No Insurance Coverage Available Because LLC Was Not A Named Insured

No Insurance Coverage Available Because LLC Was Not A Named Insured

No coverage was available to a limited liability company when it was not named as an insured in the liability insurance policy. An individual by the name of Kouk owned multiple businesses. One of the companies, Brown and Kouk Rentals, LLC, owned and rented apartments and mobile homes to people. Another business was Vernon & Sons Construction, LLC, involved in the construction trade. The businesses maintained separate bank accounts and no funds were commingled between the businesses. Vernon & Sons Construction obtained commercial liability insurance coverage through Columbia National Insurance. Vernon & Sons Construction was the only company listed on the insurance policy.

Mr. Kouk went out one evening to a renter's home to collect the rent. When he arrived, there was a party taking place in the front yard and he was invited to share a beer. Kouk joined the gathering around a burning fire and drank a beer with those present. When he finished, he put the bottle into a metal bucket that was in the fire. Several minutes later, the bottle exploded with a piece of the glass striking a young child of the renter causing him to lose sight in one eye. The father of the injured boy filed suit against Kouk for negligence.

Kouk notified Columbia National Insurance who provided an attorney to defend the case. Columbia retained separate counsel to conduct an investigation as to whether or not there would be coverage under the policy for the incident. The coverage investigation showed that Kouk was not conducting any business on behalf of Vernon & Sons Construction when the incident happened. Columbia determined there was no coverage from the loss and withdrew the defense of the injured boy's lawsuit.

Kouk proceeded to defend the lawsuit using his own personal attorney. The jury returned a verdict against Kouk in the sum of $427,000. The minor Plaintiff then filed suit against Columbia to recover the benefits of the insurance policy.

The Oklahoma Court of Civil Appeals ruled:

1. The injured child could proceed directly against the insurer and without the requirement of a garnishment based upon the language in the policy allowing a party to recover a final judgment against an insured;

2. Mr. Kouk was not insured under the policy because he was not conducting business or performing duties as part of the business of the construction company when the accident occurred;

3. Columbia National was not estopped from denying coverage because Mr. Kouk had been timely informed there was a coverage question many months before the lawsuit was even filed.

Insurance - Automobiles

A vehicle insured by Shelter Mutual Insurance Company was permissively being driven by an individual who was insured by American Farmers and Ranchers Mutual Insurance Company . The driver was involved in a collision that occurred when he turned left in front of another vehicle which resulted in injuries to the passengers of the second vehicle. The passengers of the other vehicle made claims for property damage and personal injury against the driver for his negligence and submitted claims to both insurance companies.

American Farmers’ policy contained an "other insurance" clause that stated: "provided, however, the insurance with respect to a . . . non-owned automobile shall be excess insurance over any other valid collectible insurance. . . ."

Shelter’s policy also contained an "other insurance" clause which stated: "if there is other insurance which covers the insured’s liability with respect to a claim also covered by this policy, coverages a and b (i.e., bodily injury and property damage liability) of this policy will apply only as excess to other insurance."

The two insurance companies jointly settled the claims and prorated the amount of the settlement based on the liability limits in the respective insurance policies. The Shelter insurance policy contained an "other insurance" exclusion which limited insurance coverage only to claims only in excess of other insurance which covered an insured’s liability. American Farmers reserved the right to recover from Shelter in the event Shelter’s "other insurance" clause was deemed invalid.

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UM Insurance Coverage

A lawsuit arose from a claim presented by the Plaintiff to the insurance company for uninsured motorist coverage. In the claim, Plaintiff stated that he was injured while riding his motorcycle. A red car passed him and cut-off a beige car traveling in the lane in front of him causing the beige car to brake suddenly. As a result, Plaintiff locked his brakes and was forced to lay down his motorcycle to avoid a collision. Plaintiff collided with the center barrier wall at a high speed and sustained significant injuries.

Upon investigation, the insurance company found the Plaintiff to be 100% at fault. Since the beige car had been able to safely slow down without striking the red car, the insurance company reasoned the Plaintiff also should have been able to safely slow down unless he was following too closely. In addition, the police officer recorded Plaintiff’s blood alcohol level at 0.09 which is above the legal limit for operating a vehicle in Oklahoma. It was also noted Plaintiff was traveling at speeds 5-10 miles per hour above the speed limit. As such, the insurance company denied the claim concluding that UM coverage is not available when the insured was more than 50% at fault.

As a result of the denial of the claim, Plaintiff filed suit against the insurance company alleging breach of contract (a cause of action which was later dropped just before trial) and "bad faith".

The jury returned a verdict in favor of the Plaintiff agreeing that the insurance company had acted in bad faith by denying the claim. Shortly thereafter, the insurance company filed a motion for judgment as a matter of law arguing that it acted reasonably and relief upon legitimate reasons for denying the claim. Ultimately, the trial court granted the insurance company’s motion and ruled in favor of the insurer. Plaintiff appealed.

The Tenth Circuit Court of Appeals affirmed the trial court’s judgment in favor of insurance company agreeing that based upon the facts known, a reasonable jury could not find that the insurance company failed to act reasonably in denying the claim. Further, there was no evidence showing the insurance company failed to properly investigate the claim. Bannister v. State Farm Mut. Automobile Ins. Co.,692 F.3d 1117, (10th Cir. 2012).

Choice of Law Governing The Liability Under An Insurance Contract

A product distributor in the oil-drilling industry was sued by several individuals claiming they were exposed to asbestos in the products distributed. The distributor subsequently filed claims with its multiple insurance companies seeking liability coverage. The insurers disagreed there was coverage for the liability claims under the policies. A series of declaratory judgment actions ensued in which the parties requested the Court to determine which party(ies), if any, were responsible for the cost of the extensive asbestos litigation the distributor was defending.

In one of the declaratory judgment actions in Federal court, the distributor/insured filed a counterclaim adding the parent company of the insurer as a separate party even though there was no contract with the parent company. It was argued by the distributor that the parent insurance company was responsible for the claims of its subsidiary which was merely an alter ego of the parent company. The parent insurance company filed a motion to dismiss the action alleging it was not liable for the subsidiaries obligation as it was a separate corporation.

The Court decided Oklahoma law did not apply to the issue of liability as to the parent company since the subsidiary was incorporated in the state of Indiana. Despite being filed in an Oklahoma Federal court, the court was required to look to the laws of the state of incorporation of the subsidiary insurance company as to whether to pierce the corporate veil. The court granted the parent company’s motion to dismiss. Canal Ins. Co. v. Montello, Inc., et al., 822 F.Supp.2d 1177 (Okla. 2011).

Named Driver Exclusion From Coverage

As a result of a collision between a car and a motorcycle, a lawsuit was filed in which a judgment was rendered in favor of the motorcycle driver and his passenger and against the driver of the car for bodily injuries and property damage. A garnishment action was subsequently filed against the car driver’s insurance company for liability insurance policy limits in the amount of $25,000.00 for each of the two people riding on the motorcycle.

The driver of the car was precluded from coverage under the car owner’s insurance policy which contained a named driver exclusion. As a result of the exclusion, the insurance company claimed exemption from garnishment. The trial court awarded summary judgment to the motorcycle passenger for the minimum amount of liability coverage required by law finding that the named driver exclusion left an innocent third-party without insurance coverage, thereby violating Oklahoma public policy. The insurance company appealed.

The Oklahoma Court of Civil Appeals reversed the trial court’s ruling holding that the Oklahoma insurance statutes allow named driver exclusions and that the Oklahoma Supreme Court continuously expresses the validity of the named driver exclusion. Therefore, based on the validity of the named driver exclusion, no coverage was available to the motorcycle passenger under the car owner’s insurance policy. Rodriguez, et al. v. Gutierrez-Perez, et al., 273 P.3d 69, 2012 OK CIV APP 14.

This area of law continues to evolve and change as the legislature revises and changes the Oklahoma statutes and the courts continue to interpret and articulate Oklahoma law.

Foster Care Liability Insurance Coverage

The State of Oklahoma requires liability insurance for licensed or certified foster parents. In 2002, the Oklahoma Department of Human Services ("DHS") placed a six-month-old baby in a foster home and liability insurance was provided to the foster mother by two insurers at the expense of the State. Less than one month later, the baby was found lying in her crib dead as a result of child neglect, specifically untreated illnesses and lack of personal care. In 2003, the Estate of the deceased child filed a wrongful-death lawsuit against the foster mother, the Oklahoma DHS, and two employees of the DHS.

During the litigation of the wrongful-death suit, the Estate filed an insurance claim with the liability insurer for benefits which was subsequently denied due to an exclusion for injuries resulting from physical abuse.

Just days before the trial, the insurance companies proposed a combined settlement offer which was rejected by the Estate. The case proceeded to trial and a $20 Million verdict was returned in favor of the Estate. The foster mother appealed.

In 2007, one of the two insurance companies filed a declaratory judgment action in Federal court requesting the court to find it had no responsibility to defend the foster mother or pay the damages under the liability coverage of the insurance policy. The other parties filed numerous cross-claims and counterclaims including breach of contract and bad faith. Most of the claims were settled in a compromise resolution. However, following the partial settlement, two issues remained to be decided by the Federal court.

The court ruled that:

1. the Estate of the deceased child did not demonstrate a contractual relationship existed in such a way that the foster child as a third-party claimant could assert a claim against the insurance policy. Likewise, the insurance company did not owe a duty to the Estate as a third-party claimant, and

2. the Estate could not seek garnishment against the foster mother in excess of the available liability policy limits.

The Estate appealed the rulings of the Federal court. On appeal, the Tenth Circuit Court of Appeals affirmed the District Court. Colony Ins. Co. v. Burke, 698 F.3d 1222 (10th Cir. 2012).

Liquor Liability Exclusion

An insurance company provided liquor liability coverage to a restaurant/tavern including coverage for injuries "imposed" on the insured resulting from "selling, serving or furnishing of any alcoholic beverage".

The club was sued in an underlying state court action by the parent/guardians of three minor Plaintiffs who were purportedly injured as bystanders to a fight which broke out in the insured bar. As part of the state court lawsuit, the minors never presented evidence that showed their injuries resulted from "selling, serving or furnishing alcoholic beverages", nor were any allegations made that alcohol was a factor in the injuries sustained.

The insurance company filed a declaratory action in Federal court requesting the court to determine if the insurance policy covered the injuries in the state court action and required the insurance company to defend in the underlying lawsuit.

The Federal court ruled that since the injuries did not arise out of "selling, serving or furnishing of any alcoholic beverage", coverage did not exist, and, as such, there was no duty to defend the lawsuit. The court also noted that although there was an "assault and battery" endorsement in the insurance policy, the endorsement did not apply since the loss was not covered under the liquor liability policy. Mount Vernon Fire Ins. Co. v. Olmos, 808 F.Supp.2d 1305 (Okla. 2011).

Exclusion For Inverse Condemnation Held Valid

An insurer sold a liability insurance policy to a municipality which specifically excluded coverage for inverse condemnation. The municipality was sued in an inverse condemnation action and filed a claim under the insurance policy after a verdict was returned against the municipality. The claim was denied under the insurance policy exclusion for inverse condemnation. As a result of the denial of the claim, the municipality sued the insurer seeking coverage under the policy.

The trial court granted summary judgment for the insured and the insurance company appealed.

The Oklahoma Supreme Court reversed and remanded the summary judgment entered by the trial court and instructed the trial court to enter summary judgment in favor of the insurer holding that: (1) the insurance policy contained an exclusion for claims of inverse condemnation; (2) the insurance company was not estopped from denying coverage; and (3) the municipality only obtained coverage for losses under the Governmental Tort Claims Act, and (4) a "cause of action grounded on inverse condemnation is not governed by the Governmental Tort Claims Act." City Of Choctaw v. Oklahoma Municipal Assurance Group, 2013 OK 6.

Don't Dump The UM Coverage

In September, 2010, a commercial auto insurance policy was issued to a county commissioner including uninsured motorist coverage for county vehicles. The liability limits of the policy included $125,000 per person and a maximum of $1 Million per accident.

A county worker was injured on the job while performing road-resurfacing duties and filed a claim for personal injury under the policy requesting coverage under the uninsured motorist portion of the policy contending he was operating a covered vehicle. The insurance company denied the claim and filed a declaratory judgment action stating the claimant could not be considered an insured as he was not occupying a covered vehicle and asked the court to rule there was no coverage. The claimant filed a counterclaim asserting he was entitled to policy limits of $1 Million in coverage for injuries sustained.

The claimant, as well as at least five other members of the road crew, were operating three vehicles as part of a chip-sealing method used to resurface the road; the oil distributor truck, chipper, and a dump truck. The injured claimant was riding on the back of the chipper being pushed by the dump truck when the chipper was pushed into the oil distributor truck and the claimant’s leg was pinned between the two pieces of equipment.

The parties agreed the dump truck was considered a covered vehicle under the insurance policy whereas the chipper was considered "mobile equipment". However, according to the insurance policy, mobile equipment is considered a covered auto when being "carried" or "towed" by a covered auto. These terms were not specifically defined in the insurance policy.

Plaintiff and the insurer both filed motions for summary judgment in the United States District Court for the Northern District of Oklahoma. The court held that the chipper was being towed by the dump truck when the accident occurred and was therefore considered a covered auto under the policy. However, the court ruled under the circumstances there was $125,000 in uninsured motorist coverage, not $1 Million, because the amount of uninsured motorist coverage could not exceed the amount of liability coverage, i.e., $125,000.  Argonaut Ins. Co. v. Earnest, 861 F.Supp.2d 1313 (N.D. Okla. 2012).

Oklahoma Does Not Allow Plaintiffs To Recover For Unnecessary Losses Which Could Have Been Avoided

Unnecessary damages which could have been avoided by the insured cannot be recovered in a lawsuit for breach of contract as every Oklahoma insurance lawyer well knows.  A party who asserts a claim for breach of contract against an insurance company has a duty to use reasonable efforts to mitigate his damagesHidalgo Properties, Inc. v. Wachovia Mortgage Company, 617 F.2d 196, (10th Cir. 1980)  A party, including a policyholder, has a duty under Oklahoma law, to make all reasonable efforts to minimize his damages.  Sabine Corp. v. ONG Western, Inc., 725 F.Supp. 1157, (Okla. W.D. 1989).

The principle of mitigation of damages is summarized in the Restatement (Second) of Contracts Section 350 comments (1979) as follows:

As a general rule, a party cannot recover damages for loss that he could have avoided by reasonable efforts. Once a party has reason to know that performance by the other party will not be forthcoming, he is ordinarily expected to stop his own performance to avoid further expenditure. . . . Furthermore, he is expected to take such affirmative steps as are appropriate in the circumstances to avoid loss by making substitute arrangements or otherwise. 

A promisee is not required to go to extraordinary lengths or expense to avoid loss; only efforts that are reasonable under the circumstances are necessary.

Any Oklahoma insurance law attorney defending a case brought against an insurance company for breach of contract, fraud, bad faith, or any other cause of action will always look to see if the losses could have been reasonably avoided to prevent the insurance company from being forced to pay more than the law requires.  The lawyer representing the insured will attempt to show reasonable efforts were used or it was impossible to lessen the damage.

My favorite example is the hail storm that knocks a hole in the roof.  The insured needs to do something to stop the water from raining inside and soaking the furniture, i.e., mitigate or lessen the damage by tarping the hole in the roof.  He can't just sit back and watch the water run down the walls!

Coverage Questions - A 19 Year Veteran's Experience

Coverage decisions tend to be expensive one way or the other.  If an insurance company determines coverage exists, then it has to pay for the underlying claim.  If the claim was not really covered by the terms of the insurance policy, then the company has incurred an expense that was unnecessary and which adversely impacts the year end financial picture.  Decisions to deny coverage, when in fact it exists, is even more expensive.  There is the litigation expense plus the potential bad faith claim. 

Christopher J. Boggs wrote a commentary about what his 19 years of experience in the insurance industry had taught which he was kind enough to share

  • Only good lawyers realize they don't know everything about the law
  • Someone who truly understands insurance can explain its concepts in simple language.  The person with no idea how it works masks his ignorance with $10.00 words and legalese
  • There is ALWAYS more than one possible answer to a coverage question.  One is just more correct than the others based upon the particular situation
  • Only "newbies" know everything about insurance
  • Regardless of how much I know (or think I know) about insurance, there is always MUCH more to learn.  It is NEVER okay to guess at the answer to a coverage question
  • It's perfectly acceptable to say, "I don't know", as long as you follow it up with "but I'll find out and get right back to you."

The only other thing I have to add from my 25 years of coverage analysis is the answer is always simple - just ask either side!  They always know the answer!

Insurance Fraud In An Application Can Result In Rescission Of The Policy

Oklahoma insurance law attorneys agree there are a number of reasons why a policy may be voided by an insurance company.  Fraud by the applicant or policy holder is the most common reason an insurance company would rescind or void an insurance policy.  Rescission is defined as:

1. A party's unilateral unmaking of a contract for a legally sufficient reason, such as the other party's material breach, or a judgment rescinding the contract; voidance.  Rescission is generally available as a remedy or defense for a nondefaulting party and is accompanied by restitution of any partial performance, thus restoring the parties to their precontractual positions. -- Also termed avoidance.  Black's Law Dictionary (8th ed. 2004)

According to Oklahoma statute 15 O.S. § 235, a party seeking to rescind or void a contract (which includes an insurance policy) must:

  • act promptly upon discovering facts which entitled him to do so
  • restore to the other party everything of value

In other words, experienced Oklahoma insurance attorneys advise their insurance company clients wanting to rescind a policy on the grounds of fraud to act quickly and also to return all premiums paidSneed v. State ex rel. Department of Transportation, 1983 OK 69, 683 P.2d 525 and Berlands's Inc., of Tulsa v. Northside Village Shopping Center, 1972 OK 152, 506 P.2d 908.

As a caveat fancy legal wording for caution or warning), accusing a policyholder of fraud needs to be done carefully.  In Oklahoma, an insurer really should consult with competent legal counsel before doing so.

False Statements In The Application For Insurance Can Void Coverage

 Fraud perpetrated in any contract can relieve the other party of the duty to perform.  In other words, fraud or making false statements is legally unacceptable.  Fraud includes any statement or act that is intended to deceive someone into entering into the contract.  Fraud consists of:

  • A Suggestion that something is true when in fact it is not
  • A positive statement that something is not true when the person making the statement had no reasonable basis for saying it
  • A person concealing something known to be the truth
  • A promise made without any intention of performing it
  • A person remaining silent when he had a duty to speak
  • Any other statement or action intended to deceive

Oklahoma has statutes defining actual fraud, 15 O.S. § 58-59 that attorneys rely upon in defending against fraudulent insurance claims. 

In Varn v. Maloney, 1973 OK 133, 516 P.2d 1328, the Oklahoma Supreme Court said the elements needed to prove fraud are:

  • A false representation 
  • made with the knowledge of its falsity or recklessly without knowledge as to its truth or falsity
  • as a positive assertion with the intention that it be acted upon by another 
  • actual reliance upon the statement 
  • injury or damage resulting therefrom.

Proving fraud in Oklahoma is not always easy to do and legal advice from an experienced attorney practicing in insurance litigation is usually needed.  The most common approach to dealing with fraud in insurance claims in Oklahoma is recission.

Interpretation Of An Insurance Policy: Must Be Reasonable

In our last post, we discussed some rules the courts use to interpret insurance policies. If the contract has language that is subject to more than one interpretation, it is considered to be ambiguous. In Oklahoma when an insurance policy has ambiguous language, we explained the courts construe the language in favor of the insured or the policy holder and against the insurance company.

However, this still does not answer the question of how you decide what the language means. It is one thing to say the language should be viewed favorably to the policy holder, but you still have to determine what should happen.

Oklahoma has adopted the “reasonable expectations test”. In simple terms, it is what would a reasonable insured would have expected at the time he was purchasing the coverage. An insured buying disability insurance that has a clause which is ambiguous would not reasonably expect to have collision coverage for his vehicle.

The courts have used the “reasonable expectations test” as a means of protecting insurance companies from having their contract rewritten to the point where it would be unfair and unreasonable. The courts have made it extremely clear that it is not their job to rewrite an ambiguous insurance contract, it is merely their responsibility to interpret the language of the policy when the parties otherwise disagree.

Courts Use Rules Of Interpretation To Decide What An Insurance Policy Really Means

It is no surprise there is often disagreement over whether an insurance policy provides coverage. There are competing interests to be accommodated and sometimes the language used is clearer to one person than another.

We are often asked, “How do judges decide what the insurance policy really means?” There are volumes of books in law libraries discussing this very topic, but there are some general principles judges often employ.

  1. A judge is going to look at the whole contract to determine the intent of the parties. You do not just consider one part of the contract, but use all of the parts to interpret other provisions and try to figure out what was really intended.
  2. The courts generally examine the language of the policy to see what the parties meant by the words that were used. For instance, there may be definitions in the policy that tell the meaning of the words.  If not, then the courts usually interpret words in their ordinary and popular sense. Technical words are interpreted in the way that are usually understood by persons in that particular business unless they are clearly used in a different sense.
  3. If the terms are ambiguous or otherwise uncertain, those particular phrases are read in the way that is most favorable to the policy holder or the insured.  Lawyers tend to say the contract is construed against the drafter.  Since the insurance company came up with the language used; it will be read in the light most beneficial to the person insured.
  4. The courts are going to apply any regulations that the insurance department, statutes, or case law require.  For example, it would be against public policy to write an insurance policy that provided protection for committing criminal actions. In certain categories or classifications of insurance, there are required coverages which are mandated by the legislature.  Oklahoma has a statutory fire policy in which the essential elements of the coverage are set forth in the statute and this coverage is provided even if the policy says something different.  The insurance company can add to the minimum coverage, but cannot provide less than the minimum.

Under Oklahoma Law An Insurance Policy Is A Contract

Some people, including insurance adjusters, forget an insurance policy is a legally binding contract.  Claim representatives who adjust a lot of liability and third-party claims sometimes tend to confuse the issue of coverage under a policy with liability for the accident.  These issues are not related.

One reason insurance policies don't seem like binding contracts is because the insurance policy is signed with a preprinted signature by an officer of the company. The policy holder or insured does not have to sign the agreement so it is not what people typically think of as a contract. 

Another reason maybe that insurance policies are contracts the courts call “contracts of adhesion”. In other words, the terms of the agreement are usually not negotiated like a typical business deal. The insurance company drafts and prepares the policy and the insured either buys the coverage or does not.

Regardless of whether people think of insurance polices as contracts, courts consider them valid and binding to the extent the agreement does not violate regulations of the insurance department, statutes of the jurisdiction where the policy is issued, and controlling case law interpreting insurance policies. As such, the first step in trying to decide whether there is coverage for any given situation is to read the policy.