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June 4, 2015  

 
 Q&A of the Week

Denial Due to Lack of Maintenance

A Florida subscriber recently asked the following question:

An insured has an old heating system in need of repair. Each year he travels to Florida for a month. He leaves the heat on but does not drain the water lines. While absent the furnace goes off and the pipes burst, and when he comes back there is extensive water damage to the floors and other property.

We realize the pipes themselves are not covered, but what about the other damages that resulted because of his neglect in maintaining the heating system? Is the insurer justified in denying the entire claim because of neglect?


ANSWER: It really depends on how bad the heating system was and when the insured was informed that it needed repair. If a heating professional told him it needed repair immediately or very soon, then all damages would be excluded. If the heating professional had said it needed repair but should last another season or two before repairs became absolutely necessary, then the insured could be given the benefit of the doubt and damages could be covered.

 
 Litigation Watch
Equitable Subrogation Discussion

One insurer sued another insurer seeking a declaratory judgment that that other insurer was obligated to defend and indemnify the insured and that its failure to do so resulted in a breach of contract. This case is Nova Cas. Co. v. OneBeacon America Ins. Co., No. 13-15799, 2015 WL 1189196 (11th Cir. March 17, 2015).

The facts of the case are not disputed by the parties. Silverhunt Associates leased Florida property to New York Community Bancorp (NYCB). The lease required NYCB to maintain liability insurance of at least $1 million per occurrence on the premises and to list Silverhunt as an additional insured. OneBeacon issued such a policy to NYCB. Nova insured Silverhunt under a separate general liability policy, providing $1 million per occurrence primary limits and $4 million excess limits.

During an armed robbery, McQuade was shot and paralyzed. McQuade sued both NYCB and Silverhunt. Nova stepped in to defend Silverhunt and asked OneBeacon to defend and indemnify Silverhunt pursuant to the additional insured clause of the NYCB policy. OneBeacon declined coverage based on its belief that under the circumstances of the claim, it was not required to defend Silverhunt.

Nova settled with McQuade for $1.5 million based on his lawsuit against Silverhunt. After this, OneBeacon settled with McQuade based on his lawsuit against NYCB for an undisclosed amount that was actually in excess of its primary limits. Accordingly, the primary limits of the OneBeacon policy were exhausted.

Nova then filed this lawsuit against OneBeacon seeking a declaratory judgment that OneBeacon had a duty to defend and indemnify Silverhunt. Nova also claimed a right to equitable subrogation, based on its settlement with McQuade. The district court ruled in favor of Nova, but concluded that OneBeacon policy's limits were exhausted with its payment to McQuade, and so, Nova was not entitled to any damages from OneBeacon. Nova appealed.

The United States Court of Appeals, Eleventh Circuit, started off its ruling with a discussion of equitable subrogation. The court said equitable subrogation is an equitable remedy rooted in the legal consequence of the actions and relationship between the parties. The rationale underlying this doctrine is to prevent unjust enrichment by assuring that the person who in equity and good conscience is responsible for the debt is ultimately answerable for its discharge. In the insurance context, equitable subrogation ensures that the primary insurer is held responsible to the excess insurer for improper failure to settle. The court then went on to note that, under equitable subrogation, the issue is what, if anything, Nova can recover from OneBeacon when OneBeacon exhausted its policy limits for one insured (NYCB) after refusing to defend and settle on the additional insured's (Silverhunt) behalf.

The court said that if an insurer has more than one insured, it owes a duty to act in good faith toward all of the insureds. Under Florida law, the court noted that an insurer may exhaust policy limits by settling with one insured even if doing so leaves the other insured exposed, as long as the negotiations are conducted in good faith. In this instance, however, the court found that OneBeacon utterly ignored Silverhunt and thus did not protect both of its insureds. The insurer simply refused to comply with its contract to provide a defense on behalf of both its insureds.

The court found that in this instance, OneBeacon was Silverhunt's primary insurer in accordance with the additional insured clause, while Nova was the excess insurer. OneBeacon's primary coverage attached immediately upon the happening of an event triggering liability, whereas Nova's excess coverage attached only after a predetermined amount of primary coverage was exhausted. Furthermore, as the primary insurer, OneBeacon was responsible for Silverhunt's settlement with McQuade, up to the limits of its $1 million policy. Nova's coverage was not activated until after the first $1 million was paid by OneBeacon.

The court was not persuaded by OneBeacon's argument that it cannot be held liable for the Nova settlement because it had already expended its policy limits when it settled McQuade's lawsuit against NYCB. The court said that Nova's damages against OneBeacon are measured from the date that OneBeacon refused to defend Silverhunt, and Nova, forced to undertake the obligations of the primary insurer, settled the case for $1.5 million. When Nova settled the case with McQuade, OneBeacon's $1 million policy was intact and available. So, even though OneBeacon subsequently exhausted its primary limits, the breach and damages are measured at a point in time before that money was spent. OneBeacon was not allowed to evade its liability by complaining that it exhausted its primary limits.

The court ruled that OneBeacon chose its course of action with full knowledge that Silverhunt was looking to OneBeacon for coverage. OneBeacon's refusal to defend Silverhunt based on its erroneous belief that Silverhunt was not covered under its policy was at its own peril. Thus, the burden of funding $1 million of the Silverhunt settlement falls squarely on OneBeacon's shoulders. The decision of the district court was reversed and remanded for further proceedings consistent with this opinion.

Editor's Note: The U.S. Court of Appeals, Eleventh Circuit, discusses equitable subrogation and finds that primary insurer does bear the burden of funding a settlement that the excess insurer paid.
 
   
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