Court Reverses Case Dismissal
KB Home Tucson Inc. hired GRG Construction Co. Inc. in May 1999 to perform some work at a residential subdivision in Tucson.
In May 2001, the city claimed there were defects in the subdivision’s streets and sidewalks, and KB sued GRG and other contractors to reimburse it for the cost of repairs and attorneys’ fees.
In February 2005, several homeowners in the development sued KB for construction defects.
In both situations, KB sought a defense from Charter Oak Fire Insurance Co. and Travelers Property Casualty Insurance, collectively referred to as Charter Oak in the legal opinion filed on Nov. 25, 2014 by the Arizona Court of Appeals.
KB also sought a defense from Evanston Insurance Co., which had issued two commercial general liability policies insuring GRG and which had denied coverage in the absence of a written contract requiring that GRG make KB Home an additional insured.
In the case involving Charter Oak, the insurer also refused coverage, saying that KB did not qualify as an additional insured under the blanket additional insured endorsement because there was no written contract or agreement requiring that GRG add KB as an additional insured.
KB eventually filed suit against Charter Oak and Evanston, as well as Drachman Leed and American E&S, which provided certificates of insurance to KB as GRG’s insurance agents/brokers.
The lawsuit against Evanston was settled in January 2010, and the other lawsuits, which had been consolidated into one action, were dismissed by the Superior Court in Maricopa County, Ariz.
When the case was appealed, the two agents/brokers argued they did not have an “enhanced relationship” with KB and owed “no duty of care to third-party non-clients.”
The appeals court agreed with the brokers, but reversed the dismissal of the Charter Oaks litigation.
It noted that Charter Oaks did not require pre-approval to add additional insureds, and that such status “could be established without a specific document signed by both parties.”
Scorecard: The lawsuit was remanded to the lower court, to hear evidence on allegations of breach of contract, breach of the implied covenant of good faith and fair dealing.
Takeaway: Although a specific written document on the need for additional insured coverage was not signed by both parties, other correspondence made such a requirement clear.
GL Doesn’t Cover Seasonal Employee
Mary Armbruster was hired to run the hay wagon at a farmer’s market in Michigan for eight weekends. On one of those days, an accident with the wagon crushed her spine and left her a paraplegic.
She filed a negligence lawsuit against Burt Hoey, owner of the farmer’s market, and his daughter, Jennifer Lambers. In turn, Armbruster, Hoey and Lambers filed suit in state court against Western World Insurance Co., seeking coverage from Hoey’s commercial general liability policy.
Western World, for its part, filed suit in federal court, arguing that Ambruster was not covered by the GL policy. In addition, counsel to Hoey provided by Western World also filed a workers’ compensation claim, arguing that Armbruster was an employee and should be covered by workers’ compensation insurance.
Eventually, all lawsuits but the worker’s comp claim, which has not yet been resolved, were consolidated at the U.S. District Court for the Eastern District of Michigan at Detroit.
The court ruled that the policy does not specifically define an employee, but noted that an employee does not include a “temporary worker.”
Temporary worker was defined as a person “who is furnished to you to substitute for a permanent ‘employee’ on leave or to meet seasonal or short-term workload conditions.”
Even though Armbruster was not “furnished” to Hoey, he argued she was a temporary worker as opposed to an employee.
The appeals court disagreed. It ruled that Armbruster was an employee based on the “economic-reality test” that balances whether an employer controlled the worker’s duties and whether those duties were performed to accomplish the employer’s goals, as well as whether the employer paid wages, and could hire, fire or discipline her.
Scorecard: Western World was not responsible for claims resulting from the injury to a farm market’s seasonal worker.
Takeaway: Commercial general liability insurance provides coverage for injuries to the public at large, not to employees.
Fee Limitations Rejected
On May 4, 2007, City Art Inc., which framed and sold art in California, was sued by DK Art Publishing Inc. and Drita Kessler, alleging that City Art refused to return Kessler’s art or compensate her for it.
Kessler alleged breach of contract (consignment), negligence, trade libel and unpaid wages for when Kessler was employed by City Art, and other causes of action.
Among the items cited in the 13-page letter were the insurance policy’s exclusion for damage to personal property in the care, custody or control of the insured; and the disqualification of trade libel as a covered claim in the “personal, advertising or web site injury” section of the policy.
The insurer reiterated its denial in 2008, but on April 20, 2009, City Art, again requesting reconsideration, told Travelers that the art had not been in the company’s “exclusive” care, custody or control.
In February 2010, Travelers agreed to participate in the company’s defense under a reservation of rights.
It agreed to pay defense fees at a negotiated rate dating back to April 20, 2009. On Nov. 2, 2010, City Art, and later Kessler, sued Travelers for breach of contract, bad faith and declaratory relief.
They asked the court to require the insurer to pay “reasonable and necessary fees and costs” incurred by the company’s counsel and rule that the fees were not subject to statutory rate limitations.
Travelers cross-filed, seeking to have the statutory fee rate imposed, and a ruling that it had no duty to defend prior to April 20, 2009. The insurer argued that the rate limitations should be retroactive to the April 20 date even though they didn’t start paying defense fees until Feb. 12, 2010.
The lower court ruled that the rate limitations should be triggered on the same date as the recognition of the duty to defend — April 20. On appeal, the Court of Appeal for the State of California, Second Appellate District, Division Three, reversed.
Scorecard: Travelers must pay City Art’s independent counsel at previously agreed-upon rates instead of reducing the fees based on statutory limitations.
Takeaway: Allowing an insurer to retroactively limit the fees it pays for defense would encourage insurers to reject their responsibility to defend, the court ruled.
Jury Rules in Favor of Insured
Sometime between Jan. 12, 2009 and February 5, 2009, one or more individuals entered the disc jockey’s room at the Cabo Wabo Cantina and Memphis Blues nightclub in Fresno, Calif., and stole about $140,000 of electronic equipment including HD televisions, speakers and sound mixers.
Fresno Rock Taco, which operated the cantina and nightclub, reported the theft to the police upon the advice of its broker, and filed a claim with National Surety Corp., a Fireman’s Fund Co., for the equipment, property damage and for loss of business income. It had two insurance policies with respective limits of $2.6 million and $6.1 million.
Fresno Rock, along with Zone Sports Center LLC, owner of the property at the time of the theft, filed suit against National Surety when the claim was denied.
The insurance company alleged the loss of equipment was due to repossession rather than theft, according to court documents.
Cabo Wabo denied repossession was involved, and noted in court documents that a search of the premises by the state Department of Insurance for possible insurance fraud “revealed no wrongdoing of any kind and no charges of insurance fraud or any other crime have been filed against anyone connected to this matter.”
After a trial in the U.S. District Court for the Eastern District of California, Fresno Division, a jury ruled on Aug. 22 that Cabo Wabo and Zone Sports had suffered a covered loss and did not make a false claim to the insurance company.
It ordered the insurer to pay $2.2 million to Cabo Wabo for business interruption losses and about $275,000 to the property owner for property damage losses.
Scorecard: The insurance company was ordered to pay $2.5 million for the claim.
Takeaway: National Surety’s belief that the theft was questionable and that security measures were inadequate did not sway the jury.
Insurer Need Not Pay Auto Settlement
Tyler Roush was driving his mother’s car on Aug. 3, 2009 when he struck and severely injured a pedestrian, Lloyd Miller.
Miller and his wife Nancy filed suit against Roush and his parents, Sharon and George Roush, and Brash Tygr, which owned and operated a Sonic Drive-In restaurant in Carrollton, Mo. The parents owned 75 percent of Brash Tygr; Tyler and his brother Brandon each owned another 5 percent.
The company was covered as part of a commercial lines master policy issued to Sonic Insurance Advisory Trust by Hudson Specialty Insurance Co. The CGL policy had a Hired and Non-Owned Auto Liability endorsement, under which the family and franchise sought coverage.
Hudson provided a defense, under a reservation of rights, until the family rejected that defense and settled the Millers’ lawsuit for $5.8 million in compensatory and punitive damages, according to court documents. At the same time, the family admitted that Tyler Roush was “conducting the business of Brash Tygr” during the accident.
Tyler Roush, who had not worked for the restaurant for a long time, had been on some errands for his mother at the time of the accident. While he was depositing his mother’s paycheck at a local bank, an employee had handed him some bank deposit bags for use by Sonic Drive-In, according to court documents.
Because of that action, the U.S. District Court for the Western District of Missouri-Kansas City ruled that Roush had “a dual purpose” in his travels and was acting “in the course of [the restaurant’s] business.”
On appeal, the U.S. 8th Circuit Court of Appeals on Oct. 7 disagreed. In a 2-1 decision, the majority ruled there was no dual business purpose. It ruled that “picking up the bags was a matter of convenience, not necessity, for Brash Tygr and the Sonic Drive-In.”
In his dissent, Judge Kermit Bye said it was uncontroverted that Brash Tygr used such deposit bags and that the company did not have “a limitless supply.” Thus, at some point, an employee would have needed to “make a special trip to the bank for deposit bags if Tyler Roush had not brought them to his parents’ home.”
The court also ruled that Hudson had not been given an opportunity to contest coverage in the wake of the family’s admission that Tyler Roush had been acting in the course of business.
Scorecard: The insurance company did not have to cover any of the $5.8 million in settlement costs.
Takeaway: Accepting the deposit bags “was a ‘casual and incidental’ aspect of a purely personal trip that did not give that trip a dual business purpose under Missouri law,” according to the court’s majority opinion.
Insurer Must Pay for Explosion Costs
In 2009, A.H. Meyer’s plant in Winfred, S.D., exploded for the second time in five years. The cause was heptane, a highly volatile solvent manufactured by Citgo Petroleum Corp., which is used in the production of beeswax.
After the first explosion in 2004, A.H. Meyer redesigned the plant so that electrical switches were at least five feet away — the recommended distance — from the 150-gallon storage “kettle” of heptane at the factory. In the previous plant, the distance had only been four feet. The company also added a ventilation system, as recommended.
Nonetheless, an explosion occurred in 2009 when heptane spilled from the kettle and an employee pressed a switch to turn off a pump, according to court documents. Nationwide Insurance Co., which paid for the damage, filed a subrogation suit against Citgo, the manufacturer, and Barton Solvents, the supplier of the heptane.
It argued the companies were liable and negligent because the warnings were inadequate. A safety expert it hired said that the ventilation system meant to reduce risk was actually the reason for the explosion.
Nationwide also argued the companies had provided an express and implied warranty of the heptane.
Both the Circuit Court of the Third Judicial Lake County and the state Supreme Court disagreed, granting the defendants’ motion for summary judgment.
The South Dakota Supreme Court ruled that both the supplier and manufacturer “collectively warned that heptane was volatile and explosive,” and that A.H. Meyer complied with all safety recommendations.
“Ultimately, Nationwide’s inadequate warning claim is based on nothing more than the fact of the accident, speculation, and conjecture,” it ruled.
It also said that pointing out danger is not the same as a warranty, which implies a promise.
Scorecard: Nationwide’s attempt to subrogate the costs for repair were denied.
Takeaway: A safety warning is “an alert,” while a warranty is a “promise that the thing being sold is as represented,” the court ruled.
Buying in to Workers’ Comp
Private equity’s interest in the workers’ compensation industry isn’t going to diminish anytime soon, according to three P/E senior executives.
“I think you will continue to see significant activity in the workers’ compensation space,” said Hunter Philbrick, managing director of Hellman & Friedman, whose firm (along with Stone Point Capital) acquired Sedgwick Claims Management Services in 2010 and sold it to Kohlberg Kravis Roberts & Co. earlier this year.
P/E firms get a bad reputation for ripping apart companies, he said. “That’s a very small minority and not really true of any of our firms up here.”
Philbrick was joined on the panel by Jeffrey McKibben, managing principal of Odyssey Investment Partners, which acquired majority interest in York Risk Services in 2010, and acquired and later sold One Call Care Management; and Camilo Horvilleur, principal of H.I.G. Capital, which acquired PMSI Group in 2008, selling it in October 2013, after which it merged with Progressive Medical and became Helios.
Moderating the “Private Equity’s Major Deals and Their Impact on Workers’ Compensation” panel, presented at the 2014 National Workers’ Compensation and Disability Management Conference & Expo in Las Vegas, was Joseph Paduda, principal of Health Strategy Associates.
McKibben said his firm looks for companies that “add value for their clients” and whose leaders are team oriented and flexible.
“We push, we pull and add resources and jet fuel … so they can do more,” he said.
“Chemistry,” said Horvilleur, “is very, very important. … If you don’t like us, run for the hills because you are going to be stuck with us for years.”
That’s not to say, he said, that private equity firms come in to micromanage their portfolio companies. “Most of our investment in workers’ comp, we had a great team that we backed early on,” noting that his firm focuses on small entrepreneurial companies.
What H.I.G. Capital does is help visualize what it can do to help the company grow and help support the management team, he said.
There must be clarity of purpose and alignment between the company and P/E firm on the vision for the future, Philbrick said.
“Our goal is to make our companies more critical, more tied in and better for their own customers,” he said. “I think at the end of the day, it should be a net positive.”