Legal Updates

   

Insurance Coverage

 

Choice of law in insurance coverage cases.  

When a commercial insured is incorporated in one state, headquartered in another, and has insured risks in multiple other states, what law applies to an insurance contract in a coverage dispute? The Indiana Supreme Court recently addressed this question in National Union Fire Insurance Company v. Standard Fusee Corporation, 940 N.E.2d 810 (Ind. 2010). In this case, Standard Fusee Corp (“SFC”), a Delaware corporation headquartered in Maryland, had manufacturing facilities in several states, including Indiana and California. Following claims for environmental contamination involving its California and Indiana facilities, SFC requested defense and indemnification from its insurers under multiple policies. The insurers either disputed their obligations to defend and indemnify SFC, or otherwise ignored SFC’s requests. As a result, SFC filed suit in Indiana, seeking a declaratory judgment that the insurers were required to defend and indemnify SFC under its various CGL policies against environmental liabilities in Indiana and California.

 

The Indiana Supreme Court reaffirmed Indiana’s “uniform contract” approach to choice-of-law questions. The uniform contract approach applies the law of a single state to the whole contract even though the contract covers multiple risks in multiple states. To determine which state’s law applies under this approach, the Court analyzed which state had the most significant relationship (intimate contacts) with the transaction and the parties. In insurance coverage cases, the principal location of the insured risk is given the greatest weight. Where there is no definitive principal location, other factors are considered, including the location of corporate headquarters and the site of contract negotiation and formation. 

 

In National Union, SFC did not have a definitive location, as its manufacturing facilities and presence within the subject states were substantively the same. As such, the Court considered the fact that SFC was headquartered in Maryland and that SFC’s insurance procurement, review process, and decision making all occurred in Maryland. Taken together, the Court held the overall number and quality of contacts favored the application of Maryland law over Indiana. A choice-of-law question is extremely fact-sensitive and can have a significant impact on the outcome of a case.  National Union clarifies Indiana’s approach for resolving critical choice-of-law questions in insurance coverage cases, particularly when dealing with multi-state commercial risks.

Submitted by Eric Eberwine – eeberwine@wthslaw.com

“Occurrence” in the context of CGL coverage.

CGL policies cover bodily injury and property damage arising out of an “occurrence,” the latter term defined as an “accident.”  An “accident” is an “unexpected happening without intention or design.”  Erie Ins. Co. v. American Painting Co., 678 N.E.2d 844, 846 (Ind. Ct. App. 1997).  The Indiana Supreme Court held in 1980 that a CGL policy was intended to cover tort liability an insured owes a third party, not the contract liability arising out of an insured’s work failing to satisfy warranties or meet expectations.  Indiana Ins. Co. v. DeZutti,  408 N.E.2d 1275 (Ind. 1980).  The Court of Appeals subsequently explained that CGL policies were intended to cover faulty workmanship that caused an accident, not an accident of faulty workmanship.  E.g. R.N. Thompson & Assoc., Inc. v. Monroe Guar. Ins. Co., 686 N.E.2d 160 (Ind. Ct. App. 2007).  

 

Last fall, however, the Supreme Court changed the landscape.  It noted there was a split among other jurisdictions with respect to whether an insured’s (or an insured’s subcontractor’s) defective work could constitute an “occurrence.”  Sheehan Constr. Co., Inc. v. Continental Cas. Co., 935 N.E.2d 160 (Ind. 2010).  In a 3-2 opinion, the Court concluded that defective work could constitute an “occurrence” as long as the defective work was unintentional from the perspective of the insured.  “[W]e align ourselves with those jurisdictions adopting the view that improper or faulty workmanship does constitute an accident so long as the resulting damage is an event that occurs without expectation or foresight.”  Id. at 169.  If the damage is intentional, it is not an occurrence.  If it is unexpected, however, it will be an accident and, therefore, an occurrence.  As a practical matter, one can envision few, if any, circumstances in which a contractor or general contractor would intentionally perform its work so as to cause damage.

 

In any event, the court noted that a policy’s business risk exclusions could still apply to preclude coverage, and that there would only be a duty to indemnify the insured for “property damage” or “bodily injury.”  The Sheehan court distinguished DeZutti in part on the basis that the coverage denial in the earlier case was due to the application of business risk exclusions, not to the absence of an “occurrence,” and partially due to 1986 changes to the ISO form which suggested to the Court that the insurance industry contemplated there would be at least some coverage for defective workmanship.  The court also abrogated Thompson.

 

Again, Sheehan was a 3-2 opinion.  We note that one of the three justices in the majority has since retired from the Indiana Supreme Court.  The two dissenting justices agreed with the conclusion from Thompson – that the defective workmanship must harm the person or property of others to qualify as an occurrence.  We do not know how the new fifth justice would rule on the issue.  For present purposes, however, defective workmanship in and of itself is an “occurrence” in Indiana as long as it was not intended or expected by the insured.

Submitted by Tricia Hofmann – thofmann@wthslaw.com

Litigation

Prejudgment interest in an underinsured motorist claim. 

Indiana’s Tort Prejudgment Interest Statute (“TPIS”) was intended to encourage settlement and compensate the plaintiff for the lost time value of money.   To facilitate that goal, it permits a trial court to award prejudgment interest to a party that prevails at trial in “any civil action arising out of tortious conduct” so long as that party made a timely offer of settlement according to the terms of the statute. See I.C. § 34-51-4-1 et. seq. Inman v. State Farm Mutual Automobile Insurance Company, 938 N.E.2d 1276 (Ind. Ct. App. 2011), addressed an issue of first impression in Indiana:  whether prejudgment interest is available in a case involving underinsured motorist coverage, which is a contract claim arising out of an allegedly tortious act.   

 

In Inman, the plaintiff settled with the torfeasor for policy limits of $50,000. The UIM carrier consented to the settlement. Plaintiff amended her complaint to add the UIM carrier, seeking the remaining balance of her $100,000 underinsured motorists coverage limits. Plaintiff filed a written offer of settlement pursuant to I.C. § 34-51-4-6, and offered to settle for the remaining policy limits. The UIM carrier rejected the offer, and the matter proceeded to trial. Although the opinion is not entirely clear, it appears that the jury returned a verdict for $100,000.   Plaintiff filed a motion to collect prejudgment interest of 10% beginning on the date she filed her amended complaint. The trial court summarily denied plaintiff’s motion.

 

The first question on appeal was whether a plaintiff is entitled to recover prejudgment interest in claims arising out of a contract (underinsured motorist coverage), or if prejudgment interest is limited only to civil actions arising out of tortious conduct.  After a survey of similar cases in other jurisdictions, the Court of Appeals held that a claim against an insurer for underinsured motorist benefits is a civil action arising out of tortious conduct, and that the award of prejudgment interest is appropriate, provided the other statutory requirements are satisfied. 

 

Next, the Court addressed the UIM carrier’s argument that satisfying the jury’s award and paying the interest payments would improperly require it to extend payment in excess of the available policy limits. As this was an issue of first impression in Indiana, the Court noted that other jurisdictions upheld such interest payments, even if they caused an insurer to pay more than its coverage limit. Based on the legislative purpose of the TPIS and public policy considerations, the Court of Appeals held that an insurer can be required to pay prejudgment interest in excess of uninsured and/or underinsured motorist limits in an action brought by an insured for failure to pay uninsured and/or underinsured motorist coverage. 

Submitted by Eric Eberwine – eeberwine@wthslaw.com

 

Estate and Tax

Federal Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The tax section of this Act includes changes related to gift, estate and generation skipping taxes which apply during 2011 and 2012. For instance, the applicable estate tax exclusion amount is $5 million in 2011 and will be adjusted for inflation in 2012 in $10,000.00 increments. There is also a marital deduction portability provision. The estate tax exclusion amount automatically decreases to $1 million on January 1, 2013, unless new legislation occurs. Clients may want to have their current estate planning reviewed in light of these changes and should monitor possible future law changes.

Submitted by Rick Bartlett – rbartlett@wthslaw.com

Domestic Relations

Health insurance premiums as a marital asset.

The Indiana Supreme Court ruled that health insurance premiums paid by a former employer as part of the husband's pension plan is a marital asset in a divorce.  In Bingley v. Bingley, 935 N.E.2d 152 (Ind. 2010), the parties divorced after 37 years of marriage.  Husband was retired, and as part of his retirement package, his former employer paid his monthly health insurance premiums and agreed to do so for the rest of his life.  The trial court had held that the health insurance benefits were not a marital asset, and wife appealed this decision.

The Supreme Court reversed the trial court, reasoning that the health insurance benefits are an asset because they were earned during the marriage.  The Court stated that the husband had a right to the medical services his health insurance will cover for the rest of his life.  Because his former employer assumed a monthly liability that the husband would otherwise have had to bear, his health insurance benefits more closely resemble a right to future pension payments.

The Bingley Court did concede that it is difficult to value premiums as an asset.  The Court further noted that it had not previously addressed the possible methods of valuing health insurance benefits in a marriage.  While the Court stated that the method may vary from case to case, and may ultimately depend on the type of evidence the parties produce, it concluded that there were three possible methods of valuing health insurance benefits. First, the court could arrive at a value “by considering the cost of obtaining comparable alternative benefits.” The second option would be to “consider[] the premium subsidy from the employer.” Finally, the court could “value health insurance benefits by considering the cost of providing medical services covered by health insurance.” Regardless of which approach the court elects to follow, the court must strive for a “just and proper” distribution of the marital assets, giving credence to the presumption that – unless circumstances dictate otherwise – an equal distribution is most commonly just and proper.

Justice Dickson dissented from the opinion.  He stated that the decision "expands the division of marital property contrary to statute, intrudes upon the legislature's public policy prerogatives and significantly and harmfully disrupts Indiana marriage law and practice." Justice Dickson also warned of the decision's impact on other benefits besides health insurance.

Submitted by Les Merkley – lmerkley@wthslaw.com

Clarification of Child Support Calculations.

In Ashworth v. Ehrgott, 934 N.E.2d 152 (Ind. Ct. App. 2010), the Indiana Court of Appeals reversed a trial court's decision enforcing a Tennessee support order and modifying the obligation.

 

The couple was divorced in Tennessee, and the father was ordered to pay child support and alimony as part of the dissolution.  Mother later remarried and relocated to Indiana with the two children. Meanwhile, father unilaterally reduced his support, which led mother to go to court in Indiana, seeking to enforce the Tennessee order.

 

While there were several issues raised on appeal, the most significant was how the payment of alimony factors into Indiana child support calculations.  Such calculations are based in part upon the relative gross income of each parent. Father alleged the trial court abused its discretion by failing to deduct his $1500 monthly alimony payment from his weekly gross income.  He reasoned that the alimony should be treated as a maintenance payment to mother.  The Court of Appeals concluded that he was entitled to deduct the alimony payment because it was not a property settlement.  The decision gives a fairly good analysis in determining whether alimony or maintenance really constitute payments or property settlement.

 

The Court also agreed with the father that he should have been given a credit for paying the children's health insurance premium.  Also, father alleged the trial court improperly included his daughter's full-time preschool expenses as a work-related, child-care expense for mother even though she was not working and there was insufficient evidence to order payment of his son's private school tuition as additional child support. The Court of Appeals agreed, finding the trial court abused its discretion on both those issues.

 

Submitted by Les Merkley – lmerkley@wthslaw.com

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