AFLAC Incorporated v. Chubb & Son, Inc.

Court of Appeals of Georgia, Docket No. A03A0594, decided March 14, 2003 (Eldridge, Judge, writing for the court; Johnson, P. J., and Mikell, J., concurring). Our text comes from the Caselaw Access Project (case.law), Harvard Law School’s open archive of published U.S. case law. Removed as print artifacts: the archive’s own section separators and its bracketed opinion tag (“[Eldridge, Judge. — majority]”), the reporter’s head-matter block (docket number, caption, parallel citation), the “Decided March 14, 2003” line, and the counsel listings — which the archive’s scan drops into the middle of the opinion, between the paragraph ending “not reimbursable as sue and labor” and the paragraph beginning “AFLAC failed to support its motion.” Those counsel listings are summarized here instead: for the appellant, Pope, McGlamry, Kilpatrick, Morrison & Norwood, Paul Kilpatrick, Jr., William U. Norwood III, John R. Bevis, and Finley & Buckley, James B. Finley; for the appellees, Denney, Pease, Allison & Kirk, John W. Denney, and Tisinger, Tisinger, Vance & Greer, Douglas C. Vassey. Scan repairs, complete list — five of them: “[wjithout” corrected to “[w]ithout”; “heavily buttressed]” corrected to “heavily buttresse[s]”; the stray comma in “The terms at issue, here plainly employ” removed; the two brace characters opening the conjunction lists in the second footnote (“{and, but, or…” and “{both - and…”) corrected to parentheses; and the stray single quotation mark closing “International Policy’)” corrected to a double quotation mark. Each of those was checked against the FindLaw text of the same opinion. Separately, and throughout, the archive’s curly quotation marks and apostrophes are rendered here as straight marks. The archive prints the opinion’s footnotes at the end without inline reference markers; they appear below under “Footnotes,” in the order and wording the archive gives them. The judge’s name line is bolded.

The full opinion

Eldridge, Judge.

AFLAC Incorporated, a major insurance company primarily selling supplemental group and cancer insurance, brought the instant action against its insurers, Chubb & Son, Inc., Chubb Indemnity Insurance Company, Great Northern Insurance Company, and Jordan/Woolfolk Insurance Company (“Chubb”). AFLAC sought declaratory relief as to coverage and damages under two Chubb contracts of all-risk property insurance for remediation costs incurred upon converting its computer systems from two-digit to four-digit date recognition capability in anticipation of the Year 2000 (“Y2K”) computer problem, i.e., a known computer design limitation in computer hardware and software systems evidenced by incapacity for more than two-digit date recognition rendering such systems unable to properly recognize and manipulate twenty-first century dates. Chubb answered, denying coverage and asserting 29 separate affirmative defenses. Following a status conference, the trial court stayed further discovery and ordered AFLAC to file a motion for summary judgment. This AFLAC did by its motion for partial summary judgment and declaratory judgment, seeking a declaration as to coverage. AFLAC appeals from the denial of summary judgment upon the grant of a certificate of immediate review, arguing that the trial court erred in failing to declare that the Chubb policies afforded it coverage; erred in not construing such insurance most strongly in favor of AFLAC as the insured; and erred in construing the policy terms in issue under the legal principles of fortuity and outside peril. Because AFLAC’s motion for partial summary judgment and declaratory relief was properly denied for want of coverage, we affirm. Held:

1. It is axiomatic on motion for summary judgment, all reasonable inferences must be construed in favor of the nonmovant and that summary judgment is warranted only when the record shows by plain, palpable, and undisputed evidence that a party is entitled to judgment as a matter of law. Connell v. Guarantee Trust Life Ins. Co., 246 Ga. App. 467, 469 (541 SE2d 403) (2000). If the movant for summary judgment fails to show an entitlement to a judgment as a matter of law, with the evidence viewed in favor of the nonmoving party, a prima facie case has not been shown. Case v. RGA Ins. Svcs., 239 Ga. App. 1, 3 (521 SE2d 32) (1999). Moreover, in an action on an insurance policy, the insured must show that the occurrence was within the type of risk insured against in order to make a prima facie case. Ga. Farm &c. Ins. Co. v. Alloway, 134 Ga. App. 660, 661 (215 SE2d 506) (1975).

The policies here in issue, Chubb’s Financial Institutions Policy (“Financial Policy”) and its International Commercial Policy (“International Policy”), as renewed, insured AFLAC under similar terms of insurance. Both policies provided AFLAC all-risk personal property coverage — the International Policy “for direct physical loss of, or damage to” covered property and the Financial Policy for “direct physical loss or damage to” such property if caused by or the result of a peril not otherwise excluded. The Financial Policy also insured AFLAC against “direct physical loss or damage to” newly acquired electronic data processing equipment and against extra business expenses, actual or potential, incurred for operational delay upon such loss or damage to property “away from” the insured premises by civil authority. In light of the foregoing, we must determine the meaning of nearly identical terms of insurance, that is, coverage as in the International Policy for “direct physical loss of, or damage to” insured property and coverage as in the Financial Policy for “direct physical loss or damage to” the same.

The relevant rules of contract construction guide the analysis of these contract provisions. In construing an insurance contract, [the] court must consider it as a whole, give effect to each provision, and interpret each provision to harmonize with each other. [Boardman Petroleum v. Federated Mut. Ins. Co., 269 Ga. 326, 328 (498 SE2d 492) (1998).] The policy should be read as the layman would read it. [Nationwide &c. Ins. Co. v. Collins, 136 Ga. App. 671 (222 SE2d 828) (1975).]

(Footnotes omitted.) York Ins. Co. v. Williams Seafood of Albany, 273 Ga. 710, 712 (1) (544 SE2d 156) (2001). By its brief on appeal, as it did below, AFLAC contends that the terms of insurance in issue should be read disjunctively in that each employs the word “or”; that the words “direct physical” should be read as modifying the word “loss” alone; and, citing America Online v. Nat. Health Care Discount, 121 FSupp.2d 1255 (N.D. Iowa 2000), that the word “damage” should be read as providing coverage separately for “any impairment to the integrity or availability of data.” AFLAC further contends that the insertion of a comma after the word “loss” in the International Policy “heavily buttresse[s]” its interpretation of the insuring clauses as terms of insurance in the disjunctive affording it separate coverages for direct physical loss and for damage. We disagree.

The terms at issue here plainly employ the word “or” not in the disjunctive but as a coordinating conjunction connecting the coverage words “loss” and “damage.” The coordinating adjectives “direct physical” as modifying the word “loss,” thus obviously modify the word “damage” as “connected” to the word “loss.” That a comma in addition to the word “or” was employed in the International Policy does not make this less so. Moreover, the words “loss of” in the International Policy and the words “damage to” used in both policies make it clear that coverage is predicated upon a change in the insured property resulting from an external event rendering the insured property, initially in a satisfactory condition, unsatisfactory. The word “direct” as modifying the word “physical” means only that the change in the insured property occurred by the action of the fortuitous event triggering coverage. “Direct” is defined as “[w]ithout intervening persons, conditions, or agencies; immediate.” American Heritage Dictionary (2nd college ed. abridged, Dell, 1985), p. 200.

While we have been unable to find any Georgia precedent construing the term of insurance “direct physical loss or damage,” the common meaning of the words and the policies as a whole indicate that it contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so. See, e.g., Trinity Indus. v. Ins. Co. of North America, 916 F2d 267, 271 (5th Cir. 1990); Wolstein v. Yorkshire Ins. Co., 97 Wn. App. 201, 213 (985 P2d 400) (1999); North American Shipbuilding v. Southern Marine &c. Underwriting, 930 SW2d 829, 833 (Tex. App. 1996).

AFLAC concedes that the inability of its computer systems and software to process twenty-first century dates existed from the time the systems were created by design. Further, AFLAC avers that it successfully avoided its Y2K problem upon undertaking a comprehensive remediation program to upgrade such systems and software. No change in such systems as evidenced by direct physical loss of or damage thereto as a result of a fortuitous event having been alleged, AFLAC failed to make out a prima facie claim for coverage under the policies in issue. In effect, AFLAC seeks no more than an ordinary cost of doing business — that is, a maintenance and renovation expense in the nature of the cost of upgrading its computer systems and software upon a known design limitation. The instant policies of property insurance are contracts of indemnity against loss or damage due to a fortuitous event. As such, they do not afford coverage for sums expended to improve or better property wholly apart from any indemnification purpose. See American Bumper &c. Co. v. Hartford Fire Ins. Co., 452 Mich. 440, 462 (550 NW2d 475) (1996) (voluntary improvement to covered property a regular cost of doing business not recoverable); see also Armada Supply v. Wright, 858 F2d 842, 853 (2nd Cir. 1988) (expenses undertaken in the ordinary course of business not reimbursable as sue and labor).

AFLAC failed to support its motion for summary judgment by any evidence which would give rise to a genuine issue of material fact supportive of its recovery under the policies in issue. OCGA § 9-11-56 (e). Accordingly, the trial court did not err in denying AFLAC summary judgment thereon.

2. In light of our disposition of Division 1, we need not consider AFLAC’s remaining claims of error.

Judgment affirmed.

Johnson, P. J., and Mikell, J., concur.

Footnotes

The record shows that the Financial Policy was renewed annually four times in the period May 16, 1996, through May 16, 2000. The International Policy, in turn, was renewed three times from January 30, 1998, to May 16, 2000.

“Conjunctions serve as connectors. The coordinating conjunctions (and, but, or, nor, for, so, and yet), as well as the correlatives (both - and, either - or, neither - nor, not only - but also, whether - or), connect sentence elements (words, phrases, or clauses) of equal grammatical rank.” (Emphasis in original.) Harbrace College Handbook (11th ed.), p. 16.

Where the addition of the word “and” between adjectives not separated by a coordinate conjunction “make[s] sense, the adjectives are coordinate.” Id. at 133.

Generally, adjective clauses should be placed near the words they modify. Id. at 270.

An event happening by chance or accident. That which happens by a cause which cannot be resisted. An unforeseen occurrence, not caused by either of the parties, nor such as they could prevent. For purposes of an all risk insurance policy, an event which occurs accidentally, as a lay person, and not a technician or scientist, would understand it. It is an event which happens by chance, unexpectedly, or without known cause; one which is undesigned or unplanned.

(Emphasis supplied.) Black’s Law Dictionary (6th ed.), p. 654.

What it decided

AFLAC spent money fixing its own computers before the year 2000 and asked its all-risk property insurers to reimburse the cost. The trial court refused to declare that the policies covered it. The Court of Appeals affirmed that refusal.

Two rulings did the work, and both are about the insuring clause rather than any exclusion.

The first is grammatical. AFLAC argued that “direct physical loss or damage” should be split at the word “or,” so that “damage” would stand alone and reach “any impairment to the integrity or availability of data.” The court said no: the “or” is a coordinating conjunction, and “direct physical” modifies “damage” just as it modifies “loss.” A comma does not change that.

The second is the sentence carriers now quote at homeowners. Noting that it could find no Georgia precedent construing the phrase, the court supplied one:

the common meaning of the words and the policies as a whole indicate that it contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.

Applied to AFLAC, that test failed on both halves. There was no change in the computers — they behaved in 2000 exactly as they had been built to behave. And there was no fortuitous event, because AFLAC conceded the two-digit limitation “existed from the time the systems were created by design.” What AFLAC wanted was “an ordinary cost of doing business,” and a property policy is “a contract of indemnity against loss or damage due to a fortuitous event,” not a fund for improving property.

The court also restated the burden that runs underneath the whole case: “in an action on an insurance policy, the insured must show that the occurrence was within the type of risk insured against in order to make a prima facie case.”

What it did NOT decide

• It did not decide a property-damage claim. The insured property was computer hardware and software under two commercial policies, a Financial Institutions Policy and an International Commercial Policy. No roof, no wall, no water. A carrier that cites AFLAC in a hail file is borrowing a definition, not a holding on hail.
• It did not require severe damage, or visible damage, or damage that stops the property from working. Read the test’s last clause: property qualifies if the change made it “unsatisfactory for future use or requiring that repairs be made to make it so.” The “or” is the court’s, and it means a property that still functions but needs repair is inside the definition.
• It did not apply a single exclusion. Chubb pleaded 29 affirmative defenses. The court reached none of them. The case ends at the insuring clause, on the insured’s own prima facie burden — which is why AFLAC tells you nothing about who bears the burden on wear and tear, faulty workmanship, or any other exclusion. In Georgia that burden sits with the insurer, and exclusions are construed against the company that wrote them. See Nationwide v. Kim and American Strategic v. Helm.
• It did not enter judgment for the insurer. The posture was AFLAC’s own motion for partial summary judgment, on interlocutory review by certificate of immediate review. The court affirmed the denial of that motion. It did not grant Chubb anything.
• It did not hold that intangible or invisible harm can never be a physical loss. The court decided the case in front of it: a design limitation, known from the day the systems were built, that AFLAC fixed voluntarily. It did not address data destroyed by an outside event, contamination, or any of the arguments that came later.
• It did not disturb the ordinary rules of construction it recited. The opinion quotes York Insurance for the rule that a policy “should be read as the layman would read it,” and applies it. That rule works for policyholders far more often than it worked for AFLAC.

Why it matters to policyholders

This is the sentence in the adjuster’s letter. When a Georgia denial says your loss is not a “direct physical loss,” the definition behind that word almost always traces to AFLAC. So read the definition yourself, then hold it up against your own roof:

• Was the property in a satisfactory state before the storm?
• Did an accident or fortuitous event act directly on it?
• Is there an actual change in the property?
• Does that change make it unsatisfactory for future use, or does it require repairs to make it so?

Creased shingles, fractured mats, hail bruising, lifted ridge caps, torn underlayment, water that came in through an opening the wind made — each of those is an actual change to property that was fine the day before, caused by a storm nobody planned. A test written to defeat a voluntary software upgrade does not defeat a hailstorm.

The word doing the real work is “fortuitous.” The court quoted Black’s Law Dictionary in full: “An event happening by chance or accident … one which is undesigned or unplanned.” AFLAC lost because the problem was designed in from the start. That is the family the carrier’s favorite defenses belong to — wear and tear, age, deterioration, manufacturing defect, an installation error from ten years ago. When a carrier says your damage is old, or inherent, or a defect, it is running the AFLAC play. The answer is not argument. The answer is proof: date-stamped photographs, storm-date verification for your address, a documented condition before and after, and an inspection that shows the mechanism of damage rather than just its existence.

A denial has to tell you which provision it relies on. Georgia’s claim-handling regulation requires the denial to reference the specific policy provision, condition, or exclusion the insurer is standing on. If a letter recites “no direct physical loss” and stops, ask for the provision and the facts behind it in writing. The deadlines that go with it are on our page for Rule 120-2-52-.03.

Where a public adjuster fits. AFLAC is a case about evidence as much as grammar. The insured lost partly because it “failed to support its motion … by any evidence” of a change caused by a fortuitous event. Building that record is our job: documenting the condition of the property, tying the damage to a dated weather event, writing the estimate the carrier has to answer, negotiating, and invoking appraisal when the fight is over the amount rather than the coverage. Filing suit and pleading bad faith are lawyer work, and when a claim needs that, we refer it out. More Georgia authority, in full text, is on the Georgia claim-law page.

Now you know the rule. Enforcing it against a carrier is a different job — and it's ours. A free, confidential case review by a licensed public adjuster takes three taps.

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