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Monthly Archives: May 2015

N.Y. Federal Court Grants Summary Judgment in Connection with a Contingent Business Interruption Claim

4th May, 2015 · William D Wilson · Leave a comment

Federal Judge Katherine Polk Failla of the Southern District of New York granted summary judgment in favor of Zurich American Insurance Company in connection with a contingent business interruption claim asserted by its insured, Lantheus Medical Imaging, Inc.  The insured claimed that it sustained a contingent business interruption (“CBI”) loss in excess of $75 million as a result of the shutdown of the Chalk River Reactor, also known as the NRU Reactor, in Ontario, Canada.

Lantheus, a specialty pharmaceutical company that manufactures and distributes diagnostic medical imaging products, purchased Molybdenum-99 (“Moly-99”), a radioactive isotope produced by the reactor, from Nordion, Inc.  The reactor was shut down for more than one year after a leak of heavy water was discovered.  The heavy water leaked through two penetrations in the wall of the reactor vessel.  After an extensive investigation, Atomic Energy of Canada Limited (“AECL”), which operates the reactor, determined that the loss was caused by corrosion.

In light of the AECL’s findings, Zurich denied coverage on the basis of a corrosion exclusion in the policy issued to Lantheus.  The corrosion exclusion contained anti-concurrent cause language.  Thus, if corrosion contributed to the loss, coverage was excluded “regardless of any cause or event that contributes concurrently or in any sequence to the loss or damage.”

Lantheus conducted extensive discovery of AECL in Canada in an effort to develop evidence establishing that the loss was caused by something other than corrosion.  Lantheus also retained a corrosion expert who testified that the particular type of corrosion at issue, electrochemical cell corrosion, did not qualify as “ordinary” corrosion because it happened very rapidly.  Therefore, according to the insured, the corrosion exclusion did not apply.  The insured also argued that the final penetration of the reactor wall occurred as a result of a sudden surge of water in the vessel, which caused a drastic increase in pressure (i.e., a pressure transient).  In other words, the “straw that broke the camel’s back” was a pressure transient and not corrosion.

The court rejected each of the arguments raised by Lantheus.  In doing so, it noted that the term corrosion was not defined in the policy.  Thus, it looked to the dictionary definition of the term:

Webster’s defines “corrosion” as “the action or process of corrosive chemical change not necessarily accompanied by loss of form or compactness; typically: a gradual wearing away or alteration by a chemical or electrochemical essentially oxidizing process (as in the atmospheric rusting of iron).”

The court rejected Lantheus’s argument that the exclusion applied only to corrosion damage that takes place inevitably over the useful life of a machine and, therefore, would not apply to the corrosion at issue.  According to the court:

Nothing in the dictionary definition narrows the scope of “corrosion” to that which occurs “inevitably” over the life of a machine. Other courts have rejected analogous attempts to narrow the definition of “corrosion.”

The court also found that “rapid” corrosion falls within the exclusion.  As noted by the court, “[i]mplicit in Lantheus’s argument is the notion that a ‘gradual’ process cannot also occur rapidly. This is not so. A ‘gradual’ process ‘proceed[s] by steps or degrees,’ but it does not necessarily do so slowly.”  According to Lantheus’s expert, the corrosion at issue took place over a period of 29 days.

With respect to Lantheus’s contention that a pressure transient caused the failure of the vessel wall, the court “accept[ed] for the purposes of [the] motion that the breach occurred because of a ‘pressure surge . . . act[ing] upon an already weakened point.’”  Judge Failla went on to note, however, that “in light of the anti-concurrent causation language, this theory simply begs the question of what process caused the vessel to be ‘already weakened.’”  Because the court found that corrosion caused the “already weakened” condition of the vessel, there was no coverage.

The court likewise rejected Lantheus’s argument that the loss fell within the ensuing loss exception to the corrosion exclusion.  It held that “the ensuing loss provision cannot be applied . . . to restore coverage for the loss caused by corrosion.”  According to the court, Lantheus would be entitled to coverage under the ensuing loss exception only if it could prove that “collateral or subsequent” damage occurred to other insured property as a result of the excluded peril.   Here, there was no evidence of any collateral or subsequent damage.  “Even under Lantheus’s theory of the case, the aeration cell operated in tandem with the hydraulic transient to cause the through-wall breach — there was, therefore, no ‘ensuing loss.’”

Because it granted summary judgment to Zurich based on the corrosion exclusion, the court did not need to consider whether the shutdown of the reactor resulted in a “necessary suspension” of Lantheus’s business.  It did note, however, that “the [policy] provisions suggest that Lantheus’s CBI coverage hinges on whether its business activities at the Billerica Facility ceased completely as a result of the NRU Reactor shutdown.”  The court further noted that “[t]he majority of courts have reached the same conclusion when faced with this language.”

A copy of the decision can be obtained by clicking on the following link: Summary Judgment Decision

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N.J. Appellate Court Once Again Holds Bad Faith Claim Should Be Severed and Stayed

2nd May, 2015 · William D Wilson · Leave a comment

In addition to asserting a claim seeking coverage under its insurance policy, an insured frequently will assert a claim alleging that its insurer acted in bad faith in not paying the claim.  This often occurs in cases involving uninsured motorist (“UM”) and underinsured motorist (“UIM”) claims.  A UM claim is asserted by an insured against its own insurance company when the insured is involved in an automobile accident with another driver who has no insurance or cannot be located.  A UIM claim is asserted by an insured against its insurance company when the other driver is underinsured.

Despite the fact that UM and UIM coverages provide compensation for personal injuries, they are considered to be first-party insurance coverages as opposed to third-party insurance coverages.  This is because the insured is seeking recovery under his or her own policy of insurance.  A first-party bad faith claim was first recognized by the New Jersey Supreme Court in Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (1993).  There, the court held:

[A]n insurance company may be liable to a policyholder for bad faith in the context of paying benefits under a policy.  The scope of that duty is not to be equated with simple negligence.  In the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits.  In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.

131 N.J. at 481.  An issue that frequently arises is whether the underlying coverage claim and the bad faith claim should be litigated at the same time.

In Procopio v. Government Employees Insurance Company, 433 N.J. Super. 377, 80 A.3d 749 (App. Div. 2013), which involved a UIM claim, the Appellate Division held that it is an abuse of discretion for a trial court to allow discovery to proceed simultaneously on both an underlying coverage claim and a bad faith claim.  In that case, the trial judge bifurcated the claims for purposes of trial, but allowed discovery to proceed simultaneously on both claims.  The court ruled that the bad faith claim should have been severed and discovery on that claim stayed until resolution of the underlying UIM claim.

Recently, in Wacker-Ciocco v. Government Employees Insurance Company, 439 N.J. Super. 603, 110 A.3d 962 (App. Div. 2015), the Appellate Division addressed a somewhat related issue.  The issue in that case was whether the trial court could deny a motion to sever the bad faith claim and permit discovery to move forward on that claim when the insurer has produced certain bad-faith related documents prior to moving to sever the bad-faith claim and stay discovery.  The court held that it could not.

Like Procopio, Wacker-Ciocco arose out of a UIM claim asserted against Government Employees Insurance Company, which is better known as GEICO.  There, the insured argued that GEICO acted in bad faith by failing to pay her UIM claim.  GEICO produced portions of its claim file during discovery.  It then moved to sever and stay the bad faith claim pending resolution of the underlying UIM claim.

The trial judge denied GEICO’s motion, concluding that there was no reason to stay discovery because “the cat [was] out of the bag” given that the insurer already produced certain documents.  110 A.2d at 965.  A second judge reaffirmed the prior ruling in connection with a subsequent discovery motion.  GEICO subsequently filed a motion with the Appellate Division seeking leave to file an interlocutory appeal.  While such motions are sparingly granted, the Appellate Division nonetheless granted the motion and reversed.

The court began its analysis by noting that “[a]s a preliminary matter, the insured who alleges bad faith by the insurer must establish the merits of his or her claim for benefits” under the policy.  Id. at 967.  “If there is a valid question of coverage, i.e., the claim is ‘fairly debatable,’ the insurer bears no liability for bad faith.”  Id. (quoting Pickett, 131 N.J. at 473).  “If the insured is unable to establish a right to the coverage claimed, the bad faith claim must be dismissed.”  110 A.2d at 967.

The court went on to note:

Bad faith is an intentional tort.  To establish bad faith, a plaintiff must show the lack of a reasonable basis for denying the claim or unreasonably delaying its processing, and the insurer’s knowledge or reckless disregard that it was acting unreasonably.  This claim cannot be sustained by evidence of negligence, mistake or delay in payment without some showing of the insurer’s wrongful intent.

Id. at 968.  Citing Procopio, the court then noted “that proof an insured is entitled to coverage as a matter of law is a necessary pre-requisite to pursuing discovery regarding a bad faith claim.”  Id. at 969.  According to the court, “[t]his principle does not become inapplicable simply because some discovery relevant to the bad faith claim was produced here.”  The court further noted that while certain documents were produced, GEICO did not produce its entire claim file.  “Therefore, the competing interests implicated by ordering simultaneous discovery on both the coverage and bad faith claims remained in play.”  Id.  Consequently, the court concluded that the trial court erred in allowing bad-faith discovery to move forward simultaneously with discovery on the UIM coverage claim.

Both Wacker-Ciocco and the court’s earlier decision in Procopio involved bad faith claims arising out of the failure by an insurer to pay a UM/UIM claim.  It appears, however, that the two decisions have much broader implications and would apply to any first-party bad faith claim.  Indeed, the court relied on a number of decisions outside the UM/UIM context.

As a general matter, insurers routinely produce their claim files as part of discovery.  In Wacker-Ciocco, GEICO did not do that.  Rather, it produced certain select documents from its claim file that it believed supported its coverage denial.  It is not clear what would have happened had CEICO produced its entire claim file prior to moving to sever and stay the bad faith claim.  Had that happened, an argument could have been made that “the competing interests implicated by ordering simultaneous discovery on both the coverage and bad faith claims” were no longer in play.  In order to prevent such an argument, therefore, an insurer should move to sever and stay a bad faith claim at the outset of the litigation before any documents are produced.  Otherwise, it runs the risk of having to litigate both claims simultaneously.

 

© William D. Wilson and NJInsuranceBlog.com, 2015.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

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