This claim arises out of the somewhat famous “wave ahead” case of Key v. Hamilton, 963 NE 2d 573 (Ind. Ct. App. 2012). In that case, a driver of a stopped truck waved a motorcyclist ahead to pass him after checking for traffic, failing to see an oncoming vehicle, and the motorcycle collided with the oncoming vehicle. The waving party was insured for $250,000 by American Family.
At trial, the injured party obtained a verdict for $990,00 against the waving party. American Family tendered its policy limits of $250,000 plus prejudgment interest. The driver subsequently filed for bankruptcy and the trustee filed suit for bad faith against American Family on behalf of the bankruptcy estate to recover for the excess judgment.
During the bad faith case, discovery showed that
American Family’s counsel evaluated the injured party’s claim at $110,000, but never offered the reserve amount of $100,000.00 during negotiations. Likewise, despite Mr. Hamilton’s demand that was equal to the policy limit, American Family still refused to pay this amount, even with knowing that Mr. Hamilton’s medical expenses alone were almost twice that amount. In addition, the Trustee presents evidence that American Family failed to fully investigate the claim or dispute Mr. Hamilton’s injuries.
Judge Tanya Walton Pratt, held that the evidence did justify summary judgment on the claim for punitive damages but that the evidence was not sufficient to grant summary judgment on the issue of bad faith. In so ruling, Judge Pratt cited that the duty of good faith forces the insurer to not only consider its monetary interests in deciding whether to settle, but also the risk that the insured will bear the risk of an excess verdict. Certain Underwriters of Lloyd’s v. GEN. ACC. INS., 909 F. 2d 228, 231-32 (7th Cir. 1990). Judge Pratt found that the question of whether the “gamble” is unreasonable under these circumstances is a question for the finder of fact.
The CoA’s opinion is filed in the ever-expanding catalog of cases relating to under-insured motorist (“UIM”) coverage.
The issue is relevant in light of the Indiana Supreme Court’s recent ruling in Justice v. Am. Family Mut. Ins. Co., 4 N.E.3d 1171, 2014 Ind. LEXIS 196 (Ind. 2014). In fact, the Court of Appeals relies on that decision in reaching its conclusion here.
In this case, the spectacularly surnamed Christine Anderson was in a motor vehicle accident during the course of her employment. The at-fault driver had $25,000 in coverage, which was paid in full, and Anderson received $81,166.15 in worker’s compensation (“WC”) benefits since she was on the job. She had at the time a UIM policy with limits of $100,000. Thus, she sought $75,000 for the remaining UIM coverage.
Indiana Insurance argued that the UIM policy limit was set off by the WC benefit since it exceeded the $75,000 in remianing UIM coverage. This would mean that coverage would be reduced from the policy limits rather than the total damages (e.g. if Anderson had $300,000 in damages, she argues that the amount she received in WC benefits should be deducted from the $300 number instead of the $75K in coverage).
The Court of Appeals sided with Indiana Insurance on this point, holding that policies generally provide for when a setoff is to be made against damages rather than limits of liability and the use of the word damages in other areas of the policy is evidence that the insurer did not intend for the setoff to apply to damages if another word is used.
Paragraph E mentions “element of loss” and does not mention damages. Further, the portion of the Policy addressing underinsured motorists coverage uses the term “damages” on other occasions. Also, similar to Am. Econ., Paragraph E falls under the section titled “LIMIT OF LIABILITY.” Unlike Tate, the Policy defines an “[u]nderinsured motor vehicle” as one for which the sum of the limits of liability under all bodily injury liability bonds or policies applicable at the time of the accident is either: “1. Less than the limit of liability for this coverage; or 2. Reduced by payments to persons, other than ‘insureds’, injured in the accident to less than the limit of liability for this coverage.” Appellant’s Appendix at 163. Based upon Paragraph E, we cannot say that the trial court erred to the extent that it reduced the amount Anderson received from worker’s compensation from the Policy limit.
The Court of Appeals did however hold that under the recently published Justice case, the insurer could not apply WC benefits to reduce the UIM benefit below the state mandated minimum of $50,000. In citing that case, the Court found the following language dispositive: “[i]f [the underinsured motorist] had carried the required amount of liability insurance, [the insured] would have received $50,000, and the purpose of our uninsured/underinsured motorist statute is to put him in that position.” 4 N.E.3d at 1179. Thus, no matter whatever the WC benefit Anderson received, she was entitled to $50,000 in UIM coverage.
Accordingly, the Court of Appeals upheld summary judgment by the trial court on the issue of the setoff but reversed summary judgment on the issue of the recoverable UIM benefit.
Indiana Supreme Court reversed grant of summary judgment to American Family and held that plaintiff is entitled to recover the remaining $25,000 from American Family under the terms of his underinsured motorist policy limit because the set-off using workers’ compensation benefits in his case would reduce the policy below the statutory minimum. The policy explicitly stated that wok comp benefits set-off reduced the limits of liability, and in this case would bring the policy limits below the statutory minimum.
A journeyman electrician, Holderman, who was employed, performed in a personal capacity a wiring service for friend for $300. The same wiring job eventually caused the death of a guest at the same residence. Holderman submitted the claim to State Farm, with whom he had personal liability provision under his homeowner’s policy.
Said policy excluded coverage for “business pursuits.” Under Indiana law, an insured is engaged in a business pursuit only when he pursues a continued regular activity for the purpose of earning a livelihood. At summary judgment, Judge Miller of the Northern District held that Holderman’s conduct fell under the exclusion since the favor was right in line with his professional responsibilities (thus a continued regular activity) and that he was earning a livelihood since he charged nearly exactly what he would have for any other job.
Not three months after the decision in Allen County Pub. Library v. Shambaugh & Son, L.P., 997 N.E.2d 48 (Ind. Ct. App. 2013) (published on Oct. 22, 2013 and authored by J. Barnes with Pyle and Crone concurring; reaffirmed on rehearing on 1-28-14), a different panel of the IN CoA revisits the waiver of subrogation clause in standard AIA contracts and comes to a far different conclusion.
To provide some background, since AIA contracts are rather standard nationwide, there has developed a majority and minority view on how to interpret the relevant provisions therein, including waiver of subrogation clauses. Indiana has long subscribed to the minority view. In Allen County Pub. Library, this view was reaffirmed and in the rehearing opinion, Judge Barnes opined that even if the majority view had applied, the result would have been the same. See Allen County Pub. Library v. Shambaugh & Son, L.P., 2014 Ind. App. LEXIS 26 (Ind. Ct. App. Jan. 28, 2014).
The contract language at issue in both cases is as follows:
Waivers of Subrogation. The Owner and Contractor waive all rights against each other and against the Construction Manager, Architect, Owner’s other Contractors and own forces described in Article 6, if any, and the subcontractors, sub-subcontractors, consultants, agents and employees of any of them, for damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work, except such rights as the Owner and Contractor may have to the proceeds of such insurance held by the Owner as fiduciary . . . . (Sec. 11.3.7)
With respect to waiving subrogation, Indiana has used the “work v. non-work” approach. That is, this section “is limited to the work performed under the contract and, therefore, if a contractor causes damage to property other than the Work to be performed under the contract, the property owner (or its insurer through subrogation) may seek recovery from the contractor for that damage, regardless of whether the damage was covered by insurance.” Midwestern Indem. Co. v. Sys. Builders, Inc., 801 N.E.2d 661, 672-673 (Ind. Ct. App. 2004).
The majority view as viewed by the Allen County Pub. Library decision considers “whether the insurance policy was broad enough to cover damages to work and non-work property and whether the policy paid for the damages. If the answer to both questions is yes, the waiver applies.” Allen County Pub. Library, 2014 Ind. App. LEXIS 26, 7 (Ind. Ct. App. Jan. 28, 2014) (citing Federal Ins. Co. v. Woodruff Const., 826 N.W.2d 516, 2012 WL 5954588, *2 (Iowa Ct. App. 2012)).
To put it in more simple terms, the minority view is that damage to property outside of the scope of “the work” is not subject to the standard AIA waiver of subrogation, regardless of whether the owner obtained insurance for all damage. The majority view is that if you have insurance on non-work items and that insurance pays, then the waiver applies to the extent insurance pays for it.
In Allen County Pub. Library, Judge Barnes noted in the rehearing opinion that the owner procured a “builder’s risk plus” policy which only provided for $5,000 in cleanup costs. The library did not therefore waive any claims for damages above and beyond what it received from insurance since the cases in the majority view allowed for recovery above what insurance provided. Thus, even applying the majority view, the AIA contract did not avail the contractor of the subrogation waiver protections.
By contrast, today’s opinion in Board of Commissioner of County of Jefferson v. Teton Corp., et al. rejects the minority view of the AIA subrogation waiver provision as well as Judge Barnes’s interpretation of the majority view.
In this case, the owner opted to use its own existing liability policy instead of procuring a builder’s risk policy under the contract. Under those same terms, the owner was obligated to inform the contractor of its decision in writing, which the owner did not do. During the related renovations to the Jefferson County courthouse, a fire broke out and caused over $6,000,000 in damages, some of which was covered by the liability insurance and some of which fell to Jefferson County.
In adopting with the majority view, the Court focused on two sections of the AIA contract.
Section 184.108.40.206 provides that “[i]f the Contractor is damaged by the failure or neglect of the Owner to purchase or maintain insurance as described above, without so notifying the Contractor, then the Owner shall bear all reasonable costs properly attributable thereto.”
Section 11.3.7 further provides that “[a] waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.
The Court read these provisions and the majority view to limit subrogation rights altogether, placing the entire onus on the Owner to obtain adequate insurance:
Section 11.3.1 of the AIA contract therefore requires owners to insure their interests in the construction project at least to the value of the underlying contract. The AIA contract expressly requires property owners to separately insure these interests and, in order to facilitate the completion of the project without delaying and debilitating litigation, to obtain an “all-risk” insurance policy that waives the carrier’s rights to be subrogated to any loss arising within the extremely broad coverage described in the contract. If the owner does not secure such insurance, then it still waives its subrogation rights for any loss described within the AIA contract that it sustains.
In so holding, the Court rejected the notion there could be any recovery above and beyond the insurance coverage secured by Jefferson County. The Court even noted that the recovery in Allen County Pub. Library should have been barred as the owner opted to insure its risk at $5,000.
What does it mean? Two decisions reaching two very different conclusions as to what the “majority view” even means. Judge Barnes reaches the conclusion that losses beyond what was insured would still be recoverable under the majority view whereas today’s decision reads the AIA contract to put all of the risk, and the onus of obtaining adequate insurance, on the owner. Additionally, the Court’s opinion comes close to converting the waiver of subrogation section into a hold harmless agreement where the owner is left without any recourse to recover for property damage resulting from a contractor’s negligence. Obviously, there are several nuances to this issue. I would highly recommend reading the entire opinion as well as Judge Barnes’s concurring opinion referenced herein.