First Circuit overturns itself on flood insurance requirement

I posted here about  Kolbe v. BAC Home Loans Servicing, LP, 695 F.3d 111 (1st Cir. 2012), a case in which the First Circuit Court of Appeals overturned the dismissal of the complaint of a homeowner alleging that a mortgage lender did not have authority under the loan documents to demand that the homeowner purchase flood insurance in excess of the outstanding loan amount.  The court held that the loan documents were ambiguous and that therefore the court could not determine the issue as a question of law. 

The First Circuit has now revisited the case in Kolbe v. BAC Home Loans Service, LP, __ F.3d __, 2013 WL 5394192 (1st Cir.) and overruled its prior decision.

Kolbe, the homeowner, contended that the mortgage lender cannot require more than the federally mandated minimum flood insurance, which is the lesser of the balance of the loan or $250,000 in flood zones and $0 in non-flood zones. 

Kolbe's mortgage loan was guaranteed by the Federal Housing Administration.  The mortgage agreement contained uniform covenants that are required by HUD regulations to be in every FHA-insured mortgage.  One of those covenants provided:

4.  Fire, Flood and Other Hazard Insurance.  Borrower shall insure all improvements on the property, whether now in existence of subsequently erected, against any hazards, casualties, and contingencies, including fire, for which Lender requires insurance.  This insurance shall be maintained in the amounts and for the periods that Lender requires.  Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary [of HUD]. 

Kolbe filed a class action suit contending that under the contract the bank could not require him to purchase insurance in excess of the balance of the loan.  The District Court granted the lender's motion to dismiss.  Kolbe appealed, and in the panel decision discussed in my previous post the First Circuit vacated the dismissal.  The First Circuit then granted rehearing en banc.

In its en banc decision the court held, first, that the contract provision was a uniform provision used in many contracts, and therefore it must be interpreted uniformly regardless of what an individual contracting party may have understood the clause to mean. 

It held, second, that because the uniform contract language was imposed by the government of the United States, the government's meaning with respect to the language controls.  That meaning is determined in light of the purposes for which the government imposed the language and the context of the relevant regulatory scheme.

The court held that the bank's interpretation was the correct one.  The language of the clause by itself and in combination with other clauses in the contract makes clear that the bank can impose a requirement of additional flood insurance. 

The court also held that under a broader context the bank's interpretation must prevail.  As one example given by the court, if the borrower defaulted on an FHA-guaranteed loan, HUD ultimately would take possession of and sell the property, reimbursing the mortgage insurance fund with the proceeds of the sale.  But if the house had been destroyed by flood then "there is nothing" (a slight exaggeration, but still) for HUD to sell. 

Finally, the United States submitted an amicus brief supporting the bank's interpretation.  The court held that it was required to defer to the interpretation offered by the United States unless that interpretation was clearly erroneous.   

Book Review of Insurance Regulation Answer Book 2014, with discount code

The last time I was asked to review a book was when I was a college student freelancing for Seventeen Magazine.  I remember being sort of embarrassed for giving a rave review of The Adrian Mole Diaries; but I couldn't help it -- I loved the book.  In the same way I feel sort of silly to say that Practising Law Institute's Insurance Regulation Answer Book 2014 is a fantastic book, but I really think it is.  Well-written, informative, easy to understand, and interesting (at least to insurance coverage junkies like me). 

In the spirit of full disclosure I was asked by PLI itself to review the book, and received a free copy in exchange.  It's not quite a junket but a perk is a perk.

To clear up some confusion:  despite the British spelling of "practising," PLI is located in New York and the book addresses American law. 

I had planned to skip to the parts of the book that discuss the subject I know -- liability insurance.   But I immediately realized that this book is written and formatted so clearly that just by skimming it I was learning.  For example, I did not know that life insurers are often prohibited from offering property and casualty insurance. 

The first chapter provides succinct definitions of the different types of insurance.  Ever wondered about the difference between casualty and liability insurance?  (I have.)  Turns out they are mostly but not completely interchangeable, and the book explains the subtle difference in definitions. 

Chapter 2 gets into the heart of the book -- and territory more or less unknown to me.  It discusses why states regulate insurance and the limited but changing role that the federal government plays in such regulation. 

The rest of the book  provides technical information, such as on the different forms of insurance companies, licensing issues, etc.  There's also a healthy bit of discussion on reinsurance, which I have always considered a whole different world (sort of like a Superior Court litigator trying to navigate Probate Court). 

I doubt that I'll have much use in my practice for the details the book provides -- my cases don't tend to involve international agreements among insurers, for example.  But in light of recent developments in insurance law, having an overview is helpful.  While I knew that the Federal Insurance Office somehow came into existence within the last few years, I didn't understand why.  Now I know its relationship to the Dodd-Frank Act, and how that Act, which was created to regulate banks, also affects insurance.

Overall, I don't recommend this book for the casual insurance coverage practitioner.  But for anyone who makes a habit of insurance coverage cases, this book provides valuable background. 

Special to my blog-readers:  Here's a link with a fifteen percent discount off the book. 

Comprehensive article on terrorism insurance

I posted here my thoughts on how the Terrorism Risk Insurance Act (TRIA) should be amended rather than simply readopted as is next year. 

The Insurance Information Institute has a comprehensive article on the past, present, and proposed future of TRIA here. 

US District Court holds that bond coverage does not increase policy limit

Katie Graf won a lawsuit against a restaurant called Torcia.  Graf had alleged that she was injured at the restaurant.  The judgment was for $500,000 plus prejudgment interest of $111,124.26.

Graf attached the restaurant's liquor license in the amount of $115,000 to secure payment of the prejudgment interest.

Torcia requested that its insurer, Hospitality Mutual Insurance Company, pay the cost of the bond to discharge the attachment.  The Hospitality policy had a per person limit of $500,000, and defined "damages" as including prejudgment interest.  Hospitality asserted that the prejudgment interest was therefore outside the policy limit and declined to pay the bond. 

Under the policy Hospitality agreed to pay the cost of bonds to release attachments, "but only for bond amounts within the applicable limit of insurance." 

In Graf v. Hospitality Mutual Ins. Co., 2013 WL 3878691 (D. Mass.), the court held that the policy was susceptible to only one reasonable interpretation -- "that it did not require [Hospitality] to pay prejudgment interest directly or the cost of the bond." 

Torcia had assigned its rights against Hospitality to Graf in exchange for discharge of the attachment.  Graf argued that Hospitality should pay the cost of the bond because the amount of the bond itself was within the policy limit.  The court disagreed, holding that the bond was over the policy limit because Hospitality had already paid the policy limit.

Graf next argued that there was a separate $500,000 limit for bonds.  Reading the policy as a whole, the court disagreed. 

I dislike limits that includes prejudgment interest, just as I dislike limits that include attorney's fees.  Depending on the case, insurers and insurance defense counsel have anywhere between some and a  great deal of control over how long a case will take before resolution, just as they have between some and a great deal of control over attorney's fees.  The limits are, however, a reality.

The takeaway:  When choosing your policy limits, whether or not the limits include prejudgment interest is a factor you should consider.  It is not unusual for a case to take several years to get to trial.  At the prejudgment interest rate of 12 percent in Massachusetts, the verdict of a case that takes five years will be increased by 60 percent because of prejudgment interest. 

US District Court discusses New York law on policy cancellation by premium finance agency

Troy Sutler was injured when he was hit by a forklift.  The forklift was driven by an employee of NYCP.  Sutler sued NYCP and obtained a judgment against it.  He then sued Redland Insurance for payment.

A few months before the accident NYCP had purchased a general liability policy from Redland.  It paid for the policy with a loan from BIC.  The loan agreement specified that as long as NYCP owed BIC any money, BIC would have a power of attorney to cancel the Redland insurance policy on NYCP's behalf, and thereby obtain a partial refund. 

Two months after the companies entered into the loan agreement, and before the forklift accident, NYCP failed to make its monthly payment to BIC.  BIC cancelled the policy.

Redland sent NYCP a notice that its insurance had been cancelled, and that it could avoid the cancellation by paying the total premium due within fifteen days.  NYCP did not do so. 

After the accident, BIC informed Redland that it had received payment from NYCP and asked Redland to retroactively reinstate NYCP's policy. Redland did not do so.

Sutler sued Redland on the ground that it is liable as NYCP's insurer for the judgment he obtained.

In Sutler v. Redland Ins. Co., 2013 WL 3732873 (D. Mass. 2013), Sutler argued that the cancellation of the policy was invalid because NYCP did not receive notice at least ten days (or fifteen; the decision is inconsistent) before its policy was cancelled as required by the terms of the policy.

The court rejected the argument, because Redland did not cancel the policy; BIC cancelled the policy under its power of attorney from NYCP.  The insurance policy allows NYCP to cancel upon advance written notice. 

The court also held that the cancellation complied with governing New York statute.  That statute allows a premium finance agency such as BIC to cancel an insurance contract if it first gives the insured party ten days' written notice. 

Sutler argued that BIC's cancellation was ineffective because BIC sent the notice of cancellation on May 22, 2007, with an effective date of May 29, 2007, only seven days.  But, the court held, Sutler was confusing a notice of intent to cancel with the notice of cancellation.  BIC sent its notice of intent to cancel on May 8, 2007, fourteen days before it sent the notice of cancellation.  That fourteen-day period was sufficient under New York statute. 

First Circuit holds that flooding from roof is covered because roof is a dry land area

I've been discussing Fidelity Co-operative Bank v. Nova Casualty Co., __ F.3d __, 2013 WL 4016361 (1st. Cir. 2013), in which the United States Court of Appeals for the First Circuit held that property damage from a flooded roof was proximately caused by the inadequate roof drainage system, a covered loss, not by rainwater, an excluded loss. 

Nova, the insurer, argued that there was no coverage because the water that flooded the building was surface water excluded by the policy.  The court agreed that the water was surface water. It held, however, that the surface water exclusion did not apply.  Although the policy excluded damage from surface water, an amendatory endorsement provided coverage for flooding caused by the unusual or rapid accumulation or runoff of surface waters from any source.  The flood coverage provision defined "flood" as a "general or temporary condition of partial or complete inundation of normally dry land areas."  The court held that the roof is a "dry land area" under the standard technical definition of land, which includes buildings, fixtures and fences. 

First Circuit holds faulty workmanship exclusion does not apply to work done before insureds owned building

In my last post I discussed Fidelity Co-operative Bank v. Nova Casualty Co., __ F.3d __, 2013 WL 4016361 (1st. Cir. 2013), in which the court held that there was coverage for a flooded roof because the proximate efficient cause of the loss was the failure of a roof drain, a covered loss, not the rainwater that accumulated on the roof, an excluded loss.

The insurer, Nova, also denied coverage of the basis of a faulty workmanship exclusion, asserting that the inadequacy of the roof's drainage system was faulty workmanship.

The United State Court of Appeals for the First Circuit held that the faulty workmanship exclusion did not apply.  It held that the exclusion was "intended to prevent the expansion of coverage under the policy to insuring the quality of a contractual undertaking by the insured or someone authorized by him."  The record showed that the roof was repaired prior to the insureds' ownership and that the insureds did not repair, renovate or replace the roof or its drain.