Cussing Out Employee leads to lawsuit
If threats to wash out your mouth with soap didn't do it as a child, perhaps a lawsuit from the Occupational Safety and Health Administration will prevent further cussing. OSHA recently filed a lawsuit in federal district court against Duane Thomas, owner of Duane Thomas Marine Construction, for terminating an employee who reported "workplace violence."
The violence consisted of the owner's actions as he "behaved abusively, made inappropriate sexual comments and advances, yelled, screamed, and made physically threatening gestures, in addition to withholding the employee's paycheck," according to OSHA.
The employee filed a whistleblower complaint with the federal agency after she was fired.
"Employees have a right to raise workplace violence concerns without fear of retaliation," said Teresa Harrison, OSHA's acting regional administrator in Atlanta, in announcing the lawsuit.
"This atmosphere," wrote Howard Mavity, an attorney with Fisher & Phillips, "may or may not have presented a valid safety hazard, but guess what? Under the law, the violation is the act of terminating the employee for complaining about a safety hazard. The concern does not have to be valid!"
Scorecard: The lawsuit seeks back wages, interest and compensatory and punitive damages in addition to front pay in lieu of reinstatement.
Takeaway: In addition to training supervisors to behave professionally, organizations need to realize that they can be found liable for taking action against a whistleblower, even if that person's allegations are false.
Spotlighting Murky Reinsurance Deals
The Consumer Financial Protection Bureau recently issued $15.4 million in fines to four mortgage insurers over alleged "improper kickbacks" paid to lenders for more than 10 years.
The accusations involve claims that Genworth Mortgage Insurance Corp., United Guaranty Corp., Radian Guaranty Inc. and Mortgage Guaranty Insurance Corp. paid millions to lenders that referred business to them by "purchasing captive reinsurance that was essentially worthless but was designed to make a profit for the lenders," according to the CFPB.
"In exchange for kickbacks, these mortgage insurers received lucrative business referrals from lenders," the bureau said.
In agreeing to pay more than $15 million in penalties, the insurers neither admitted nor denied the allegations. The settlement requires them to end the reinsurance practice going forward and prohibits them from entering any new captive insurance arrangements with mortgage lenders for 10 years.
Scorecard: The four mortgage insurers paid $15.4 million in penalties to the Consumer Financial Protection Bureau.
Takeaway: The action is an indication that federal agencies are increasing their oversight of reinsurance arrangements, as well as other insurance industry practices.
Travelers alleges negligent audit
Travelers Casualty and Surety Co. of America sued PricewaterhouseCoopers for failing to uncover an embezzlement scheme by one of its insureds, according to a lawsuit filed in the Superior Court of New Jersey.
Travelers is the fidelity insurer of Alfa Wasserman Inc., a corporation that employed Terrance Armstrong as its accounts payable manager. Between May 2007 and September 2011, Armstrong embezzled $879,580 from the company, according to the lawsuit. The scheme involved Armstrong's use of the company's American Express cards, which he used to obtain cash and to pay for personal travel and purchases, according to the lawsuit. He was the only person in the company with online access to the AMEX accounts and was permitted to sign and mail checks without review or back-up documentation.
Travelers accused PwC of professional negligence and breach of contract for not issuing any concerns or identifying any internal controls weaknesses when it audited the company for year-end financial statements in 2007 through 2010. Its failure to uncover such vulnerabilities "made Alfa susceptible to theft and/or other illegal activities which could materially affect its financial statement accounts," according to the lawsuit.
Scorecard:Travelers is seeking reimbursement of the covered loss of nearly $880,000, together with interest, expenses and legal costs.
Takeaway: Insurers may want to do their own oversight of insureds as audits and management letters may not reveal internal controls weaknesses and deficiencies.
Court denies indemnity request
The New York Court of Appeals rejected a request by Starwood Hotel & Resorts Worldwide Inc. to reverse a decision that denied it coverage from Executive Risk Indemnity, a Chubb Corp. affiliate.
The case dates back to 2005, to a contract between Starwood and Castillo Grand, LLC for construction and management of a luxury hotel in Fort Lauderdale, Fla. In October of that year, Castillo wrote to Starwood demanding $18.3 million in damages, complaining that Starwood "had caused delays and cost overruns by failing to meet its responsibilities in implementing the hotel's design."
At the time, Starwood had an Executive Risk professional liability policy that ran from April 10, 2005 to June 10, 2006. A subsequent policy ran from June 10, 2006 to June 10, 2007.
Starwood did not notify Executive Risk of the issue until Castillo brought a lawsuit against it in federal court on July 21, 2006. Executive Risk denied coverage, citing the policy provision that required the reporting of claims during the policy period and another that required claims be reported as soon as practicable.
Starwood argued Castillo's 2005 demand letter was not a claim, and the state's lower court agreed. The court also ruled that the 2006 litigation was properly reported during the 2006 coverage period and ordered Executive Risk to defend and indemnify Starwood.
The New York Court of Appeals reversed that decision, and the state's high court upheld that ruling in April. The appeals court found that Starwood's design work was not a professional service as defined in the 2005 policy, so no claim was made under that policy.
While those services were included as part of the definition in the 2006 policy, the insurer did not have to cover the claim, because the 2006 policy had a "prior pending" exclusion, meaning no coverage was available for claims based upon incidents prior to the 2006 policy inception date.
Scorecard: Executive Risk did not have to provide a defense or indemnify Starwood in the lawsuit that sought $18.3 million in damages.
Takeaway: The ruling affirms that insurance contracts should not be read so that some provisions are rendered meaningless.
N.D. Court Changes CGL Precedent
The North Dakota Supreme Court ruled that faulty work by a construction company may be covered by a commercial general liability policy.
The decision was a reversal of the court's own previous opinion on the definition of an "occurrence."
"This [previous] focus on the nature of property damaged to define whether there has been an 'occurrence' has been criticized by courts and commentators," wrote Justice Mary Muehlen Maring in the April 5 opinion. "We conclude that faulty workmanship may constitute an 'occurrence' if the faulty work was 'unexpected' and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended or expected."
In this case, K&L Homes Inc. was appealing a lower court's summary judgment declaring no coverage existed under K&L's commercial general liability policy with American Family Mutual Insurance Co.
K&L was seeking indemnification for about $250,000, after a jury found the company breached their contract or implied warranty with a homeowner, who alleged their house suffered damage because of shoddy workmanship. That work had been done by a subcontractor hired by K&L, who was provided a defense in that action by American Family. However, after the adverse judgment, the insurer denied coverage under the CGL policy for the damages.
The case was sent back to a lower court to determine whether the faulty work and resulting property damage "was unexpected and unintended," as well as to consider whether other policy exclusions may apply.
Scorecard: K&L Homes is seeking payment of about $250,000 in damages under its commercial general liability policy with American Family Mutual Insurance Co.
Takeaway: Experts say insurers are unlikely to change their definition of "occurrence" in response to this decision, which has been litigated in many states for more than a decade.
Compiled by Anne Freedman. Please feel free to send tips about legal decisions that impact the insurance industry to firstname.lastname@example.org.
June 1, 2013
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