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April 30, 2015  

 
 Q&A of the Week

Is Business Income Coverage Triggered If Dentist Abandons Practice after a Fire?

An Iowa subscriber recently asked the following question:

Our insured had total loss fir and is insured under a businessowners policy. The insured is a dentist and determined that as of this loss she would abandon this practice as she had other locations that were more productive.

Since there was a direct loss from a covered peril, but no period of restoration to speak of, will the insured recover any policy proceeds under business income coverage?


ANSWER: In order for business income coverage to be triggered, the insured must suffer an actual loss of business income due to the necessary suspension of operations during the period of restoration. If the dentist is not continuing the business at that location, and it is not going to be repaired or replaced, you are correct that there is no period of restoration, and there is also no loss of income due to suspension of operations, so there would be no business income coverage.

 
 Litigation Watch
Immediate and Complete Defense

Additional insureds sought summary judgment against the insurer on the issues of whether the insurer failed to provide an immediate and complete defense for the insureds. This case is Travelers Property Casualty Company of America v. Kaufman & Broad Monterey Bay, Inc., No. 5:13-cv-047545-EJD, 2015 WL 581528 (N.D. Cal. Feb. 11, 2015).

The insurer issued nine commercial general liability policies to Norcraft Companies and the insurer agreed to defend Norcraft or an additional insured against lawsuits for bodily injury or property damage. Kaufman & Broad Monterey hired Norcraft as a subcontractor to perform cabinet work for a residential project. Kaufman & Broad Monterey were named as additional insureds on the Norcraft policy.

After the project was completed, homeowners in the development filed a lawsuit against Kaufman & Broad Monterey, alleging strict product liability and tort causes of action. Kaufman & Broad Monterey demanded a defense from Travelers as additional insureds under the Norcraft policies. The insurer assigned the defense to a law firm that the additional insureds opposed so the insurer commenced this action alleging that the additional insureds' refusal of appointed counsel was a material breach of the insurance contract. Kaufman & Broad Monterey filed a counterclaim, alleging that Travelers did not intend to provide an immediate and complete defense.

The United States District Court for the Northern District of California noted that the parties all agreed that the insurer had a duty to defend the additional insureds. The issue then for the court was whether Travelers breached that duty for failing to provide an immediate and complete defense.

The court said that the duty of providing an immediate defense arises on tender of defense and lasts until the underlying lawsuit in concluded or until it has been shown that there is no potential for coverage. In this instance, the court found that the duty to defend the additional insureds did not arise until Travelers was provided with all of the information necessary to determine the existence of coverage. The insurer did not have a copy of the subcontract between Norcraft and Kaufman & Broad Monterey, so Travelers could not confirm that Kaufman & Broad Monterey were named as additional insureds on the Norcraft policies. When the insurer finally received a copy of the contract, it was several months after the underlying lawsuit was filed. Travelers accepted the tender of defense about one week after receiving the copy of the contract, so the court denied the motion on the issue of failing to provide an immediate defense.

As to the claim of failing to provide a complete defense, the court noted that Kaufman & Broad Monterey alleged that Travelers included extensive limitations upon its duty to defend in its reservation of rights letter. However, the court said, the motion for summary judgment against Travelers did not explain how the provisions in the reservation of rights letter violated the duty to provide a complete defense.

Kaufman & Broad also alleged that Travelers entered into a secretly negotiated settlement agreement that excluded Kaufman & Broad Monterey, and this exclusion meant the insurer failed to provide a complete defense. The court ruled that an insurer may settle a claim without informing the insured or even over an insured's objection, in accordance with the policy provisions. In this instance, the insurer settled only the claims that arose out of the work of Norcraft and this did not make the settlement improper. Travelers fulfilled its contractual duty to defend. The motion for summary judgment against the insurer on the issue of providing a complete defense was denied.

Editor's Note: The U.S. District Court rules that the insurer did not breach its duty of providing an immediate and complete defense as alleged by the additional insureds. The insurer merely followed proper procedure in accordance with the policy provisions and it fulfilled its contractual duty to defend. The fact that the additional insureds did not approve of the insurer's actions did not alter that point.
 
   
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