Confusion Amongst Texas Courts: When Can Insureds Recover Policy Benefits for Statutory Violations?

While first-party bad faith claims may appear to be a dying notion in other jurisdictions, the tort-based claim in Texas is alive and well. Throughout the years, courts have continued to search for ways to define the common-law standard and balance it with public interest due to the unequal bargaining power in the insured-insurer relationship.For this reason, the law of bad faith in Texas is constantly evolving.

Texas imposes a common law duty on insurers to “deal fairly and in good faith with their insureds.”A breach of the duty of good faith and fair dealing gives rise to a tort cause of action that is separate from any action for breach of the underlying insurance policy.If an insurer breaches its duty of good faith and fair dealing, in addition to interest, court costs and attorney’s fees, the insured can recover actual, i.e. extra-contractual, damages for economic or personal injuries and exemplary damages if: (1) actual damages were awarded for an injury independent of the loss of policy benefits and (2) the insurer’s conduct was fraudulent, malicious, intentional or grossly negligent.Exemplary damages are within the jury’s discretion and “must be reasonably proportioned to actual damages.”5

Texas also provides a statutory scheme for bad-faith claims that allows recovery of extra-contractual damages through a private cause of action against an insurer. The statutory bad-faith tort is governed by Chapter 541 of the Texas Insurance Code (“Code”).The statutory claim is in addition, and a supplement, to the contractual cause of action against an insurer for breach of an insurance policy. Similar to the common law claim, for Code violations the insured may recover economic damages, but only up to three times the amount of economic damages, i.e. treble damages, for violations committed “knowingly.”7

It is not uncommon in first party bad-faith cases for the insured to assert a breach of contract claim against the insurer for breaching the insurance policy and a tort cause of action against the insurer for violations of the Code. However, extra-contractual tort claims brought pursuant to the Code require the same predicate for recovery as a bad faith claim under a good faith and fair dealing violation.Because the frameworks of the statutory and common law claims are so similar, most Texas courts have treated common law claims as redundant.

When considering the damages available under the policy and under the statute, there have been some inconsistencies amongst Texas courts regarding the recovery of policy benefits when there have been statutory violations of the Code. As such, in USAA Texas Lloyds Company v. Gail Menchaca, the Texas Supreme Court seized the opportunity clear up the confusion by addressing the issue of whether an insured can recover policy benefits for Code violations when there has been no breach of the insurance policy.9

USAA v Menchacha

In Menchaca, the Texas Supreme Court acknowledges, “When our decisions create such uncertainties, ‘it is our duty to settle conflicts in order that the confusion will as nearly as possible be set at rest.’”10 Thus, the goal in Menchaca was “to provide clarity regarding the relationship between claims for an insurance policy breach and Insurance Code violations.”11 The primary question was “whether an insured can recover policy benefits as actual damages caused by an insurer’s statutory violation absent a finding that the insured had a contractual right to the benefits under the insurance policy.”12

Following Hurricane Ike in September 2008, Gail Menchaca contacted her homeowner’s insurance company, USAA Texas Lloyds (“USAA”), and reported storm damage to her home.13 The USAA adjuster who inspected Menchaca’s claim found only minimal damage.14 USAA determined that the damage was covered under Menchaca’s policy but declined to pay benefits because the total repair costs did not exceed the deductible under Menchaca’s policy.15 Five months later, at Menchaca’s request, another USAA adjuster re-inspected Menchaca’s home.16 The second adjuster confirmed the first adjuster’s findings and again USAA declined to pay any policy benefits.17 Menchaca filed suit against USAA for breach of the insurance policy and for unfair settlement practices in violation of the Texas Insurance Code. Menchaca sought policy benefits for both claims.18 For the alleged breach of the insurance policy, she sought benefit of the bargain damages, i.e. the amount of her claim for policy benefits and attorney’s fees. For the statutory violations, she sought actual damages, i.e. the loss of the benefits that should have been paid pursuant to the policy, court courts and attorney’s fees.19

The case proceeded to a jury trial and three questions were submitted to the jury.20 Question 1 addressed Menchaca’s breach of contract claim and asked whether USAA failed “to comply with the terms of the insurance policy with respect to the claim for damages filed by Gail Menchaca resulting from Hurricane Ike” and the jury answered “No.” Question 2 addressed Menchaca’s claim for statutory violations and asked “whether USAA engaged in various unfair or deceptive practices, including whether USAA refused to “pay a claim without conducting a reasonable investigation with respect to that claim” and the jury answered “Yes.” Question 3 asked the jury to determine Menchaca’s damages that resulted from either USAA’s failure to comply with the policy or its statutory violations, calculated as “the difference, if any, between the amount USAA should have paid Gail Menchaca for her Hurricane Ike damages and the amount that was actually paid” and the jury answered “$11,350.”21

Both parties moved for judgment in their favor. USAA argued that Menchaca was not entitled to recover for bad faith or extra-contractual liability because the jury found that it did not breach the insurance policy. Menchaca argued that the jury answered Questions 2 and 3 in her favor and neither were dependent on a favorable answer to Question 1. The trial court disregarded Question 1 and entered judgment in Menchaca’s favor. The court of appeals affirmed and the Texas Supreme Court granted USAA’s petition for review.22

In analyzing whether an insured can recover policy benefits as actual damages caused by an insurer’s statutory violation absent a finding that the insured had a contractual right to benefits under the insurance policy, the Court set forth “five distinct but interrelated rules that govern the relationship between contractual and extra-contractual claims in the insurance context.”23 Following the Court’s analysis of these rules, it determined that the court of appeals erred by affirming the trial court’s decision to disregard the jury’s answer to Question 1. The Court further stated, “In light of the parties’ obvious and understandable confusion over our relevant precedent and the effect of that confusion on their arguments in this case, we conclude that a remand is necessary here in the interest of justice.”24 The rules outlined by the Court are as follows:

Rule 1:

General Rule: An insured cannot recover policy benefits for an insurer’s statutory violation if the insured does not have a right to those benefits under the policy.25 This rule is derived from the Court’s rule in that “there can be no claim for bad faith when an insurer has promptly denied a claim that is in fact not covered.”26 Although the fact pattern in Stoker was limited to the bad faith denial of a claim, the Court has since applied the general rule to other types of extra-contractual violations, i.e. failing to properly pay a claim, failing to fairly investigate a claim and failing to effectuate a prompt and fair settlement of the claim.27 The general rule is derived from the fact that Code “only allows an insured to recover actual damages ‘caused by’ the insurer’s statutory violation.”28 In determining whether the insured has to establish a right to benefits and then a breach of the policy to recover policy benefits for statutory violations, the Court stated, “While an insured cannot recover policy benefits for a statutory violation unless the jury finds that the insured had a right to the benefits under the policy, the insured does not also have to establish that the insurer breached the policy by refusing to pay those benefits.”29

Rule 2:

Entitled to Benefits Rule: An insured who establishes a right to receive benefits under an insurance policy can recover policy benefits as “actual damages” under the statute if the insurer’s statutory violation causes the loss of the benefits.30 “If an insurer’s ‘wrongful’ denial of a ‘valid’ claim results from or constitutes a statutory violation, the resulting damages will necessarily include ‘at least the amount of the policy benefits wrongfully withheld.’”31

Rule 3:

Benefits Loss Rule: An insured can recover policy benefits as actual damages under the Insurance Code even if the insured has no right to those benefits under the policy, if the insurer’s conduct caused the insured to lose that contractual right. 32 The Court has recognized this principle in cases alleging claims against an insurer for misrepresenting a policy’s coverage, statutory violations by the insurer which prejudice the insured by waiving its right to deny coverage or is estopped from doing so, and statutory violations that cause the insured to lose a contractual right to benefits that it otherwise would have been entitled to.33 “[A]n insurer that commits a statutory violation that eliminates or reduces its contractual obligations cannot then avail itself of the general rule.”34

Rule 4:

Independent Injury Rule: The first aspect of the rule is that if an insurer’s statutory violation causes an injury independent of the insured’s right to recover policy benefits, the insured may recover damages for that injury even if the policy does not entitle the insured to receive benefits.35 This rule takes into account that there may be some extra-contractual claims that may not “relate to the insurer’s breach of contractual duties to pay covered claims” and recognizes that there may be compensatory damages different from policy benefits that result from the tort of bad faith under common law.36

The second aspect of the independent-injury rule is that an insurer’s violation does not allow the insured to recover any damages beyond policy benefits unless the violation causes an injury that is independent from the loss of the benefits.37 For instance, the Court held in Twin City Fire Ins. Co. v. Davis that “an insured who prevails on a statutory claim cannot recover punitive damages for bad-faith conduct in the absence of independent actual damages arising from that conduct.38 Notably, as it relates to the independent-injury rule, the Court states that an independent-injury claim would be rare, they have yet to encounter one, and “have no occasion to speculate what would constitute a recoverable independent injury.”39

Rule 5:

No-Recovery Rule: An insured cannot recover any damages based on an insurer’s statutory violation unless the insured establishes a right to receive benefits under the policy or an injury independent of a right to benefits.40.

Conclusion

“It is the beginning of wisdom when you recognize that the best you can do is choose which rules you want to live by, and it’s persistent and aggravated imbecility to pretend you can live without any.”41 The Texas Supreme Court has attempted to clear up the confusion caused by its precedent by adopting five rules on the issue of recovery of policy benefits for statutory violations. While the rules appear fairly simplistic and undoubtedly will provide guidance, it remains to be seen whether the opinion actually brings clarity to the situation or simply a lesser degree of confusion for the courts to follow. In any event, the rules in Menchaca appear to weigh in favor of insurers because the law is settled, i.e. there must be a right to receive benefits or a (rare, but possible) independent injury to receive policy benefits for statutory violations.


[1] Universal Life Ins. Co. v. Giles, 950 S.W.2d 48, 53 (Tex. 1997).

[2] Arnold v. Nat’l Cty. Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987).

[3]Viles v. Sec. Nat’l Ins. Co., 788 S.W.2d 566, 567 (Tex. 1990).

[4] Pena v. State Farm Lloyds, 980 S.W.2d 949, 958 (Tex. App.—Corpus Christi 1998, no pet.); Giles, 950 S.W.2d at 54. See also Arnold, 757 S.W.2d at 168 (stating, “[E]xemplary damages and mental anguish damages are recoverable for a breach of the duty of good faith and fair dealing under the same principles allowing recovery of those damages in other tort actions.”).

[5] Pa Preston Carter Co. v. Tatum, 708 S.W.2d 23, 25 (Tex. App.—Dallas 1985, no writ). There is no set rule or ratio between the amount of actual damages and exemplary damages which will be considered reasonable and the determination is made on a case-by-case basis. Alamo Nat’l Bank v. Kraus, 616 S.W.2d 908, 910 (Tex. 1981).

[6] Texas does not adhere to the Uniform Deceptive Trade Practices Act adopted by many other states, but has its own set of laws, known as the Texas Deceptive Trade Practices Act (“DTPA”). Chapter 541 of the Texas Insurance Code addresses the protection of consumer interests against deceptive, unfair, and prohibited practices within the context of insurance. Chapter 17.50(a)(4) of the DTPA incorporates Chapter 541 of the Texas Insurance Code in its entirety.

[7] TEX. INS. CODE § 541.152

[8] National Sec. Fire & Cas. Co. v. Hurst, 523 S.W.3d 840, 840 (Tex. App.—Houston 14th Dist. 2017, no pet.).

[9] No. 14-0721, 2017 WL 1311752, at *1 (Tex. 2017).

[10] 2017 WL 1311752, at *1.

[11] Id. at *3.

[12[ Id. at *1.

[13] Id. 

[14] Id. 

[15] Id. 

[16] Id. 

[17] Id. 

[18] Id. 

[19] Id. at *3.

[20] Id. at *2.

[21] Id.

[22] Id.

[23] Id. at *4.

[24] Id. at *14

[25] TEX. INS. CODE § 541.151; Stoker, 903 S.W.2d at 341.

[26] Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995).

[27] Menchaca, 2017 WL 1311752, at *5.

[28] Id. (citing TEX. INS. CODE § 541.151).

[29] Menchaca, 2017 WL 1311752, at *7.

[30] Id

[31] Id. (citing Vail v. Texas Farm Bureau Mut. Ins. Co. v. Castaneda, 988 S.W.2d 189, 188 (Tex. 1998).

[32] Menchaca, 2017 WL 1311752, at *10 (emphasis in original).

[33] Id.

[34] Id.

[35] Id. at *11.

[36] Id.. ; see also Twin City Fire Ins. Co. v. Davis, 904 S.W.2d 663, 666 (Tex. 1995) (identifying mental anguish damages as an example).

[37] Menchaca, 2017 WL 1311752, at *11 (emphasis added).

[38] 904 S.W.2d 663, 666 (Tex. 1995) (citing Federal Express Corp. v. Dutschmann, 846 S.W.2d 282, 284 (Tex. 1993) (stating that “[r]ecovery of punitive damages requires a finding of an independent tort with accompanying actual damages.”). Therefore, insurers are not liable for punitive damages if there is not an independent injury resulting in extra-contractual damages.

[39] Menchaca, 2017 WL 1311752, at *12.

[40].Menchaca, 2017 WL 1311752, at *12; Casteneda, 988 S.W.2d at 198.

[41] WALLACE STEGNER, ALL THE LITTLE LIVE THINGS (PENGUIN BOOKS 1991).

 

© Steptoe & Johnson PLLC. All Rights Reserved.
This post was written by Dawn S. Holiday of Steptoe & Johnson PLLC.

Insurance Coverage in the Post-Weinstein Era

With new headlines involving sexual harassment and other inappropriate sexual conduct continuing to emerge on a daily basis, insurance coverage for claims that might emerge is something every company should consider.

Recently, media reports have discussed settlements of shareholder derivative claims against members of the boards of directors and other senior executives of public companies. These settlements illustrate both the type of corporate liability that can ensue from allegations that a company turned a blind eye to, or otherwise failed to prevent, sexual misconduct allegations, causing financial and reputational harm to the organization, and the critical role insurance can play in protecting companies and their executives against such claims.While reports indicate that one or more of the settlements is being funded entirely from insurance proceeds, it is unclear whether the settlement proceeds will be coming from D&O insurance or EPLI insurance, or both. D&O insurance is intended to cover corporate mismanagement claims but typically contains some form of employment practices liability exclusion. EPL insurance is intended to cover employment practices liability claims but may not cover management liability claims arising from allegations of sexual harassment. This creates a potential gap in coverage that could have serious consequences.

D&O and EPLI policies are not standard and contain different wording and exclusions.

WHAT TO DO?

In this environment, it behooves corporate management of every company to understand the scope of insurance coverage for sexual harassment and management liability claims and to ensure that appropriate coverage is in place without coverage gaps.

Here is what policyholders should do: comprehensively review all relevant corporate insurance programs to determine what coverage is in place for sexual harassment claims of any variety, and for claims arising from corporate actions that might be necessary in the wake of an issue or claim, such as claims of wrongful termination and defamation.

Policies to be reviewed should include CGL, EPL, D&O and E&O.

Determine whether coverage gaps exist and if so, consider enhancing coverage to ensure proper protection.

Understand what needs to happen in terms of notice to insurers in the event of a claim or knowledge of circumstances that might lead to assertion of a claim.

And be aware of the potential for coverage before agreeing to any payments or settlements that might preclude or limit coverage.

© 2017 Proskauer Rose LLP.
This post was written by Seth B Schafler of Proskauer Rose LLP.
Learn more at the Insurance Law Page on the National Law Review.

Effects of Insurance Marketplace Uncertainty

Even as Senators continue to consider “Graham-Cassidy,” the latest Affordable Care Act (ACA) repeal legislation, insurance markets are already reacting to uncertainty and instability brought about by persistent GOP efforts to upend the post-ACA insurance landscape. Between the Trump Administration’s ongoing refusal to commit to long-term funding of the ACA’s cost-sharing reductions (CSRs) and legislative overtures to repeal key portions of the ACA, premiums have increased, insurers have exited state exchanges, and access to health care coverage has been compromised.

As the Congressional Budget Office (CBO) recently estimated, insurers are expected to “raise premiums for marketplace plans in 2018 by an average of roughly 15 percent, largely because of uncertainty about whether the federal government will continue to fund CSR payments and because of an increase in the percentage of the population living in areas with only one insurer.” Speaking to the latter factor, CBO notes that a number of insurers have withdrawn from healthcare exchanges established under the ACA, spurred, at least in part, by “uncertainty about the enforcement of the individual mandate, and uncertainty about the federal government’s future payments for [CSRs].” Although ACA proponents’ (and critics’) most dire predictions were narrowly avoided – that some counties would have no insurers offering marketplace plans – there is little doubt that insurer participation has been adversely impacted by market uncertainty, with pocketbook repercussions for policy-holders.

The turbulent political climate is also likely to reduce the number of insured individuals in 2018. CBO and the Joint Committee on Taxation anticipate lower insurance enrollment as a result of reductions in federal-sponsored advertising and outreach. Department of Health and Human Services officials recently indicated that the advertising budget for the open enrollment period commencing in November would be reduced to $10 million, amounting to a 90% reduction when compared to spending in the last year of the Obama Administration. Grants to “navigators” – nonprofit groups that assist people with marketplace insurance plan enrollment – will be reduced from approximately $63 million to $36 million.

Whether or not the worst is yet to come will hinge on the fate of Graham-Cassidy and the presently-stalled efforts to reach consensus on a bipartisan ACA stabilization bill. In what is turning out to be a recurring theme in 2017, we may have to wait several weeks for the dust to settle and reasoned prognostication to be possible.

This post was written by Matthew J. Goldman & Jordan E. Grushkin of Sheppard Mullin Richter & Hampton LLP., Copyright © 2017
For more legal analysis go to The National Law Review 

Litigation After Devastation: The Legal Storm Surge

Bridges crumbling in Texas. Houses turned to toothpicks in the USVIs. Newly-formed rivers ravaging the streets in South Florida. The devastating destruction from the recent hurricanes that have pummeled the U.S. has uprooted many peoples’ homes and lives, but we have only begun to feel the impact of the surge.

Massive relief efforts have begun, national fundraising, news coverage, responsive legislation, and building codes to name a few. A litigation surge is swelling as well. We have seen several types of cases and class actions churn from a hurricane’s aftermath. Here are some of the types of cases, coverage issues, and expert needs you may see after the storm.

Property Damage and Meteorological Causation

Insurance companies insuring the Southern United States are bracing for the waves of claims that will soon be flooding in. Just as it was following Hurricanes Katrina, Ivan, and Sandy, the hotly-debated issue of whether the damage was caused by wind or water will be the likely focus. While most homeowner insurance policies will cover water damage that was caused by a roof or window that was compromised by wind and allowed water intrusion, most do not cover water that rises from the ground level and enters the home. Experts will be relied upon to determine how water got into a structure, even when it is entirely obliterated.

Insurance companies and attorneys will be looking for experts in meteorology, often with advanced degrees and testifying experience, who can opine on the types of weather conditions that might have existed at a given time in a given place (i.e., Key West when Hurricane Irma struck). The experts could come from academia or environmental institutes and societies. They will be asked to review various data points and speak on weather conditions at a particular time and place to support causation for insurance coverage. Structural engineers will also be needed, preferably with experience in standard insurance practices, procedures, and protocols in evaluating damage caused by hurricanes. They will need to have an understanding of insurance claims handling and will be asked to review various reports and data, some from other engineers, discussing damage caused to structures by the hurricane and opine as to whether or not the reports and data are accurate.

Structural Failures and Faulty Design/Construction

While many large, concrete commercial buildings and bridges are designed to withstand 150+ mph winds and flooding,  they can still be left severely damaged after a storm blows through. Structural failure of buildings, roofs, bridges, and roadways that were expected to withstand hurricane winds will lead to litigation over damage caused by the failure. Structural engineers with expertise in the types of structures at issue, likely licensed engineers, will be needed to examine damage patterns through photos, video, or via a post-storm on-scene inspection. They will also need to use meteorological wind information to determine the cause of the failure and the quality of the design or construction.

Class Actions for Coverage Determinations

Often, the core issues in insurance-related storm damage cases are similar across a wide span of policyholders. These cases will vary depending on the coverage matter at issue, but the most sought-after experts will be familiar with insurance claims standards, protocols, and policy interpretation. Construction experts may also be needed to opine on the necessity and extent of certain repairs required after a storm. Also, standard practices and interactions between contractors and insurance companies during the re-build process will come into question. Class actions may be filed as well, simply as placeholders to toll certain claims-filing deadlines or allow broader bad faith discovery against insurance companies who refuse to pay mass claims.

Litigation Over Price-Gouging

One of the worst scenarios to follow a storm is wide-scale price-gouging and scamming by companies trying to capitalize on the desperation and vulnerability of storm victims. Before the storm, many people preparing for power outages or evacuation will see unfair spikes in essentials such as water and gas. After the storm, shady contractors and tree-removers often flood in, lie about their licensing and credentials, and charge exorbitant fees while performing shoddy, haphazard work, or no work at all. Many states, including Florida, have made it a crime for any service provider to offer or sell essential commodities for an amount that “grossly exceeds the average price” during the thirty days following a declaration of emergency. In the days before Hurricane Irma’s approach, many reported price-gouging for essentials such as water, ice, batteries, and gas when thousands of Floridians were stocking up or evacuating. Class actions alleging price-gouging will likely occur following the storm. Experts in standard industry pricing, manufacture costs, and storm clean-up and repair may be called in to opine on the “average price” of certain essential commodities and post-storm services.

In the wake of Hurricanes Harvey and Irma, we are gearing up for the incumbent waves of litigation and expert requests we anticipate will follow. What types of cases, class actions, and expert needs are you expecting?

This post was written by Annie Dike of IMS ExpertServices, All Rights Reserved. © Copyright 2002-2017
For more legal analysis go to The National Law Review

Hurricanes and Act of God Defenses

Maritime contracts for services generally include clauses for performance, demurrage, deviation, termination, and suspension. Performance may be affected by an Act of God or Force Majeure clause and event. A typical Force Majeure clause reads as follows:

Except for the duty to make payments hereunder when due, and the indemnification provisions under this Agreement, neither Company nor Contractor shall be responsible to the other for any delay, damage or failure caused by or occasioned by a Force Majeure Event as used in this Agreement. “Force Majeure Event” includes: acts of God, action of the elements, warlike action, insurrection, revolution or civil strife, piracy, civil war or hostile action, strikes, differences with workers, acts of public enemies, federal or state laws, rules and regulations of any governmental authorities having jurisdiction in the premises or of any other group, organization or informal association (whether or not formally recognized as a government); inability to procure material, equipment or necessary labor in the open market acute and unusual labor or material or equipment shortages, or any other causes (except financial) beyond the control of either Party. Delays due to the above causes, or any of them, shall not be deemed to be a breach of or failure to perform under this Agreement.

A. Act of God

Act of God or Force Majeure is a defense to many contractual obligations, including performance, deviation, and demurrage. It may also be the basis to suspend or terminate a maritime agreement for cause. It is defined as an abnormal natural event that is overwhelming and cannot be forestalled nor controlled. Skandia Ins. Co., Ltd. V. Star Shipping, AS, 173 F.Supp. 2d 1228 (S.D. Ala. 2001) (Hurricane Georges cargo claim). It is also a defense to certain tort claims like collisions and allisions occurring during a storm. Petition of U.S., Heide Shipping & Trading v. S.S. Joseph Lykes, 425 F.2d 991 (5th Cir. 1970) (vessel break-away in Hurricane Betsy).

When plead, a party must demonstrate that it was prudent in predicting and attempting to avoid the impact of the overwhelming and unexpected natural event and took reasonable precautions under the circumstances. A failure to perform or third party tort damages are not subject to an Act of God defense if the failure results from human agency, neglect or an unseaworthy condition. Compania DeVapores Ins. Co., SA v. Mo-Pac R.R. Co., 232 F.2d 657 (5th Cir. 1985) (cargo claim for failure to take reasonable steps to guard against wind storm).

Following Hurricane Katrina, the U.S. District Court for the Eastern District of Louisiana held that a category 4 or 5 hurricane was an Act of God sufficient to bar a tort claim by a marina owner against the owner of a vessel that broke away from her berth, drifted and hit another vessel. The defense of Act of God applied because, 1) the accident was due exclusively to abnormal natural events without human interest, and (2) there was no intervening negligent behavior by the vessel owner. J.W. Stone Oil Dist., LLC v. Bollinger Shipyard, 2007 WL 2710809 (E.D. La. 2007). Judge Lemmon held in Stone Oil that hurricanes are considered as a matter of law to be an Act of God and defensible unless there is an intervening and contributing act of individual negligence. This obligation includes taking reasonable precautions based upon all available information.

In Simmons v. Lexington Ins. Co., 2010 WL 1254638 (E.D. La. 2010), aff’d., 401 Fed. Appx. 903 (5th Cir. 2010), J),  the courts similarly considered whether reasonable precautions had been taken by a marina to protect a sailboat during Hurricane Katrina under both Louisiana and maritime law. The Court reviewed other Katrina cases, including Conagra Trade Group, Inc. v. AEP Memco, LLC, 2009 WL 2023174 (E.D. La. 2009), and Coex Coffee Int’l., Inc. v. Dupuy Storage & Forwarding, LLC, 2008 WL 1884041 (E.D. La. 2008). (Katrina’s unprecedented flooding and devastation was an Act of God defense.) In Conagra, supra, Judge Fallon was asked to review a contract of affreightment for a cargo of wheat aboard a barge that sunk. Memco was found not negligent in delivering its barge of cargo to an affected berth several days before the weather forecast accurately predicted the landfall of Katrina.

In re S.S. Winged Arrow, 425 F.2d 991 (5th Cir. 1970), affirmed that where a vessel had been sufficiently moored based upon the anticipated path of Hurricane Betsy, the Act of God defense applied to relieve its owner of  tort damages resulting from its breakaway. From a review of the case law involving severe weather events, it is apparent that Act of God defenses will be granted as a defense to both third party tort claims and also contractual claims for failure to perform where reasonable decisions and precautionsunder the circumstances have been made.

B. Performance Clauses

Clauses for demurrage, detention or laytime usually involve delays in the loading or unloading of cargo or the delivery of goods and materials. Laytime is the period of time allowed for loading and unloading. Demurrage and detention are sums paid to compensate for time lost related to the delivery of equipment or cargo. Demurrage begins to run after the passage of laytime or the agreed time of delivery and performance. Damages are awarded for failure to perform. Deviation is an obligation to maintain a proper course in ordinary trade and to timely arrive at the agreed destination. All deviation clauses are subject to certain liberties. Any deviation may affect insurance and hire.

Typically a contract for maritime services can be terminated for cause or for convenience. Similarly, parties may negotiate terms to suspend performance, which would suspend payment of hire and performance of services. A suspension clause is typically an off-hire clause where the contract terms remain but no hire is paid. Usually a vessel owner will be compensated and reimbursed for certain additional expenses if a contract is terminated for convenience. An Act of God clause excuses delays in performance, but in most cases serves to either suspend performance or terminate the contract for cause as between the parties.

Similar defenses are also statutorily allowed under COGSA. Under the COGSA “perils of the sea” defense, a carrier and vessel are not liable for cargo damage proximately caused by an Act of God where the carrier is not independently negligent and its vessel seaworthy when confronted with an unexpected and abnormal event of nature. 46 USC 1304(2) (c) & (d) ; J.Gerber & Co. v S/S SABINE HOWALDT 437 F.2d. 580 (2nd Cir. 1971); Taisho Marine & Fire Ins. Co. v. Sea-Land ENDURANCE 815 F. 2d. (9th Cir. 1270).

C. Conclusion

The purpose of an Act of God clause in a contract or asserted as a defense to a maritime tort is to relieve a defendant from liability for performance and damages where there was an extreme natural event. Whether a particular storm or natural event is considered an ACT OF GOD is a question of fact. The factors to be considered in accessing an ACT OF GOD/FORCE MAJEURE include the intensity of the natural event and whether the conditions would normally be expected. In order to avail oneself of the ACT OF GOD defense a defendant must show a causal connection between the loss and the peril as well as defendant’s freedom from fault.

This post was written by Grady S. Hurley of Jones Walker LLP © 2017

For more legal analysis go to The National Law Review

Contingent Business Interruption Coverage: Insuring the Far-Reaching Effects of Tropical Storm Harvey

Manufacturers and producers are keenly aware of the value provided by business interruption coverage. Typically, this coverage is sold to companies as one of several coverages under their commercial property insurance package. Business interruption coverage is generally triggered by physical damage to a company asset (e.g., a manufacturing plant), which causes a suspension of business activities resulting in a loss of business income.

Tropical Storm Harvey has forced manufacturers and producers across Southeastern Texas to shut down operations while repairing their damaged facilities. These companies will turn to their business interruption carriers to recoup their business income lost during this period. However, for companies doing business in that region, but physically located outside the reach of Harvey, business interruption coverage may not protect them from lost profits caused by the storm.

For example, say a company owns a manufacturing facility in California where it assembles cars. The manufacturer purchases its engines from a company located in the flood-ravaged portions of Texas. If the Texas company is unable to build and deliver engines to California, the manufacturer might be unable to assemble cars for days, possibly weeks. Any business income losses incurred by the California company are unlikely to trigger standard business interruption coverage because the California manufacturing facility did not suffer any physical damage. To fill the gap, manufacturers and producers often purchase contingent business interruption coverage (CBI).

CBI coverage is, in effect, an extension of business interruption coverage to the business activities of suppliers and customers. If an upstream supplier or downstream customer suffers an interruption in business activities, CBI coverage should kick in to reimburse the policyholder for certain lost profits. CBI coverage can be written on specific properties owned by suppliers or customers and/or on a blanket basis.

The value of CBI coverage may vary depending on the precise language of the coverage grant.

Compare Millennium Inorganic Chems. Ltd. v. National Union Fire Ins. Co., 744 F.3d 279, 285-86 (4th Cir. 2014) (CBI coverage was expressly limited to “direct contributing properties” therefore, the presence of an intermediary between policyholder and supplier precluded coverage) to Archer-Daniels-Midland v. Phoneix Assur. Co., 936 F. Supp. 534, 544 (S.D. Ill. 1996) (CBI coverage was not limited to “direct suppliers,” therefore, CBI coverage was appropriate despite an intermediary in the supply chain).

There are a myriad of issues that arise when a company tenders a claim for CBI coverage, all of which need to be carefully considered on a case-by-case basis. For manufacturers and producers that rely on companies in Southeastern Texas, CBI coverage may become vital.

This post was written by Joshua B. Rosenberg of BARNES & THORNBURG LLP© 2017

Trump Administration Takes First Steps to Support Healthcare Exchanges, but Key Questions Remain

healthcare exchangesIn an effort to stabilize the Exchanges and encourage issuer participation, the Centers for Medicare & Medicaid Services (CMS) recently extended the federal Exchange application and rate filing deadlines and published a proposed rule affecting the individual health insurance market and the Exchanges. While issuers will likely see these actions as encouraging signs of the Trump administration’s willingness to support the Exchanges, these actions do not resolve the political uncertainty regarding the Affordable Care Act’s fate or whether cost-sharing reductions will be funded for 2018. These outstanding questions will likely be a key factor in Exchange stability going forward.

In Depth

On February 17, 2017, the Centers for Medicare & Medicaid Services (CMS) published a proposed rule in the Federal Register outlining a series of proposals intended to stabilize the individual health insurance market and the Exchanges created by the Affordable Care Act (ACA). Comments on the proposed rule are due to CMS on March 7, 2017.

On the same day as the proposed rule was published, CMS announced that it was extending the federal Exchange application and rate filing deadlines with the apparent goal of ensuring that the proposed rule changes could be finalized and taken into account when issuers make Exchange participation and rate decisions for 2018. Although issuers are likely to support the proposed rule and delayed federal filing deadlines, it is not clear what effect these changes will have since they do not resolve the ongoing uncertainty regarding the fate of the ACA repeal effort in Congress and federal funding of cost-sharing reductions in 2018.

CMS believes that the proposed “changes are urgently needed to stabilize markets, to incentivize issuers to enter or remain in the market and to ensure premium stability and consumer choice.” The agency’s urgency is underscored by recent reports that Humana would exit the Exchanges entirely for 2018 and other companies have publicly stated that they are uncertain about the extent of their participation in 2018. Looking just at states using healthcare.gov, there are 960 counties with only one issuer in 2017. Additional issuer defections for 2018 would increase the odds that certain counties will have no issuers participating on the Exchange. This would result in residents of such counties being unable to utilize premium or cost-sharing subsidies for which they otherwise qualify.

The proposed rule addresses long-standing issuer concerns about special enrollment periods and perceived gaming of the 90-day grace period available to enrollees receiving premium subsidies. Looking beyond the specific proposals, the proposed rule is significant for the simple fact that it is the Trump administration’s first concrete step to support and stabilize the Exchange market. This likely provides a measure of relief for industry stakeholders that were unsure whether Republicans would be willing to support the Exchanges, which were a key focus of Republican opposition to the ACA. There had been mixed signals during the Trump administration’s first weeks about how it would approach ACA implementation. President Trump issued an executive order his first day in office directing the Secretary of Health and Human Services (HHS) and other agencies to “exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of” ACA requirements, creating uncertainty regarding how this broad directive would be implemented. In addition, the administration reportedly pulled back on advertising healthcare.gov during the final weekend of open enrollment, leading some to speculate that the Trump administration would be less supportive of Exchange stability than the Obama administration. In the proposed rule, however, CMS tries to make clear that it shares issuers’ goals of “improv[ing] the risk pool and promot[ing] stability in the individual market.”

The question remains whether the proposed changes (and the directional signal of Trump administration support) are sufficient to achieve their stated policy goals. That question is significantly influenced by the status of the ongoing legislative process seeking to quickly repeal the ACA. Although CMS has in this proposed rule endorsed the goal of Exchange market stability in anticipation of CY 2018 open enrollment proceeding as planned, a Republican-led Congress and the Trump administration have continued to signal their commitment to repeal the ACA. Even with the recent delay in Exchange product and rate filing deadlines, the political process (and the related uncertainty about the ACA’s fate) may not be resolved by the time issuers need to begin developing their rates and making decisions on CY 2018 participation. The proposed rule also does not resolve lingering questions related to Exchange funding, such as the availability of cost-sharing reductions for 2018, that will likely be a key factor in Exchange stability going forward.

Summary of Proposed Rule Changes

The proposed rule changes are largely designed to close potential avenues of adverse selection and improve the overall risk pool by encouraging healthier individuals to enroll in coverage.

Open Enrollment

CMS proposes shortening the 2018 open enrollment period from November 1, 2017, through January 1, 2018, to November 1 through December 15, 2017. CMS originally proposed that the shortened open enrollment period would be effective for the 2019 open enrollment period, but the agency is now proposing to move this up by one year. CMS expects that this change would improve the risk pool by reducing enrollments late in the open enrollment period spurred by an applicant’s recent discovery of a need to access health care services. This policy would also increase premium payments to plans, as more enrollees would begin the year’s coverage in January instead of February.

CMS likely would need to extensively market the shortened enrollment period to ensure public awareness. It remains to be seen whether the Trump administration is comfortable with such a commitment to marketing the program given the pull back on marketing efforts for the end of CY 2017 open enrollment.

Special Enrollment

CMS proposes a series of limitations on special enrollment periods intended to reduce adverse selection. Previously, issuers had complained that many healthy individuals were forgoing coverage until they were sick, taking advantage of lax special enrollment period rules to enroll in coverage only when it was needed.

To limit gaming, CMS proposes to expand an enrollment verification pilot program for states using healthcare.gov, planned to begin in summer 2017. CMS proposes that applicants enrolling in coverage under a special enrollment period would have their enrollment pended until they provide documentation that they actually qualify for the special enrollment period. Where providing and processing documentation would result in a delay in coverage after the requested coverage effective date, this policy would result in retroactive coverage. As such, where verification results in a delay in coverage of two months or more, CMS proposes to permit enrollees to request a later effective date.

Guaranteed Availability

CMS also proposes to reinterpret the “guaranteed availability” standard, which requires health plans in the individual market to sell coverage to any willing buyer during open or special enrollment periods. CMS proposes to create an exception to guaranteed availability for individuals with unpaid premiums due to the issuer from which the individual is seeking to purchase new coverage. In part, this proposal seems to address issuers’ concern that some individuals have taken advantage of generous grace periods to discontinue premium payment towards the end of a benefit year only to reenroll with the same plan for the next benefit year. Individuals could still enroll in coverage without coming due on unpaid premium amounts by enrolling with a different issuer (if there is more than one issuer participating in the service area).

Accepting Comments on Continuous Coverage Proposals

CMS requests comments on potential policies it could implement to promote continuous coverage, but the agency is not proposing any specific policies at this time. A continuous coverage requirement is a central feature of many Republican ACA replacement proposals as an alternative to the ACA’s individual mandate. The ACA’s statutory guaranteed availability protections are broad, so adoption of a generally applicable continuous coverage requirement would likely require a legislative change. This is, however, a signal that CMS, under HHS Secretary Price and congressional Republicans, is considering similar policy solutions.

De Minimis Variation

CMS proposes to expand the definition of de minimis variation, the amount by which a qualified health plan’s (QHP’s) actuarial value may vary from the statutorily mandated value. CMS proposes to increase the amount of permissible variation to -4/+2 percentage points from the +/-2 percentage points currently permitted. CMS argues that this policy will promote market stability by permitting plans to maintain the same plan design year over year. CMS additionally argues that this policy may promote competition and put downward pressure on premiums, encouraging healthier individuals to participate in the plan.

Network Adequacy

CMS also proposes to defer to states with respect to network adequacy for Exchange plans in federally facilitated Exchange (FFE) and state-based Exchange states. In past years, CMS has proactively verified that QHPs in FFE states have an “adequate” network of providers. Through such reviews, CMS has enforced “maximum time and distance standards” requiring, for at least 90 percent of enrollees, that certain types of providers be within a specified distance and travel time. These quantitative standards mirrored the Medicare Advantage program requirements. CMS proposes to discontinue its analysis of QHP time and distance, instead deferring to state regulators and accrediting bodies.

Network adequacy requirements vary significantly across states, so this change will affect issuers differently. While the National Association of Insurance Commissioners has adopted a new Health Benefit Plan Network Access and Adequacy Model Act, it has not been adopted in any states and defers to individual states to set applicable time and distance standards. Thus, CMS’s deferral of network adequacy to states may permit narrower networks than under CMS’s quantitative standards.

Executive Order on Significant Regulatory Actions

Also of note is CMS’s approach to President Trump’s recent executive order, which requires that any “significant regulatory actions that [impose] costs” be offset through the elimination of costs associated with at least two prior rules. The proposed rule offers an early opportunity to examine how the administration will implement this executive order. CMS determined that the proposed rule “is not a significant regulatory action that imposes cost” under the recent executive order. The basis for this finding appears to be CMS’s belief that the proposed rule results in a net cost reduction. Thus, while CMS characterized the rule as “significant” for creating separate costs and benefits that exceed $100 million, the net cost reduction allows the agency to avoid eliminating two rules. Industry stakeholders should continue to monitor how CMS implements President Trump’s recent executive order.

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