Rights Available to the Insurer

Need for an Occurrence

Rights of an Insurer that Provided Defense without Knowledge of True Facts

In Federated Dep't Stores, Inc. v. Twin City Fire Ins. Co., 28 A.D.3d 32, 807 N.Y.S.2d 62 (2006), the First Department held that the insurer’s assumption of the defense without knowledge of the true facts was insufficient to stop the insurer from successfully disclaiming coverage upon learning the true facts.

Since the insurer reserved its rights before disclaiming coverage, the insured’s argument that estoppel prevented the disclaimer failed.

Estoppel (a rule that requires fairness and protects one party from being harmed by another party’s voluntary conduct) cannot be used to create coverage where none exists. Any reservation provided by the insurer is sufficient to prevent reliance upon the defense provided by the insurer should the insurer decide to disclaim later.

In an insurance dispute, estoppel can only be used by a court to prevent an action if the insured demonstrates actual prejudice by the insurer’s actions. Specifically, the insurer’s control of the defense must be such that the character and strategy of the lawsuit can no longer be altered.[1]

When a suit on its face shows no coverage, but the insured notifies the insurer of factual contentions that would place the claim within the policy coverage, the insurer has an obligation to give due consideration to its insured's factual contentions and to base its decision as to whether to provide a defense on true facts. The requirement that an insurer base its decision on true facts will necessitate that the insurer conduct a reasonable investigation into its insured's contentions. To relieve an insurer of any duty to investigate its insured's contentions would allow the allegations of a third-party to determine the insured's rights under its contract.

Courts will place a duty of investigation on insurers in these limited circumstances because the duty is not an unreasonable burden on the insurer, especially in light of the availability of the procedurally safe course of providing a defense under a reservation of rights and filing a declaratory judgment action to determine its obligations.

An insurer who fails to investigate its insured's contentions and refuses a defense will be liable for a breach of the duty to defend if a reasonable investigation at the time would have established the potential for coverage. [Anderson v. Southern Guar. Ins. Co., 235 Ga.App. 306, 508 S.E.2d 726 (Ga. App. 1998)]

Need for an Occurrence

An “occurrence” is usually defined as accidental loss or damage which results, during the policy period, in bodily injury or property damage.

Sometimes what appears to be the most routine home sale transaction can result in grave legal problems and seriously complicated litigation. In James T. Krause and Patricia Ann Vanlear v. James M. Kerns and Christine C. Kerns, And American Automobile Insurance Company, No. 121,842, Court of Appeals of The State of Kansas (October 16, 2020) James M. and Christine C. Kerns owned a residence covered by a homeowner’s insurance policy issued by American Automobile Insurance Company (AAIC). The Kernses entered into a contract to sell their home to James T. Krause and Patricia Ann Vanlear (collectively Krause). As part of the sale, the Kernses provided a disclosure statement which indicated that there were no problems with several common areas of concern when buying a home. However, according to Krause the disclosure either misrepresented a number of issues or outright omitted problems with the home.

The suit between Krause and the Kernses was settled. As part of the settlement, the Kernses agreed to stipulate to a final judgment in the amount of $79,482 in favor of Krause. The Kernses also agreed to assign “all of their rights, claims, and causes of action against AAIC and its agents, brokers, employees, officers and all other persons or entities relating to our arising” out of the Kernses insurance policy with AAIC. Additionally, Krause agreed to not take any action to collect from their judgment against the Kernses. Instead, Krause could only pursue collection of the judgment against AAIC.

Krause and the Kernses settled the suit, and as part of the settlement the Kernses agreed to assign all of their rights under their insurance policy to Krause. The insurer successfully moved for summary judgment arguing, in part, that coverage under the policy was not triggered because there was no “occurrence” which the policy required.

According to Krause, after closing on the property they discovered multiple issues with the property that were not properly addressed in the disclosure. As examples, Krause alleged that the pool was in serious disrepair, the fireplace was unusable because of ventilation problems, there was a leak in the basement, and the lawn irrigation system was largely inoperable.

The insurance policy referenced by the settlement agreement referred to the homeowner insurance policy the Kernses had through AAIC. Essentially, Krause argued that an “occurrence,” as defined by the insurance policy, included the “failure of [the Kernses] to remedy or otherwise correct the errors and omissions from disclosure made by [the Kernses] in the disclosure.” Krause argued that “the damage to the Property that was conveyed by [the Kernses] to Krause in an occurrence.”

The district court granted AAIC’s motion for summary judgment and noted that even if the disclosure and subsequent damages constituted an occurrence as defined by the policy, Krause still could not recover because of another exclusionary clause in the policy. The district court concluded that AAIC had no duty to indemnify the Kernses because the Kernses’ statements and Krause’s reliance on those statements clearly fell within the exclusion.

Under the policy, AAIC agreed to insure the Kernses in the event of: “A. Property losses and bodily injury; personal injury; or property damage caused by an occurrence; or B. Loss assessment that is charged against you; during the policy period.”

The entire linchpin of this case was whether there was an occurrence, as defined in the policy, which would trigger coverage. If there was no occurrence, then there is no policy coverage and thus no need to look to any other policy provisions of inclusion or exclusion.

An “occurrence” must be fortuitous, that is undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate character, and often accompanied by a manifestation of force. Using that definition, there is no occurrence which would require AAIC to indemnify the Kernses for Krause’s suit against them.

The closing was not an occurrence as defined by the policy. The closing on the home was Kermess designed, planned, and expected.

The Court of Appeal concluded that the trial court did not err by granting AAIC’s motion for summary judgment and holding there was no occurrence as defined by AAIC’s policy. And the existence of such an occurrence is the necessary predicate for application of provisions allowing coverage under any other language of the policy.