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Sixth Circuit Issues Important Insurance Coverage Ruling

On Behalf of | Sep 6, 2017 | Banking Law, KB Blog, KB News

Sixth Circuit Issues Important Insurance Coverage Ruling

On December 9, 2009, a limb from a red maple tree fell during a windstorm (with winds in excess of 50 mph) in Somerset, Kentucky and killed 17-year old Kaitlyn Griffin and her unborn child.  The tree limb also injured Kaitlyn’s cousin, Joshua Thacker.  On the morning of December 9, Kaitlyn’s mother, Rhonda Griffin, was moving into an apartment owned by the Housing Authority of Somerset.  Kaitlyn was seven months pregnant at the time and had come to visit with her mother that day.

Following the incident, a lawsuit was filed by Kaitlyn’s parents as the co-administrator’s of her estate and by Joshua against the Housing Authority, asserting that it was negligent for the respective deaths of Kaitlyn and her unborn baby and for Joshua’s injuries.  The case proceeded to a jury trial in the Pulaski Circuit Court in October 2013.  The Housing Authority defended that it had no prior notice of any defect, illness, or condition exhibited by the tree that collapsed during the storm – in essence, it argued that the incident was an unforeseeable act of God.  Tree experts called by the defense testified that the tree was not diseased and that it was alive at the time of the incident.  The Plaintiffs countered with a witness who was a former employee of the Housing Authority who stated that he had advised the Housing Authority Executive Director several years prior that he had cut down dead limbs from the tree and that he believed the tree had issues that needed to be addressed.  The Housing Authority denies the conversation ever occurred and pointed out that the former employee was not a tree expert.

The jury found for the Plaintiffs and awarded nearly $4 million in damages.  The Housing Authority appealed the judgment and while the appeal was pending, the case was settled at a court-ordered mediation.  The terms of the settlement were that the Kentucky Housing Authorities Self-Insurance Fund’s insurer, Evanston Insurance Company, would pay the several Plaintiffs “policy limits” to resolve the claims.  The Plaintiffs reserved the right to and did ultimately file a declaratory judgment action to determine the amount of available policy limits.  Evanston contended that policy limits were $1 million and the Plaintiffs claimed the cap was between $2 million and $4 million.  Judge Danny Reeves of the U.S. District Court for the Eastern District of Kentucky ruled in favor of Evanston that policy limits were capped at $1 million.  See 2015 WL 8373945 (E.D. Ky. 2015).  The Plaintiffs appealed to the Sixth Circuit.

On appeal, the Plaintiffs argued for the first time that the interests of the Housing Authority and the Self-Insurance Fund (both Kentucky entities) aligned with those of Evanston Insurance (an Illinois entity) such that diversity jurisdiction was destroyed.  The Sixth Circuit remanded the case to Judge Reeves to allow him to examine the party alignment/diversity jurisdiction issue.  See 658 Fed. Appx. 799 (6th Cir. 2016).  On remand, Judge Reeves held that he had properly aligned the parties given their respective interests in the primary dispute at the time of filing of the declaratory judgment action and he reinstated his prior judgment in favor of Evanston.  See 2016 WL 6650843 (E.D. Ky. 2016).  The Plaintiffs appealed again.

On August 15, 2017, the Sixth Circuit entered an opinion (designated for publication) which affirmed the ruling of the trial judge in favor of Evanston.  See — F.3d —, 2017 WL 3481865 (6th Cir. Aug. 15, 2017).  This opinion covers several important points for future insurance coverage disputes.

First, the Court addressed the proper alignment of parties in a coverage case brought under diversity jurisdiction.  The Court held that “[p]arty alignment is not solely a function of how the parties align themselves; courts may realign the parties to reflect their actual ‘interests in the litigation.’”  Id. at *2.  Judge Sutton wrote in his opinion that “courts must group parties with similar interests on the same side of the suit and pit them against parties with competing interests.”  Id. (citing Smith v. Sperling, 354 U.S. 91, 96 (1957)).

The Sixth Circuit applied this test and concluded that Judge Reeves had properly aligned the parties and found that diversity jurisdiction existed.  It found that this case presented the normal situation in a coverage matter of “Insurer versus Insured and Injured Party.”  Id. at *2.  The rationale for this holding was that the Housing Authority and its Self-Insurance Fund had an interest in the court finding more coverage as opposed to less coverage (the position taken by Evanston, the insurer).  The key time to look at the alignment of the parties is the time the declaratory judgment action is filed.  The Sixth Circuit stated that how the interests of the parties appeared before (or even after) that time was not material to the diversity jurisdiction decision.  Id. at *4.

The Court then turned to the coverage merits.  Part A of the insurance policy at issue insured Fund members from general liability stemming from bodily injury, personal and advertising injury, or property damage caused by an occurrence that takes places in the coverage territory.  It limited coverage to $1 million for each “occurrence,” and $2 million in the aggregate.  Part B of the policy insured Fund members for wrongful acts stemming from any actual or alleged error, misstatement or misleading statement, act or omission, neglect, negligence, or breach of duty committed by the insured parties.  Like Part A, Part B covered up to $1 million per claim and $2 million in the aggregate.  Both parts limited Evanston’s liability for events that qualified as occurrences and claims.

The Plaintiffs argued that the deaths of Kaitlyn and the unborn baby and the injury to Joshua arose from multiple causes even though only one tree fell on them.  The Court found only one occurrence under Part A – “just one tree in one fall caused all of the harm.”  See 2017 WL 3481865 at *5.

The Court also rejected the Plaintiffs attempt to increase coverage under Part B.  Judge Sutton stated:  “Neither party disputes that a coverable event could constitute an occurrence and a claim.  Both parts provide for a maximum of $1 million in coverage per event.  Because the applicable limits of each coverage part are equal, the text of each says that only Part A’s limit applies.  Evanston thus does not owe anything under Part B of the contract.”  Id. at *6.  Thus, Judge Reeves’ trial judgment was completely affirmed by the appellate court.

The ruling is significant in two respects.  First, and this will help coverage counsel, it clarifies that the question of whether parties are “adverse” in determining federal diversity jurisdiction has to be decided at the time the complaint is filed, not at some later point.  The Court recognized that a party’s position in litigation is constantly morphing based on discovery, rulings, and settlements and it therefore makes sense that diversity jurisdiction be determined at the outset of the case.  Second, the Sixth Circuit recognized that Kentucky follows the “cause approach” in determining what constitutes an “occurrence” under a GL insurance policy and directs courts not to look at the number of injured parties (the “effects approach”) but rather, to whether there was one proximate uninterrupted, and continuing cause of the injuries.