Oklahoma Insurance Law Update 2016

Oklahoma Bar Association CONTINUING   LEGAL   EDUCATION

INSURANCE LAW UPDATE 2016

By Rex Travis

ABOUT THE SPEAKER

Rex Travis is a graduate of the University of Oklahoma College of Law (1962). He limits his practice in Oklahoma City to plaintiff’s insurance and personal injury claims. He has done this practice more than 50 years.

He writes articles for the Oklahoma County Bar Association Briefcase, frequently writes briefs for the Oklahoma Association for Justice (OAJ) amicus curiae program, writes a regular insurance law column for the OAJ Advocate, teaches Insurance Law at the University of Oklahoma College of Law and frequently teaches CLE programs. He has published chapters in Matthew Bender Company’s Law of Liability Insurance. He is a past president of the OAJ and the Oklahoma County Bar Association and serves on the Legal Ethics Committee of the Oklahoma Bar Association. He received the Earl Sneed Award for CLE from the OBA in 1996. He is a retired Lt. Col. from the U.S. Air Force Reserve.

© 2016 - Rex Travis 

TABLE OF CONTENTS

ERISA

Denial of disability benefits was arbitrary and capricious where medical opinions failed to address inability to work in light of combination of problems but case should be remanded for another determination by the ERISA plan

McMillan v. AT&T Umbrella Benefit Plan No. 1, 161 F. Supp. 3d 1069 (N.D. Okla. 2016)

ERISA preemption applies to require declaratory judgment action between employee and helicopter medical transport company to be removable to federal court

Garrett v. Eaglemed, LLC, 2016 WL 4718017 (N.D. Okla. 2016)

GARAGE LIABILITY INSURANCE

Neither a primary garage liability policy on a car dealership nor umbrella coverage of two car dealerships provided coverage for a customer’s liability for a crash

Universal Underwriters Ins. Co. v. Winton, 818 F.3d 1103 (10th Cir. 2016)

GENERAL LIABILITY INSURANCE

No coverage or defense obligation under a commercial general liability policy for suit arising from sub-standard work and breach of a construction contract

Kentucky Bluegrass Contracting, LLC v. Cincinnati Insurance Co., LLC, 2015 OK CIV APP 100, 363 P.3d 1270

HOMEOWNERS’ INSURANCE

Homeowners’ insurance carrier could deny claim in suit on ground other than that asserted in the claim’s denial but insurance company could still be liable for bad faith for treating claim as multiple claims and applying multiple deductibles

McCrary v. Country Mut. Ins. Co., 2016 WL 1273243 (N.D. Okla. Mar. 31, 2016)

MOTOR VEHICLE INSURANCE

Dealer and car salesman who sell a car and affix a paper tag to a car without requiring proof of liability insurance are not liable for accident injuries and failure of the purchaser to have insurance

Blakley v. M&N Dealerships, L.L.C., 2016 OK CIV APP 41, 376 P.3d 917

PERSONAL LIABILITY UMBRELLA/HOMEOWNER’S INSURANCE

Homeowner’s personal liability umbrella policy provides no coverage for defamation action arising out of service on board of directors due to business pursuits exclusion and exclusions for professional services and membership on boards

State Farm Fire and Cas. Co. v. Pettigrew, 2016 WL 1337290 (N.D. Okla. Apr. 5, 2016)

SUBROGATION

No attorney fee award against subrogated insurance companies who potentially would have benefited from failed class action but which did not participate actively in class action suit

Avens v. Cotton Electric Coop., Inc., 2016 OK CIV APP 39, 377 P.3d 163

UNINSURED MOTORIST COVERAGE

Foreign exchange student qualifies as a “ward” so as to be covered as a “family member” insured under UM

Serra v. Personal Representative of Estate of Broughton, 2015 OK 82, 364 P.3d 637

Kansas insured may stack UM benefits under Kansas policies for motorcycle accident in Oklahoma, due to policy’s liberalization provision

Leritz v. Farmers Insurance Company, Inc., 2016 OK 79, __ P.3d __  

ERISA

Denial of disability benefits was arbitrary and capricious where medical opinions failed to address inability to work in light of combination of problems but case should be remanded for another determination by the ERISA plan

McMillan v. AT&T Umbrella Benefit Plan No. 1 holds an ERISA plan administrator’s denial of disability benefits arbitrary and capricious where the medical opinions relied upon each spoke to their particular specialty but did not address the claimant’s inability to work in light of the combination of problems, but that the remedy was to remand for reconsideration by the ERISA plan rather than awarding benefits.

Mr. McMillan had a high tech job dealing with setting up computer operations for businesses on behalf of AT&T. He had sleep apnea, diabetes, stage-III kidney disease, shortness of breath, chronic obstructive pulmonary disease, inability to walk or stand for long periods of time and inability to focus, concentrate, and retain short-term memory. He made a claim for short-term disability benefits under a policy which required inability to perform all essential functions of his job or another job assigned by the company with the same classification for which he was qualified.

The third-party-administrator (TPA) for the plan denied the claim and he appealed, as provided in the plan. The TPA then sent his medical records and reports to a large number of doctors, based on the large number of medical complaints. Each doctor found (in an extensive summary in the opinion) that the particular problem involving their specialty was not disabling. However, each deferred to the other specialties as to McMillan’s ability to perform his job in light of the combination of problems. The plan denied his appeal and he appealed to the U.S. District Court.

Judge Gregory Frizell reversed, finding the TPA’s determination arbitrary and capricious because, while a number of doctors had made findings as to their particular specialty, none addressed his ability to perform his job in light of the combination of problems McMillan had.

This raised the question of whether the Court should award benefits or remand for a redetermination of eligibility by the TPA. The Court notes that the Tenth Circuit has held that ordinarily the proper remedy is to remand for reconsideration and further findings. One gets the impression the result will be another denial.

ERISA preemption applies to require declaratory judgment action between employee and helicopter medical transport company to be removable to federal court

Garrett v. Eaglemed, LLC holds that a declaratory judgment action between an employee covered by an ERISA plan and a helicopter medical transport company gave rise to federal jurisdiction due to ERISA preemption.

An employee of a company which had an ERISA health plan had to be transported to another hospital for treatment. The helicopter service billed $35,000 for the service.

Rather than let the ERISA plan litigate with the helicopter service, the employee sued the helicopter service in state court (Ottawa County District Court) for a declaratory judgment that the charge was excessive. The helicopter company removed the case to federal court, citing federal question jurisdiction under ERISA.

The employee moved to remand, arguing that the employee’s action against the helicopter company involved only state law claims and did not implicate ERISA. There was no showing that the claim was ever submitted to the ERISA plan for payment or that the ERISA plan had taken any position with regard to the reasonableness of the bill.

The federal court, Judge Claire Egan, in the Northern District, holds in this opinion that ERISA preemption is so broad that the action is preempted by ERISA so as to be removable under federal question jurisdiction. Apparently, the Court’s theory is that the real dispute was between the ERISA plan and the helicopter service since the employee was entitled to submit the claim to the ERISA plan for payment and simply chose not to.

Under these circumstances, the Court holds, ERISA preemption is complete. The Court appears to have been influenced by the fact (which the Court notes) that the employee and the ERISA plan are represented by the same law firm.

GARAGE LIABILITY INSURANCE

Neither a primary garage liability policy on a car dealership nor umbrella coverage of two car dealerships provided coverage for a customer’s liability for a crash

Universal Underwriters Ins. Co. v. Winton holds that neither a primary garage liability policy nor umbrella coverage on two car dealerships covered multiple injury and death claims against a customer of one of the dealerships using a car belonging to one of the dealerships.

Mrs. Roberts really wanted a new car. She bought a Chrysler 300 from Mark Heitz dealership in Norman. Heitz did not have the car she wanted in stock so Heitz found the car she wanted at Bob Moore Chrysler in Oklahoma City, which delivered the car to Heitz. Mrs. Roberts apparently celebrated excessively. She caused a wreck which killed five people, including herself and injured two who survived.

After much litigation, the state court entered judgment for $5 million for each of two estates and for $3 million each for two of the survivors but with a provision that execution would be rendered on the judgments only against available car insurance. This case is a federal declaratory judgment action against the insurance companies for the two dealerships.

The federal district court, Judge David Russell, in the Western District, granted summary judgment for the insurance companies. This opinion in the Tenth Circuit Court of Appeals affirmed in a unanimous opinion by Judge Hartz.

The purchaser of the car, Mrs. Roberts, had a $25,000/50,000 policy. The Heitz garage liability policy provided, in a “most we will pay” provision that the policy would pay only a portion of its $300,000 limit “needed to comply with the minimum limits” required by the jurisdiction where the crash took place. Because Mrs. Roberts’ policy provided the required 25/50 limit needed to comply with the Oklahoma Compulsory Insurance Law, no part of the garage liability policy applied.

The Court rejected the argument by the injured people and estates that the “most we will pay” clause became an “escape” clause which the Court was required to disregard under the seminal Oklahoma case on “other insurance” clauses, Equity Mutual Ins. Co. v. Spring Valley Wholesale Nursery, Inc.

The Court then moved on to consider the umbrella coverage of the two dealerships. The Court rejected the victims’ argument that the vehicle remained the property of Bob Moore’s dealership because the title had not yet been transferred when the wreck occurred. The Court cites several Oklahoma cases which it holds reflect that the paper title to a car is not ownership of the vehicle but rather that a sale is complete upon delivery of the vehicle with intent to complete the sale. This case will be helpful in resolving such issues as it collects the Oklahoma cases on the relationship between the paper title and ownership of the vehicle. Here, since Moore did not retain ownership of the vehicle, the vehicle was not insured under Moore’s policy.

With regard to Heitz’ coverage, the Court holds that while Heitz was covered under its umbrella coverage, Heitz was not held liable and that, under the policy provisions, Mrs. Roberts was not covered. Since Mrs. Roberts was not covered and it was she who was found liable, there was no coverage applicable to pay the huge damages.

GENERAL LIABILITY INSURANCE

No coverage or defense obligation under a commercial general liability policy for suit arising from sub-standard work and breach of a construction contract

Kentucky Bluegrass Contracting, LLC v. Cincinnati Insurance Co. holds that there was no coverage under a commercial general liability (CGL) policy for a lawsuit arising out of a commercial construction contract and alleging faulty work which had to be redone, with the result that other contractors on the job could not get paid and suffered damages.

Kentucky Bluegrass Contracting, LLC (KBC) entered into a sub-contract for the construction of barracks and officers’ quarters at Fort Sill. The job did not go well and the result was a welter of lawsuits with claims and cross-claims by various contractors on the job, due to the prime contractor refusing to pay for sub-standard work which the prime contractor had to pay to have redone.

KBC sued in Oklahoma on its policy issued in Kentucky. That coverage suit resulted in this opinion. The trial court, Judge Keith Aycock, in the Comanche County District Court, granted summary judgment to the insurance company. The Court of Civil Appeals (COCA) affirmed, in this unanimous opinion by Judge Hetherington.

The Court first had to resolve a choice of laws dispute. It noted that 15 O.S. § 162 required the court determining the correct interpretation of a contract to apply the law of the place where the contract was to be performed or, if no place of performance was indicated, the law of the place where the contract was entered into.

The trial court applied Kentucky law, as the law of the place of contracting. The COCA reasoned that the side which wants the law of another state applied had the burden of showing that the other state’s law should apply. COCA held that there was an insufficient showing that the contract (the policy) did not provide a place of performance and so Oklahoma insurance law should apply. However, the Court said the result was not different, so it affirmed the trial court.

The thrust of the opinion is that, under either Kentucky or Oklahoma law, improper performance of a contract is not an “occurrence” so as to give rise to a duty to defend and indemnify. The only damage directly resulting from the poor construction was that the construction performed by the insured had to be redone. This does not give rise to a claim for an occurrence causing property damage. This is so because of exclusions in the policy (and all CGL policies) for the “business risk,” that is the risk that the work will not be done satisfactorily and will have to be redone. That is just not a risk which is insured by a CGL, which, rather, insures against damage to property other than the work done by the insured contractor.

HOMEOWNERS’ INSURANCE

Homeowners’ insurance carrier could deny claim in suit on ground other than that asserted in the claim’s denial but insurance company could still be liable for bad faith for treating claim as multiple claims and applying multiple deductibles

McCrary v. Country Mut. Ins. Co. holds that a homeowner’s insurance carrier could deny a claim in a lawsuit against it on a ground not asserted in the company’s initial denial of the claim but that a fact question precluded summary judgment for the insurance company whether the company was in bad faith for treating a single claim as multiple claims and applying multiple deductibles to covered losses.

Mr. and Mrs. McCrary had an older home which developed plumbing problems with its sewer drainage system. As a result, dirt washed out from under the home and settling caused damage to the home. The homeowners’ carrier, Country Mutual, treated as separate claims each of several instances of such settling and paid the cost of accessing the sites of the leaks but not the cost of the repairs. However, by treating leaks in each separate location as a separate claim, the insurance company caused the insureds to be liable for multiple $1,000 deductibles.

After the extent of the damage became apparent, County Mutual denied further payment, saying the claims were not covered under the policies but not relying specifically on “earth movement” and “seepage or leakage” exclusions in the policy. In the suit, Country Mutual relied on these exclusions.

The federal district court, Judge John Dowdell, in the Northern District, granted the insurance company summary judgment for the damage to the house but overruled the company’s summary judgment for a bad faith claim based on the imposition of multiple deductibles to the cost of accessing the plumbing leaks, which the company had conceded was covered.

This case has multiple problems. The decision was rendered March 31, 2016. On April 7, 2015, the Oklahoma Supreme Court rendered its decision in Broom v. Wilson Paving & Excavating, Inc.  which held an “earth movement” exclusion is limited to natural earth movement, such as an earthquake or landslide, and not to earth movement caused by human activity. For this reason, the effect of this decision is probably short-lived.

In addition, this federal court decision ruling that an insurance company can deny a claim on one ground and then defend its denial on another is simply contrary to long-standing Oklahoma law. This rule is commonly called the “mend the hold” doctrine. The term relates to a wrestling term where a wrestler releases a hold on his opponent to get a better hold or “mends the hold.”

The rule is generally stated thusly: If the insurer denies liability, all defenses of which it has knowledge at the time of the denial must be asserted or else they are waived.  The rule in Oklahoma originates from contract cases generally and is then applied to insurance cases. The Oklahoma Supreme Court adopted the rule in Morrison v. Atkinson  and quoted language from the United States Supreme Court as follows:

Where a party gives a reason for his conduct and decision touching anything involved in a controversy, he cannot, after litigation has begun, change his ground, and put his conduct upon another and a different consideration. He is not permitted thus to mend his hold.

The Oklahoma Supreme Court applied the rule, although not by name, in Buzzard v. Farmers Ins. Co., Inc.  It is not clear whether the Oklahoma law on this point was briefed to the court in the present case. The court in the present case relies solely on an unpublished 10th Circuit case, Cust-O-Fab Serv. Co., LLC v. Admiral Ins. Co.  which, in turn, cites no Oklahoma authority. The Tenth Circuit probably needs to take another look at this case and issue.

MOTOR VEHICLE INSURANCE

Dealer and car salesman who sell a car and affix a paper tag to a car without requiring proof of liability insurance are not liable for accident injuries and failure of the purchaser to have insurance

Blakley v. M&N Dealerships, L.L.C. holds a car dealership and its salesman who sell a car and affix a paper tag to the car without requiring proof of insurance from the purchaser are not liable in negligence for injuries inflicted by the uninsured purchaser of the car.

Miller, a car salesman for Edmond Hyundai, sold a car and put a paper tag on it. The dealership put insurance coverage on the car but only collision coverage. Blakley, who was injured in a wreck with the purchaser about a month after the sale claimed that the dealership represented to the purchaser that the insurance financed into the sale included “full coverage.” There was no liability coverage on the car.

Blakley sued the dealership and salesman, claiming they were liable for having put the paper tag on the car without making sure there was liability coverage on the car and were liable in tort for negligence for having failed to do so. The trial court, Judge Bryan Dixon, in Oklahoma County, granted the Defendants summary judgment. The Court of Civil Appeals affirmed, in this opinion by Judge Larry Joplin.

Both courts held that there was no duty on the car dealership or the salesman for failure to see to it that the purchaser had liability insurance. The courts rejected plaintiff’s argument that the statute requiring that the owner furnish a motor vehicle license agent with proof of liability insurance imposed such a duty. This case holds that the duty is solely on the vehicle owner and not the dealer who issues the temporary tag.

The Court of Civil Appeals says the duty to procure liability insurance is non-delegable and seems to think this prevents the person issuing the tag from being liable along with the owner for the failure to procure insurance. The more usual test is whether the tort is foreseeable and not whether the duty is non-delegable.

PERSONAL LIABILITY UMBRELLA/HOMEOWNER’S INSURANCE

Homeowner’s personal liability umbrella policy provides no coverage for defamation action arising out of service on board of directors due to business pursuits exclusion and exclusions for professional services and membership on boards

State Farm Fire and Cas. Co. v. Pettigrew holds that a homeowner’s personal liability umbrella policy provides no coverage for a suit for defamation and other business torts arising from the insured’s service on the board of directors due to a business pursuits exclusion and exclusions for professional services and membership of boards of directors.

Mr. Pettigrew had more than 30 years of experience in the insurance business. He served for eight years on the Board of Directors of a holding company for an insurance company. He became disenchanted with the man who served as chairman and CEO of the holding company. As a result, he submitted a Freedom of Information Act request to the Oklahoma Insurance Commission and, as a result, found that the man had some years before entered into a deferred prosecution agreement in Montana in a case involving securities fraud.

Pettigrew resigned from the board and shared his information about the background of the chairman/CEO with a fellow board member and the Oklahoma Department of Securities. The chairman/CEO sued Pettigrew for defamation, breach of fiduciary duty, intentional interference with business relationships, interference with prospective business relationships, fraud and deceit, outrage and sought actual and punitive damages.

Pettigrew had a homeowner’s policy and a personal liability umbrella with State Farm. While he conceded that the homeowner’s policy coverage was barred, he claimed coverage and sought a defense under the umbrella policy. State Farm defended under reservation of rights and sued Pettigrew and the chairman/CEO for a declaratory judgment that there was no coverage and no duty to defend. In this opinion, Judge Claire Eagan, in the Northern District federal court, sustained State Farm’s motion for summary judgment, finding there was no coverage or defense obligation.

Pettigrew argued that his action involved in the underlying lawsuit did not come within the business pursuits exclusion or exclusions for professional services or service on the board. He argued that his action in reporting the claimed wrongdoing was not a business pursuit nor a professional service so as to be excluded. Rather, he argued, he was simply trying to report the questionable information as a good citizen.

State Farm disagreed and Judge Eagan agreed with State Farm. She noted that Pettigrew was paid for his service on the board and that his reason for being on the board was based on his extensive knowledge of the insurance business. Thus, his liability, if any, for the business torts, “arose out of” a business pursuit and the rendering of professional services. Neither did the fact that some of his claimed wrongful acts occurred after he resigned from the board change the result since he was simply doing acts which ultimately resulted from his board membership and his rendering of professional services.

SUBROGATION

No attorney fee award against subrogated insurance companies who potentially would have benefited from failed class action but which did not participate actively in class action suit

Avens v. Cotton Electric Coop., Inc. holds that insurance companies whose insureds were members of a class suing for damages from a wild fire were not liable for attorney fees when the plaintiffs lost the suit.

Avens was the class representative for a class made up of people who lost property in a wildfire and sued Cotton Electric for negligence in causing the fire and who lost the suit. The prevailing party in the lawsuit was entitled to attorney fees under 12 O.S. § 940 because the suit was one for negligent damage to or destruction of property.

After the class lost the suit, Avens negotiated a settlement under the terms of which Avens declined to appeal and Cotton Electric agreed to forego its attorney fee claim against Avens as class representative. Cotton Electric then sued in this case the insurance companies which had subrogation claims arising from the fire. While the insurance companies cooperated in the class action, they did not finance the litigation nor participate.

The trial court, Judge Joe Enos, in Stephens County, refused to award Cotton Electric attorney fees. The Court of Civil Appeals affirmed, in an opinion by Judge Larry Joplin.

The Court noted that the Oklahoma class action statute, 12 O.S. § 2023 is similar to and based on the federal class action rule, F.R.C.P. 23, and looked to federal cases for precedent in deciding the issue whether the subrogated insurance companies were liable for attorney fees.

The Court of Civil Appeals noted that the U.S. Supreme Court has held that class members “are almost never subject to counterclaims or cross-claims, or liability for fees or costs.”  While the Oklahoma statute does not address the issue and the Oklahoma cases have not decided it, this case adopts the rule as Oklahoma law.

UNINSURED MOTORIST COVERAGE

Foreign exchange student qualifies as a “ward” so as to be covered as a “family member” insured under UM

Serra v. Personal Representative of Estate of Broughton holds that a foreign exchange student living with the named insureds qualified as a family member insured as a “ward” of the named insured.

Ms. Serra was an 18-year old foreign exchange high school student from Spain, living with the named insured and his family in Oklahoma when she was injured by an uninsured motorcyclist, who was killed in the crash. She sought UM coverage under the State Farm family auto policy covering her host family.

The trial court entered summary judgment for State Farm, holding she was not a “ward” or “foster child” and was not, therefore, a family member insured. The Court of Civil Appeals affirmed. The Supreme Court reversed, in this 7 to 2 opinion by Justice Watt, with Justices Winchester and Taylor dissenting.

The Supreme Court relied on its earlier decision in Flitton v. Equity Fire and Cas. Co.,  holding a step-brother was a resident relative and the Tenth Circuit’s decision in Houston v. National General,  that an unrelated child living in the insured home qualified as a “ward.”

The decision in Flitton is pretty straight-forward. Houston is a little more complicated. In Houston, a girl lived with her boyfriend and his grandfather, after she and the boyfriend had a child and her parents presumably put her out of their home. The Tenth Circuit held that this put her in the position of being a “ward” of the grandfather/insured, although there had been no guardianship.

In this case, there was a complicating factor in that the foreign exchange student, unlike the children in Flitton and Houston, was 18-years old and, therefore, an adult. The Supreme Court suggested the Court of Civil Appeals had declined to adopt a “non-technical” definition of the term “ward” while the Supreme Court does so.

Kansas insured may stack UM benefits under Kansas policies for motorcycle accident in Oklahoma, due to policy’s liberalization provision

Leritz v. Farmers Insurance Company, Inc. holds that a Kansas insured may stack uninsured motorist (UM) limits under a policy issued in Kansas, due to a liberalization provision in the policy.

Leritz lived in Kansas and had a motorcycle and two cars insured under a policy issued in Kansas which provided $100,000 UM benefits. Farmers charged separate premiums for each vehicle but denied stacking under the policy, due to a Kansas anti-stacking statute. At the time of Leritz’ wreck on the motorcycle in Oklahoma, Oklahoma law permitted stacking where separate premiums were charged for each of multiple vehicles insured under the policy. The controlling Oklahoma UM cases at the time required an Oklahoma court to apply the law of the place where the policy was written.

Leritz had serious injuries. Farmers paid $100,000, much less than his medical expenses alone. Leritz sued Farmers in Delaware County, Oklahoma, arguing that the earlier Oklahoma cases were wrong and that Oklahoma law should apply since 15 O.S. § 162 requires the court to apply the law of the place where a contract is to be performed and provides for the application of the law of the place where the policy is written where the contract does not specify where the policy is to be performed. Leritz argued that the provision in Lertiz’ policy that the policy applied anywhere in the United States or Canada where an accident occurs specified that the contract (the policy) was to be performed where the accident occurred.

The trial court, of course, had to follow the existing Oklahoma law and granted Farmers summary judgment. The Court of Civil Appeals affirmed and the Supreme Court granted certiorari and reversed, in a six to three decision by Justice Colbert.

The Supreme Court based its decision on an argument different from the one Leritz presented. The Court noted that the policy contained a liberalization provision that when the insured traveled outside the state where the policy was issued, “We will interpret this policy to provide any broader coverage required by those laws, . . .”  Further and “most importantly” the policy provided that “Subject to the law of the state of occurrence, we will pay no more than these maximums [policy limits] regardless of the number of vehicles insured, insured persons, claims, claimants, policies, or vehicles involved in the occurrence.”  The majority found these provisions to be “choice of law” provisions, which make it unnecessary to address the propriety of the Court’s earlier rulings on which state’s statute should be applied.

Justices Winchester and Taylor joined in a separate dissent by Justice Gurich. The dissent argues that Oklahoma has no involvement in the case “other than being the location” of the accident. The dissent takes no position as to whether the Court should address the statutory choice of law rule.