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Assault and Battery Exception in Insurance Contract Applies Even When Plaintiff Was Not The Intended Target, Eighth Circuit Finds

17 Oct 2023

ABSTRACT: In a premises liability case involving allegations of negligence and assault and battery, an insurance company whose policy has an assault and battery exception need not defend an insured, so long as the assault and battery is within a narrow scope of foreseeable harms arising from the negligence.

Insurance policies often contain exclusionary clauses that limit the scope of coverage arising from certain types of incidents. In some cases, the “concurrent-proximate-cause” rule applies, which states that “an insurance policy will be construed to provide coverage where an injury was proximately caused by two events—even if one of these events was subject to an exclusion clause—if the differing allegations of causation are independent and distinct.” Taylor v. Bar Plan Mut. Ins. Co., 457 S.W.3d 340, 347 (Mo. banc 2015). However, Missouri courts have favored a narrow application of this rule, holding that a covered cause must be “wholly separate” from the excluded cause for the rule to apply, even going so far as to note an example where negligent hiring of a maniac who commits arson may not be foreseeable, but negligent hiring of a pyromaniac would be. See Great Lakes Ins. SE v. Andrews, 33 F.4^th 1005, 1008 (8^th Cir. 2022).

In Scaglione v. Acceptance Indem. Ins. Co.,the Eighth Circuit considered whether an insurance company’s decision to not defend its insured against a claim of negligence arising out of injuries sustained in a shooting fell within this rule.On June 16, 2019, Sominkcole Conner was a patron at Voce Bar in downtown St. Louis, which was owned by Steven Scaglione. A dispute broke out between two other patrons, and Conner, an innocent bystander, was struck by a stray bullet. Scaglione’s insurance carrier, Acceptance Indemnity Company, refused to provide him with a defense. Accordingly, Conner and Scaglione agreed to arbitration, and Conner obtained a $2.5 million arbitration award, which was later confirmed by the Circuit Court of the City of St. Louis.

Conner filed an equitable-garnishment action against Acceptance. Scaglione filed a cross claim, alleging Acceptance had, in bad faith, refused to settle Conner’s claim, failed to defend or indemnify him, and breached its fiduciary duty. Acceptance filed motions to dismiss both Conner’s and Scaglione’s claims based on the assault-and-battery exclusion in the contract, which excluded, “[a]ny claims arising out of Assault and/or Battery.” The district court granted the motions, finding the assault-and-battery exclusion in Scaglione's policy barred coverage. Scaglione and Conner appealed to the Eighth Circuit.

On appeal, Scaglione and Conner argued that: (1) the assault-and-battery exclusion only applied to assault or battery committed by the insured or the insured’s employees, not other patrons; (2) the exclusion only applied to claims of the intended victim of the assault and battery, not innocent bystanders; and (3) the concurrent-proximate cause rule applied because Connor’s injury arose from Scaglione’s negligence, which did not depend on the assault and battery.

The Eighth Circuit affirmed the decision below, finding the policy exclusion for “[a]ny claims arising out of Assault and/or Battery” was plain and unambiguous. The exclusion contained no words suggesting a limitation regarding the perpetrator of the assault or battery, and likewise contained no limiting language suggesting that injuries to innocent bystanders did not fall within the exclusion.

The Eighth Circuit also rejected the appellants’ argument under the concurrent-proximate-cause rule, finding that Scaglione’s negligence was not “independent and distinct from the excluded assault and battery.” The Court focused on whether Conner’s injury was within the scope of foreseeable harms from Scaglione’s negligence. Here, because the underlying petition alleged that Scaglione was aware that bar patrons were often armed with dangerous weapons, and that Scaglione failed to provide adequate security measures, Conner’s assault and battery was within the risk of foreseeable harms flowing from Scaglione’s negligence. Because the injury was foreseeable, the concurrent-proximate-cause rule did not apply, and, therefore, the exclusion barred coverage.

Key Takeaways

The court’s opinion illustrates several key points for consideration by insurance companies and legal practitioners alike:

Assault and battery exclusions in insurance contracts are valid regardless of whether the intended target of the assault and battery is the injured person, assuming policy language similar to the exclusion before the Eighth Circuit is used.
Insurance companies and their counsel must be sure to assert, and prove, an assault and battery occurred in any responsive pleadings to the court.
Insurance companies must ensure all exclusions in a policy remove any ambiguity in order to be enforceable in Missouri.
For the concurrent-proximate cause-doctrine to avoid the application of an exclusion, the non-excluded cause must be truly independent and distinct, with a focus on foreseeability.

* Andrew Snively, Law Clerk, assisted in the research and drafting of this post. Snively is a 3L student at Pepperdine Caruso School of Law.

Missouri, Illinois, and Kansas 2022 Notable Insurance Law Decisions

06 Feb 2023

ABSTRACT: Our Insurance Law Blog 2022 year-end review encapsulates significant jury verdicts and decisions affecting insurance cases across the nation. View the post for a non-exhaustive list of insurance cases with national and regional implications that deserve attention.

Missouri

M.O. v. Geico Gen. Ins. Co., 2023 Mo. LEXIS 4 (Mo. banc. 2023).

A couple’s back seat dalliance became the basis of an insurance claim that attracted national attention in 2022. The plaintiff alleged that she contracted HPV after engaging in sexual activity with defendant in his vehicle, which was insured by GEICO. After making an insurance claim, the plaintiff and defendant entered into a §537.065 agreement and arbitrated the matter, resulting in a $5.2 million arbitration award. GEICO was not notified of the §537.065 agreement or arbitration until after the arbitration occurred. When GEICO moved to intervene in the lawsuit prior to the circuit court’s entry of judgment, it was allowed to, but only after the circuit court’s entry of judgment affirming the arbitration award. GEICO’s post-judgment motions challenging the judgment and arbitration award were denied. After the Western District of Missouri affirmed the circuit court’s judgment, the Missouri Supreme Court ultimately vacated the circuit court’s judgment finding that the circuit court should have granted GEICO’s motion to intervene prior to entry of judgment, thereby allowing GEICO to challenge the arbitration award.

Estate of Max Overbey v. Universal Underwriters Ins. Co., 645 S.W.3d 641 (Mo. App. W.D. 2022).

This case is one of many lawsuits arising from a Kansas City, Missouri used car dealership’s “drive for life” program. The program advertised low monthly payments and the ability to exchange vehicles every six months. The plaintiffs in this case were made to sign a sales contract that obligated them to a high-interest loan in an amount significantly more than the actual value of the vehicle as well as subjecting them to various hidden fees. When the plaintiffs attempted to trade in their vehicle after six months, the dealership disavowed any knowledge of the “drive for life” program, leaving plaintiffs with a high interest car loan. A jury found in favor of plaintiffs and awarded actual and punitive damages.

The plaintiffs then brought an equitable garnishment action against the dealership’s insurer seeking indemnity for the entire amount of the judgment. The circuit court was not swayed by the insurer’s argument that the underlying act was not an “occurrence” under the policy because the policy definition of “occurrence” required the loss to be an accident resulting in an injury that was not intended or expected. However, the Appellate Court reversed the trial court’s judgment reasoning that an intentional act of fraud which caused damage that was foreseeable, meriting the award of punitive damages, could not also be an “accident,” and therefore, the loss was not an “occurrence” under the policy.

Great Lakes Ins. SE v. Andrews, 33 F.4^th 1005 (8^th Cir. 2022)

A patron of the “Tool Shed Lounge” bar was attacked by an employee of the bar in the parking lot and was struck repeatedly on his head and body. He brought suit against the bar and its owner, ultimately obtaining a judgment in his favor. The bar’s insurer brought a declaratory judgment action to determine if the bar’s insurance policy provided coverage for the damages resulting from the attack. The Eighth Circuit, applying Missouri law, affirmed the District Court’s determination that that the insurance policy’s assault, battery, or physical altercation exclusion was unambiguous and precluded coverage for the attack.

M.P. v. Trexis One Ins. Corp., 652 S.W.3d 685 (Mo. App. S.D. 2022).

An individual was riding a bicycle through an RV park when he was struck by a golf cart and injured. The injured individual made a claim under his uninsured motorist automobile policy. The policy stated that the insurance would apply if the injury arose out of the operator’s ownership, maintenance, or use of an uninsured motor vehicle. The policy, however, excludes from the definition of “uninsured motor vehicle” any vehicle or equipment “[d]esigned mainly for the use off public roads while not on public roads” (emphasis added). The parties agreed that the golf cart was a motor vehicle designed mainly for use off public roads, but disagreed whether the subject road where the accident occurred was a “public road.”

“Public road” was not defined under the subject policy, so the Court’s applied its plain and ordinary meaning to the term. The accident occurred in a parking lot adjacent to a road that was on private property. Additionally, the road, while accessible for restricted use by the public, was not used by the public freely and commonly, was not commonly used by the public as a shortcut to access a public road, and guests who entered the subject RV park were required to check in with the park’s office. Furthermore, a state-issued driver’s license was not required to operate a vehicle on the subject road and postal, delivery, and emergency vehicles did not freely drive on the road. The court, applying these facts, determined that the subject road was not a “public road” as used in the insurance policy and, therefore, because the accident did not occur on a public road, the golf cart did not qualify as a “uninsured motor vehicle,” and the policy did not provide coverage for the accident.

Illinois

Sheckler v. Auto-Owners Ins. Co., 2022 IL 128012

This case arose from an apartment’s non-functioning gas stove. A technician was hired to inspect the stove and make repairs, but when the technician left to obtain parts for the stove, the tenants turned the stove on causing gas inside the apartment to ignite resulting in a fire. The Illinois Supreme Court determined that an insurer which provided liability and property damage coverage to the landlord did not owe a duty to defend the tenant against the technician’s contribution claim because the tenant was not an insured nor additional insured under the policy. The Supreme Court rejected the argument that the tenants were implied co-insureds under the policy, distinguishing its holding in Dix Mut. Ins. Co. v. LaFramboise, 149 Ill. 2d 314, 323, 173 Ill. Dec. 648, 597 N.E.2d 622 (1992), noting that the Dix case concerned a cause of action based on equitable principles, while the technician’s contribution claim did not.

Illinois Farmers Ins. Co. v. Godwin, 2022 IL App. (3d) 210001

A passenger was killed in a single-vehicle accident when the driver and passenger were returning to Illinois from a trip to New Mexico. The driver and the driver’s mother were named insureds on an insurance policy issued by Farmers. The driver’s father and mother were divorced and lived in different residences. At the time of the accident, the driver was operating his father’s vehicle, which was not listed on the Farmers policy.

Farmers filed a declaratory judgment action seeking a determination that it had no duty to defend and/or indemnify the driver for the accident claiming that an exclusion applied which excluded coverage for bodily injury arising out of the use of any vehicle other than an insured car that is available for regular use by the insured or a family member.

The Appellate Court determined that the father was not a “household driver,” even though the driver resided with his father roughly 50% of the time. The policy specifically listed the driver and driver’s mother as insureds while listing the driver’s mother’s address as the insureds’ residence. The Appellate Court further determined that the driver’s use of his father’s vehicle was not “regular,” because it was contingent upon driver being at his father’s house, driver making a reasonable request to use the vehicle, and upon father’s granting of permission to use it. Therefore, the vehicle driven during the accident did not fit within the exclusion under the insurance policy, and the Appellate Court determined there was liability coverage under the Farmers policy.

Nationwide Prop. & Cas. Ins. Co. v. State Farm Fire & Cas. Co., 2022 Ill. App. (1st) 210267

This dispute between insurance companies arose from an accident that resulted in the death of a 13-year-old. The 13-year-old was fatally struck by a dump truck while riding his bike. The dump truck was being operated by an employee of a Davis Concrete as he was returning to a road construction project. Davis Concrete had a commercial general liability policy issued by Nationwide. Davis Concrete subcontracted some of its work to RJ&R Trucking and Excavating, who was insured by an automobile, commercial general liability, and umbrella policies.

The wrongful death suit was settled for $3.5 million, of which Nationwide paid $400,000. Nationwide then brought a declaratory judgment action against State Farm seeking a determination that the State Farm commercial general liability policy’s automobile exclusion was inapplicable and seeking indemnity for the $400,000 that it paid towards the settlement. The Appellate Court determined that because the underlying Complaint contained allegations of negligence that were independent of the operation of the dump truck (claiming negligence due to not having a flagman present to direct traffic), that the auto exclusion was not applicable. Nationwide was, thus, entitled to indemnification for the full $400,000 that it paid towards the settlement.

Unique Ins. Co. v. Tate, 2022 IL App. (1st) 210491

An individual was involved in an accident with an ambulance owned and operated by the City of Chicago Fire Department. He sued the fire department, but the fire department was granted summary judgment because it was immune from liability for negligent operation of a motor vehicle under the Local Governmental & Governmental Employees Tort Immunity Act, 745 ILCS 10/5-106. After summary judgment was granted, the individual made a claim with his insurer seeking indemnity under his policy’s uninsured motorist coverage arguing that because the fire department was immune from liability, a denial of his uninsured motorist claim would violate public policy by depriving him and other drivers of their right to recovery.

The Appellate Court found that under the plain terms of the policy, the ambulance did not fit within the definition of an “uninsured motor vehicle,” the definition of which explicitly excludes any vehicle or equipment owned or operated by a self-insurer or owned by any governmental unit or agency. The ambulance was owned by the self-insured fire department, which is also a governmental agency and, therefore, not an uninsured vehicle. The Appellate Court also found the injured party’s public policy arguments unpersuasive.

Kansas

Granados v. Wilson, 62 Kan.App.2d 10, 505 P.3d 794 (2022)

After a fatal accident in Kansas City, Kansas, the tortfeasor notified his insurer of the accident, but denied causing the accident. The claims adjuster determined the tortfeasor was at fault, but did not contact the wife of the decedent, did not interview any of the 12 listed witnesses on the police report, did not inspect the vehicles, and did not contact the wife’s insurer. The tortfeasor’s insurer first learned of a claim from the decedent’s wife when she filed a wrongful death lawsuit in Wyandotte District Court.

The tortfeasor’s insurer offered to settle the lawsuit for the policy limits of $25,000. The wife’s attorney sent a letter to the tortfeasor’s insurer rejecting the offer and scolding the insurance company from not having offered the policy limits “a long time ago.” The attorney argued that the insurer had a duty to promptly initiate settlement and made a demand to settle the case for just under $3 million. During a bench trial, the District Court found damages in the amount of $4,603,777.52, the amount of which was later appealed and ultimately negotiated and stipulated between the parties as $3,353,777.52 in damages.

The wife brought suit against the tortfeasor’s insurer for the full amount of the judgment. After a bench trial, the Court entered judgment in the wife’s favor. The insurer appealed and the Appellate Court determined that, while the claims adjuster’s investigation did not meet industry standards, failing to do so did not necessarily expose the insurer to damages in excess of its policy limits. For an insurer to be liable for a judgment in excess of its policy limits, there must be a causal connection between an insurer’s breach of duty to its insured and the excess judgment. Here, the Appellate Court found no such causal connection and the insurer was only liable for the judgment in the amount of its policy limits.

Illinois Federal Court Re-Affirms Insurance Coverage Exclusions Matter

03 Feb 2023

ABSTRACT: In Crum & Forster Specialty Ins. Co. v. Spike’s Pub & Grub, No. 3:21-CV-1722-NJR, 2023 U.S. Dist. LEXIS 1360 (S.D. Ill. Jan. 4, 2023), the United States District Court for the Southern District of Illinois found that an insurance company owed no duty to defend a pub for a stabbing that took place on its premises, but denied the insurance company’s request for a declaration that it owed no duty to indemnify the pub.

In the underlying action, Devin Elliott filed a lawsuit against Spike’s Public House in the Circuit Court of St. Clair County, Illinois, alleging that Spike’s sold alcoholic beverages to Corey Lyell, causing Lyell’s intoxication. While intoxicated, Lyell attacked Elliott and stabbed him multiple times. Elliott asserted two claims against Spike’s – negligence for failing to keep security personnel on the premises and for violating Illinois’s Dram Shop Act.

Spike’s was insured under a CGL policy issued by Crum & Forster Specialty Insurance Company (“CFSIC”) and sought coverage for the claims asserted against it. CFSIC advised it owed no obligation to defend or indemnify Spike’s based on the terms of the policy. CFSIC filed a Complaint for Declaratory Judgment in the United States District Court for the Southern District of Illinois, seeking a declaration that it owed no duty to defend or indemnify Spike’s. Spike’s and Elliot both failed to answer and, consequently, default was entered against them pursuant to Fed. R. Civ. P. 55(a). CFSIC then filed a motion for default judgment.

In its motion for default judgment, CFSIC first argued there was no coverage because the bodily injury alleged in the underlying Complaint was not caused by an “occurrence” as the term was defined in the policy and, thus, there was no duty to defend. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The underlying Complaint alleged Spike’s sold alcohol to Lyell, causing his intoxication, and, because of his intoxication, Lyell attacked Elliott. It went on to allege that Lyell intended to and did cause harm.

Because of the procedural default, Elliot and Spike’s failed to dispute CFSIC’s argument that the policy offered no coverage because the underlying Complaint did not allege bodily injury from an “occurrence” – i.e., an accident. Accordingly, the court found that CFSIC was entitled to default judgment as to Count I (negligence).

Interestingly, the decision did not elaborate on or state that it agreed with CFSIC’s position. It merely stated Elliott and Spike’s failed to dispute CFSIC’s argument and “accordingly” found CFISC was entitled to default judgment. Conversely, the Court expressly agreed with CFSIC’s second argument.

CFSIC’s second argument was that even if the Complaint contained sufficient allegations to support coverage, the policy contained a Total Liquor Liability Exclusion that barred coverage. The Court agreed. The exclusion stated insurance did not apply to bodily injury or property damage for which any insured may be held liable by reason of: (1) “[c]ausing or contributing to the intoxication of any person”; or (2) "[a]ny statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.” Because of these express terms, the Court held the exclusion applied, and CFSIC was entitled to default judgment as to Count II (Illinois Dram Shop Act).

CFSIC also asked the Court to declare it owed no duty to indemnify Spike’s, but the Court declined to do so, noting, “[i]t is well established that the duty to indemnify is narrower than the duty to defend.” More specifically, the “general rule” in the Seventh Circuit is that “a suit to determine an insurer’s obligations to indemnify its insured is premature until the insured as been determined to be liable to somebody.” Bankers Tr. Co. v. Old Republic Ins. Co., 959 F.2d 677, 680 (7th Cir. 1992). Because the underlying action was still pending, a ruling on CFSIC’s obligation to indemnify would be premature. Consequently, the Court denied CFSIC request, without prejudice.

There is no doubt that this opinion is favorable to insurers. While more elaboration would have been ideal regarding the existence of a duty to defend, the Court nonetheless held the insurer was entitled to a default judgment as to that issue. Furthermore, the Court held that the exclusion applied, thus barring coverage, thereby re-affirming that exclusions do matter.

No Liability Coverage for Company Owner Operating Personal Vehicle in Course and Scope of Employment (Illinois Court of Appeals)

12 Jan 2023

In a DJ action filed by a commercial liability carrier, an Illinois Appellate Court held that an insurer had no duty to defend or indemnify a self-employed driver who was operating his personal vehicle during the course and scope of employment. In the underlying negligence claim, the injured plaintiff alleged personal injury and property damage when a truck driven by the owner of a construction company struck the open door of her parked car as she was getting out. The owner’s truck was purchased by him in his own name and insured through his personal auto insurance.

The owner’s construction company was a named insured on a CGL policy that defined "insured" to include, "an organization" and its "executive officers...but only with respect to their duties [as officers]." The policy excluded claims "arising out of the ownership, maintenance [or] use ... of any ... 'auto'... owned by or rented or loaned to any insured."

The injured plaintiff argued the truck was not "owned" or "used" by an insured because the driver was acting in his capacity as a company officer at the time of the accident. Since he was not being sued in his personal capacity, the plaintiff argued, he was not an "insured" and the "auto" exclusion did not apply.

In affirming summary judgment for the insurance company, the court found that counsel for the injured plaintiff had made numerous binding "judicial admissions" at the trial court level, and specifically that the driver was acting as an employee of the company at the time of the accident. This is important because as an employee, the “auto exclusion” provision in the insurer’s policy applied to bar coverage.

Ultimately, as an employee of the company, and with a claim against the company for coverage regarding to an accident that occurred with the owner, the insurer was correct in examining the policy and applying the coverages, and exclusions, to the circumstances of the accident. Here, because owner was driving his personal vehicle at the time of accident, despite being an employee of the company (and even being in the course and scope of his employment), the “auto exclusion” in the insurer’s policy applied to bar coverage.

Erie Ins. Exch. v. Petrovic, 2022 IL App (1st) 210628-U; 2022 Ill. App. Unpub. LEXIS 1876.

Appeals Court Affirms Household Exclusion to Limit UIM Claim

09 Jan 2023

ABSTRACT: The Court of Appeals for the Eastern District of Missouri recently upheld the use of a “household exclusion” in an insurance policy to drastically limit the recovery available in claim made against a member of the same household.

The case of Mendelson v. Bankers Standard Insurance Company involved a single car accident wherein the driver, Paul Mendelson, was killed and his wife, Betty Mendelson, was injured. The Mendelsons had an insurance policy with Bankers Standard Insurance Company (“Bankers Standard”) that included both liability and underinsured motorist (UIM) coverage in the amounts of $500,000 each. However, both portions of the policy included a “household exclusion” that limited coverage in instances of bodily injury to an insured or a family member. In such cases, the policy limits for both coverages would be limited to the amount of the state-mandated minimum liability coverage under the Missouri Financial Responsibility Law, which was $25,000. After the accident, Mrs. Mendelson made a claim for liability coverage based on the alleged negligence of Mr. Mendelson, as well a claim for underinsured motorist coverage, arguing that Mr. Mendelson’s liability coverage of $500,000 was insufficient to fully cover her damages. Bankers Standard filed for summary judgment, arguing that the above limits applied. The trial court granted Bankers Standard’s motion for summary judgment, applying the household exclusions and limiting recovery to $25,000 for both the liability and UIM coverages.

On appeal, Mendelson first argued that the UIM household exclusion violated Missouri public policy. In so doing, she contended that courts allow the “stacking” of uninsured (UM) and UIM coverages where UM and UIM coverages were treated identically. In those cases, the courts noted that Missouri law requires a minimum UM coverage, and further allows an insured with UM coverage on multiple vehicles to add them together, or “stack” them, to increase the amount of coverage available. However, Missouri law does not mandate UIM coverage. Mendelson argued that since insureds may stack their mandated UM coverages, in instances where insurance policy language functionally treats UM and UIM coverages as the same, courts have stopped insurers from attempting to block stacking of UIM benefits as well. Here, Mendelson sought to apply this rationale to suggest that, to the extent that her policy treats UM and UIM coverage the same, and non-statutory exclusions cannot reduce UM coverage, the Court should prevent Bankers Standard from applying the household exclusion in a UIM claim.

The Appeals Court was not persuaded, noting that Mendelson’s case had little in common with the issues involved in stacking cases. Even though this policy may lump UM and UIM coverages together in some areas, the court found the policy considerations in UM stacking cases did not apply here. To the contrary, Missouri courts have repeatedly upheld household exclusions limiting coverage to the minimum amount required by law ($25,000), and in the absence of any applicable public policy, the language of the contract in those instances prevails.

Mendelson next argued that the household exclusion was unenforceable because the policy is ambiguous in the way it seemingly grants $500,000 of coverage in one part of the policy, but elsewhere purports to reduce the coverage to $25,000 by way of an exclusion. The Court acknowledged that an ambiguity may exist if contractual language is reasonably open to reasonably different interpretations or uncertainty, including instances where a contract seemingly promises something at one point but later takes it away. However, it notes that insurance contractual provisions must be read in the context of the policy as a whole, and in doing so, did not find any ambiguity in Bankers Standard’s policy.

Indeed, the Court noted that exclusions are common in insurance policies and do not automatically create an ambiguity. Rather, as in this case, a policy may provide coverage subject to clear, applicable limitations appearing later in the policy. Here, the declarations page noted $500,000 in UIM coverage, and clearly indicates that it contemplates both the language of the policy itself and any endorsements. An introductory section of the policy further describes how it will note the specific losses that it will not pay for using exclusions. Then, as suggested, the policy notes how UIM coverage is available, but specifically lists the household exclusion under “damages we won’t pay.” Upholding summary judgment and a cap on the applicable coverage, the Court determined that an ordinary consumer would understand and anticipate that his/her coverage is subject to limitations stated later in the policy. As such, the policy was not ambiguous. The appeal was denied, and the household exclusion was upheld, limiting the otherwise $500,000 in UIM coverage to $25,000.

This Opinion reiterates the importance of analyzing a policy in its entirety. One must note how UM and UIM coverages are differentiated in the policy, and the context they are applied. Insurance contracts often spend just as much time detailing what is not covered as what is, and when clearly worded, the effects can be significant. In Mendelson, the Court of Appeals reinforces the importance of determining coverage through careful cross-referencing of the stated limits within the policy and all applicable endorsements. Failure to appreciate not only the coverages, but the limits, can lead to shocking outcomes for insureds. However, for insurance companies, this case reinforces that clear language and reiterating to the insured the application of the entire policy, coverages and limitations, will have a better chance of leading to the intended application of coverage as written.

The Illinois Supreme Court Finds Equitable Subrogation Principles Do Not Apply to Third-Party Contribution Claims for Negligence Against Tenants

27 Dec 2022

The Illinois Supreme Court unanimously held an insurer has no duty to defend or indemnify a tenant of an insured property against a third-party contribution claim where the tenant is not a covered insured under the policy.

In a 7-0 decision, the Illinois Supreme Court unanimously reversed the Third District Appellate Court’s holding that an insurer has a duty to defend or indemnify tenants against third-party contribution claims. Sheckler v. Auto-Owners Ins. Co., 2022 IL 128012, ¶ 47.

The facts of Sheckler v. Auto-Owners involve an insurance coverage dispute following a fire that occurred at a rental property located in Pekin, Illinois. There, Monroe and Dorothy Sheckler entered into a lease agreement for an apartment owned by Ronald McIntosh. Id. at ¶ 4. McIntosh maintained an insurance policy with Auto-Owners for the apartment, which included first-party dwelling and third-party landlord liability coverage. Id. at ¶ 5.

The first-party dwelling provision covered the apartment premises for fire damage. Id. The third-party landlord liability provision covered claims brought by third parties that the insured “becomes legally obligated to pay as damages because of or arising out of bodily injury or property damage.” Id. The third-party landlord liability provision further provided a duty to defend clause for any claim or suit for damages covered by the policy. Id. The provision, however, excluded from coverage “property damage to property occupied or used by an insured or rented to or in the care of, any insured.” Id. The policy declarations listed McIntosh and his wife as the only named insureds. Id.

In August 2015, the Shecklers notified McIntosh that the apartment’s gas stove was not working properly. Id. at ¶ 8. McIntosh hired a technician to inspect the stove and make repairs. Id. When the technician left the apartment to obtain stove parts, the Shecklers attempted to mask the gas odors by spraying Febreze over the stove range. Id. When the Shecklers turned the stove on shortly thereafter, the stove ignited, resulting in a fire that caused substantial property damage. Id. As a result, McIntosh submitted a claim and Auto-Owners paid McIntosh for the damages incurred due to the fire. Id.

Auto-Owners subsequently filed a subrogation action against the technician, who then filed a third-party complaint for contribution against the Shecklers. Id. at ¶ 10. In response, the Shecklers filed an independent declaratory judgment action against Auto-Owners, McIntosh, and the technician. Id. at ¶ 11. They asserted that Auto-Owners had a duty to defend and indemnify them against the technician’s third-party contribution claim under the policy. Id. The parties then filed cross-motions for summary judgment. Id. at ¶ 12. Specifically, the Shecklers relied on the Supreme Court’s decision in Dix Mut. Ins. Co. v. LaFramboise, 149 Ill. 2d 314, 323, 173 Ill. Dec. 648, 597 N.E.2d 622 (1992) in support of their argument that Auto-Owners had a duty to defend. Id. The circuit court disagreed and ruled that Auto-Owners did not owe a duty to defend. The Shecklers appealed. Id. at ¶ 13.

On appeal, the Third District reversed the circuit court’s judgment. Id. at ¶ 15. The court determined that the Shecklers were implied coinsureds under the policy based on equitable subrogation principles. Id. Specifically, the court reasoned that since the Shecklers’ rent payments ultimately accounted for the insurance premiums paid by McIntosh, said payments served as a form of reimbursement. Id. Based on these facts and Dix, the court found that Auto-Owners had a duty to defend. Id. at ¶¶ 15-18. Auto-Owners appealed.

The question presented to the Supreme Court concerned whether Auto-Owners owed a duty to defend or indemnify the Shecklers against the technician’s third-party contribution claim. Id. at ¶ 31. The Court determined that the holding of Dix was irrelevant. Id. at ¶¶ 39-40. Specifically, the Court found that Dix concerned a subrogation action based on equitable principles whereas the third-party claim against the Shecklers did not. Id. at ¶ 39. In so doing, the Court notably agreed with Presiding Justice McDade's dissenting opinion in Dix, wherein he asserted that Dix did not provide “a general rule that whenever tenants pay rent and their landlords insure the leased premises that the tenants are automatically coinsureds under the insurance policy as a matter of law.” Id. at ¶ 20. Accordingly, the Court held Auto-Owners owed no duty to defend or indemnify the Shecklers. Id. at ¶ 47.

The Court’s holding effectively limits the application of Dix in landlord/tenant claims. It is therefore incumbent upon insurers to carefully account for the specific facts and policy language of the claim before it. Particularly, whether a third-party contribution claim asserted against a tenant arises out of equitable subrogation principles or negligence.

Insurer Wins Coverage Dispute for COVID-19 Business Losses

09 Nov 2022

In The One Group Hospitality, Inc. v. Employers Insurance Company of Wausau, the United States District Court for the Western District of Missouri dismissed an insured business owner’s claim for the costs of suspending and limiting its restaurant operations during the COVID-19 pandemic under an “all risk” insurance policy. The court’s decision to terminate the litigation at the pleading stage was based on the express language of the policy limiting coverage to “direct physical loss or damage,” as well as a contamination exclusion.

The insured, an owner and operator of restaurants around the country, was forced to shut down its operations for cleaning and decontamination, and otherwise limit its operations, to comply with governmental restrictions on occupancy. The insured had purchased an “all risk” policy that insured against “all risks of direct physical loss or damage.” The policy also contained a “contamination exclusion,” precluding claims for costs and loss of use of property that resulted from contaminants. The policy’s definition of “contaminant” included viruses. Based on these policy provisions, the court found that there was no coverage, and that coverage would be excluded in any event under the “contamination exclusion,” because although the virus is technically physically present, it did not physically alter any structure it attached to, nor was there reason to think it could. The court also found that governmental orders limiting use of the property did not constitute physical damage.

Given the insured’s presence in various states, the court discussed decisions involving similar facts and policies in eight other jurisdictions where the outcome was the same. For example, the Seventh Circuit, applying Illinois law, held that the loss of use of property alone, without any damage or alteration to the property, was not sufficient to assert a claim for physical damages. The Eighth Circuit, while noting a lack of Missouri precedent, has also required some physical loss, such as alteration, contamination, or destruction.

The court noted that even if the presence of a substance that required cleaning did constitute “physical” damage, the damages would be limited to costs or losses incurred to clean the properties, and would not include damages resulting from government-ordered closures or the mere threat of customers bringing in the virus. Regardless, a contamination exclusion would preclude coverage for costs and damages as a result of a virus present on the property. While some policies might leave the door open to contamination claims because of a covered loss, in cases where the contamination itself is not a covered loss, courts have dismissed claims for coverage.

This decision reflects the ongoing and evolving responses to the COVID-19 claims in courts throughout the country. Each case requires fact-specific application of the applicable policy language. However, despite the toll the pandemic has taken on us all, some courts appear to be reluctant to extend insurance coverage beyond claims for physical damage to property. Additionally, certain policies contain exclusions that may preclude claims based solely on viruses. In litigation involving insurance coverage, one must pay special attention to the wording of the allegations regarding property damage in the context of the applicable policy language.

Illinois Court of Appeals Affirms Denial of Loss of Business Coverage Caused by COVID-19

11 Aug 2022

ABSTRACT: Illinois Court of Appeals affirms COVID-19, and the Governor's executive actions regarding the same, did not constitute a "direct physical loss of or damage" to the covered restaurant property, and that no loss of business income coverage resulted from the prohibition of in restaurant dining during the pandemic.

In the recent decision of State & 9 Street Corporation et al. v. Society Insurance; the Appellate Court of Illinois First Judicial District affirmed the circuit court’s judgment on the pleadings in favor of Society Insurance Company, finding the restaurant company plaintiffs were not entitled to business income, extra expense, civil authority, or contamination provisions in their property damage policies.

The pertinent facts are as follows: Plaintiffs own and operate 14 taverns in Illinois; On March 16, 2020 Governor Pritzker issued several executive orders in response to the COVID-19 pandemic, including a suspension of on-premises consumption of food and beverage; Society issued plaintiffs a “Businessowners Policy” that included a “Businessowners Special Property Coverage Form” that provided covered loss of business income coverage caused by or resulting from a “Direct Physical Loss;” the Society policy also contained an exclusion for loss or damage caused by the enforcement of an ordinance or law that regulated the use of the property.

Plaintiffs filed a Complaint for Declaratory Judgment, seeking a declaration that COVID-19, and Governor Pritzker’s executive actions, triggered loss of business income coverage under the Society policy. Society filed a countercomplaint against plaintiffs seeking a declaration that there was no coverage under the policy. The circuit court entered an order granting Society’s motion for judgment on the pleadings, and Plaintiffs appealed the decision.

The Appellate Court determined that COVID-19, and executive order regarding the same, caused economic loss and not a “physical loss” to the covered properties. Without an allegation of a change to the physical nature of the existing property, the court found plaintiffs’ allegation insufficient to establish a physical loss; as a further basis to deny coverage the Appellate Court found plaintiffs failure to allege their properties needed to be physically repaired or replaced evidenced no physical loss had occurred.

The Appellate Court also denied coverage under a contamination provision of the Society policy. Plaintiffs alleged that COVID contamination resulted in governmental authorities prohibiting access to the restaurants. The Appellate Court found no coverage relying upon Governor Pritzker’s expressed intent of ensuring the maximum number of people self-isolate, while enabling essential services to continue. The Governor’s limitation on the use of the restaurant premises was not a prohibition of access to the premises required to trigger the contamination provision of policy.

Plaintiffs’ Complaint included claims for Bad Faith under section 155 of the Insurance Code (215 ILCS 5/155). The Appellate Court found that the determination of no coverage against plaintiffs meant their bad faith claims must fail as a matter of law. An insurer cannot act vexatiously or unreasonably with respect to a claim when no coverage applies.

The Appellate Courts decision creates a cautionary tale for both insurers, and those seeking insurance coverage. Insurers need to remain cognizant that policies are generally construed in favor of coverage when ambiguous, and therefore extra caution needs to be taken in writing policy provisions to ensure coverage and exclusions precisely detail the coverage intended to be available.

While the pandemic may have been unforeseeable, those seeking insurance should closely evaluate their needs and routinely review their policies with an expert to confirm that they have the coverage they need to avoid the next pandemic level event.

Court of Appeals Reaffirms Arbitration Award in Sec. 537.065 Case Where Insurer Not Present; Though All is Not Lost

01 Aug 2022

ABSTRACT: The Missouri Court of Appeals for the Western District affirmed an arbitration award stemming from a Sec. 537.065 agreement finding that the insurance company could not substantively act, even after timely and properly intervening. The Court held that the intervenor must accept the case as it is at the time of intervention, and, thus, it was too late to change the award.

In the recent decision M.O. v. Geico General Insurance Company and Government Employees Insurance Company, the Missouri Court of Appeals for the Western District upheld a judgment against Geico affirming an award from an arbitration that only the insured participated in with the tortfeasor.

The pertinent facts are as follows: the driver had consensual sexual relations with the plaintiff in his vehicle, which allegedly resulted in the transmission of a sexually transmitted infection. The insured driver failed to disclose to plaintiff that he had this transmissible illness, and the plaintiff brought a claim against the insured and his insurer claiming that such failure to disclose was negligent. After an investigation, the insurer determined that the claim was outside of the driver’s insurance policy and denied coverage. The insured and plaintiff entered into a §537.065 agreement, and then arbitrated the claim pursuant to that agreement, where the plaintiff was awarded $5.2 million dollars.

Plaintiff then filed a petition in the circuit court to affirm the award. At that time, the insurer attempted to intervene to reduce or set aside the arbitration award. The court entered a judgment affirming the award and then, subsequent to the entry of judgment, granted intervention. The insurer moved to set aside, amend, or alter the judgment, which the court summarily denied. On appeal, the court of appeals held that the law grants insurers the right to intervene; but that right does not guarantee anything more than intervention, with the intervener having to accept the action as he finds it at the time of intervention.

This holding is troubling, but while this case was pending, the Missouri legislature amended the relevant statutes to guarantee not only an insurer’s right to intervene, but also guarantees that insurers are able to meaningfully develop facts and arguments in the case before entry of any judgment. This amendment to the statute guarantees an insurer the ability to adequately defend its interests, provided the insurer timely intervenes (the statute still requires intervention within 30 days of notice).

In sum, while the recent amendments to the statute limit this case’s precedential effect, the key lesson remains that the law does not reward those who sit on their rights. The statute now permits an insurer a guaranteed right to be able to develop its case, but an intervening party must still accept the litigation as it finds it at the time of intervention. For this reason, early and continuous engagement in or monitoring of any matter in which an insurer might wish to intervene is essential to protecting that insurer’s interest.

SCOTUS Rules States May Seek Recovery from Settlement Payments Allocated for Future Medical Expenses

15 Jul 2022

ABSTRACT: The issue before the Court was whether the Medicaid Act allows a state Medicaid agency to recover reimbursement for Medicaid payments of a beneficiary's past medical expenses by imposing a lien against the portion of the beneficiary's tort recovery that compensates for future medical expenses. The Supreme Court held that the Medicaid Act permits a state to seek reimbursement from settlement payments allocated for future medical care.

Factual and Procedural Background

In November 2008, Gianinna Gallardo, a 13-year-old student, was struck by a pickup truck after getting off a school bus. She suffered devastating injuries that left her in a permanent vegetative state. Florida’s Medicaid agency paid $862,688.77 towards Gallardo’s medical expenses and continues to pay her medical expenses. Gallardo’s family brought suit against the owner and driver of the truck and the school board, eventually settling for $800,000. The settlement allocated $35,367.52 for past medical expenses without expressly designating any amount for future medical expenses.

The Medicaid Act requires recipients of state-approved Medicaid assistance to assign the state any rights to payment for medical care from any third party. 42 U. S. C. §1396k(a)(1)(A). Accordingly, Florida enacted Medicaid Third-Party Liability Act requiring Medicaid recipients to automatically assign any right to third-party payments for medical care to the state’s Medicaid agency. Fla. Stat. Ann. §409.910(6)(b) (West). Specifically, the Florida statute allows the state to recoup medical payments from the beneficiary’s tort recovery against liable third parties allocated as “past and future medical expenses.” Fla. Stat. Ann. §§409.910(11)(f)(1), (17)(b) (West).

Florida filed a lien against the settlement, and under the statutory formula, the state was entitled to $300,000 of Gallardo’s settlement. Gallardo challenged Florida’s presumptive allocation and sought a declaratory judgment alleging that the state violated the anti-lien provision of the Medicaid Act, § 1396k(a)(1)(A), by attempting to recoup from settlement portions allocated for future medical expenses. The U.S. District Court for the Northern District of Florida agreed and granted Gallardo’s summary judgment, concluding that the Medicaid Act prohibited the states from seeking reimbursement from portions of the settlement allocated for future medical expenses. See Gallardo v. Dudeck, 263 F. Supp. 3d 1247, 1260 (2017). However, the Eleventh Circuit reversed the lower court decision, holding that the Medicaid Act only prohibits a state from imposing a lien against settlement portions not allocated for medical expenses. Gallardo v. Dudeck, 963 F. 3d 1167, 1176 (2020).

The Holding

In a 7-2 opinon, SCOTUS affirmed the Eleventh Circuit’s decision, holding that the plain language of the Medicaid Act permits a state to seek reimbursement from portions of a tort award allocated for future medical care. Justice Thomas, writing for the majority, concluded that the broad language of § 1396k(a)(1)(A) naturally covered both past and future medical expenses. Gallardo v. Marstiller, No. 20-1263, slip op. at 3 (Jun. 6, 2022). The Court reasoned that the lack of scope-defining language that is present in §§ 1396a(a)(25)(A) and (B)—provisions enacted prior to §1396k(a)(1)(A)—is proof that Congress did not intend to limit recovery of medical expenses under the provision at issue to only portions allocated for past medical care. Id.

The Court also opined that Gallardo mistakenly relied upon its holding in Arkansas Dept. of Health and Human Servs. v. Ahlborn that the anti-lien provision bars a state’s assertion of a lien against a beneficiary’s property beyond the portion of a settlement representing payments for medical care. See 547 U. S. 268, 285 (2006). The Court noted that Ahlborn is distinguishable in that it held that a state is prohibited from imposing a lien against non-medical expenses, as opposed to medical expenses.

Justice Sotomayor dissented, joined by Justice Breyer, arguing that the interpretation of the Medicaid provisions is “a symmetrical and coherent regulatory scheme.” Id. at 8 (quoting FDT v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000)). The dissent, criticizing the majority opinion as an implausible workaround, expressed concerns that the holding could discourage Medicaid recipients from seeking compensation in tort lawsuits in the future.

Implications

The parties involved in tort liability actions must now be keenly aware of any applicable Medicaid recovery statute(s) similar to that of Florida. In such jurisdictions, the parties must consider the state’s potential attempt to recoup past and future medical expenses from portions of settlement monies allocated for medical care.

* Ryan Sim, Summer Law Clerk, assisted in the research and drafting of this post. Sim is a rising 3L student at Washington University School of Law in St. Louis.