairie from Virginia, for which Suburban received a commission based on a percentage of the premium. In October 1993, Suburban ceased placing insurance for that business. In an agreement dated October 1, 1993, Suburban sold all of its insurance accounts, except for the Prairie account.

For the policy years 1993-94 and 1994-95, Prairie renewed its workers compensation coverage directly with Virginia, and Suburban provided no services at all for those years and received no renewal commissions.

The lower court found that, under the plain language of the 1993 agreement, Suburban was not entitled to renewal commissions. Suburban appealed.

Suburban contended that Virginia had paid Suburban renewal commissions prior to 1993, thereby acknowledging that Prairie was Suburban’s customer. Suburban argued that it was entitled to renewal commissions because it was the “procuring cause” of the insurance sales to Prairie.

The court ruled that the 1993 written contract governed the case, and since the contract did not mention renewal commissions, Suburban could not recover. The agreement contained no obligation to pay renewal premiums when the insured chose to deal directly with the insurance company.

The judgment entered in the lower court in favor of Virginia Surety was affirmed.

Suburban Insurance Services, Inc., Appellant, v. Virginia Surety Company, Inc.-No. 1-00-1276-Appellate Court of Illinois, First District, Fifth Division– May 10,2001-752 North Eastern Reporter 2d 15.

Copyright Rough Notes Co., Inc. Jun 2002

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