Mini-MDL approved to consolidate business interruption cases against one regional insurer

 

Last week, the U.S. Judicial Panel on Multidistrict Litigation agreed to at least one mini-MDL, consolidating the business interruption lawsuits filed against Society Insurance Co.  At the same time, it decided against consolidation of cases against several other insurers, saying it would be inefficient.

In August the MDL panel ruled against centralizing all COVID-19 business interruption lawsuits because of differences between policies and unique facts of certain policyholders.  However, the panel requested additional briefing on mini-MDLs against five insurers. Those five (Lloyds, Cincinnati, Hartford, Society Insurance, and Travelers) insurers accounted for approximately 275 cases (approximately 1/3 of cases filed). 

In approving the mini-MDL against Society Insurance Company, the MDL court stated consolidation “will serve the convenience of the parties and witnesses and further the just and efficient conduct of this litigation.”  Unlike the other insurance carrier defendants, the panel noted that Society is a regional insurer only operating in six states (Minnesota, Iowa, Illinois, Indiana, Wisconsin, and Tennessee).  These cases were transferred to the U.S. District Court for the North District of Illinois, in Chicago.

In a series of separate opinions, the MDL ruled against consolidating the cases against the other insurers involved.  Generally speaking, the insurance carriers argued that local courts were already familiar with state law (which governs most substantive insurance law issues), that various states and municipalities issued unique and differing civil authority issues, that a variety of policy forms were at issue, and that any question of damages would require individualized, fact-specific attention. 

Is the Owner-Manager of your Vendor your “Employee?”

Expansion of Coverage: North Carolina Crime Coverage Part:  Embezzlement

Is the Owner-Manager of your Vendor your “Employee?”

            On November 14, 2014, the Eastern District of North Carolina entered summary judgment in favor of an insured seeking coverage for embezzlement for actions by owners of a vendor. Colony Tire Corp. v. Fed. Ins. Co., No. 2:15 CV 27, 2016 WL 6683590 (Nov. 14, 2016 E.D.N.C.)

            The insured was seeking coverage under a claims-made policy for theft that occurred between 2002 to 2014.  The embezzlement losses were approximately $492,350.00.  The insurer denied coverage claiming that Colony, the insured, could not establish that the loss was caused by an “Employee” under the Policy.

            The money was stolen from Colony through its payroll and tax vendor, Employee-Services.Net (“ESN”).  Through the contract between ESN and Colony, ESN was allowed to withdraw funds from a designated bank account to pay Colony’s payroll and taxes.  Owners/Managers/Principals of ESN, James Staz and William Staz (collectively “the Stazes”) pled guilty to embezzling over $14 million from ESN’s many clients, including Colony.

            Essentially, the Stazes would withdraw money from Colony’s account, claiming that the money would be used to pay payroll taxes.  In reality, the taxes would go unpaid, and the money would fund the Stazes’ extravagant lifestyle, which included alcohol, strip clubs, jewelry, a luxury car, and a luxury home “with a lavish three-tiered pool, a cascading waterfall, wet bar, and dining area.”

            The critical issue for the court was whether the Stazes were “Employees” under the policy.  In the policy, the definition of Employees included “contractual independent contractor.”  In the definition, “contractual independent contractor” had to be a natural person.  Thus, from the outset, ESN, as a business entity, could not be a “contractual independent contractor.”  Further, to qualify as a contractual independent contractor, there had to be a written contract between Colony on one hand, and on the other hand either (a) the natural person or (b) an entity “acting on behalf of” the natural person.

            The written contract was between Colony and ESN.  The Stazes were not a part of the contract.  Thus, to qualify as “contractual independent contractors,” the court had to determine whether ESN was an entity “acting on behalf of” the Stazes pursuant to part (b) of the definition.

            The court interpreted the phrase “acting on behalf of” broadly due to its ambiguity.  Thus, not only did the phrase mean to act within the scope of a formal agency relationship, the Court also construed the phrase to mean actions in the general interest of or in the general benefit of the natural person.  Given this broad definition of “acting on behalf of,” the Court determined that ESN acted on behalf of the Stazes when it contracted with Colony.  Thus, the Stazes were Employees as defined by the policy.  Because they were Employees, there was coverage for the loss and directed the insurer to pay the loss.  The Court then directed the insured to prepare additional briefings on potential costs, attorney’s fees, and interest that it sought through its prayer for relief.    

            An important portion of the analysis, in our opinion, was the Court’s use of the Federal indictment for the Stazes.  Using the facts of the indictment, the Court concluded that ESN’s purpose was to facilitate the Stazes’ embezzlement scheme.  No one, other than the Stazes, benefited from ESN’s existence.  Further, the Court emphasized that ESN was a tool used by the Stazes for their criminal actions:  “the Stazes “through [ESN] defrauded ESN clients.” Id. at *5 (emphasis in original).  While not explicitly done in this case, such findings could support a veil piercing theory under North Carolina law, which would yield similar results through equitable means. 

            Given the results of this case, it would not be surprising to see a re-write of the “contractual independent contractor” provision in the future.  However, litigators could also distinguish this case on the basis of the facts.  The facts in the indictment supported showing that the Stazes used ESN for their exclusive, personal benefit.  One could potentially argue that similar facts, establishing this high-bar, close to a veil-piercing standard, would need to be found in order to meet the burden of “acting on behalf of” language.  This would be distinguished from actions by a "lone wolf" employee at a vendor who steals funds without benefiting the owners. 

Steps to effectively cancel an insurance policy

The North Carolina Court of Appeals recently released an unpublished opinion further illuminating how insurers can effectively cancel worker's compensation policies.  However, nothing in the case limits its application solely to workers' compensation (or assigned risk workers' compensation policies).  As a result, this case gives some guidance to insurers who wish to effectively cancel policies of all sorts of insurance for any valid reason (such as payment of premium).    

In McNeill v. McNeill, Travelers provided a worker's compensation policy to the employer.  Pursuant to the policy's terms and North Carolina statutory law, Travelers then requested certain information from the employer, including its IRS 1040 and Schedule C tax information.  After two months elapsed, and because the employer had not responded with any information, Travelers sent a cancellation letter to the address on the policy (certified mail, return receipt requested), giving notice that the policy would be cancelled in four weeks.  The certified mail indicated that the cancellation letter was delivered. 

During the case, the parties deposed Betty Hurst of the North Carolina Rate Bureau.  She testified that this was an assigned risk policy, and that Travelers' request for the employer's 1040 and Schedule C forms were "typical" and allowable under the North Carolina Workers' Compensation Assigned Risk Plan. 

The Court of Appeals explained that, under N.C.G.S. 58-36-105(a)(2), an insurer may cancel a worker's compensation policy if the insured commits an "act or omission . . . that constitutes material misrepresentation or nondisclosure of a material fact in obtaining the policy, continuing the policy, or presenting a claim under the policy."  To effect the cancellation, the insurer must follow the steps of N.C.G.S. 58-36-105(b). 

The Court then applied North Carolina Rule of Civil Procedure 4 (specifically, Rule 4(j2)(2) to the insurance cancellation statute, and concluded that the insurer sending a cancellation letter, via certified mail, to the employer's last known address (which was the same as the address appearing on the policy), and the letter being received, was sufficient under Rule 4 and N.C.G.S. 58-36-105 to effect a cancellation of the policy.   

Further, the Court stated that "it does not offend these principles [of administrative law or the law of the Industrial Commission] to hold that Travelers cancelled Defendant's workers' compensation policy for his failure to produce 1040 and Schedule C forms."

Because this opinion is an unpublished opinion of the Court of Appeals, reported pursuant to North Carolina Rule of Appellate Procedure 30(e), it is non-binding on future panels.  Specifically, "an unpublished decision of the North Carolina Court of Appeals does not constitute controlling legal authority."  However, citation is still allowed under Rule 30(e)(3) if there are no other published opinions on a material issue in a future case.  There is nothing in this opinion that should limit its application solely to workers' compensation cases.  Because the issue of effective cancellation of insurance policies frequently comes up, this case may prove important for practitioners in the future. 

Late notice to insurer costs Maryland bank millions

Insurance law generally imposes on a policyholder the duty to give timely notice of claims to its insurance company. Sometimes, because of forgetfulness, ignorance, neglect, or a number of other reasons, companies fail to immediately give notice of loss and potential losses to insurers. In those circumstances, insurers often raise the defense of “late notice.” As a result, a number of courts have devised a “notice prejudice rule” which limits the use of the late notice defense to situations when the delayed notice actually caused prejudice to the insurer.

In St. Paul Mercury Insurance Company v. American Bank Holdings, Inc., the Fourth Circuit, applying Maryland law, addressed the question of what qualifies as “prejudice.” In that case, American Bank Holdings, Inc., did not provide notice to its insurer until after a $98.5 million default judgment had been entered against it in the underlying claim. St. Paul raised the defense of late notice, argued that it was prejudiced, and denied coverage.

 Although the bank was eventually successful at overturning the $98.5 million default judgment, it still spent $1.8 million resisting collection on the judgment and having the judgment set aside. All of this was because the underlying complaint had been served on the bank’s CFO, who had left employment at the bank. Another officer later found the complaint and transmitted it to an outside lawyer, who claims he never received the complaint. This procedure was described by the district court as “a variety of screw-ups” such that “significant suit papers that should have gotten immediate attention didn’t.” Writing for a unanimous panel, Judge Niemeyer of the Fourth Circuit explained that “corporate screw-ups” are not a basis to excuse the failure to give timely notice to an insurer, if the corporation expects to be indemnified for the defense of the claim.

 “Actual prejudice” was shown in this case by the insurer, because the bank’s failure to give timely notice prevented the insurer from selected counsel, consulting with counsel on the defense of the claim, prevented the timely raising of a personal jurisdiction defense, and prevented the possibility of settlement discussions with the underlying plaintiff either prior to the entry of default judgment or prior to the expenditure of $1.8 million spent to resist and set aside the default judgment. These were all rights which the insurer has under the insurance contract, and all rights which it was not able to exercise because of the bank’s failure to give timely notice. As a result, actual prejudice was shown and St. Paul's declaratory judgment was granted on the basis that it had no duty to pay for American Bank's defense costs.

No Coverage, but Liability for Unfair or Deceptive Practices: The Question of Damages in North Carolina and a Current Case to Watch

There is a current case pending in the Western District of North Carolina that will likely add to North Carolina’s divergent case law regarding the measure of damages in an unfair and deceptive practices claims against insurers.

Background

Unlike other states, North Carolina recognizes liability for unfair and deceptive practices or bad faith even absent insurance coverage. “Thus, even if an insurance company rightly denies an insured's claim, and therefore does not breach its contract, as here, the insurance company nevertheless must employ good business practices which are neither unfair nor deceptive.” Nelson v. Hartford Underwriters Ins. Co., 177 N.C. App. 595, 609, 630 S.E.2d 221 (2006).

So, in cases where there is no insurance coverage, if an insurer is liable for bad faith or unfair and deceptive practices, one of the most important questions is: What are the Damages that get Trebled? On one hand, there is case law that supports that the full contract damages should be trebled. Cullen v. Valley Forge Life Ins. Co., 161 N.C. App. 570, 578-79, 589 S.E.2d 423, 430, (2003). On the other hand, there is case law that supports that only the damages that were proximately caused by the actual bad faith or unfair and deceptive trade practice. Gray v. North Carolina Ins. Underwriting Ass’n., 352 N.C. 61, 75, 529 S.E.2d 676, 685.

Current Case

For the purposes of the Motion to Dismiss, the Court assumed the facts in Plaintiff’s Complaint as true. Since Defendant has not yet answered, our discussion will also assume the veracity of Plaintiff’s facts in the Complaint.

In Biltmore Avenue Condominium Association Inc v. Hannover American Insurance Company, 1:15 CV 43 (W.D.N.C. Feb. 17, 2016), the Plaintiff was an owner of a medical office building who purchased commercial property insurance from Defendant. The policy was for $2,000,000.00, but there was a broadening endorsement that provided $500,000.00 for various potential losses. A fire occurred in the building on July 28, 2011. Plaintiff requested coverage for $2,500,000. After a series of communications, Defendant ultimately paid $2,000,000 in coverage, but denied the $500,000 under the broadening endorsement. Plaintiff wanted the additional $500,000 for reimbursement on the newly installed/upgraded sprinkler system.

Plaintiff filed a claim for breach of contract and violation of North Carolina’s Unfair and Deceptive Practices Act. For the breach of contract claim, the Court dismissed the claim pursuant to the three year statute of limitations. Because the statute of limitation for violation of North Carolina’s Unfair and Deceptive Practices Statute was four years, it was still a timely claim.

Defendant argued that because the alleged damage for the Unfair and Deceptive Practice ($500,000 endorsement value) was the same alleged for the Breach of Contract, there was actually no damages to Plaintiff for violation of N.C. Gen. Stat. § 75-1.1. Defendant argued that there must be independent damages, separate and apart from a breach of contract. Therefore, Plaintiff’s Unfair and Deceptive Trade Practice claim should be dismissed for failing to show a required element-- injury.

Resolution 

The District Court, in adopting the Magistrate’s Recommendation, dismissed the Breach of Contract claim and found that Plaintiff pled a claim for violation of North Carolina’s Unfair and Deceptive Practices Statute.

In reviewing the argument the Court emphasized that eventually, it or a factfinder will have to decide on the true measure of damages in this case. “If Plaintiff is able to prove such a claim [violation of N.C. Gen. Stat. § 75-1.1], its damages may be the same as what its contract damages would have been; and they may be different. But that inquiry is not before the Court on the present motion pursuant to Rule 12(b)(6).“ Id. 1:15 CV 43 (W.D.N.C. Feb. 2, 2016).

Defendant filed a Motion for Reconsideration, and the Court maintained its decision. “The Plaintiff’s Complaint states a claim for unfair and deceptive trade practices. If Plaintiff is able to prove such a claim, its damages may be the same as what its contract damages would have been; and they may be different. But, as stated in its prior Order, that inquiry is not before the Court on the present motion pursuant to Rule 12(b)(6). Accordingly, the Court will deny the Defendant’s motion for reconsideration and will grant Defendant’s motion for additional time to file its Answer.” Id. 1:15 CV 43 (W.D.N.C. Feb. 17, 2016).

Issues to Monitor

The District Court Judge correctly noted the current state of North Carolina’s law. In this situation, some cases allow for full contractual damages to be used and some cases recognize damages distinct from breach of contract damages. In this case, the Court twice has alluded that this inquiry will be one that will eventually be presented to the Court or fact finder.

Hopefully, this case will provide some guidance for future cases. Particularly, as it seems that the Defendant may have a viable “no causation” defense. It has suggested that Plaintiff was required to replace and upgrade the sprinkler system due to regulations and not due to any statement by Defendant.

It will be interesting if the Court provides some guidepost or insight on how to approach this issue in the future. Potential considerations could be: was the violation in the procurement of the policy as a whole? Was the violation in the adjustment after the claim occurred? Did the violation only result in a delayed award? In those cases, would interest be an appropriate measure?

New Section Created by the Govenor to Combat Employee Misclassification

On December 18, 2015, Governor McCrory issued Executive Order Number 83, which created a new section in the Industrial Commission to combat employee misclassification.  Employee misclassification is when employers classify employees as independent contractors to avoid liabilities and obligations required by state and federal law. 

The Order allows the Industrial Commission to employ inspectors and respond to complaints that employers may be misclassifying employees.  The Section will have liaisons from the Department of Revenue and the Employment Security Division.  In addition, the Commissioner of Labor and the Commissioner of Insurance have the opportunity to appoint liaisons to the section as well. 

While there is a need for an enforcement agency to respond to misclassification complaints, we hope that this joint-effort also creates an opportunity for North Carolina to take a thoughtful, coordinated approach to the new "gig" or "on-demand" economy model.   The gig economy is characterized by freelancers looking for short-term work or "gigs."  They are enabled by Uber, Lyft,  Airbnb, Etsy, and TaskRabbit.  The troubles of classifying these individuals have been reported on in several different  articles over the past year. 

Five Important Lessons on North Carolina Insurance Law from Recent Federal District Court Decision

A recent decision by United States District Court Judge Richard L. Voorhees in Charlotte, North Carolina, serves as a reminder of five rules followed by the North Carolina courts when determining an insurance company’s duty to defend. See New NGC, Inc. v. ACE American Insurance Co., et. al, 3:10-CV-00022-RLV-DSC, 2015 WL 2259172 (W.D.N.C. May 13, 2015) (“Memorandum and Order”).

In New NGC, the policyholder was one of the largest drywall manufacturers in the country. It became a defendant in a number of individual actions and class actions around the country, which all generally claimed that New NGC’s products were defective, causing both property damage within buildings where the drywall was installed, as well as bodily injury to individuals complaining of respiratory illness and allergy-like symptoms.

The first major takeaway from this opinion is, not only is the North Carolina Court of Appeals’ 1991 decision in West American Insurance Co., v. Tufco Flooring East, Inc., 409 S.E.2d 692 (N.C. App. 1991) of questionable precedential value, but the attempt by the policyholder to argue that the pollution does not apply when the pollution arises out of the policyholders’ central business activity only applies, if at all, if the court determines that the pollution exclusion is ambiguous. [Tufco] was unusual in that the court found that the exclusion was ambiguous because of the “interrelationship between the completed operations coverage and the pollution exclusion clause.” Id at 697.

Second, this case is important because it explains that an insurance company may not focus exclusively on the allegations of the putative class representative in evaluating its duty to defend. Focusing solely on the named Plaintiff would “completely ignore the general notice pleadings standard of the Federal Rules of Civil Procedure as well as the underlying purposes of class action.” Memorandum and Order at 23.

In our next post, we will address three additional points of insurance law, as explained by Judge Voorhees.