Printer Friendly



Appeal of New Hampshire Department of Health and Human Services 761 A.2d 431 2000 N.H. LEXIS 44 (New Hampshire Supreme Court, August 23, 2000)

In a decision much criticized by some in the insurance industry, the New Hampshire Supreme Court has affirmed a state Compensation Appeals Board decision finding a worker's "major depression" to be "compensable under the workers' compensation statutes because it was caused by employment-related stress arising from her supervisor's legitimate criticism of her work performance." 461 A-2D 432-33 2000 N.H. LEXIS 44 at *2.

Gail Sirvivis-Allen began working as a "Clerk I" with the State of New Hampshire in February 1978. She left state employment because of the depression and stress in August 1995 as a Case Technician II, a position she had held for nine years. The job duties included "taking applications for food stamps, Medicare, and disability, as well as verifying information and entering it into a computer," as well as contacting "clients and following up by letter." Id. at 432. Her job performance was checkered. "During her tenure," she often failed to adequately fulfill her assigned work responsibilities. In 1989, due to job performance problems including inaccuracy and a poor attitude, she was transferred to a slower-paced environment. In 1992, she was given a series of performance warnings and transferred to an even less demanding position. Her tenure was also marked by frequent medical and psychological problems . . . . In March 1994, she was diagnosed with clinical depression and problems related to attention deficit disorder (ADD) and excused from work [for a short time].

Id. at 432-433. Sirvivis-Allen returned to work in May 1994 and requested a quiet office location to aid her concentration, but this request was apparently not granted. Complaints were received about her work, engendering critical evaluations and warnings by her supervisors. She perceived this as being criticized "for every little thing" and "verbal abuse at work," according to her testimony at the board hearing. In August 1995, she left work, citing stress, and consulted a psychiatrist, complaining of headaches and chest pains. In 1996, her doctor advised that she could return to work in a less stressful position.

In September 1995, Sirvivis-Allen filed her workers compensation claims, "claiming that she suffered a work-related stress injury resulting from disciplinary action taken against her on or about August 5, 1995." Id. at 433. The Department of Labor hearing officer denied the claim. After a de novo hearing, the board reversed, finding that her "ADD constituted a pre-existing weakness which caused her work performance to suffer. It also found that her supervisor's criticism, although justified, caused her major depression. Finally, the board concluded that the respondent's work-related stress, which triggered depression, headaches, and chest pain, was greater than normal, non-employment related stress." Id. at 433.

The employer challenged the board's ruling, arguing that compensation benefits should not have been available because (1) Sirvivis-Allen was not injured in "accident"; (2) her depression and disability did not "arise out of" employment; (3) there was an insufficient showing that her problems were caused by the work-related criticism rather than other factors; (4) an award of compensation benefits was inconsistent with desirable public policy because "workers' compensation should not be awarded for injuries resulting from good faith criticism of an employee's job performance." Id. at 433. The court rejected all of these arguments and upheld the board's award of benefits to Sirvivis-Allen.

The court backed the board in part because it was the board. Under the applicable law of workers compensation, like most administrative law schemes, courts are required to defer to the fact-finding of regulatory boards unless they are clearly erroneous or their decisions are arbitrary and capricious. The court affirmed the award in part because of this deference to the board's fact-finding that Sirvivis-Allen was indeed disabled and that her depression was in fact sufficiently casually related to her work (thus "arising out of" employment) even though the supervisors' criticisms were apparently necessary and not excessively harsh. See id. at 434 ("'[b]ecause the petitioner does not challenge the board's finding that medical causation exists, we review its finding only of legal causation.") and 434-35 ("a reviewing court may not substitute its judgment for that of the board even though contrary testimony received would have supported a different result"')[quoting New Hampshire Supply Co. v. Steinberg, 121 N.H. 506, 509, 433 A.2d 1247, 1249 (1981)1.

Under the law, the court found legally sufficient causation because the claimant had demonstrated to the board's satisfaction that her employment-related stress was greater than what she encountered in ordinary life outside the workplace. See id. at 434. In addition, the court emphasized that it was operating under the presumption that all reasonable doubts as to construction of the statutes should be resolved in favor of the injured employee, a central principle of workers compensation in most states.

On the issue of whether the inability to work was sufficiently "accidental," the court read the New Hampshire workers compensation statute as requiring only that the injury be accidental, not that the events leading to injury be accidental or unintended. See id. at 434 (N.H. Rev. Stat. Ann. 281-A:2 speaks of "accidental injury" rather than injury caused by accident). The criticisms and work assignments of Sirvivis-Allen were of course no accident--they were part of the job--but her supervisors never expected her to go into dysfunctional depression in response. Consequently, the court found the injury sufficiently accidental. This is consistent with the purpose of workers compensation law, which is to provide compensation for work-related injuries that stem from the regular operations of the employer. Coverage is not limited to the improperly operating aspects of the workplace.

Regarding public policy, the court acknowledged that affirming the award tended to be a "troubling" extension of liability greater than normally found in a common law system because of the unusual nature of the claimant's injuries and the claimant's "thin skull" susceptibility to depression coupled with her receipt of more criticism because of her pre-existing ADD and difficulty performing her work tasks. The court also noted that cases in other states had diverged on the issue of whether proper criticism of employee work performance could be the cause of compensable workers' compensation injury. Compare Calovechhil v. State, 233 Mich. App. 349, 566 N.W.2d 40 (Mich. Ct. App. 1997) (injury from stress of investigation compensable) with Duncan v. Employers Cas. Co., 823 S.W.2d 722 (Tex. Ct. App. 1992)(injury from stress of reprimand and job transfer not compensable).

Despite its misgivings about "rewarding" the employee for poor work and great sensitivity to criticism in management, the court felt constrained to affirm the board's decision because of the structure and language of the statute and the basic principles of workers compensation law. "In view of our longstanding practice 'to give the broadest reasonable effect to the remedial purpose of workers' compensation laws,' however, a rule barring recovery for injury caused by good faith criticism of an employee's work performance is more properly made by the legislature." Id. at 436 (citations omitted).

Perhaps unsurprisingly, some insurers have labeled the court's decision absurdly extreme, suggesting a need for immediate legislative correction. Although the New Hampshire Supreme Court has suggested that it would not be unhappy with such political feedback, the court's decision is hardly ridiculous and is defensible. Since its inception during the early 20th century, workers compensation has been premised on the no-fault system and has embodied something of a political compromise between workers and employees. Workers compensation arose in response to great social protest because workers were thought to be woefully lacking rights and remedies if injured on the job.

In return for nearly strict liability for workplace injuries (benefiting the worker and removing the need to prove employer fault and to overcome the fellow-servant rule and assumption of risk tort law defenses), recovery was restricted to a set schedule of compensation amounts (benefiting the employer by providing predictability, limiting runaway verdicts, and preventing exemplary damages). Depending on whether one talks to workers or employers, the modern system is either too expensive or the benefits too limited.

Without question, however, the workers compensation law and system are designed to provide benefits to injured workers on a no-fault basis where there is a sufficient showing that the injury, even if "wimpy" in the eyes of some, resulted from work activity, which it did under the facts as found by the board. This may be a low standard, but meeting it does not bring a damages "jackpot" to the worker. Sirvivis-Allen, for example, will undoubtedly enjoy significant compensation as a worker "totally disabled" by her depression, but she will not live like royalty from a seven-figure tort award. Although there may be some incentive for malingering in the wake of cases like this, most workers are unlikely either to become depressed or to claim depression from job problems. Most workers would rather continue to work: the pay is better than the benefits schedule, and working brings other benefits to the worker.

The New Hampshire Court's decision is unlikely to change much in the field of actual employment. Questionable as Sirvivis-Allen's depression may seem to some, allowing compensation to her is consistent with the rest of workers compensation law, which generally does use a "thin skull" doctrine in favor of the injured party. For example, if a worker suffers a strained back from lifting at work, no tribunal would deny the worker compensation by suggesting that workers should spend more time in a gym conditioning before work or use better lifting technique. Rather, the tribunal would focus on issues of misconduct (Was the worker engaged in horseplay or the like?), connection with work (Was the worker lifting packages for an employer or moonlighting on the job? Did the worker suffer the injury playing football and pretend it was a work-related injury?), and the extent of injury and its place in the schedule of damages (Is the worker really injured badly?).

As long as a worker's depression is real rather than feigned and results from work stress, compensation appears to be consistent with this area of the law, just as it would be for back injuries and other more physical and typical mishaps in the workplace. Because of the division of courts and observers on this issue, additional litigation and legislation on the issue is likely. Courts and legislatures may need to expressly decide whether they would rather see workers compensation costs increase by some amount to cover mental/emotional injuries from workplace stress or whether they believe the better social policy is to leave workers on their own for these types of injuries.


Brown v. Life Insurance Co. of North America, 8 P.3d 333 (Wyoming Supreme Court, July 5, 2000)

Kent Brown, a dentist, was injured in a fireworks accident on July 4, 1987, and as a result had "virtually no vision in his left eye, except for light perception." 8 P.3d at 335. His treating physician told him that the maximum medical recovery would take place in six months. After that time, Brown's vision was no better. He continued to practice dentistry but with difficulty and concluded that he could not continue, taking steps to sell his practice. However, the practice was not finally sold until May 1, 1993. During summer of 1993, Brown finally submitted a claim for total disability to his insurer.

Although there was "no apparent dispute but that Brown was totally disabled from practicing as a dentist after the injury to his eye," the insurer took the position that notice and proof of loss was too late under the policy and precluded coverage. See 8 P.3d at 336. "Based on the record before us, it seems clear that Brown was entitled to disability benefits under the policy but for the conclusion [by the trial court] that his claim was not timely submitted." 8 P.3d at 336.

The policy provided that notice should be given to the company "within 30 days after the occurrence of any loss" or "as soon there after as is reasonably possible." Proof of loss under the policy was required within 90 days after the date of loss, but late proof of loss would not diminish benefits as long as the proof was "furnished as soon as reasonably possible and in no event .. later than one year" (absent capacity of the claimant to make a claim during the relevant time period). See 8 P.3d at 336.

Despite the six-year delay in notice, the Wyoming Supreme Court rejected the insurer's defense, ruling that the notice was not late as a matter of law and might under the unusual facts of the case be notice as soon as was "reasonably possible." Although Brown's blinded left eye left him unable to be a complete dentist, he was able to maintain a semblance of the practice, doing what he could with the assistance of his wife. The court suggested that the ability of Brown to give dental care or to persuade the public that he could give care was diminished after the accident. For example, the revenue of the practice sank from $188,000 in 1986 to $69,000 in 1991. Thus, by the time the practice was sold, the Browns were not making enough to cover the overhead of operating the dental practice. See 8 P.3d at 335-36.

Dr. Brown argued that notice was not reasonably possible to give until he was aware of the full extent of his disability and completely unable to practice. The insurer took the view that the disability policy was triggered at the time of the accident itself (July 4, 1987) or six months later when the policyholder's vision showed no improvement (or at least insufficient improvement to overcome the disability). The policy in question defined total disability as inability to "practice your own occupation (your special area of dental practice)." 8 P3.d at 337. Based on these facts, the court found that

[u]nder the terms of the policy, so long as he was practicing his profession as a dentist, he was not disabled and would not have been eligible for disability benefits. Moreover, the question as to what constitutes a reasonable time for filing of the claim in the context of disability insurance is ordinarily for the jury. Perhaps of greater importance, the disability from which Brown suffered was a continuous disability, and under the terms of the policy, there was nothing to prevent submission of the claim within the duration of the disability covered by the policy.

8 P.3d at 337 (citations omitted).

Although the court gives short shrift to the policy's one-year outer time limit for notice, one can understand its reasons for finding the claim timely. Although Brown was obviously badly hurt in 1987 and the proverbial handwriting was on the wall, Brown was able to cobble together a continuation of his practice for several years before finally closing shop. Brown was not malingering but was trying to stave off disability. Under the circumstances, the insurer's hard line is difficult to understand. Unless something not mentioned in the court's opinion suggested suspicion to the insurer, it should have had no objection to being asked to provide benefits later rather than sooner. In addition, Brown's disability policy was not a rich one: it paid a maximum of $1,000 per month for 60 months. In short, one wonders if the insurer did not buy itself adverse precedent simply by being meaner than necessary in this situation.

Clearly influenced by the equities of the situation favoring the policyholder, the court also observed that

based on the record before us, [the insurer] does not have a viable defense based on prejudice because of an inability to investigate the claim. The record extant demonstrates that an accident occurred, that Brown was eventually totally disabled by it, and that the policy provided for benefits once Brown was deemed disabled from practicing as a dentist.

8 P.3d at 337. In other words, even though the notice was late, this, if anything advantaged the insurer, making the late notice defense appear excessively bellicose.


Coregis Insurance Co. v. Law Offices of Phillip S. DeCaro, P.C., 2000 U.S. App. LEXIS 23653 (United States Court of Appeals for the Tenth Circuit, September 22, 2000)(applying Colorado law)

Edmund Healy and Trudy Valerio Healy sued attorney Philip DeCaro for mishaps related to a real estate development. Thirteen of the fifteen claims in the complaint related to DeCaro's role as a landowner and developer, and these were dismissed by the trial court, leaving two claims of legal malpractice. The Healys'

two malpractice claims concerned real estate agreements and conveyances that, allegedly due to DeCaro's negligence, failed to provide for ingress to and egress from certain tracts of land owned by the Healys and failed to "reserve or grant such easements as reasonably necessary to provide ingress and egress from" the Healys' land. Both claims sought damages measured by "the value of the easement and the reduction in the value of the tracts caused by the lack of ingress and egress."

Id. at *6 (citations omitted).

DeCaro held a policy of Lawyers Professional Liability Insurance with Coregis, who sued for a declaration that this malpractice policy did not provide coverage to DeCaro against the Healy claim because of Exclusion E, which precluded coverage for

any claim for loss of, injury to, or destruction of tangible property or for loss of use thereof.

Id. at *5. The trial court granted summary judgment to Coregis, but the Court of Appeals for the Tenth Circuit (encompassing Wyoming, Montana, Colorado, Kansas, New Mexico, and Oklahoma) reversed and ruled in favor of DeCaro. The case was in federal court because DeCaro and the Healys were citizens of different states, not because of any federal law involved. Consequently, the Tenth Circuit applied the law of the state with the greatest connection to the insurance coverage matter, which it implicitly found to be Colorado, which was the location of DeCaro's law practice and presumably the place where the contract was finalized or the policy delivered.

Under Colorado insurance law, the Appeals Court required Coregis to bear the burden of persuasion because it was relying on an exclusion in the policy rather than maintaining that DeCaro had not shown he was within the general grant of coverage in the insuring agreement. According to the court, Coregis failed to meet this burden because

here, the damages alleged by the Healys are the value of a lost easement and the concomitant reduction in the value of their land. This claim is not one for the loss of use of tangible property for two reasons. First, an easement is not tangible property [because it cannot be handled, touched or physically possessed]. [A]n easement is an "interest in land owned by another that entitles its holder to a specific limited use or enjoyment. In other words, it is merely an intangible property right. DeCaro's alleged failure to obtain the desired easements for the Healys deprived them of the use of someone else's land and not their own.

[T]he diminution in value of the Healys' land allegedly caused by DeCaro's conduct does not constitute a "loss of use" of the land in the ordinary sense of those words. Nowhere in the Healys' third-party complaint do they allege that the lack of easements caused them to lose the use of their tracts of land. Instead, the complaint merely seeks damages measured by a difference in the value of the Healys' land with and without the easements. This allegation of economic injury does not compel a conclusion that there was a "loss of use" of their land.... A reasonable interpretation of an exclusion requires a more restrictive reading, so that a mere diminution in value of property would not rise to the level of a "loss of use" of it. To lose the use of tangible property connotes an inability to employ or apply it or to enjoy the benefit of using it. It does not connote a simple decrease in its monetary worth.

Id. at [10.sup.*]-[11.sup.*] (citations omitted).

Because Coregis could not demonstrate the applicability of the exclusion as a matter of law, the summary judgment in its favor was reversed and the case remanded to the trial court for further proceedings. This leaves open the possibility that Coregis might seek to introduce evidence at trial on the issue of whether the Healy claims were loss of use or damage claims. However, the Appeals Court opinion suggests that the insurer would need very powerful facts to overcome the way in which the complaint was framed by the Healys and characterized by the court. in effect, the Appeals Court read Exclusion E of the Lawyers Liability Policy to require physical injury or physical destruction of property in order for the Exclusion to apply. Although interesting, the DeCaro opinion is technically "unpublished" and of limited precedential value.


Schubert v. Blue Chips and SAIF Corporation, 9 P.3d 114 (Oregon Supreme Court, Aug. 24, 2000)

Milan Schubert injured his shoulder in a 1987 industrial accident and received workers compensation benefits, including an award for permanent, partial disability ("PPD"). Several years later, [he] underwent a "Bristow" surgery to repair his shoulder. After that surgery, his original PPD award was adjusted upward to 17 percent.

Claimant continued to have problems with his shoulder. Eventually, claimant's treating physician determined that those continuing problems were being caused by a screw that had been inserted in claimant's shoulder during the Bristow surgery. The doctor recommended additional surgery to remove the screw. Claimant followed that recommendation and simultaneously filed an aggravation claim....

9 P.3d at 116.

Schubert's claim was denied, and he sought reconsideration. Under the Oregon workers compensation statute, when there is such a reconsideration request and the type of claim is not already addressed in the standing workers compensation Rules, the director of the state Department of Consumer and Business Services (who presides over the workers compensation system in Oregon) is to adopt a temporary rule to address the situation. Schubert had, with supporting medical evidence, claimed a 10 percent impairment because of the unsuccessful surgeries. In Schubert's case, the director eventually adopted such a rule stating that after the Bristow procedure, Schubert and other such workers did not suffer an impairment because the procedure was generally curative rather than damaging.

Bristow repair of a dislocated shoulder improves the function of the shoulder and reduces the chance of dislocation. Removal of the screw fixation device does not result in recognized loss of shoulder function. In this case, the impairment value for these procedures shall be a value of zero.

9 P.3d at 117.

The court reversed the director's determination and remanded for further proceedings, holding that a director's use of a temporary rule must examine and decide the particular circumstances of a claim (e.g., did Schubert's Bristow procedure work out?) rather than articulating general medical facts (e.g., does the Bristow procedure usually make a shoulder as good as new?).

We agree with claimant that, if the Director finds that a worker suffers from an impairment that results in disability and that disability is not addressed by existing standards, then the Director must promulgate a rule that addresses the worker's particular impairment. The Director cannot escape that duty by, for example, making some categorical pronouncement about the ordinary and expected effects of the event that caused the impairment.

The Director's failure to address claimant's personal circumstances, as opposed to the generality of circumstances attendant upon the two kinds of surgeries, means that the Director's temporary rule was unresponsive as a matter of law. The Director thus has not yet performed the function contemplated by [the Oregon workers' compensation statute, Ore. Rev. Stat. 656.726(4)(f)(C)].

9 P.3d at 118, 119.

Although workers compensation statutes differ by state, Oregon's requirement of a case-specific decision is not unusual, suggesting that the reasoning of Schubert, a unanimous Oregon Supreme Court opinion, will apply in similar circumstances in other states.


West v. Umialik Insurance Company, 8 P.3d 1135 (Alaska Supreme Court, Sept. 29, 2000)

James and Jane West's home in Fairbanks, Alaska, had a well for its water source. The pump for the well was located next to the house "in an insulated chamber buried four or five feet below ground." The chamber was "connected to the house's basement by a water pipe which runs through an insulated causeway. Ordinarily, heat from the basement also heats the causeway and prevents the system from freezing." 8 P.3d at 1136. However, during the 1995-96 winter, the basement temperature dipped below freezing and provided insufficient heat to the causeway, and the well pump pipe froze and broke, allowing well water to "gush out of the pump into the ground." The water "infused the ground beneath the house's foundations." 8 P.3d at 1136.

The Wests had the pipe repaired. At that time, there did not appear to be any damage to the house. Later, however, one corner of the house settled by approximately three feet, causing the house to twist, which in turn brought Sheetrock cracks, gaps in the ceiling and floor, uneven flooring, and doors that were out of plumb. The damage was so severe that the building of a new house structure would essentially be required to restore the Wests to the housing they enjoyed before the pipe burst and the settling occurred. See 8 P.3d at 1136.

The Wests sought coverage, which was denied by their homeowners insurer, prompting litigation. The trial court found for the insurer, granting summary judgment in its favor as a matter of law based on policy language excluding coverage for "settling" and earth movement. The Alaska Supreme Court, in a detailed opinion, reversed and found for the policyholders as a matter of law, ruling that these exclusions were inapplicable when the source of the problem was water emanating from malfunctioning or broken plumbing.

The homeowners policy in question provided coverage "against risk of direct loss to property," subject to a significant number of limitations and exclusions, including

loss [from]

a. Freezing of a plumbing.... system... while the dwelling is vacant, unoccupied or being constructed.

(e)(6) Settling, shrinking, bulging or expansion, including resultant cracking, of pavements, patios, foundations, walls, floors, roofs or ceilings;

[In addition to these coverage limitations, the following exclusions apply:] We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or even contributing concurrently or in any sequence to the loss.

b. Earth Movement, meaning earthquake including land shock waves or tremors before, during, or after a volcanic eruption; landslide; mine subsidence; mudflow; earth sinking, rising or shifting ....

c. Water Damage, meaning:

(1) Flood, surface water, waves, tidal water overflow of a body of water, or spray from any of these, whether or not driven by wind;

(2) Water which backs up through sewers or drains or which overflows from a sump; or

(3) Water below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.

See 8 P.3d at 1136-37, n. 1.

The insurer argued that the house had settled because of underlying earth movement, making both exclusions applicable to preclude coverage. The policyholders argued that these exclusions were not applicable because they were designed to preclude coverage only where such ground movement and foundation change resulted from natural causes or external forces. The Supreme Court found for the policyholders based both on a reading of the policy language as a whole and through invocation of Alaska's version of the "reasonable expectations" doctrine, which holds that insurance coverage should be consistent with the objectively reasonable expectations of the policyholder even if a close reading of the policy would suggest an absence of coverage.

The term "settling" was not defined in the policy, but all parties agreed the house settled in the literal sense of having the foundation of the house drop because of falling soil. However, the court agreed with the Wests that the cause of the settling was a broken water pipe, the type of peril that was insured under the policy as long as the house was occupied at the time of the plumbing problem. Under these circumstances, the court found that the Wests could reasonably expect coverage from broken-pipe problems even if the ultimate manifestation of those problems was a type of injury otherwise excluded from coverage. The court reached this conclusion both because of what it regarded as the policyholders' reasonable expectations and that court's perceived need to reconcile the tension in the different provisions of the policies (cover-broken-pipes vs. don't-cover-settling-and-earth- movement). See 8 P.3d at 1138-40. "In other words, regardless of the settling exclusion, the policy implies coverage from the da mage caused by water discharged from pipes which are ruptured by freezing." 8 P.3d at 1139.

The court engaged in a lengthy discussion of the settling and earth movement exclusions, examining precedent in Alaska and other jurisdictions, concluding that the better view of these exclusions is that they preclude coverage where the loss stems from external forces changing the topography and do not apply where the settling is the result of an otherwise covered event particular to the insured home. See 8 P.3d at 1139-41. The West court approvingly cited language from another decision concluding that "[w]hen the settling occurs from an accidental cause and happens abruptly and unexpectedly, that is not the sort of 'settling' to which the policy language refers." 8 P.3d at 1140, quoting Winters v. Charter Oak Fire Insurance Co., 4 F. Supp.2d 1288, 1295 (D.N.M. 1998)). The West court also cited with favor decisional law that distinguished between whether the immediate cause of the settling was an "unanticipated event" or an "inevitable occurrence." See 8 P.3d at 1140.

The court also noted that the settling exclusion was in a list of other limitations on coverage that generally fell into a category of "wear and tear" items with which the loss was either inevitable or gradual. Consequently, it interpreted the settling limitation on overage narrowly so as ordinarily not to include abrupt and violent changes brought about by accidents rather than the passage of time. So construed, settling caused by water gushing from a broken pipe would appear reasonably to be covered, while settling caused by gradual and natural shifting of soil would not be covered. See 8 P.3d at 1139-41. The West court also noted that authorities such as Couch on Insurance have defined settling as taking place when "the soil compacts downward vertically over time." See 8 P.3d at 1140. See also 8 P.3d at 1143-44 (invoking Couch on Insurance in further support of its holding).


Phoenix Indemnity Insurance Company v. Pulis, 9 P.3d 636 (New Mexico Supreme Court, Aug. 17, 2000)

Larry and Lynette Pulls purchased automobile insurance and executed a "named driver" exclusion providing that the insurance did not apply "while any motor vehicle is driven or operated by" Michael, their teenage son. Named driver exclusions are offered by insurers in return for a reduced premium by eliminating coverage for "high risk" drivers in the insured family, such as teenagers or family members with bad driving records. See 9 P.3d at 643. The effect of the exclusion came into play after a tragic accident. Michael and his brother, Steven, were on a visitation with their biological father, Donald Reese, and another boy (Kevin) when Reese permitted Michael to drive Reese's uninsured pickup truck. Michael's abrupt starting and stopping of the truck caused Kevin to fail, and his hunting rifle discharged, killing Steven instantly. See 9 P.3d at 641-42.

The Pulises filed an uninsured motorist (UM) claim against their policy with Phoenix for Steven's death on the theory that had the Reese pickup truck been insured, Reese's negligence in letting Michael drive the truck with Kevin armed in the flatbed would have made Reese liable, making the truck's liability policy limits (had there been coverage) payable to the Pulises for the wrongful death of their son. Phoenix denied coverage, pointing to the named driver exclusion: Michael specifically was carved out of the Pulis policy, and Michael was driving the truck when the tragic accident happened.

The trial court saw this as an ironclad defense for Phoenix and granted summary judgment to the insurer. The New Mexico Supreme Court saw it differently and reversed. The basis for the court's decision was the ambiguity created by providing coverages to the Pulls family without adequately explaining to them that these coverages were stripped away for all of them if Michael was the driver of any vehicle when an accident occurred. See 9 P.3d at 942-43.

New Mexico, like most states, provides by statute that UM and underinsured motorist (UIM) coverage must be offered to policyholders. According to the Supreme Court, it is a statute with a "remedial" purpose that should be "liberally" construed. Consequently, "any provision allowing for an exception to uninsured coverage is strictly construed to protect the insured." See 9 P.3d at 642. At the same time, state law also provides that the policyholder may reject UM and UIM coverage, provided that the rejection is clearly made part of the policy by endorsement to the declarations of the policy in a manner that calls the policyholder's attention to the waiver of such coverage in a manner that is clear and unambiguous. See 9 P.3d at 643.

According to the court, Steven, as a class-one insured [named insureds and immediate family], had an expectation of UM coverage if he were injured in an accident involving an uninsured car. Phoenix's policy did not alert the Pulises that they had no UM coverage in an uninsured car driven by Michael. In enacting the UM statute,

"[t]he legislature intended that an injured person be compensated to the extent of liability coverage purchased for his or her benefit."... Allowing Phoenix's exclusion to apply to class-one insureds without notice or disclosure appears to be contrary to the legislature's purpose.

Considering the application and policy together, we are persuaded there is an ambiguity created by the election of UM coverage [by the Pulises] and the driver-exclusion agreement [also accepted by the Pulises]. The auto application and policy do not clearly and explicitly define the limits of insured UM coverage for class-one insureds when the driver is a named excluded driver.

Phoenix disclosed other specific situations in which no UM coverage existed for the insureds.... In total, the liability exclusion section details twenty scenarios where liability coverage is excluded. No such section exists for the named-driver exclusion provision; rather, the provision merely states that "no liability or obligation of any kind shall be attached."

On [their] face, the exclusionary provisions contained in Phoenix's policy are silent as to their applicability to a class-one insured when he or she is a passenger in an uninsured automobile operated by a named excluded driver. . . . The express language of the application only informs a lay person that the named driver is excluded. That is not sufficient notice that class-one insureds are excluded.

We conclude that the excluded-driver provision did not exclude Steven from UM coverage. In reaching this conclusion we do not preclude all named-driver exclusions. We believe that an insurance company can validly exclude high-risk drivers from any and all coverage; but to do so, they are required to adequately inform an insured of the consequences to all class-one insureds of excluding that driver. This requires written disclosure within the body of the application and policy detailing the lack of UM coverage available to named insureds as well as to household members when they elect to exclude a driver or actual notice of the limitations on coverage.

In a special concurrence, Justice Baca stated that he was "not convinced that any amount of notice would be sufficient to deprive Steven or other members of his family of their class-one coverage." 9 P.3d at 647. He viewed the issue as "whether the driver exclusion will be allowed to trump Steven's class-one protection." 9 P.3d at 647. He saw the legislative intent behind the state's UM statute as precluding a situation in which a named driver endorsement, even one spelled out clearly, could "eliminate all coverage for the entire family when a driver subject to an exclusion under the same policy takes the wheel. More importantly, I do not believe that any reasonable insured would understand that they are bargaining away their entire family's class-one status by signing a driver exclusion for an individual high-risk driver." See 9 P.3d at 647-48.


Taylor v. Travelers Indemnity Company of America, 9 P.3d 1049 (Sept. 15, 2000)

Nellie Taylor was a passenger in the family car driven by her husband when his negligence caused an accident that killed him and injured her as well as four people in the other vehicle.

The Taylors had a $300,000 single-limit liability policy issued by Travelers, with UIM [underinsured motorist] coverage in the same amount. Mr. Taylor was the named insured and Plaintiff [Ms. Taylor] was insured as a family member. Plaintiff and the four occupants of the other vehicle presented claims on the liability coverage, which Travelers settled by apportioning the $300,000 liability limit among the five claimants. Plaintiff received $183,500, far less than her medical bills, let alone her total damages. Having no coverage from any other source, Plaintiff made a UIM claim on her Travelers policy.

9 P.3d at 1051.

Travelers denied coverage based on a policy exclusion that barred coverage to any person who had received any payment for bodily injury under the liability provisions of the policy. See 9 P.3d at 1050-51 (emphasis added). The trial judge agreed and entered judgment as a matter of law for the insurer. The Court of Appeals reversed, "finding the policy provision that prohibited paying UIM to a person who received payment under the liability coverage was void because it was not permitted" by Arizona's UIM statute. See 9 P.3d at 1052. The Arizona Supreme Court agreed, also finding the provision too inconsistent with the statute to be effective.

Arizona law requires that UIM coverage be made available to policyholders in an amount equal to the liability limits of the auto policy and that the UTM coverage provide coverage to a person who is injured but unable to obtain full compensation for the injury from available sources of liability insurance. "To the extent that the total damages exceed the total applicable liability limits, the underinsured motorist coverage provided in subsection B of this section is applicable to the difference." 9 P.3d at 1052 (quoting Ariz. Rev. Stat. [ss] 20-259.01(G)(Supp. 1999)(emphasis in original opinion, not statute).

Travelers argued, however, that allowing Nellie Taylor to collect both $183,500 of liability coverage and additional UIM coverage would violate state law provisions against "stacking" coverage as well as the policy provisions at issue. The Supreme Court found that statute on stacking inapplicable because it applied to coverages on multiple insured vehicles, whereas the Taylor case involved different coverages under the policy affecting a single vehicle--and the Taylors had paid a premium for both coverages when they purchased insurance on the vehicle. They were not getting a "windfall" if Nellie Taylor was permitted to tap the policy's UIM coverage, as long as she was not overcompensated for the injuries. See 9 P.3d at 1052-54. Consequently, she was entitled to an additional $116,500 in UIM benefits (the $300,000 policy limits minus the $183,500 received under the liability coverage in the policy). In view of the severity of her injuries, the court appeared to see little danger that she would be overcompensat ed by this amount. The court noted

The total amount of liability coverage available to Plaintiff was less than her total damages. In such a situation, each injured victim is entitled to fill the gap by seeking recovery under her own UIM policy. This is exactly what Plaintiff [Nellie Taylor] is doing. As Travelers concedes, Plaintiff could recover on her policy's UIM coverage to fill the gap if she had been injured while driving her own car, riding in someone else's car, or even walking on the sidewalk. The statute contains no exception for injuries occurring when Plaintiff is a passenger in her own car. Because the policy provisions cannot override the statute, Travelers' policy exclusion should be read solely to limit duplication of recovery, as opposed to completely eliminating UIM coverage. Under Travelers' exclusion, however, availability of any recovery under the liability coverage eliminates the UIM coverage. Thus, an insured injured by someone covered for liability under the same policy has no UIM coverage even though the liability cov erage actually available might be very little. This, as we have seen, is not authorized by the antistacking provision of the statute. Travelers argues, however, that the exclusion is valid and does not violate legislative intent when the UIM claim is made on the same policy that provided liability coverage. We disagree.

We have quite clearly found the legislature intended a broad application of UIM coverage to provide benefits up to the policy limits whenever the insured is not indemnified fully by the available limits of liability.

We see nothing in the text or goals of the statute that would support the concept that the legislature had some unexpressed intent to allow insurers to preclude UM [underinsured motorist] or UIM coverage merely because the policy purchaser was injured in her own car by another person insured under the same policy. No doubt this is a frequently encountered risk because we may safely assume that the insured's family members, such as a spouse or children, ordinarily spend a significant amount of time riding in the insured's car. Why would the legislature permit an insurer to exclude such a risk when the only reason for the consumer to buy UM and UIM is to protect against injury to his or her own family and guests as well as to the named insured himself? Travelers cannot provide a good answer and we can conceive of none.

9 P.3d at 1054, 1055. According to the court, permitting the Travelers exclusion to be enforced as written would destroy the basic purpose of UIM coverage. See 9 P.3d at 1057.

Travelers had requested that an adverse decision be given only "prospective" application (to future cases only) rather than the "retroactive" application (to the instant case and all pending cases) that is normally accorded to legal precedent and decided cases. The Supreme Court found that the normal retroactive application of its decision to Nellie Taylor and Travelers was appropriate because its holding did not establish a sufficiently jarring or surprising "new" interpretation of the law. Rather, the court majority saw itself as simply making a determination based on prior precedent applied to an upcoming factual situation. See 9 P.3d at 1059-60.

Justice Martone dissented. Although he found the case presented a "difficult question," he favored enforcing the Travelers language barring resort to UTM coverage when the negligent driver is another person insured under the policy. His rationale was that the policyholders could have avoided undercompensation simply by providing themselves with higher policy limits. For example, if the Taylors had purchased $500,000 in limits, another $200,000 of liability coverage would have been available for Nellie Taylor's injuries. According to the dissent, most policyholders

buy underinsured motorist coverage to protect themselves against injuries caused by underinsured third parties. I do not believe most policyholders consider the possibility that the third party might be the person with whom they either made decisions about limits or had the opportunity to do so. We buy underinsured motorist coverage to protect ourselves against the poor choices other people make when they buy liability insurance in limits too low to cover our losses. It seems unlikely that anyone would expect that the claimant would have any role in the selection of limits and at the same time be a UIM claimant.

Ordinarily, insurance does not cover that which is in the control of the insured.

9 P.3d at 1059-60.


Mutual of Enumclaw Insurance Co. v. Cross, 10 P.3d 440 (Washington Court of Appeals, Sept. 18, 2000)

Dirk Dalton's death was a tragedy, but not an insured occurrence under the homeowners policy in question, ruled the Washington Court of Appeals. The court found coverage excluded the "expected or intended injury" exclusion despite the "innocent" co-insured's claims that she was entitled to coverage because of the policy's severability clause. In 1994, Dirk Dalton was "voluntarily placed in the temporary foster care of Kirk and Kimberly Cross" by Casey Dalton, Dirk's biological mother.

Kimberly Cross took the four-year-old boy to the hospital four times in the next two weeks. Dalton was treated for severe bruises, cuts, and a head injury. On May 1, 1994, Kimberly Cross went to church, leaving Dalton in the care of Kirk Cross. An emergency medical team (EMT) responded to a call from Kirk Cross and found Dalton dead. The physicians who attempted to revive him noted that there were unexplained bruises covering Dalton's body and head and numerous other secondary findings of trauma.

10 P.3d at 441. Kirk Cross was convicted of homicide by abuse. Kimberly Cross was charged with rendering criminal assistance but the charge was dropped.

Casey Dalton sued Kimberly Cross for failure to protect little Dirk from the abuse of Kirk Cross. Kimberly sought defense and indemnity under the homeowners policy for which both she and her now ex-husband, Kirk, were named insureds. The insurer brought a declaratory judgment action seeking a determination of no coverage under the standard policy exclusion that bars coverage for "bodily injury or property damage ... which is expected or intended by the insured." There was no dispute that Kirk's brutal beatings of the boy disqualified him from coverage under this exclusion. Kimberly, however, maintained that she could nonetheless be covered as an "innocent" co-insured. Although she was initially charged with aiding and abetting, the charges were dropped and she was never adjudicated to have committed wrongdoing against young Kirk Dalton. In particular, Kimberly Cross invoked a condition of the policy that provided that the "insurance applies separately to each insured." 10 P.3d at 442 (boldface omitted).

The court rejected the policyholder's argument for separate coverage. The court read the expected or intended exclusion as barring coverage whenever "an insured" (the language of the exclusion) expected or intended the injury that is the subject of the third-party claim. Consequently, a co-insured intentional injury deprives all insureds of coverage notwithstanding the severability clause. In the court's view, the severability clause was designed only to make it clear that each insured has coverage up to the full policy limits (but only up to the policy limits for a single occurrence) if named as a tort litigation defendant. The policy provisions were not inconsistent and the policy was therefore not ambiguous; thus, there was no need to construe the coverage issue in favor of the policyholder.

The court reviewed case law at some length and found it consistent with its holding. Although the court did not discuss the fortuity concept expressly, its decision is consistent with the axiom of insurance law that insurance provides coverage for accidental events, not intentional injury. Even though Kimberly Cross may have been personally at fault in Kirk Cross's deadly child abuse, the claim against Kimberly Cross did not result from an accident. Rather, it stemmed from a nonfortuitous event that is ordinarily not insurable. Although this may seem unfair to Kimberly (who was probably as terrified of Kirk as was poor Dirk Dalton), it still does not make Dirk's death accidental. The homeowners insurance company wrote a policy that assumed the risk of accidents resulting in claims against the household. It did not assume the risk of underwriting one member of the household's homicidal behavior.

A case like Cross, however, raises interesting implications. Many jurisdictions permit an "innocent" co-insured to recover under a policy even where another insured has committed fraud or arson. In Washington and other states following the Cross approach, an insurer can presumably draft a contract with sufficient clarity to exclude from coverage any claims or losses resulting from the intentional wrongful behavior of any insured. Whether state insurance regulators should permit this is another question. A truly innocent co-insured, like every policyholder, purchases insurance to spread risk and obtain protection for contingent events. From the perspective of the innocent insured, a claim brought about by the unknown wrongdoing of another is a contingent, surprising, "accidental" event, one for which it might have reasonably expected insurance protection. (For states that attempt to honor the objectively reasonable expectations of the policyholder, including Washington, cases like Cross inevitably create some tension in doctrine.)

Should the insurance policy be permitted to strip the innocent insured of the risk protection it purchased because of the bad acts of another insured? The fair answer would seem to be "no." But should the insurer be forced to pay for fraudulent or nonfortuitous claims merely because the policyholder making the demand for coverage is not the particular insured who actually committed the bad acts? The answer to that question would also seem to be "no," creating some continued potential for judicial difficulty in this area. Apart from the deterrence rationale of insurance, there is the compensation rationale. Insurance not only spreads risk for the policyholder but increases the likelihood of adequate compensation to the third-party victims of tortious conduct. The Cross decision, however well-reasoned, has the effect of denying compensation to the biological mother of a little boy brutally killed. If the victim in Cross had been a single parent instead of a child, children could be orphaned and unable to obtain a source of funds that might well maintain their lives and benefit society more than does vindication of the fortuity principle.

One solution might be to provide lower policy limits to the innocent co-insured when a claim arises out of the intentional wrongdoing of another insured. Another solution would be to offer innocent co-insured coverage, but only at a higher premium, reflecting the increased risk to the insurer. Both of these approaches, however, impose significant administrative costs and are therefore unlikely to appeal to insurers. Insurers would prefer to simply eliminate the risks by using policy language like that at issue in Cross.

Insurers wishing to invoke cases like Cross to preclude coverage for the intentional injury of a single insured can argue with considerable force that decisions like Cross are good public policy in that they force innocent insureds to (a) keep a watchful eye on other insureds and (b) blow the whistle on other insureds who act wrongfully. Kimberly Cross may not have killed little Dirk, and she may have been genuinely afraid of Kirk, but perhaps she should have found a way to speak out to authorities while there was still time to save the boy. Although insurance was probably not on Kimberly's mind at the time, the Cross decision at least creates some incentive for innocent co-insureds not to stand idle in the face of wrongdoing by other insureds. In the commercial liability insurance context, this policy perspective probably has more bite than in the consumer context or in situations where the innocent co-insured may also be the victim of an abusive relationship.

Although the unspoken implications of the Cross decision are interesting, the general legal rule appears clear: as long as insurers are permitted to draft policies to exclude coverage for the intentional injury of a single insured, there would appear to be no doubt that courts will enforce these exclusions if they are written with sufficient clarity.


Jadco Management Corp. v. Federal Ins. Co., 9 P.3d 92 (Oklahoma Court of Civil Appeals; decided Feb. 4, 2000; rehearing denied, March 3, 2000; certiorari denied, May 16, 2000)

Jadco Management Corp. purchased insurance from Federal. Later, it made a claim against Federal, asserting that large quantities of crude petroleum were stolen from its facility in Tussey, Oklahoma. Federal denied the claim. Jadco was predictably upset. So was its sole shareholder, director, and officer, John R. Armstrong. He joined Jadco's suit against Federal, alleging breach of contract and bad faith handling of the claim and alleged that he suffered damages from emotional distress. The trial court dismissed Armstrong from the lawsuit; and the court of appeals affirmed, holding that the principals of a corporate policyholder have no standing to bring a lawsuit against the insurance company. According to the court, the duty of good faith and fair dealing in insurance runs between the policyholder and the insurer, not between the insurer and those who own the insured company or are interested in its fate.

Armstrong argued that his potential injury from unfair claims handling was clearly foreseeable because, for all practical purposes, he is the company. The court responded that Armstrong

was not Federal's insured or a party whom Federal intended to protect when the coverage went into effect. Armstrong's entire relationship with Federal arises only because of the insurance policy between various Jadco corporations and Federal. Federal, therefore, has no direct liability to Armstrong, and the implied covenant to deal fairly and in good faith cannot be extended to him because he pleads an action in tort.

9 P.3d at 94.

The court noted that under state law precedent, however, injured third parties making liability claims against an insured corporation could be considered intended third-party beneficiaries of the insurance policy under some circumstances. The owner of a company, however, was not the type of third party intended to be protected by the insurance policy. The lesson of cases like Jadco for small-business owners and individuals who control corporations is this: If you want the rights of a policyholder, you must be the policyholder or an insured under the policy.

The option of becoming an insured under an insurance policy is presumably available if the individual owner has an adequate insurable interest matching that of the company. For corporations and shareholders, however, satisfaction of this criterion will vary. For example, if Jadco Corporation is liable in tort, Armstrong's personal wealth is presumably beyond the reach of the claim because tort liability extends only to the corporation. For first-party claims (such as the crude oil theft alleged in the instant case), however, Armstrong and other company owners would appear to have an insurable interest. If Jadco goes bankrupt because of lost crude oil and no insurance payment, Armstrong as sole shareholder would certainly suffer a real loss as well when his shares are lowered in value. Presumably, he and others can find insurance carriers that will make them part of first-party coverage if that is what they desire, provided that the pool of owners is small. It is unlikely that an insurer would agree to conside r shareholders insureds in the case of the typical publicly traded corporation, which has thousands of shareholders.


Kimta v. Royal Insurance Company, 9 P.3d 239 (Washington Court of Appeals, Sept. 18, 2000)

In December 1996, the motor vessel ship BIKIN was transporting cargo of fish and crab from the Russian Far East to Korea when Russian authorities arrested the vessel and its cargo, citing failure of the ship's captain to comply with orders to return to port and failure to obtain a required transshipment permit. "Following judicial proceedings in Russia, the Russian authorities confiscated the cargo [valued at $3 million] and sold it at auction." See 9 P.3d at 240. The owners of the cargo sought coverage under their marine cargo insurance or war risk policies, whichever might be applicable. The trial court denied war risk coverage but also declined to rule for the insurer as a matter of law on the marine cargo coverage issue. The Washington Court of Appeals affirmed that there was no war risk coverage under these circumstances and also found for the insurer that, as a matter of law, the marine cargo policy offered no coverage.

A marine cargo policy, as its name implies, provides first-party coverage to the owners of ocean-going cargo that is lost. The policy generally covers losses of all types, and this policy also included a so-called "Inchmaree" clause providing coverage for losses caused by the negligence of captain or crew in the navigation or management of the vessel. See 9 P.3d at 240. However, the policy also contained a standard "paramount warranty" provision commonly called a "Free of Capture and Seizure Clause," which excludes coverage when the cargo is confiscated by the "capture, seizure, arrest, restraint, detainment, confiscation, preemption, requisition or nationalization, and the consequences thereof or any attempt thereat, whether in time of peace or war and whether lawful or otherwise." See 9 P.3d at 241.

At the outset, the court devoted considerable discussion to the applicable law, concluding that the coverage issue was governed by federal admiralty law in view of the history of maritime insurance. See 9 P.3d at 241-43. Although there is some precedent for applying state law where waterborne losses are local or where there is no established rule on coverage question, the general preference discerned from U.S. Supreme Court and other precedent is to apply admiralty law when the facts of the case have a "'genuinely salty flavor'." See 9 P.3d at 242 (citation omitted). The court's determination was also buttressed by the obvious need for maximum consistency in this line of insurance, where losses frequently occur in a variety of jurisdictions, with the insured cargo's itinerary varying to a considerable degree. See P.3d at 242-43.

The use of federal admiralty law made the decision straightforward. Precedent in the area establishes that the negligence of the captain leading up to a government seizure of goods is not the efficient proximate cause of the loss (rather, the excluded seizure is the proximate cause of the loss) unless the negligence of captain or crew endangers the cargo in a mariner "independent" of the seizure. See 9 P.3d at 243-44. Because the captain's negligence in not returning to port and not obtaining proper permits did not threaten the cargo as such but merely led to the seizure, the loss was excluded as one resulting from seizure, notwithstanding the captain's negligence. See 9 P.3d at 244.

As to the war risk coverage issue, the court held that war risk coverage does not apply to peacetime regulatory actions of governments. The Russian actions may have been a bit harsh--confiscating $3 million of cargo over a permit violation rather than levying a fine against the vessel or captain--but they were not an act of wartime hostility.

[T]he original purpose of the Free of Capture and Seizure Clause was to exclude only wartime losses, [however] it is now interpreted to exclude losses caused by arrests, seizures and detentions by governmental authorities during peacetime as well. There is no authority supporting the argument that war risk coverage has been similarly interpreted to extend to peacetime losses. In fact, one commentator notes that "war risk coverage is not as broad as if the Free of Capture and Seizure Clause were merely deleted."

9 P.3d at 245, citing Alex L. Parks, the Law and Practice of Marine Insurance and Average 317 (1987).
COPYRIGHT 2001 American Risk and Insurance Association, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Stempel, Jeffrey W.
Publication:Journal of Risk and Insurance
Date:Mar 1, 2001
Next Article:Law of Insurance Contract Disputes.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters