The Federal court in Worcester has decided a dispute between two insurers over how their insurance policies would apply to a serious liability suit against their common insured. The insured had rented her property through an online platform catering to vacation homeowners. After the insured’s renter suffered a traumatic brain injury allegedly from a fall on the rental property’s dilapidated staircase, the guest and her husband sued to recover the wife’s $627,000 in medical bills, rehabilitation expenses, conscious pain, and suffering, and the husband’s loss of consortium.
The insurer for the renter’s home, Commerce Insurance, and the insurer for the online rental platform’s insurance program, Generali-USA, each claimed the other carrier had the primary duty to indemnify and defend the renting homeowner against the lawsuit.
Generali-USA sued for a declaratory judgment based on an endorsement changing Generali-USA’s “other insurance” clause from primary to excess. Commerce Insurance failed to deny in its answer to Generali-USA’s declaratory judgment that the endorsement was valid. Based on that omission, the court ruled that the insurers had to share proportionally share the defense and any indemnity in proportion to their liability limits of $1,000,000 and $600,000 for Generali-USA and Commerce Insurance, respectively.
The rental of the insured’s property and its insurance policies
In the fall of 2017, Susannah Gale had offered her property in Berkshire County for rental on VRBO.com, a vacation rental website specializing in putting together owners and renters of vacation properties around the world. VRBO.com is a member company of the Expedia Group, the owner of sites such as Expedia, Hotels.com, Travelocity.com among two-hundred travel sites on the Web.
Ms. Gale had a homeowners policy on her residence property with Commerce for the policy period July 9, 2017, to July 9, 2018, with a basic policy liability limit of $500,000. An “Advantage Elite Extended” endorsement provided her with an additional $100,000 in liability coverage, creating a total policy liability limit of $600,000.
Generali-USA had issued to VRBO, whose business designation was as a “vacation rental marketplace”, a claims-made commercial general liability policy for the policy period May 8, 2017, to May 8, 2018, with an applicable policy limit of $1,000,000.
Under Part II of the Generali-USA policy, “Who is an Insured,” Ms. Gale became an insured by virtue of the policy provision designating as an insured:
“Any person or organization that rents a property to a third party through your website or the website of your parent, its subsidiaries, or affiliates using your checkout, either directly or through your API, but only with respect to liability arising out of the ownership, maintenance or use of such property under the terms and for the duration of a “rental agreement” for such rental property.“
The alleged injury to Ms. Gale’s renters found through VRBO
In early December 2017, Ms. Gale rented her property for a weekend vacation to two residents of Northport, New York, Laura Kampa, and her husband, using VRBO’s website.
On December 1, 2017, while descending an outside staircase, Mrs. Kampa was allegedly hit by a defective door, causing her to fall on a defective set of stairs located on Ms. Gale’s property.
On April 20, 2018, a Boston law firm sent Ms. Gale a letter advising that they represented the Kampas and requested that Ms. Gale: “Please forward a copy of this letter to your insurer and notify them that a request has been made pursuant to M.G.L. c. 175, §112C for the amount of the limits of any applicable insurance coverage.” (M.G.L. c. 175, § 112C requires insurers to divulge liability limits or pay a $500 penalty and legal fees).
The letter also advised Ms. Gale about maintaining the property to avoid any claim of spoliation of evidence stating:
Please be advised that any construction, renovations, changes, or alterations to the interior or exterior of the house, including, but not limited to, the stairs, railings, doors, thresholds, porches, overhangs, or walkways, will be considered spoliation of evidence and may lead to adverse consequences for you in any future legal proceeding. If you seek to make any changes or have any work done to the house or the areas identified above whatsoever, please contact our office in advance.
Ms. Gale notified Greylock Insurance Agency, her agent, of the claim letter, and the agent notified Commerce. Ms. Gale also notified VRBO, which notified Generali-USA.
The lawsuit by the Kampas and the insurers’ dispute over primary coverage
On March 6, 2019, Mrs. Kampa and her husband sued Ms. Gale in the Berkshire County Superior Court.
The lawsuit alleged that because of her fall, Mrs. Kampa had suffered a subdural hematoma on the right side of her head, requiring brain surgery. The removal of this hematoma caused a subsequent brain hemorrhage on the left side of Mrs. Kampa’s brain. Consequently, Mrs. Kampa was unable to function in daily life for months after the accident and required assistance in the most basic functions such as standing, eating, bathing, and dressing herself. These injuries also allegedly adversely affected Mrs. Kampa’s memory.
Mrs. Kampa’s medical bills from her injury totaled over $627,000.
The lawsuit also alleged that Mr. Kampa suffered a significant loss of consortium because of his wife’s brain injuries causing Mrs. Kampa’s personality, energy level, and interest in physical activities to permanently change. These changes, the suit claimed, had detrimentally affected Mr. Kampa’s relationship with Mrs. Kampa.
After Ms. Gale reported the suit to her insurers, Commerce and Generali-USA disputed who had the primary duty to defend her. Commerce refused to participate in the lawsuit’s defense, claiming that Generali-USA’s policy was primary insurance and that its policy was excess.
Generali-USA’s coverage suit on primary vs. excess policy allocation
Generali-USA provided a defense to Ms. Gale in the Kampas’ lawsuit. After incurring over $34,000 in defense costs, it filed a declaratory judgment in the Federal court in Worcester seeking a declaratory judgment on the respective priorities of coverage and liability between it and Commerce for the defense and indemnity for the negligence suit in state court against Ms. Gale.
Generali-USA’s complaint sought a ruling that it and Commerce were co-primary insurers for the Kampas’ lawsuit because the operative “Other Insurance” clauses in the policies were “mutually repugnant.” Thus, under Massachusetts law, Generali-USA argued, Commerce was obligated to contribute equally to Ms. Gale’s defense.
Also, Generali-USA sought an order that Commerce had to reimburse Generali-USA for its share of those defense costs General-USA has already incurred; and—if Gale were found liable—that Generali-USA would pay 62.5% and Commerce 37.5% of indemnification costs on a pro-rata basis until Commerce’s lower policy limit of $600,000 was exhausted.
Commerce’s judicial admission binds it on the effectiveness of the General-USA endorsement
When Generali-USA moved for summary judgment asserting there was only a question of law for the judge to decide based on the insurance policies involved, Commerce demurred.
It claimed that a factual issue existed over the effectiveness of an endorsement to the Generali-USA’s policy and whether the endorsement had properly been added to the Generali-USA policy. This disputed endorsement modified the Generali-USA’s policy by removing a provision that unequivocally made the policy primary.
However, the Federal Court hearing the summary judgment rejected Commerce’s argument. The judge found that in its First Amended Complaint, General-USA had alleged that its policy included the disputed endorsement and provided the exact language of the endorsement. Moreover, Commerce’s answer to General-USA’s First Amended Complaint had admitted that the General-USA policy contained the specified endorsement language.
The judge ruled that Commerce’s answer to General-USA’s First Amended Complaint constituted a judicial admission, and as a judicial admission, it was “conclusive on the party making them.”
The judge further stated:
“If Commerce was unsure whether [this endorsement] had been timely made part of the Generali Policy, it could have denied the corresponding allegation in the First Amended Complaint or answered that it lacked adequate knowledge to respond, or it could have sought to amend its answer before summary judgment. Either action could have preserved this issue for summary judgment.”
Mutually repugnant “Other Insurance” clauses
Based on his ruling, the judge compared the two policies’ provisions for “Other Insurance.”
The Court noted that both policies contained identical language purporting to provide excess coverage if another insurance policy applied. The policies stated:
- (General-USA Policy) “This insurance is excess over . . . other valid and collectible insurance except insurance written specifically to cover as excess over the limits of liability that apply in this policy.” (OI Endorsement Section 4.b.(1)(d), Docket No. 34-4 at 1).
- (Commerce Policy) “This insurance is excess over except other valid and collectible insurance written specifically to cover as excess over the limits of liability that apply in this policy.” (Section II. Conditions, Docket No. 34-7 at 37).
The judge noted that both the Commerce and General-USA Policies’ provisions claimed to be excess insurance under their respective “Other Insurance” clauses. Massachusetts law provides that where excess “Other Insurance” clauses conflict like this, they are considered “mutually repugnant.” As such, both insurers must contribute to the loss, regardless of any other language in the policies.
The judge noted that Massachusetts law required this result because to otherwise allow both insurers to negate coverage “would deny the insured the benefit of his bargain twice over.”
The final ruling of sharing costs and possible indemnity
Based on his ruling concerning sharing, the judge elected to apply the allocation scheme provided in the General-USA policy. Under this scheme, the Court ordered both General-USA and Commerce to pay an equal share of defense costs in the Kampa Action. This means that Commerce must reimburse General-USA for 50% of the defense costs it has already incurred and contribute 50% of any future costs.
As to indemnification, the Court ruled that since the Commerce Policy did not permit contribution by equal shares, any indemnity owed to Ms. Gale if she should be found liable in the Kampa Action would be based on the ratio of its applicable insurance limit to the total applicable limits of both insurers.
The General-USA policy limit had $1,000,000 per occurrence, and the Commerce policy limit was $600,000 per occurrence. The combined limits of these policies afforded $1.6 million in coverage. Thus prorated, General-USA’s policy limit to the total limits of both insurers ($1,000,000/ $1,600,000) was 62.5% and Commerce’s ($600,000/$1,600,000) was 37.5%.
The final order of the Court stated:
“Therefore, for the purposes of determining priority of coverage between the insurers only, Generali will pay 62.5% of any indemnity costs up to its $1,000,000 policy limit, and Commerce will pay 37.5% of any indemnity costs—up to its $600,000 policy limit.”
Points for agents to keep in mind based on the Generali-USA case
While this decision involves a dispute between two insurers about “other insurance” allocation, there are a couple of points that agents might wish to consider.
- Insureds who are using Airbnb and similar type rental services need as much coverage as they can afford. The underlying lawsuit, in this case, provides an object lesson that serious claims of bodily injury may arise when renting one’s property. While a review of the claim Superior Court claim shows that the claim may have substantial weaknesses, the damages claimed (over $600,000 in medical and brain damage) could result in a jury verdict that could exceed the $1,600,000 in liability limits this insured may have. For such insureds who use these rental services, an umbrella policy providing extended limits is a must.
- Homeowners who receive a claim letter should be cautioned about spoliation of evidence. Insureds who have a valid defense, if unadvised, might quickly change or repair claimed property defects. In doing so, they may adversely affect a defensible case by creating a situation where the plaintiff’s counsel can argue, as has happened in this case, that the jury should decide whether the insured spoliated evidence evidencing consciousness of liability.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
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