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Herten, Burstein, Sheridan, Cevasco,
Bottinelli, Litt, Toskos & Harz, LLC
REPORT FROM COUNSEL
FALL 2003 ISSUE
HOMEOWNERS' INSURANCE: THE DEVIL RESIDES IN
THE DETAILS
Reading and understanding all of the language in a
homeowners' insurance policy are not formalities to be skipped over
while searching for the signature line. As with any contract, the
fine print can have real and lasting consequences, and its contents
will control over any contradictory verbal assurances. Taking the
time to understand the terms of their policies might have headed off
bad outcomes for homeowners in two recent cases.
Business Purposes Exclusion
Joan bought property consisting of a home, two
barns, and other outbuildings. She also purchased a homeowners'
insurance policy that excluded coverage for any nondwelling
structure that was rented out "unless used solely as a private
garage." Joan rented the barns to a commercial marina, which used
them for winter storage of customers' boats. When one of the barns
collapsed due to snow and ice on its roof, Joan submitted a claim
for loss of the barn.
The insurer denied coverage, prompting Joan to
point out that the rental exclusion should not apply because the
marina was using the barn as a "private garage." Her point made
sense as far as it went, but the insurer won because of a separate
exclusion from coverage for any nondwelling "used in whole or in
part for business purposes." Joan's main occupation was as a
financial analyst, and she brought in only a few thousand dollars by
renting out the barn. But all that was necessary for the business
purposes exclusion to apply was that the insured regularly engage in
the conduct with an intent to profit.
It was significant for the court that, by failing
to disclose her conduct, Joan had prevented the insurer from knowing
the risks it was insuring. The purpose of a business pursuits
exclusion, after all, is to rule out coverage for a whole set of
risks and liabilities flowing from business activity. It did not
matter that the damage to the barn was not caused by the boats that
were stored there for profit.
"Household" Defined
At the heart of another dispute over homeowners'
insurance coverage was what turned out to be an erroneous assumption
by the homeowners that "residents of your household" meant any
persons living on the same parcel of land, even if in a different
house from that occupied by the insureds. Ken and June lived in one
house and their daughter and 10-year-old grandson lived rent-free in
another house that was only 20 feet away and had the same mailing
address. The close-knit family often shared meals and activities,
and Ken and June regularly cared for their grandson.
When the grandson accidentally shot a playmate
with a rifle, Ken and June submitted a claim under their homeowners'
policy, which covered "residents of your household who are your
relatives." The insurance company succeeded in arguing that it had
no obligation to defend the grandson in a suit for his friend's
injuries because he was not a resident of Ken's and June's
household.
In legal terminology, a "household" is a
collection of persons living together as a unit under one roof or
within a single "curtilage." "Curtilage" is a technical term for the
area next to a house that is inside the same enclosure, is used for
the intimate activities of the house, and is protected from
observation by passers-by. The house where the grandson lived did
not meet any of these criteria so as to make the grandson part of
Ken's and June's "household." The four individuals in this case
probably constituted a household in many respects and for many
purposes, but not in the context of interpreting the homeowners'
insurance policy.
"CYBERSMEAR" LAWSUITS
The free-wheeling give and take in various online
forums is leading to more defamation claims by individuals and
businesses. Given that so many online speakers are anonymous,
however, Internet service providers sometimes become trapped between
the speaker and his offended subject. Before the alleged victim can
seek redress, the perpetrator must be identified, and providers
often resist divulging such information. Courts are still in the
early stages of setting rules for these legal contests.
An electronics company brought an action in
California against an anonymous individual who allegedly had trashed
the company's publicly traded stock on an Internet message board.
Among other comments, the secretive critic had said that the company
produced "low tech crap" and that its president was manipulating
stock prices. In its efforts to identify the speaker, the company
discovered that his online name was registered with a service
provider with headquarters in Virginia.
When the plaintiff sought permission from a
Virginia court to examine the provider's records, the request was
met with stiff resistance. The provider argued that it would
infringe on the constitutional right to speak anonymously if it were
forced to reveal subscriber information. Citing the principle that
the courts of one state generally should respect court orders from a
sister court, the Virginia court allowed the review of the
provider's records. The right to free speech was not an impediment
to the court's ruling, as "the constitutional guarantees of free
speech afford no more protection to the speaker than they do to any
other tortfeasor who employs words to commit a criminal or civil
wrong."
Wounded by disparaging comments posted anonymously
on an Internet message board, another company similarly sought to
unmask its detractors by forcing information from a provider. In
that case, the court saw more merit in the free speech defense
raised by the provider, but it did not completely block the request
for subscriber information. The court balanced the right to speak
anonymously with the right of the injured company to protect its
proprietary interests and its reputation.
The result was a compromise of sorts: The company
could gain access to the speakers' identities only if it first
showed to the court's satisfaction that it could make out a
plausible defamation case against them. This meant exactly
identifying the offending statements and demonstrating how they
harmed the plaintiff. In this case, the critics remained safely in
the dark because the company could not substantiate its claims that
the comments adversely affected its stock price and its hiring
practices.
AGE DISCRIMINATION IN
EMPLOYMENT
The combined effects of an aging population and a
sluggish economy have led to an increase in lawsuits alleging age
bias in the workplace. The Age Discrimination in Employment Act (ADEA)
prohibits age discrimination in the employment of persons who are at
least 40 years old. The ADEA covers most private employers of 20 or
more persons. It forbids age discrimination in advertising for
employment, hiring, compensation, discharges, and other terms or
conditions of employment. Retaliation against a person who opposes a
practice made unlawful by the ADEA or who participates in a
proceeding brought under the ADEA is a separate violation.
The ADEA takes into account that sometimes there
is a correlation between age and the ability to fulfill the
requirements of a job, and that even older workers must comply with
employers' rules and requirements that have nothing to do with age.
An employer does not violate the ADEA if it takes an otherwise
prohibited action where age is a "bona fide occupational
qualification" necessary to the operation of a particular business.
Nor is it a violation to differentiate among employees based on
reasonable factors other than age or to fire or discipline an
employee for good cause.
Before suing in court, an aggrieved person first
must allege unlawful discrimination in a charge filed with the Equal
Employment Opportunity Commission (EEOC) and then wait 60 days to
allow the EEOC an opportunity to resolve the dispute informally
before taking further legal action. Court remedies include
injunctions (court orders stopping a discriminatory practice),
compelled employment, promotions, reinstatement with back pay and
lost benefits, and an award for attorney's fees and costs of
bringing the suit. If a court finds that an employer's violation of
the ADEA was willful, it may also award liquidated damages equal to
the out-of-pocket monetary losses of the plaintiff.
It is not essential to an ADEA lawsuit that there
be a "smoking gun" in the plaintiff's favor in the form of
derogatory age-based comments about older employees. In fact,
remarks of that kind will not support liability if they have no
connection to the challenged employment decision. In a recent
lawsuit brought by an on-air television reporter who was fired, a
boss's comment that "old people should die" was an insignificant
stray remark because it was made about the boss's own father. On the
other hand, it was very helpful to the plaintiff's case that the
same boss had stated repeatedly that she wanted to "go with a
younger look" and she did not like having an older man appearing on
the news.
Employers sometimes select older workers to be
terminated as a money-saving measure, given their generally higher
compensation and perhaps their being close to vested retirement
benefits. There is no ADEA violation in a decision that treats
employees differently because of something other than age, such as
money. An employer will not be liable under the ADEA for terminating
an employee solely to prevent his pension benefits from vesting.
(That conduct might very well violate ERISA, however.) Such a
scenario is distinguishable from situations in which employers face
ADEA liability because they have made decisions based on the
stereotype that productivity and competence always decline with old
age.
BE CAREFUL WHAT YOU FAX
The Telephone Consumer Protection Act (TCPA)
prohibits any person within the United States from using a telephone
facsimile machine to send an unsolicited advertisement to a person
with whom the sender does not have an existing business
relationship. A prior business relationship will be treated as
consent to a faxed advertisement unless the recipient withdraws that
consent.
Court remedies under the TCPA should command the
attention of any company giving thought to a fax advertising blitz
directed at potential customers. A person receiving an unsolicited
fax may bring an action to prohibit violations of the TCPA and for
actual damages, or statutory damages of $500 per violation. For a
willful or knowing violation, a court has the discretion to triple
the amount of statutory damages. Actual damages may amount to cents
per page and the costs of tied-up telephone lines. Statutory
damages, however, could reach into the millions for a "blast-faxed"
advertising campaign with hundreds or thousands of faxes, with each
transmission considered a separate violation.
Not only can the cost of TCPA violations be steep,
but in some cases that cost may be extracted from the personal
assets of corporate officers, not just the business itself. In one
case, the officers and sole shareholders of a small advertising
service were found to be personally responsible for
statutory damages based upon nearly a million unlawful faxes a
month, over five months.
They were personally liable not simply because
they held particular offices and sat on the board of directors, but
because they actively oversaw and directed the unlawful conduct.
With good reason to believe that their actions violated the TCPA,
the individual defendants had persisted, as the court put it, "with
their eyes and pocketbooks wide open."
THE MARITAL DEDUCTION: A
VALUABLE ESTATE PLANNING TOOL
The federal estate tax marital deduction is one of
the most important estate planning tools available to a married
couple. The basic marital deduction rule is that, upon the death of
the first spouse, the value of any interest in property passing to
the surviving spouse is deducted from the decedent spouse's gross
estate. This means that the amount passing to the surviving spouse
escapes taxation in the decedent spouse's estate.
There is no limitation on the value of property
that can qualify for the marital deduction. By transferring
sufficient assets to the surviving spouse in the proper manner,
estate tax liability upon the first spouse's death can be completely
avoided.
At first view, the estate tax marital deduction
may seem to be a government giveaway. It is not. The advantage
afforded is not the total avoidance of estate tax on the transferred
property but, rather, the deferral of such tax. The marital
deduction requires that the transfer of assets to the surviving
spouse be made in such a way that those assets are exposed to estate
tax liability in the surviving spouse's estate.
The obvious advantage of deferring the estate tax
liability is that the surviving spouse will have the use of the tax
dollars that would otherwise have been paid to satisfy the tax
liability of the first spouse's estate. The deferral of tax
liability also postpones the possible need to sell off assets that
the surviving spouse might wish to preserve in order to obtain funds
to satisfy the tax liability.
Transfer by Will
A key decision is the selection of the type of
transfer to be made to the surviving spouse. The simplest form of
transfer that qualifies is the outright transfer of assets by will.
The problem with such a transfer is that it saddles the surviving
spouse with the responsibility of managing the assets and also
exposes him or her to possible pressures from relatives, creditors,
or charities to transfer the property for their benefit.
Transfer by Trust
The marital deduction law permits, with no loss of
the deduction, the transfer to the surviving spouse in trust. There
are two basic types of trusts that have become the standard means
for taking advantage of the deduction without burdening the
surviving spouse with the problems of outright ownership of the
first spouse's estate.
The first type of trust is known as a "power of
appointment trust." The property is placed in trust under the will,
giving the surviving spouse a life interest in the income generated
by the trust and a power to give the assets in question to anyone,
including to himself or herself or to his or her estate. This power
can be restricted so as to be exercisable by the surviving spouse
only by will and still qualify for the marital deduction.
The second type of trust, rather than giving the
surviving spouse the power to ultimately dispose of the assets,
permits the decedent spouse to designate the ultimate recipients of
the property qualifying for the marital deduction. This trust is
known as the Qualified Terminable Interest Property (QTIP) trust.
The surviving spouse must receive a lifetime income interest in the
property. No one other than the surviving spouse may have any rights
in the trust assets during the surviving spouse's lifetime. The
decedent spouse's personal representative must elect QTIP treatment
on the estate return. The crucial feature of the QTIP trust is that
the decedent spouse retains the ability to control the course of
ownership of the assets qualifying for the marital deduction.
Coordination with the Lifetime Credit
It has become standard estate planning practice to
coordinate the estate tax marital deduction with the unified credit
against the estate tax. The unified credit against the federal
estate tax allows an individual to pass a certain amount of assets
free from estate tax liability regardless of the identity of the
recipients. For decedents who have died in 2002 or who die in 2003,
that amount is $1 million; for decedents dying in 2004 and 2005, the
amount is $1,500,000; for those dying in 2006 to 2008, the amount
that can pass tax-free is $2,000,000; and for 2009, the amount is
$3,500,000. In a will, the amount allowed to pass tax-free is
normally transferred under what is known as a "credit shelter" or
"by-pass" trust. Then, the transfer under the marital deduction
rules is made so as to prevent the taxation of the remaining assets.
Clearly, in the case of a married couple owning
sufficient assets to make estate taxation a possibility, estate
planning must take into account the marital deduction rules and the
associated tax savings. Given the complex nature of the many rules
involved, you should always seek the guidance of a qualified
attorney for any estate planning needs.
CAPPED COMMISSIONS
As a sales representative for a computer software
company, Richard received an annual salary and sales commissions as
determined by a compensation plan that was part of his contract.
There was a specific formula for how commissions were to be
calculated, but language in the plan gave the company broad
authority to make a final decision about compensation and to change
the plan at any time. For sales commissions, in particular, the
employer reserved the right to review any transaction generating a
commission beyond a salesman's annual quota and to determine the
"appropriate treatment" of it.
When Richard scored an especially large sale, the
company decided that its "appropriate treatment" was to cap
Richard's commission at an amount that was less than he expected
under the usual formula. The company's position was that the large
commission expected by Richard was not justified because it arose
from a single transaction on which Richard had not done as much work
as he claimed, and because he had only been employed by the company
for eight months. Richard quit and sued for breach of contract.
A federal court ruled in favor of the employer.
The language in the compensation plan was broad, but it was not
ambiguous. The whole thrust of the document was to leave
determination of the commissions to the employer's discretion,
notwithstanding that the plan identified some forms of appropriate
treatment of commissions.
When a contract leaves a decision up to one
party's discretion, it is nearly unassailable in court. A court may
intervene if that party is guilty of fraud, bad faith, or a grossly
mistaken exercise of judgment, but Richard did not make those
arguments. Despite the fact that it was arguably unfair, the court
ruled that such a decision was "out of our reach."
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