Steve Rosenberg and I were talking the other day about how, among the millions of blogs in the blogosphere, only a few are dedicated to discussing insurance coverage law. This surprises me a little, because I know a lot of lawyers read this blog and because a number of lawyers have asked me about starting a coverage blog. Generally, their interest decreases when I tell them it takes up to two hours a day of unbillable time, that it is really hard work and that I don’t view a blog as a great means of communicating with a firm’s clients.
I tend to view blogging not as another means of distribution of the same information I already disseminate, but as a new form of communication in which the medium becomes part of the substantive product. It’s a good way of meeting new people, learning new information and sharing it with others, and having fun. Despite the hours it takes, blogging is highly idiosyncratic and brings a freedom you may not find in the daily routine of your practice. Give it some thought.
All this is long-winded introduction to ReRisk, a reinsurance blog written by Jolyon Patten, a lawyer in London. Because he is from the UK and I am from NoDak, I can understand only about four-fifths of what he says, but I fill in the 20 percent with my best guess on a translation into NoDak-speak. I enjoy reading his blog and I encourage you to check it out.
I’m having a hard time buying the court’s opinion in Stansley Group v. Fru-Con Construction Corp., 2006 WL 2711795 (N.D. Ohio September 21, 2006)(click here for a pdf of the case). Stansley poured some apparently defective concrete in construction of two bridge pylons, although the concrete it poured for 11 other pylons met pressure standards of 10,000 pounds per square inch. Stansley was sued by the general contractor, and the issue in the case was whether Stansley’s insurer owed a duty to defend and indemnify.
The court acknowledged that defective work does not constitute an "occurrence" under a Commercial General Liability policy, and that only damage to other work or property could constitute covered property damage. Then the court went in a direction I did not anticipate. Now, to finish out this discussion let’s remember that in the construction business wet concrete is called "mud." It will be more fun and make us feel like construction insiders if, for the rest of this post, we call the concrete "mud." Let’s also remember that many courts will find that if other property has to be destroyed to tear out defective work, the damage to the non-defective work is covered.
Strangely, to my way of thinking, the court said an issue of fact precluded summary judgment for the insurer. It was unclear, the court said, if all the mud poured for the two pylons was bad mud, or if some good mud was mixed in with the bad. If some good mud was in the pylons, the court said, destruction of the defective pylons resulted in damage to non-defective property. I am not agreeing with this. If I give you a beverage that is 98 percent coffee and 2 percent poison, I am not giving you a drink that is mostly good coffee and a little bad coffee, I am giving you poison. If I pour some loads of good mud and some loads of bad mud in a pylon, I am not giving you partly a good product and partly a defective product, I am giving you one whole product that is no good. To my mind, the whole pylon is uncovered defective work.
UPDATE: We’re not afraid of dissenting opinions at this blog. Here is another point of view on Stansley, which focuses on different things about the case, but calls the analysis "great."
I got in late last night from an out-of-town hearing and have some work from yesterday that needs to get done in the next couple hours, so I’ll be posting later this morning after I’ve taken care of it.
I love this story. Two sisters who worked for a firm hired to help State Farm with adjuster services for Katrina claims later switched teams and went to work as consultants for plaintiff lawyer Dickie Scruggs. I blogged about this earlier here. Now they are getting sued by their former employer for violating the Alabama Trade Secrets Act and divulging confidential information. I haven’t seen the complaint yet, but I bet the sisters had to sign confidentiality agreements when they went to work for the vendor. A trade secret is really just something that derives independent economic value from not being generally known, and is subject to reasonable efforts to prevent its disclosure. Sounds to me like the vendor may have a point. It’s hard to picture how taking documents from your employer and giving them to the other side squares with a duty of confidentiality.
When I was a kid in NoDak, I stayed away from the tall grass whenever I could because, like Paul Newman in Butch Cassidy and the Sundance Kid, I hate snakes, and they seemed to have an affinity for making the stuff their abode. These days, I look at political ideology the same way I looked at the tall grass, and I try to steer clear of it on this blog, at least in its most egregious and irrational forms. Some people like snakes (like this fairly odd guy I saw at Home Depot a while back wearing some kind of big snake for a scarf) and some people infuse politics into everything they talk about, but it’s not for me or this blog. Insurance coverage analysis, in my view, is the antithesis of politics.
But this column about flood insurance seems like a pretty mild form of politics, asks the interesting question of whether the rich are being led into temptation by flood insurance, and had enough facts to get me to read to the end. A lot of the points seem valid.
Stories like this one are fun to read for the quotes. Although you don’t learn a darn thing, and you feel like you actually know less than before you started to read, there is a certain reality-show, Weekly World News appeal to a story that doesn’t pretend to be anything but a total waste of time.
This, in essence, is the question Steve Rosenberg asks in this post. I have never come across any convincing rationale for third-party bad faith, and to me, intellectually it ranks with pseudo, false or failed doctrines like suing an insurance company for negligent claims handling when you weren’t covered in the first place.
I was dumbstruck by this story, which to my utter surprise gave a very good explanation of insurance pricing and how, if insurers are denied the ability to set rates at the level of perceived risk, they may not only refrain from selling to the riskiest customers, but pull out of that market altogether. I wish the story had a byline so I knew whom to congratulate.
I am amazed by this story because the usual format for insurance stories is for the lead to contain some quotes by outraged homeowners about how high their premiums are. How and why this happens, including any mention that the homeowner may be living in a $1.1 million house 200 feet from the ocean, is mostly left as big a mystery to the reader as it apparently is to the writer.
Now, my views on this do not mean I am against necessarily against all sensationalism in journalism, which has its place, such as in the thousands of crime stories I wrote about serial killers, street gangs, narcotics vendors, unidentified dead bodies found in the desert, and so forth. But even with those stories, I offered context whenever possible, along with an explanation, if there was one, of what kind of people do these things and why. Too many writers fail to admit to themselves that their stories about politics and insurance are nothing more than sensationalism with a clean shirt and a new pair of shoes.
You know the answer to the question above, and so does every court in this country. And yet in a few cases we can still see a court fail to void a policy, even though the applications contained obvious falsehoods designed to produce a lower premium or qualify for insurance in the first place. A small minority of courts occasionally find that, because the loss caused by the insured would have produced the same payment from the insurer regardless of whether the insured told the truth or not, the misrepresentation was not material.
Most states have statutes, however, that define a misrepresentation as material if it affects the risk, not if it affects the payment of indemnity. Most courts interpret "risk" in its true sense, including the fact that the insurer would have charged higher premiums had it known the truth. An illustration is Commercial Union Insurance Co. v. Dean Pesante, 2006 WL 2276951 (1st Cir. August 9, 2006). A Rhode Island fisherman, Pesante, apparently falsely claimed on his policy application that his boat was used for lobstering, when it really was used for gill-net fishing, a more risky proposition. While returning from gill-net fishing, he collided with another boat, some people on board were injured, and sued. In the insurer’s later declaratory action on coverage issues, the district court denied the insurer’s summary judgment motion because Pesante was not engaged in gill-fishing at the time. The court reasoned that his breach of warranty therefore was immaterial at the time of the loss.
The First Circuit reversed, granted summary judgment for the insurer and rescinded the policy. The court pointed out that whether the breach of warranty caused the accident was not the issue. Because the policy contained a misrepresentation material to the risk, it was voidable from the beginning, before the accident happened. That’s the result you’ll see most of the time.
UPDATE: Thanks to a reader for pointing out a typo in the last sentence of the second paragraph. The sentence originally said the breach of warranty was material, not immaterial as it should be, which completely changes the meaning of the sentence. Things like that are why you will almost always see a newspaper say someone was found "innocent," when the technically accurate term is "not guilty." Too many papers have gotten sued when someone was in a hurry and forgot to put the "not" before "guilty."
Walter Olson points to a story about a county’s request that a frequent protester name the county as an additional named insured on her homeowners policy. I’m not so sure the insurer would go for that, but if people can find a company that will insure them against the possibility of giving birth to Jesus Christ, some company out there must be willing to write a separate policy for protest liability.