Two Insurance Cases Written by the New Supreme Court Justice
Today, Justice Neil Gorsuch will be appointed to the U.S. Supreme Court. Since I and my readers are interested in insurance matters I thought it might be useful to see the type of decisions he has made in the past relating to insurance. Below I have digested two of his insurance decisions so you may understand the way our new Justice resolves insurance matters.
How Policy Limits Disputes Are Resolved
In Professional Solutions Ins. Co. v. Mohrlang, 363 Fed.Appx. 650 (2010) the parties asked the Tenth Circuit to determine whether two professional insurance claims against the same attorney are related to one another? If so the limits available is $500,000 and if not the limits available to the lawyer is $1,000,000.
Professional Solutions Insurance Company (PSIC) provided single coverage liability of $500,000, up to an annual aggregate limit of $1 million, to one of its insureds. When Bruce Mohrlang submitted a negligence claim against the insured, and Harry Mohrlang submitted another alleging breach of fiduciary duties, PSIC conceded liability of at least $500,000 on each but argued that under the policy definitions, the claims were related and thus subject to the $500,000 single coverage limit.
The parties eventually settled their disputes. PSIC agreed to pay the single coverage limit of $500,000 and pursue this declaratory judgment action to determine any further liability. The sole question was whether the two claims were related to one another so as to cap PSIC’s liability at $500,000, or whether the two claims were unrelated and thus separately covered under PSIC’s annual aggregate limit of $1 million. The district court granted summary judgment in favor of the Mohrlangs.
THE TWO CLAIMS
The trial court recognized that the critical inquiry was whether the claims were “temporally, logically or causally connected by any common fact, circumstance, situation, transaction, event, advice or decision.” The court understood that Bruce Mohrlang’s claim was based on the insured’s negligence in structuring a corporate stock sale, while Harry Mohrlang alleged breach of fiduciary duties based on the insured’s misrepresentations that caused him to release a deed of trust he held against the corporate entity.
Harry Mohrlang’s claim was not temporally connected to the sale because the insured caused Harry Mohrlang to release his deed of trust some three weeks after the sale closed. The court found no logical connection between the claim and the sale because neither the deed of trust nor the promissory note it secured was incorporated into the final sale agreement and both should have remained unaffected by the sale. Finally, the court determined that no causal connection existed between Harry Mohrlang’s claim and the sale because the promissory note remained a valid, independent obligation even after the sale, and the deed of trust was not released until the insured’s unforeseeable acts severed any causal link that could have existed.
The trial court ruled that the two claims were unrelated and PSIC was liable under the policy’s $1 million annual aggregate limit.
Judge Gorsuch and the Tenth Circuit concluded that the two claims are unrelated. Moreover, having reviewed the parties’ appellate materials, the district court’s order, and the relevant legal authority, Judge Gorsuch agreed with the district court’s cogent and well-reasoned analysis. The analysis was detailed, accurate, and complete.
As an insurance lawyer, consultant and expert witness it is a welcome relief and refreshing to see an appellate decision that looks at the clear findings of the trial court, affirms the decision because that is what the facts and the law required, and although the ruling went against the insurer it was clearly correct.
AN INSURER IS NOT OBLIGATED TO BE CLAIRVOYANT
In Johnson v. Liberty Mut. Fire Ins. Co., 648 F.3d 1162 (2011) Judge Gorsuch was faced with a suit insureds brought action against their automobile insurer, alleging spoliation of evidence, that the insurer acted negligently as a bailee, and that insurer engaged in bad faith breach of its insurance duties by failing to hold onto a pair of tail lights that would allegedly help insureds win a personal injury lawsuit they wanted to bring against a driver involved in accident with insureds.
Judge Gorsuch reported that the case is about a pair of missing tail lights and the limits of reasonable foreseeability.
Russell and Jennifer Johnson blame Liberty Mutual for failing to hold onto a pair of tail lights that, they say, would have helped them win a personal injury lawsuit they wanted to bring. “Problem is, the Johnsons never asked Liberty Mutual to keep the tail lights, never mentioned their intent to sue, and allowed years to pass without a word. Now they fault the company for failing to divine their hidden (and perhaps not yet formed) intentions. Because the Johnsons, quite unsurprisingly, cannot identify a statutory or contractual basis for their claim, they ask us to create one for them in the common law of tort.”
One early summer morning, Russell Johnson was driving a pickup truck when he was rear-ended. Michael Dellock, an employee of Zimmerman Truck Lines, did it. When the police arrived, Mr. Dellock told them he crashed into Mr. Johnson’s truck because the latter’s trailer’s tail lights weren’t working—and, based on this account, the police issued Mr. Johnson a traffic citation. Recognizing the potential evidentiary importance of the tail lights, Mr. Johnson’s insurance company—Liberty Mutual—took them to have them tested. After a lab report suggested that the lights were operating at the time of the crash, Liberty Mutual succeeded in fending off liability claims threatened by Zimmerman and Mr. Dellock’s insurance companies. Liberty Mutual even managed to get Zimmerman’s insurance company to pay for the damage to Mr. Johnson’s truck and trailer. And to top it off, the police dismissed Mr. Johnson’s citation. Jennifer Johnson, Mr. Johnson’s wife, herself later admitted that by this time she had “kind of forgot about” the tail lights.
“But the end of these lurking lawsuits only marked the birth of another.” Four years after the accident, Mr. and Mrs. Johnson decided to turn the tables on Zimmerman and Mr. Dellock and sue them for personal injuries. To help their case, the Johnsons asked Liberty Mutual to return the tail lights. By this time the lights were long gone. Gone because, over all the intervening years, the Johnsons had never asked Liberty Mutual to return or retain the lights, and never mentioned their potential interest in suing. Ultimately, the Johnsons settled their personal injury claims but, they say, at a deep discount because of the missing tail lights.
And this is the nub of our case. Arguing they could have obtained more money from Zimmerman and Mr. Dellock had Liberty Mutual held onto the tail lights, the Johnsons sued under Colorado law. The Johnsons seek to use the common law in many uncommon ways. They ask the court to recognize and enforce an independent spoliation tort, but the Colorado courts have yet to go so far. They say Liberty Mutual neglected its duties as the bailee of their property, but it’s unclear from the record whether the Johnsons even owned the tail lights by the time they asked for them. They argue that Liberty Mutual tortiously (in bad faith) disregarded an insurance obligation, but it’s hardly obvious what obligations Liberty Mutual had as an insurer to help the Johnsons anticipate and prepare for an affirmative lawsuit.
The Johnson’s needed to prove that Liberty Mutual knew or should have known that the destroyed tail lights would be relevant (valuable) evidence in their future affirmative litigation.
The Johnsons can’t prove the need for such an affirmative duty. No court has reached the stage where everyone is bound by the common law to gird for more litigation even after everything appears settled. Ours may be a litigious world. Lawsuits may tend to beget more lawsuits. But, in the absence of any statutory or contractual duty, it is unreasonable to expect anyone to hold onto apparently unwanted property for two years after all claims involving it appear to have been resolved.
The common law rarely demands such uncommon foresight.
Although Liberty Mutual had an internal policy requiring it to preserve the tail lights for six years after closing its claims file—in time for the Johnsons to use the lights in their affirmative litigation. But this line of argument conflates two very different things. When you violate a corporate policy you may well be in trouble with your boss, but that doesn’t necessarily mean you have committed a tort.
The role of a court of law is not to enforce private corporate policy but to assess public legal liability. And the Johnsons were unable to show how, in this case, the existence of the one (the corporate retention policy) might be evidence of a violation of the other (the law).
It is far more likely Liberty Mutual adopted its internal retention policy not to help out others with their own lawsuits, but to ensure it could process and defend insurance claims that it had a contractual or statutory duty to address.
So, fact-wise, everything there was to know on the foreseeability question was known by the time of the district court’s ruling. And those facts were undisputed. No doubt, a trial still might have been warranted if reasonable jurors could have drawn conflicting inferences from the evidence. But that isn’t our case.The district court was right that the undisputed facts of this case are insufficient as a matter of law to establish reasonable foreseeability.
The common law doesn’t require such uncommon foresight of an insurer to anticipate that years after all claims presented to them were settled, the persons they insured would file an affirmative suit for bodily injuries.
It is often said that courts dislike insurance companies and will move Heaven and Earth to find some way to rule against an insurer. A judge, whether sitting in a trial court or an appellate court is, as Judge Gorsuch pointed out, is required to apply the facts and law. To rule in favor of the Johnsons in this case would require a rule of law that insurers must be clairvoyant about future needs of its insureds. He concluded, properly, that there is nothing in an insurance contract, the covenant of good faith and fair dealing or the law to require the foreseeability of a biblical prophet.
This article and all of the blog posts on this site summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
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