Louisiana Insurance Law Newsletter – October 2019

 In Insurance

Written by Richard Petre

This newsletter highlights several interesting out-of-state decisions—an excess insurer seeking allocation between covered and non-covered claims, a telephone voice-mail reservation of rights, and the question of whether in Texas applying the “eight-corners” test depends on the policy’s wording. And we do have a Louisiana decision that discusses how the bad-faith penalty under La. R.S. 22:1973 is calculated.
Finally, one more plug for the fourth edition of our Louisiana Liability & Property Insurance Coverage Law: A Handbook for the Busy Practitioner, which is available for purchase through Claitor’s Publishing in Baton Rouge.

Damages – Bad Faith On a hurricane claim, the trial court found the Louisiana Citizens Property Insurance Corporation was arbitrary and capricious for failing to make payment because of a rain exclusion in a homeowners’ policy. The exclusion contained an exception for loss when “the direct force of wind or hail damages the building causing an opening in a roof or wall and the rain . . . enters through this opening.” The trial court awarded the plaintiff $26,406 in property damage ($40,414 minus a hurricane deductible of $14,008), $52,812 in penalties under La. R.S. 22:1973 (two times the $26,406 amount owed under the policy), and attorneys’ fees of $19,804 under La. R.S. 22:1892. For breach of an insurer duty under R.S. 22:1973, subsection (C) states that “the claimant may be awarded penalties assessed against the insurer in an amount not to exceed two times the damages sustained or five thousand dollars, whichever is greater.”

The Louisiana Fourth Circuit Court of Appeal finds that the trial court incorrectly determined the penalty under R.S. 22:1973 by doubling the amount still owed under the policy. Under the 1973 statute, the amount that should be doubled is the amount in damages actually caused by breach of the insurer duty. As a result, the Fourth Circuit, after finding that the plaintiff was entitled to $12,500 in general damages caused by the insurer’s arbitrary failure to make payment, holds that the plaintiff was entitled to a penalty of twice that amount, or $25,000.

The court did not discuss the option of a 50 percent penalty under La. R.S. 22:1892, though a 50 percent penalty on the $26,406 amount arbitrarily not paid under the policy would have been $13,203, which was less than the $25,000 penalty awarded under R.S. 22:1973. Dedenhefer v. Louisiana Citizens Property Insurance Corporation, 13-0977 (9/25/19).

Damages – Loss of Enjoyment of Life In a case where the plaintiff had a lumbar fusion and a cervical fusion was recommended, where the jury awarded $1,149,509 in total damages, but where the plaintiff’s credibility was seriously challenged because of false denials of prior back and neck treatment, the Louisiana Second Circuit Court of Appeal finds the jury did not abuse its discretion in failing to award the plaintiff any amount for loss of enjoyment of life. Perry v. Starr Indemnity & Liability Company, 52,720 (9/25/19).

Insurer Subrogation – “Made Whole” Doctrine Plaintiff was involved in a car accident and had health coverage through the State of Louisiana Office of Group Benefits (“OGB”) under its HMO plan. OGB paid $32,252 in plaintiff’s medical expenses. Plaintiff received $155,000 in insurance proceeds because of the accident, but refused to reimburse the OGB the medical expenses paid because of the “Make Whole” doctrine. Under that doctrine, in the absence of a contrary agreement, an insurance company cannot enforce its subrogation rights until the insured has been fully compensated for her injuries or “made whole.”  The personal injury lawyers in Tampa can help with the legal aid that one needs.

But here, the subrogation section in the OGB HMO plan stated in pertinent part:

Under these subrogation and reimbursement rights, the Office of Group Benefits has a right to first recovery to the extent of any judgment, settlement, or any payment made to the covered Employee, his Dependents or other Covered Persons. These rights apply regardless of whether such recovery is designated as payment for, but not limited to, pain and suffering, medical benefits, or other specified damages, even if he is not made whole (i.e., fully compensated for his injuries). (Emphasis added.)

The Louisiana First Circuit Court of Appeal finds that, because of the subrogation provision in the HMO plan, the “Make Whole” doctrine did not apply. Though noting a 2003 directive by the Louisiana Commissioner of Insurance stating in effect that the “Make Whole” doctrine is Louisiana public policy, the First Circuit notes that “the Louisiana Supreme Court has recognized that health and accident insurers can readily protect themselves by stipulating reimbursement rights or conventional subrogation in their policy contracts.” Bayham v. State of Louisiana through the Office of Group Benefits, C628132 (8/29/19).

Allocation Between Covered and Non-Covered Claims In a Minnesota case, New Horizons, a childcare facility, was sued for physical and sexual assaults on a three-year-old by a nine-year-old at the facility. Travelers, the primary insurer, provided $3,000,000 in coverage and provided a defense to New Horizons. RSUI, the excess insurer, provided $8,000,000 in coverage, but the RSUI policy contained a sexual-abuse or molestation exclusion. At trial, the insured conceded liability, and the jury awarded plaintiff $6,032,585 in damages. However, the jury was not asked to find whether there was physical abuse or sexual abuse, or to allocate damages between physical abuse and sexual abuse. Approach the Yaffa Family Law Group to handle your cases who have the best lawyers to solve your problem.

After trial, Travelers paid its $3,000,000 policy limit; and New Horizons paid the remaining $3,224,888 in damages and demanded indemnity from RSUI. Contending that its policy’s sexual-abuse exclusion barred coverage, RSUI filed a declaratory judgment on coverage. The trial court granted summary judgment to New Horizons on coverage, finding RSUI could not prove any part of the unallocated award was caused by sexual assault and thus could not prove the sexual-assault exclusion applied.

Reversing the district court, the United States Eighth Circuit Court of Appeals finds excess insurer RSUI had the right to show that the damages in part were caused in part by a sexual assault and, if so, to then have the court make an allocation of damages between the covered physical assaults and the non-covered sexual assaults. RSUI Indemnity Company v. New Horizons Kids Quest, 17-3567 (8/12/19).

Reservation of Rights – Telephone? On March 22, plaintiff filed suit. On April 24, the attorney hired by the liability insurer, ACCC, filed an answer for the insured, and ACCC filed a declaratory-judgment action on whether it had a duty to defend the insured and whether its policy covered the insured. And on April 19—19 days before the answer was filed—ACCC left a voice-mail message on the insured’s voice-mail with reference to “a previous reservation of rights issued on the file.”

Opposing ACCC’s motion for summary judgment, the insured argued that ACCC was estopped from contesting coverage because, before assuming his defense, ACCC failed to unambiguously advise the insured that it was providing a defense under a reservation of rights. In this case, a Georgia appeals court agrees with the trial court’s denial of the insurer’s summary‑judgment motion, finding that there was a genuine issue of material fact as to whether the insurer had issued an effective reservation of rights (and whether the insurer had earlier notice of policy defenses later raised). ACCC Insurance Company of Georgia v. Walker, A19A0804 (9/5/19).

Duty to Defend – Texas – Extrinsic Evidence In a tragic accident in Texas, a child, while under the temporary care of his grandparents, was killed in an all-terrain vehicle accident. The child’s mother sued the grandparents for negligent supervision. The grandparents sought a defense from their homeowners’ insurer, State Farm Lloyds. The homeowners’ policy required the insurer to provide a defense “[i]f a claim is made or a suit is brought against an insured for damages because of bodily injury . . . to which this coverage applies, caused by an occurrence.”

State Farm contested coverage under two exclusions. First, there was a motor-vehicle exclusion, with the policy definition of “motor vehicle” expressly including all-terrain vehicles used “while off an insured location.” Second, there was an “insured exclusion,” excluding coverage for bodily injury to any insured, with the policy defining “insured” to include household residents under 21 in the care of a named insured. 
Under the traditional eight-corners test that looks only to the factual allegations in the pleading to determine whether a defense is owed, State Farm provided a defense under a reservation of rights, but then filed a motion for summary judgment that it never owed a defense to the grandparents because of extrinsic evidence showing that the accident occurred off an insured location and that the grandparents had responsibility for care of the child. 

Relying on the extrinsic evidence, a federal district court granted State Farm’s motion for summary judgment, ruling the insurer had no duty to defend and to indemnify the grandparents. Finding based on extrinsic evidence the eight-corners test here did not apply and the insurer had no duty to defend, the district court relied heavily on the absence of wording in the State Farm policy that the insurer would defend all actions, even if the suit allegations were groundless, false, or fraudulent.

On appeal, the United States Fifth Circuit Court of Appeals certified to the Texas Supreme Court the question of whether an insurer, with a policy with the duty-to-defend wording in the State Farm policy, has a duty to defend if extrinsic evidence shows there was no coverage.
Certainly, an insurer, after initially providing a defense under an effective reservation of rights, can always file a motion for summary judgment based on extrinsic evidence that the policy does not provide coverage and hence the insurer no longer owes a defense, even when a defense is initially owed under the eight-corners test. State Farm Lloyds v. Richards, 2019 WL 4267354 (9/9/19).

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