National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

The American Law Institute will be considering Tentative Draft No. 1 of the Principles of the Law of Liability Insurance from 2 to 5 p.m. next Monday at its annual meeting in Washington, D.C.  

As previously reported, this draft encompasses Chapters One and Two of the Principles, encompassing a wide-ranging series of topics concerning policy interpretation, waiver and estoppel, misrepresentations and the right and duty to defend.

On the eve of the ALI vote on Tentative Draft No. 1, insurer counsel and representatives have proposed amendments to ameliorate certain provisions that are perceived as being extremely problematic and outside of the mainstream of insurance law from the viewpoint of insurance companies.  While there is little reason to expect that these proposals will find support among the full ALI, few of whose members are versed in insurance issues, they may cause sufficient concern to have the draft resubmitted to the Council for further consideration.

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On May 20, the American Law Institute will debate and very likely approve tentative Draft No. 1 of the Principles of the Law of Liability Insurance. The Principles project, which has been in the works now for three years, will set forth the ALI’s view of what insurance law ought to be with respect to diverse topics ranging from the interpretation of insurance policies to the consequences of misrepresentations by insureds or breach by insurers of the duty to defend and finally, more esoteric issues such as allocation and bad faith. 

Unlike the more familiar ALI “Restatements,” which seek to codify areas of the law for which there is already a general consensus, a “Principles” is a declaration of what the American Law Institute thinks the law ought to be. 

Surprisingly, given the scope of the Principles project and its potential implications for the future development of insurance law, this project has largely flown under the radar as far as most insurance companies and insurance coverage practitioners are concerned

The proposal to create a Principles of the Law of Liability Insurance was approved by the ALI in May 2010. Thomas Baker of the University of Pennsylvania Law School and Kyle Logue of the University of Michigan Law School were appointed as the Reporters, working with a team of three dozen “Adviser” members drawn from academia, industry and law firms that represent both insurers and policyholders. There is also a large “Members Consultative Group” that has offered comments and advice as the project progressed.

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 In a wide-ranging new opinion, the New York Court of Appeals has considered whether (1) an insurer’s delay in issuing a coverage denial may estop it to dispute issues of allocation and (2) whether incidents of sexual abuse that occurred over a period of years should be treated as a “single” occurrence. The opinion has interesting implications for other long-tail claims, such as those involving toxic torts, asbestos and pollution.

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Asbestos claims coverage litigation pits policyholders against insurers, and insurers against insurers, and raises novel issues and complex interaction between insurance concepts, policy language, and common sense.

In the latest from the ongoing saga of Kaiser Cement and Truck Insurance – Kaiser Cement & Gypsum Corp. v. Ins. Co. of the State of PA / Truck (Los Angeles County B222310), the court of appeal issued a ruling grappling with the situation when horizontal exhaustion bumps up against “anti-stacking” language.

This litigation has been before the appellate court several times. This case provided the ruling that all asbestos claims were not one occurrence. London Market Insurers v. Super. Ct. (2007) 146 Cal.App.4th 648.

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The Supreme Judicial Court of Massachusetts heard oral argument this week in three interesting insurance coverage disputes.   Rulings are likely by Labor Day.

On Tuesday, a policyholder argued in Golchin v. Liberty Mut. Ins. Co., SJC-11305 that a Worcester Superior Court judge erred in granting Liberty Mutual’s motion for judgment on the pleadings on the basis that its auto policy did not afford med pay coverage for bills that had been entirely paid by her health insurer and therefore had not been “incurred” by the policyholder.

In another Liberty Mutual case that has drawn extensive industry amicus attention, the Court heard argument on Thursday in New England Physical Therapy Plus, Inc. v. Liberty Mut. Ins. Co., SJC-11284 on the issue of whether the trial court had properly refused to permit the use of Ingenix medical data base information by Liberty Mutual in calculating whether underlying medical charges were “reasonable” for the purposes of PIP payments under the Massachusetts No Fault Statute, G.L. c. 93, § 34M.

Finally, the Court heard argument on Thursday in Caron v. Horace Mann Ins. Co., SJC-11273 as to whether a trial court properly reformed a homeowner’s policy to eliminate an endorsement restricting animal liability coverage to $25,000 on the basis that the insured had not expected such limitation as it had not been included in her earlier coverage with the FAIR Plan. Horace Mann argues that the court erred as there was no evidence of mutual mistake, nor had it ever led its insured to believe that such coverage would be fully afforded under its homeowner’s policy.

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Clues to the attitude of courts come from funny places. Such is the case in Massachusetts where one of the major open issues has been the right of insurers to recoup defense costs paid for claims later determined not to be covered under their policies. 

Several years ago, the Supreme Judicial Court of Massachusetts ruled in Medical Malpractice Joint Underwriting Association v. Goldberg, 425 Mass. 46, 680 N.E.2d 1121 (1997) that an insurer’s unilateral assertion of a right to reimbursement for sums paid to settle a case did not give rise to any obligation on the part of the policyholder absent some express agreement on the part of the insured to do so or a policy provision compelling reimbursement. The court indicated, however, that an insurer could obtain reimbursement for a non-covered settlement, despite its policyholder’s opposition, if it first obtained court approval to proceed.

The holding in Goldberg was clearly influenced by the court’s perception that the insurer was acting to protect its own interests in settling the case and that it would be unfair under the circumstances to saddle the insured with a settlement that had been negotiated without its involvement or agreement. In the interim, of course, the whole issue of allocation and recoupment has exploded from coast to coast with courts adopting diverse takes on the issue of whether a right to recoupment for defense costs or indemnity should ever be implied and whether it is fair for policyholders to be unjustly enriched by having cases settled or defended that were, in fact, not covered by their insurance.

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Class action counsel  have a lot at stake, including recovering their own fees. Their choice of forum to resolve the claims of the class and the insurance coverage that might be available for any stipulated judgment or settlement can be critical to the outcome.   As a result, class action counsel has been very proactive in “securing” where the class action dispute will be resolved and what court addresses the availability of coverage. Some of their  procedural and substantive machinations, however, have recently been struck down by  the United States Supreme Court and the Illinois Appellate Court.

Let’s take the Supreme Court decision first: the Standard Fire Insurance v. Knowles, No. 11-1450 (Mar. 19, 2013) decision

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Diane Polscer and I are excited to announce formation of the Insurance Litigation Institute of America, an institute of the Litigation Counsel of America. Founded with colleagues Julia Molander and Stacy Broman, ILIA is a nationwide, but limited, network of highly skilled and experienced insurer and policyholder counsel that will offer programs and publications addressing critical insurance law and litigation issues. ILIA aspires to become an important resource for insurance litigation-related information and referrals, and a vehicle for promoting collegiality and professional cooperation among its members. We look forward to sharing more about ILIA's work in the months and years to come.

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In G.M. Sign, Inc. v. Schane, 2013 IL App (2d) 120434 (March 1, 2013), the IL Appellate Court ruled that State Farm had standing to challenge a stipulated judgment entered against its insured in an underlying TCPA action, even though it was not a party to that suit, nor had it sought to intervene in that case.   Per the settlement agreement, the stipulated judgment could only be recovered from the State Farm policy proceeds.   Thus, State Farm was the only party that could be injured if the judgment was not vacated or modified.    This case also has some interesting coverage implications as the class plaintiffs amended the TCPA complaint after the settlement in order to plead around the TCPA exclusion. So, let the saga begin….

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We wanted to alert you to a recent Washington Supreme Court case that alters the scope of the attorney client relationship between an insurer and coverage counsel.  In Cedell v. Farmers Ins. Co. of Washington, --Wn. – (February 21, 2013), the Washington Supreme Court created a presumption of no attorney-client privilege for "first party" insured's claiming bad faith in the handling and processing of claims, other than UIM claims.  The Court was addressing a first party property damage case, but used prior cases as precedent and used language indicating a broader application of the new rule.  The Court stated: “We start from the presumption that there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process, and that the attorney-client and work product privileges are generally not relevant. . . . However, the insurer may overcome the presumption of discoverability by showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.”  The presumption can be overcome "upon a showing in camera that the attorney was providing counsel to the insurer and not engaged in a quasi-fiduciary function."  Prior Court decisions have applied the “quasi-fiduciary function” in the context of general liability insurance cases where there is a claim of bad faith.  Therefore, the Cedell case may be read to apply to general liability as well as first party property damage cases.  Furthermore, the term "first party" is used throughout the opinion to refer to claims made by an insured against his own insurance carrier, not just first party as opposed to a third party liability insured.  This is similar to the use of the term "first party" by the Washington Legislature in the Insurance Fair Claims Act.                                                         

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• Starting in July of 2011, the NFL and Riddell, the helmet manufacturer, began facing a barrage of suits from more than 3700 former NFL players who have alleged that concussions and other injuries sustained during their NFL careers had resulted in brain and other neurological damage and that the defendants failed to warn them of the dangers and participated in a cover up (among other theories).

• The NFL and Riddell tendered these suits to their insurers, some of whom denied any defense or indemnity obligations.

• Thereafter the bi-coastal coverage battles began.

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The Illinois Supreme Court will soon be addressing whether the statutory penalty of $500 per faxed advertisement allowed under the TCPA is in the nature of punitive damages and uninsurable. It is anticipated that the Supreme Court will  also address the insurability of punitive damages generally, an issue never squarely addressed by the Supreme Court.  The Supreme Court accepted the petition (No. 114617) to review Standard Mutual Ins. Co. v. Lay, 2012 WL 1377599 (4th Dist. Apr. 20, 2012), in which the Appellate Court found that the TCPA penalty is uninsurable, as a matter of public policy, because such awards are intended to punish and deter – a purpose that would be undermined if the policyholder could pass those penalties on to their insurer.  

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In the latest chapter of an asbestos coverage dispute that began over twenty years ago, the New York Court of Appeals has authored a provocative and interest analysis of the interplay between a reinsurer’s duty to “follow the settlement” and its right to challenge the cedent’s allocation methodology where the settled claims have significant components that seemingly fall outside the scope of the reinsurance agreements at issue. 

In United States Fidelity & Guaranty Co. v. American Re-Insurance Co., No. 1 (N.Y. February 7, 2013), the Court of Appeals ruled that while reinsurers could not dispute the trigger and allocation methodology used to settle the underlying claims, summary judgment should not have been granted to the cedent due to substantial evidence that called into question the values that the cedent had assigned to certain types of claims and the failure to assign any value at all to the insured’s bad faith claims.

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In recent years, policyholders have increasingly structured their insurance programs so that the “working layer” of coverage—the layer in which cases are defended and most claims are resolved—is self-insured.   SIRs have obvious advantages for policyholders: greater control over risk management, reduced costs and tax deductibility being the three most obvious.  SIRs can be problematic for insurance companies, however, as where the insolvency of the insured prevents it from carrying out its duties under the “policy.”

The underwriting of "excess" policies subject to self-insured retentions also requires a detailed understanding of state laws and regulations as many states only allow self-insurance for if the insured is of a certain size, has adequate financial assets or otherwise meets stated criteria.   If those criteria are not met, the excess carrier may still have valid claims and arguments relative to the policyholder but may be vulnerable to direct claims or “reach and apply” actions by third party claimants.

In such circumstances, as CNA recently learned to its dismay in Peloquin v. Haven Health Center, No. 2011-130 (R.I. January 14, 2013), promises on paper may also prove illusory where underwriting fails to take into account the vagaries of state insurance regulation.   .

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