Sunday, November 2, 2014

Indemnity, Insurance, Interest, Interest on Interest, and Iffy-ness

Town of Ira v. Vermont League of Cities and Towns, 2014 VT 115

By Andrew Delaney

You can smell dusty law books when you read this opinion. It even feels a little like law school. Let me break it down for you.

Town bought a policy from its insurer, which covered, among other things, embezzlement by town employees. The policy coverage limit was a half-mil. As it turns out, a 2009 audit showed that the long-term elected town treasurer had embezzled over $300K, and the lost interest on that was figured at $346.4K. So town gets a judgment against treasurer just north of a $1.1M (there were other things goin’ on for those keeping score at home).

When town put in a claim with insurer, insurer paid, but paid only the amount actually taken, not the interest. Town sued for the difference and the trial court—on cross motions for summary judgment—held that the town could recover lost interest in addition to the amount actually embezzled. Town’s argument was that the policy should cover the “time value” of the money taken and the trial court agreed. The trial court figured that got to the policy limit, and kind of booted town’s claim for audit and attorney’s fees, town’s bad-faith claim, and insurer’s counterclaims to recoup already paid sums.

Insurer appealed, town cross-appealed, and that brings us to the main event.

The SCOV lays out the playing field first. Because this is a case interpreting an insurance policy, it’s primarily a question of law and the SCOV can do whatever it wants—no blood, no foul. Plain meaning of the policy language controls if unambiguous, but ambiguity is interpreted in favor of the insured. There’s a short discussion whether a fidelity policy (which indemnifies for certain criminal conduct, like here) and a liability policy (your garden-variety-coverage policy) should be subject to the same rules of interpretation—the SCOV concludes they should.

To begin, the SCOV goes back to a Massachusetts case from the 1800s. More or less, that case stands for the idea that there are two types of potential prejudgment interest in this kind of situation: (1) interest from the time of misappropriation; and (2) interest on the amount demanded under the covered loss.

This case involves only the first type of interest. The SCOV hasn’t specifically addressed this issue before, but follows the reasoning of some other jurisdictions—primarily the jurisdiction that brought us Chris Christie, Boardwalk Empire, and Snooki. There are two rationales. One is essentially that the insurer in this posture underwrites the principal’s behavior and is liable for the same damages the principal would be liable for—in order to be made whole, the insured should be compensated for both the loss of the money itself and the loss of the use of that money, or interest. The second rationale is that there’s a presumption that the insurer is liable for the same damages as the principal, and lost interest is simply a form of damages payable under the bond. On this point, the SCOV quotes a Tennessee case: “We do not believe that the defendant insurer is in the habit of keeping its reserves for losses hidden in the bottom of a sugar jar in the kitchen. They are put out at interest.” Go Tennessee with your snarky self.

Coverage is interpreted broadly under insurance contracts, and the SCOV notes this.

Insurer’s strongest argument is based on a North Carolina case where the policy language was pretty much the same and the North Carolina Appeals Court said that “money” doesn’t include interest. Unfortunately for insurer, that dog won’t hunt. The SCOV comes right out and says it rejects the reasoning—it even spends some time explaining why the reasoning is misguided (though it would be possible to replace “misguided” with a number of far-more-colorful words and phrases). Primarily, the issue boils down to whether the policy language is ambiguous at all. The North Carolina court took the view it wasn’t, and the SCOV takes the view that it is.

The SCOV runs through a scenario in which an employee might embezzle from deposits (which are absent from the definition) and there would be no coverage because of that inopportune definition of money. Thus the SCOV reasons that “the use of the term ‘money’ refers to liquidity, not to the form of the asset.” I feel compelled to note, also, that this opinion is peppered with more footnotes than my sixteen-year-old face was peppered with acne.

Insurer argues that the town isn’t a bank and so it shouldn’t get interest. Insurer wants the SCOV to limit “loss of use” coverage to financial institutions, but the SCOV ain’t havin’ it. It doesn’t really matter what the town might’ve done with the interest, it’s the lack of having that interest in the first place that is being compensated.

The SCOV also rejects insurer’s policy-payments-don’t-cover-damages argument. The policy payments are to cover losses and the interest lost is a loss and those losses were made reasonably certain by an outside audit—makes sense to me.

Insurer’s argument that if interest is included in the required policy payments, interest after demand is prohibited as “interest on interest” is "interesting."  Interest on judgments (in Vermont) are calculated using simple interest and not compounded annually. The SCOV notes that the trial court didn’t compound interest in this case, so it’s kinda irrelevant. The SCOV points out, however, that if the clock stops ticking after the policy demand is made, then delays in payment are rewarded as that delay becomes interest free, so that takes care of that. There are two different kinds of interest

Finally, on insurer’s end, there’s some issue about audit and attorney’s fees, but ‘cause we’ve already reached the policy limit between principal and interest and such, well, nobody cares. The SCOV doesn’t get into it. Same deal with insurer’s counterclaims for amounts paid—not gonna make a difference, not gonna get into it. 

Town appeals the dismissal of its bad-faith claim against insurer. On that point, the trial court held that the insurer’s denial of the claim was “fairly debatable.” See, two things need to present for a bad-faith claim to hold water: first, the insurer has to have no reasonable basis for denying the policy’s benefits; and second, the insurer has to know or recklessly disregard that there ain’t no reasonable basis for denying benefits.

A little aside here: almost everybody knows what “ain’t no” means—but just in case you don’t, dear reader, it translates to “is not any.” It’s a basic colloquialism that your average six-year-old child can use correctly. Unfortunately, vigorous attempts are often made to chastise it out of the child instead of explaining its potential for humorously folksy phrasing. Personally, I think the phrase needs to find its way into some judicial opinions.

At any rate, the way the bad faith claim plays out is that the SCOV agrees with the trial court—that because the SCOV hadn’t decided the issue and because not all (just most) decisions from other jurisdictions favored the town’s position, there was a reasonable basis for insurer to take the position it did. So, because the first prong isn’t present, the SCOV affirms the trial court’s dismissal of the bad-faith claim.

So that’s it. Town gets interest, insurer pays the policy limit, and the SCOV just slices through the extraneous stuff paragraph-by-paragraph. As I alluded to at the beginning, this is a well-researched opinion with some useful discussion of these particular issues. I’d suggest you keep a list of insurance-contract terms handy if you decide to work your way through it, however.

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