Vermont Bar Association 134 th Annual Meeting

Vermont Bar Association 134 th Annual Meeting Year in Review Insurance Law Seminar Materials Faculty Samuel Hoar, Jr., Esq. Paul J. Perkins, Esq. September 21, 2012 Lake Morey Resort, Fairlee, VT

2012 Vermont Bar Association Annual Meeting Year in Review Insurance Law The Vermont Supreme Court issued five decisions in the last year related to insurance. Those decisions are available on the Vermont Department of Libraries website. They are: 1. Bradford Oil Co. v. Stonington Insurance Co., 2011 VT 108, available at http://info.libraries.vermont.gov/supct/current/op2010-361.html 2. Co-operative Insurance Cos. v. Bennett, 2012 VT 22, available at http://info.libraies.vermont.gov/supct/current/op2011-158.html 3. Doe v. Vt. Office of Health Access, 2012 VT 15, available at http://info.libraries.vermont.gov/supct/current/op2011-045a.html 4. McGoff v. Acadia Insurance Co., 2011 VT 102, available at http://info.libraries.vermont.gov/supct/current/eo2010-264.html 5. ProSelect Insurance Co. v. Levy, 2011 VT 109, available at http://info.libraries.vermont.gov/supct/current/eo2010-438.html 1. Bradford Oil Co. v. Stonington Ins. Co., 2011 VT 108. Bradford Oil is another time-on-the-risk contamination case (the Court previously addressed time-on-the-risk in Towns v. Northern Security Insurance Co., 2008 VT 98). The Court allocated liability to an insurer for remediation costs only in proportion to the period of insurer s coverage, as compared to the total period of contamination leakage. The Court declined to impose joint-and-several liability, which would have required that the insurer pay up to its policy limits for the total costs of remediation and seek contribution from other insurers, or the policyholder, or both. The Court declined to distinguish Towns based on the reasonable expectations doctrine, statutory liability for petroleum remediation or public policy. Bradford Oil owned a gas station in St. Johnsbury which had leaked petroleum into the ground for about 27 years. In April 1997, the Agency of Natural Resources placed the site on the Vermont Hazardous Waste Sites List after petroleum contamination was discovered. At the State s direction, Bradford Oil investigated the extent of the contamination and remediated it. The Vermont Petroleum Cleanup Fund reimbursed Bradford for most of its costs. Bradford Oil had four general liability occurrence-based policies through Stonington

Insurance Company. The policies provided coverage only from 1994 through 1997. In 2006, Bradford Oil sued Stonington to establish coverage. It also named the State as a defendant. The State filed a cross-claim against Stonington. Stonington eventually agreed that its policies provided coverage, but disputed the extent of its liability for remediation costs. It sought partial summary judgment, asserting that under Towns, its was liable only for its time-on-the-risk; in other words, for the period it expressly assumed the risk of loss under its policies. The trial court granted the motion, but held that there was a factual dispute regarding the period of coverage. The parties then submitted a joint statement of undisputed facts and the Court ruled that Stonington s liability was limited to a 4/27 share of past and future cleanup costs.... On appeal, the State s main argument was based the reasonable expectations doctrine and 10 V. S. A. 6615(c): because the statute imposes joint and several liability on gasoline station owners for petroleum contamination, Bradford Oil reasonably would have expected that its commercial general liability policies would provide coverage to the extent of its potential joint and several liability. The Court, however, affirmed, concluding that the case was governed by Towns. It refused to impose joint and several liability on the insurer merely because the insured was jointly and severally liable under 10 V. S. A. 6615(c), noting that the insurer s coverage obligations turn on policy language, not the insured s statutory liability. The Court also held that the entire period of contamination, including periods when the station owner was not insured, must be counted in the time-on-the-risk calculus. While some states deduct gaps in coverage due to insolvency or a lost policy or other reasons, the Court found no legitimate reason to do so on a time-on-the-risk allocation scheme. 2. Co-operative Insurance Cos. v. Bennett, 2012 VT 22. Bennett was one of two coverage cases in the last year involving sexual abuse (the other is ProSelect Insurance Co. v. Levy, 2011 VT 109). The Bennett case involved the extensive abuse, and homicide, of an adolescent girl by her uncle. The facts of the case have been reported extensively in media outlets, and form the basis of United States v. Michael Jacques, a capital murder case pending in the U. S. District Court for the District of Vermont. In the underlying personal injury case, the father of Brooke Bennett sued Michael Jacques former wife for negligently failing to protect Brooke Bennett. After the father filed suit, 2

the insurer, who issued a homeowners policy to Michael Jacques and his former wife, sought a declaration that it did not owe the aunt coverage in the underlying case. The trial court granted summary judgment for the insurer. The father appealed. The main issue presented on appeal was, broadly, whether the policy was ambiguous and had to be construed in favor of coverage for the aunt. More specifically, the issue was whether a severability of interests clause, read together with an exclusion for the intentional acts of an insured, created ambiguity, requiring construction in favor of coverage. The clause at issue stated, Insured means: a. you ; b. your relatives if resident of your household; c. persons under the age of 21 residing in your household and in your care or in the care of your resident relatives;... Each of the above is a separate insured, but this does not increase our limit. The exclusion at issue excluded coverage for Bodily injury 1) which is expected by, directed by, or intended by an insured ; 2) that is the result of a criminal act of an insured ; or 3) that is the result of an intentional and malicious act by or at the direction of an insured. An earlier Vermont case made clear that an exclusion for intentional acts of an insured would apply to each insured. In other words, there would be no coverage for an insured who negligently fails to protect a third person from the intentional acts of another insured. By contrast, an exclusion for the intentional acts of the insured, would not exclude coverage for the negligent insured. Northern Security Ins. Co. v. Perron, 172 Vt. 204 (2001). In Bennett, the plaintiff-appellant relied on a recent case from the Supreme Court of California, Minkler v. Safeco Ins. Co. of America, 232 P.3d 612 (Cal. 2010), which held, an exclusion of coverage for the intentional acts of an insured, read in conjunction with a severability or separate insurance clause... creates an ambiguity which must be construed in favor of coverage that a lay policyholder would reasonably expect.... The Vermont Supreme Court declined to follow Minkler, holding instead, like the majority of jurisdictions, that the phrase, an insured in an exclusion must always be read to apply collectively to all insureds, even if a clause within the policy requires that each insured be treated separately. 3. Doe v. Vermont Office of Health Access, 2012 VT 15A. The Doe case is not so much an insurance coverage as it is a lien recovery case. It has limited applicability for that reason, but also because it involved the construction of Vermont Medicaid lien recovery statutes prior to their most recent amendments. Doe is the first Vermont Supreme Court case applying Arkansas Department of Health 3

& Human Services v. Ahlborn, 547 U.S. 268 (2006), which held that a state s Medicaid department which has paid medical benefits to a plaintiff may seek reimbursement only from that portion of the plaintiff s judgment or settlement allocated to medical expenses. In other words, the state Medicaid Department may not seek reimbursement from portions of a settlement or judgment for damages other than medical expenses, such as lost wages or pain and suffering. The case arose from an auto accident in New York in 1992, when the Plaintiff, then a nine-year-old boy, was catastrophically injured and paralyzed. After the accident, the boy applied for, and received, Medicaid benefits. After the accident, the boy sued third party tortfeasors and the New York State Thruway Authority. The boy settled first with the third parties for $8.75 Million with no part of the settlement allocated to medical benefits. Before this settlement, the boy had received nearly $900,000 in Medicaid benefits and Medicaid placed a lien on the recovery. Medicaid agreed to accept about $594,000, or 66% of its payments, in satisfaction of its lien. Eventually, the boy s claim against the Thruway Authority went to trial, and he was awarded $42 Million, with $2.9 million allocated to past medical expenses. During an appeal, the boy accepted $12 Million from the Thruway Authority, with no part of the settlement allocated to medical expenses. After the first settlement, but before the second, Medicaid paid $771,000 in medical expenses for the boy. The State then claimed a $506,800 lien on the $12 Million settlement. That figure represented the amount Medicaid paid for the boy s medical care, less its share of litigation expenses. The boy sued the State, seeking a declaratory judgment (1) that the two settlements must be added, and the New York Court of Claims allocation of medical expenses utilized, to determine what portion of the total settlement must be allocated to medical expenses in order to calculate the lien and (2) that he was entitled to a $70,000 set-off for amounts he claimed to have overpaid Medicaid in the first settlement. The trial court calculated the lien, based upon the total amount of the boy s medical expenses ($1.3 Million) not just the amount of expenses Medicaid had paid ($771,000). It ordered the boy to pay about $377,000 to the State. Both parties appealed. On appeal, the Vermont Supreme Court ruled: 1. Based on the pre-2008 version of 33 V.S.A. 1910(a), the State may 4

assert a gross lien only up to the amount of its actual payments. Therefore, the gross amount of the State s lien is limited to $771,000. (The Court expressed no opinion on the meaning of the statute following the 2008 revisions and additions.) 2. The gross lien must be reduced to account for a proportionate share of attorneys fees incurred to obtain the settlements, pursuant to 33 V.S.A. 1910(j). 3. The boy was not entitled to a set-off for overpayment to Medicaid after the $8.75 Million settlement, since he and Medicaid had reached an agreement, and he paid, and Medicaid accepted, the sum in accord and satisfaction of the lien. 4. McGoff v. Acadia Insurance Co., 2011 VT 102. McGoff is a case on the application of 23 V. S. A. 941. The statute requires auto policies to provide equal underinsured/uninsured motorists' and liability coverage on policies with limits on individual coverage above $50,000. The Court ruled that the statute applies only to policies delivered in Vermont for vehicles either registered or principally garaged in Vermont. The Plaintiff, a Vermont resident, was driving a Massachusetts-registered vehicle owned by his employer, a Massachusetts company, when he was injured in an auto accident in Vermont. Although the car had been garaged in Vermont, the employer insured the vehicle with Acadia under a Massachusetts fleet policy. The policy, consistent with Massachusetts law, provided $1,000,000 in liability coverage, but only $20,000 in UIM coverage. After the accident, the plaintiff sued the tortfeasor, whose policy limits were only $100,000. He also and made a claim for UIM coverage against Acadia. Acadia denied the UIM claim because its UIM coverage was less than the tortfeasor's liability coverage (under 23 V.S.A. 941(f), a vehicle is underinsured only to extent the insured's UIM coverage is greater than the tortfeasor's liability limit or is greater than the amount of the tortfeasor's available liability insurance after payments to others in the same occurrence) and moved for summary judgment. Initially, the superior court denied summary judgment because of disputed facts on where the insured vehicle was garaged. The superior court later granted the motion, ruling that 23 V.S.A. 941(a) did not apply to the Acadia fleet policy because the policy was not delivered or issued for delivery in this state. On appeal, the plaintiff argued that because the vehicle was garaged in Vermont, not Massachusetts, the Court should read the requirements of 23 V.S.A. 941 into the policy. The Supreme Court affirmed, citing the plain language of 941, which states that its UIM requirements apply only to policies delivered or issued for delivery in this state. The Court 5

noted that the Acadia policy was a Massachusetts fleet policy, written on a Massachusetts form, approved by a Massachusetts regulator and delivered to a Massachusetts company with its principal place of business in Massachusetts, by a Massachusetts agent, for vehicle registered in Massachusetts. The Court went on to reject the plaintiff's claim that 23 V. S. A. 941(a) applies to vehicles that are principally garaged in Vermont, citing language from the statute that it applies to auto policies delivered or issued for delivery in this state with respect to any motor vehicle registered or principally garaged in this state. The Court seized on the phrase with respect to, noting that it was conjunctive, not disjunctive, and therefore required that both clauses, (1) delivered or issued for delivery in this state and (2) any motor vehicle registered or principally garaged in this state, must both be met in order for the statute to apply. Finally, the Court bolstered its decision with citations to near-unanimous case law in other jurisdictions and the Restatement (Second) of Conflicts of Law 188. 5. ProSelect Insurance Co. v. Levy, 2011 VT 109. Levy was a declaratory relief action to determine an insurer s duty to indemnify its insured, a psychiatrist, in a lawsuit alleging malpractice and sexual assault. The case arose from a complaint in the underlying case that the defendant psychiatrist negligently failed to diagnose the plaintiff s psychological disorder, prescribed harmful medications, encouraged the plaintiff to pursue unhealthy lifestyle choices, failed to refer her to a community-based mental health program, treated her contrary to established professional protocols and sexually assaulted and battered her. At issue was the policy exclusion which provided, This policy does not apply to any liability of an insured or to any damages, incidents, claims or suits... [w]hich, in whole or in part, arise out of or contain any allegations of any of the following by any person:... (a) Sexual intimacy,... exploitation, assault or undue familiarity; (b) Mishandling of transference or countertransference.... (d) The abandonment of a patient with whom an insured has had an intimate or sexual relationship, or the failure to refer such patient to an appropriate healthcare provider. The trial court concluded that the professional malpractice policy excluded coverage and entered judgment for the insurer. On appeal, the plaintiff in the underlying case, who was also a party to the coverage action, appealed, arguing for coverage under the concurrent causation doctrine and public policy. Vermont s concurrent causation doctrine is set forth in State Farm Mutual Automobile Insurance Co. v. Roberts, 166 Vt. 452, 459, 697 A.2d 667, 671 (1997), which holds that if an 6

insured s liability arises from concurrent but separate acts, and one of them is covered by the policy, coverage may not be denied merely because a separate excluded risk was an additional cause of the accident. The doctrine is limited, however, to cases in which the conduct on which coverage is premised must somehow be independent of the conduct excluded from the policy. The Court in Levy declined to apply the concurrent causation doctrine because the excluded claims of sexual abuse were not independent from the covered claims for malpractice. The Court noted that the malpractice claims derived from the theory that the psychiatrist s deviations from the standard of care were a design to isolate the patient from other health care providers in order to preserve the improper sexual relationship between the psychiatrist and plaintiff. The Court also declined to find coverage for reasons of public policy. It observed that other jurisdictions have held that a policy which excludes coverage for all claims, whether related to sexual misconduct or not, once sexual misconduct is alleged, contravenes public policy (Am. Home Assurance Co. v. Cohen, 881 P.2d 1001, 1009 (Wash. 1994); Am. Home Assurance Co. v. Stephens, 130 F.3d 123, 127 (5th Cir. 1997)). But, the policies at issue in those cases excluded coverage even when both sexual and non-sexual misconduct claims were independent, a situation not implicated in this present case, where all of the claims essentially derive from the noncovered allegation of sexual misconduct. 7