National Insurance Law Forum

National Insurance Law Forum

Published By The Attorneys of the National Insurance Law Forum

Connecticut Mega-DJ Class Action Seeks New “Foundation” For Conspiracy Claims Against 113 Insurers

Posted in Bad Faith/Extra Contractual

A Connecticut law firm has filed an unusual proposed class action law suit in the federal district court in Bridgeport, claiming that over one hundred insurers have conspired over the years with the Insurance Services Office (ISO) eliminate coverage for damage to home foundations that were constructed years ago with defective concrete.

In Halloran, et al v. Harleysville Preferred Ins. Co., No. 16-0133 (D. Conn.) four Connecticut families are seeking recovery on behalf of a class of hundreds or thousands of “individuals who own a home in the Connecticut towns of Manchester, Andover, Ellington, Stafford Springs or any other Connecticut town located east of the Connecticut River whose homes are insured by any of the Insurance Defendants, and whose homes have sustained ‘pattern cracking’ including but not limited to horizontal and vertical cracks on their basement walls, and whose bad foundation claims have been denied or will be denied by the Insurance Defendants, which denials are or will be based on the same standardized language regarding the term ‘collapse’, the term ‘basement’, the term ‘foundation’, the term ‘decay’, the term ‘hidden’ and the term ‘retaining wall.’”

The plaintiffs claims that their “basement walls are in a state of collapse” because they were built with defective concrete containing deleterious iron sulfide minerals mined by J.J. Mottes & Co. It is alleged that the oxidation of these minerals produces a chemical reaction that causes the concrete to swell and crack and the cement paste to break down and will ultimately cause these homes to collapse into their basements.

While it might seem that the remedy for these complaints would be a law suit against J.J. Mottes or other companies that were responsible for building the homes or selling or distributing the allegedly defective concrete, the Halloran plaintiffs have taken the novel approach of suing every insurance company that does business in Connecticut (excepting only those Connecticut domiciliaries whose involvement would destroy diversity jurisdiction).  These 111 insurers are alleged to have led “the plaintiffs into a sinkhole of financial trouble” by adopting exclusionary language that the insurers have allegedly each uniformly interpreted to preclude coverage for claims of this sort.  The plaintiffs claim that the insurers and ISO have conspired to adopt increasingly restrictive “collapse” wordings in their policy in the knowledge that Connecticut homes constructed between 1984 and 1998 with this defective concrete would eventually suffer “pattern cracking” and give rise to claims that might have been covered under earlier, less restrictive policy wordings.

The Complaint sets forth individual claims for each of the four class representatives against their own insurers; seeks recovery against ISO and the insured named in the first four Counts in Count V and then sets forth a general request for Declaratory Relief as to all of the insurers on behalf of the entire putative class in Count VI.

Most property policies contain language stating that [l]oss to … foundation, retaining wall … is not included … unless the loss is a direct result of the collapse of a building. Collapse does not include settling, cracking, shrinking, bulging or expansion.”

The Halloran case has been assigned to federal judge Victor Bolden, who recently ruled in Gabriel v. Liberty Mut. Fire Ins. Co., 2015 WL 5684063 (D. Conn. Sept. 28, 2015) that homeowners’ policies was ambiguous with respect to whether cracks in concrete basement walls are excluded “foundations” or “retaining walls.”  Judge Bolden ruled that “foundation” can be read both to mean all concrete structures, including basement walls, that supports a building from underneath, as insurers have proposed, or more narrowly, ton only include the footing under basement walls that support the entire structure.   Similarly, the court found that he term “retaining wall” is ambiguous because it can mean both the freestanding wall that holds in place a mass of earth as well as a all built to resist lateral pressure or prevent an earth slide. The court noted that its opinion with three other rulings in which Connecticut’s federal district courts had found coverage for first party concrete foundation claims. See Karas v. Liberty Ins. Corp., 33 F.Supp. 3d 110, 115 (D. Conn. 2014) and Belz v. Peerless Ins. Co., 46 F. Supp.3d 157, 164 (D. Conn. 2014) and Bacewicz v. NGM Ins. Co., 2010 WL 3023882 (D. Conn. Aug. 2, 2010).

Plaintiffs also argue that the gradual deterioration of their basement walls are a covered “collapse.”  Connecticut is among those states that have adopted a broad interpretation of collapse, at least as it was set forth in earlier standard first party forms.  In Beach v. Middlesex Mut. Assurance Co., 532 A.2d 1297 (1987), the Connecticut Supreme Court ruled that “collapse” was ambiguous and could mean a “substantial impairment of the structural integrity of the building” even where the building had not actually fallen down. Id. at 1300.

Notably, the Supreme Court’s ruling in Beach repeatedly referred to the insured’s basement walls as the building’s “foundation,” suggesting that the state Supreme Court would reject the broad view of coverage that the federal district courts have adopted.  The District Court has declined to certify this issue to the Supreme Court, however.

In light of these pro-insurer rulings, it is unclear why a class action forum is deemed necessary to resolve these disputes. Nevertheless, the plaintiffs claim that they should be entitled to class status because the prosecution of individual coverage claims would be wasteful and might result in inconsistent judicial findings whereas a judicial declaration that the “collapse” language in question is ambiguous would be dispositive of each homeowner’s individual claim.  The complaint references twenty-four cases that are already pending in state or federal court in Connecticut in which homeowners are seeking coverage for these types of first party loss.

The Halloran plaintiffs allege that their disparate claims are unified by four common questions of law and fact:

  1. Whether Defendant Insurance Companies breached their contract of insurance with the Plaintiffs and putative Class Members by failing to provide coverage for bad concrete claims.
  2. Whether Defendant Insurance Companies and ISO conspired to provide unsuitable homeowners insurance policies to Plaintiffs and putative Class Members all the while being previously aware of bad concrete claims and knowing full well that these policies would not provide coverage for bad concrete claims.
  3. Whether Defendant Insurance Companies, as part of a regular business practice, denied the insureds’ claims in an unfair, deceptive manner that has caused substantial injury to the Plaintiffs and putative Class Members.
  4. Whether the Plaintiffs and putative Class Members suffered losses and, if so, the proper measure of the losses.

Rule 23 of the Federal Rules of Civil Procedure require commonality in order to sustain a class. Commonality is typically achieved through allegations and proof that each of the defendants caused or contributed to the alleged injuries of at least one of the class representatives.   No such commonality can be proved here, however, as the plaintiffs (and presumably the class that they purport to represent) were each insured by different carriers over the years.  Plaintiffs seek to avoid this jurisdiction obstacle by arguing that insurers engaged in a conspiracy to limit and avoid coverage for these claims. See 5 Moore’s Federal Practice, Section 5-23(b).    While this “conspiracy” exception to FRCP 23(2) has been approved by a few courts, it is unclear whether it will find favor in Connecticut.

Even if a “conspiracy” exception is recognized by Connecticut courts, it does not appear that the unsupported assertion in one paragraph of this Complaint that the insurers entered into a “cartel” for the purpose of denying claims meets the level of detail required by Iqbal/Twonbly and should not be tossed out by way of a Rule 12(b)(6) motion.

One must also wonder whether this judge will be intrigued or appalled by the prospect of a case being visited on him and whether the court will find that this kind of mega-DJ is appropriate for treatment as a Rule 23 class. Although the Complaint states that Rule 23 certification is necessary to deal with the problem comprehensively, it bears noting that the plaintiffs have failed to sue all of the major Connecticut insurance companies so as to ensure diversity jurisdiction and preserve the ability to ensure that the same court that decided the Gabriel case hears their claims.  One may only wonder how “comprehensive” an adjudication would be that omits the policies issued by Connecticut domiciliaries such as The Hartford and Travelers.

Finally, there is something extremely strange about a putative class action that focuses on a single policy provision and involved over a hundred defendants, many of whom may not have received a “foundation” claim and may or may not have denied such a claim. Indeed, a class action focusing on the adoption and implementation of an industry-wide exclusion is nearly unheard of.  The only comparable example in this author’s experience was the law suit that nineteen state attorneys-general filed against ISO, Allstate, Aetna, CIGNA and Hartford in 1988 alleging that they had conspired with the Lloyd’s to violate anti-trust laws by developing the 1986 edition of the CGL form that would radically limit coverage by adopting “claims made” terms, cap defense costs and add an absolute pollution exclusion.   After a scary ruling from the Ninth Circuit, that case largely dissolved after the U.S. Supreme Court ruled in Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993) that the P&C companies did not lose their anti-trust immunity under the McCarran-Ferguson Act by alleging conspiring with foreign reinsurers.  The case was remanded to the District Court in California and subsequently settled.

WHILE SLOGANS CAN BE TRADEMARKS, NOT ALL TRADEMARKS ARE SLOGANS.

Posted in Duty to Defend, Liability Coverage

There has been a trend among policyholders to recast trademark infringement claims as infringement of slogan, in order to trigger a duty to defend under the “personal and advertising injury” liability coverage of the CGL policy. This is driven, in large part, by the intellectual property exclusion which expressly excludes coverage for trademark claims, but contains an exception for infringement, in the named insured’s “advertisement” of slogan.

Slogan is not defined in most policies.  One dictionary defines it as a “distinctive cry, phrase, or motto of any party, group, manufacturer, or person; catchword or catch phrase.” Random House Unabridged Dictionary 1800 (2d ed.1993), as cited in Cincinnati Ins. Co. v. Zen Design Group, LTC., 329 F. 3d 546 (6th Cir. 2003).  Another dictionary defines slogan as “(1) `a word or phrase used to express a characteristic position or stand or a goal to be achieved’ and (2) `a brief attention-getting phrase used in advertising or promotion.'” Interstate Bakeries Corp. v. OneBeacon Ins. Co., 686 F.3d 539, 546 (8th Cir.2012) (quoting MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 1174 (11th ed.2005)).   The court in Hugo Boss Fashions, Inc.  v. Federal Ins. Co., 252 F. 3d  608, 620 (2nd Cir.  2001), defined the term as “phrases used to promote or advertise a house mark or product mark, in contradistinction to the house or product mark itself.”

Although in the proper context … a slogan[] can serve as a trademark … [a] slogan is certainly not by definition a trademark.”  Zen Design, supra, 329 F. 3d at 556.    “A slogan or any other combination of words is capable of trademark significance, if used in such a way as to identify and distinguish the seller’s goods or services from those of others.” JA Brundage Plumbing v. Massachusetts Bay Ins., 818 F. Supp. 553, 559  (WD NY 1993), citing McCarthy, Trademarks and Unfair Competition (2 Ed.1984).   That being said, many courts have recognized that a slogan cannot be the house name or product name itself, but are phrases used to promote the house or product mark. Hugo Boss, supra;  James River Ins. Co. v. Bodywell Nutrition, LLC, 842 F. Supp. 2d 1351 (S. D. Fla. 2012);  CGS Industries, Inc. v. Charter Oak Fire Ins. Co., 720 F. 3d 71 7th Cir. 2013).

Insurers have three rebuttals to a policyholder’s attempt to characterize a trademark claim as an infringement of slogan. (These are separate and apart from the issue of whether any infringement took place in the named insured’s “advertisement”).  In 2015, courts embraced each of these arguments in finding the insurer had no duty to defend:

(1) the complaint contained no allegations of slogan infringement.  See Boler v. 3D International LLC, No. 2:14-cv-00658-TLN-CKD, 2015 WL 8056100 (E.D. Cal. December 4, 2015);  Shanze Enterprises, Inc. v. American Cas. Co. of Reading, PA, No. 3:15-cv-0756-D, 2015 WL 8773629 (N.D. Tex. 2015).   See also, Interstate Bakeries Corp. v. OneBeacon Ins. Co., 686 F. 3d 539, 546 (8th Cir. 2012);

(2) the words or phrase at issue was not used as a brief attention getting phrase or to express a characteristic or position.   See, Selective Ins. Co. of America v. Smart Candle, LLC, 781 F.3d 983 (8th Cir. 2015); and

(3) the name of the company or the name of the product cannot constitute a slogan.  Auto Mobility Sales, Inc. v. Praetorian Ins. Co., No. 14-cv-80094, 2015 WL 3970578 (S.D. Fla. June 30, 2015).

Policyholders have had greater success recasting trademark claims as infringement of trade dress.  But that discussion is for another day.

Many States Do Not Allow Insurers or Insureds To Consider Extrinsic Evidence in Determining the Duty To Defend

Posted in Duty to Defend, Recent Cases

Yesterday’s blog addressed Illinois law, which allows consideration of extrinsic evidence in determining an insurer’s duty to defend.   However, many courts still adhere to the “Four Corners” approach  (or the “Eight Corners” approach if you count looking at the policy too)  in determining the duty to defend.  In other words, the courts in the following states  look solely to the allegations of the complaint to assess whether a duty to defend is triggered:

DelawarePacific Ins. Co. v. Liberty Mut. Ins. Co., 956 A. 2d, 1247, 1255 (2008)(“The test is whether the underlying complaint, read as a whole, alleges a risk within the coverage of the policy”).

District of Columbia:  Stevens v. United Gen. Title Ins. Co., 801 A.2d 61, 63 (D.C. 2002) (“[T]he duty to defend depends only upon the facts as alleged to be,” so that the “[insurer’s] obligations should be measured by comparing the policy it issued with the complaint filed [in the underlying case]; the obligation to defend “is not affected by facts ascertained before suit or developed in the process of litigation or by the ultimate outcome of the suit”).

Florida:  Higgins v. State Farm Fire and Casualty Co., 894 So.2d 5, 9-10 (Fla.2004) (“Whether an insurer has a duty to defend its insured “is determined solely by the claimant’s complaint if suit has been filed”).

Kentucky:  Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69, 79 (2010)(“an insurer has a duty to defend if there is any allegation which potentially, possibly or might come within the coverage terms of the insurance policy”).

Louisiana:  Elliot v. Continental Cas. Co., 949 So. 2d 1247, 1250 (2007)(the insurer’s duty to defend suits brought against its insured is determined by the allegations of the plaintiff’s petition); Longleaf Investments, LLC v. Cypress Black Bayou Recreation and Water Conservation District, 162 So.3d 479, 483-84 (2015)(“this is known as the “eight corners rule,” whereby an insurer must look to the “four corners” of the plaintiff’s petition and the “four corners” of its policy to determine whether it has a duty to defend).

Maine: York Ins. of Me., Inc. v. Superintendent of Ins., 2004 ME 45, ¶ 23, 845 A.2d 1155, 1161 (“a duty to defend could arise not just from what was alleged in a complaint, but from what could be alleged in a complaint;” “a duty to defend arises if a complaint reveals “a potential” that facts ultimately proved may come within coverage;” “before the underlying action is concluded, an insurer cannot avoid a duty to defend by establishing that ultimately there will be no duty to indemnify”).

Oregon:  Ledford v. Gutoski, 877 P.2d 80, 82 (Or. 1994) (“Whether an insurer has a duty to defend an action against its insured depends on two documents: the complaint and the insurance policy”). However, whether the party seeking coverage was actually an insured within the meaning of the policy can be determined by reference to extrinsic evidence. Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 240 P. 3d 67, 73-74 (2010).

Pennsylvania:  Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888, 896 (2006)( an insurer’s duty to defend is determined solely from the language of the complaint against the insured).

Rhode IslandMed. Malpractice v. Charlesgate Nursing, 115 A.3d 998, 1003 (2015)(“ It is well settled in Rhode Island that the “pleadings test” is applied in order to ascertain whether an insurer has a duty to defend an insured;” that test requires the trial court to look at the allegations contained in the complaint, and `if the pleadings recite facts bringing the injury complained of within the coverage of the insurance policy, the insurer must defend irrespective of the insured’s ultimate liability to the plaintiff’”).

Tennessee:   Clark v. SPUTNIKS, LLC, 368 S.W.3d 431, 439 (2012)(“An insurer’s duty to defend is determined solely by an examination of the allegations of the underlying complaint”).

Texas: Pine Oak Builders, Inc. v. Great American Lloyds, Ins. Co., 279 S.W. 3d 650, 655 (2009)(“Under the eight-corners rule, the duty to defend is determined by the claims alleged in the petition;” in deciding the duty to defend, “the court should not consider extrinsic evidence from either the insurer or the insured that contradicts the allegations of the underlying petition”).

Vermont: Hardwick Recycling & Salvage, Inc. v. Acadia Ins. Co., 2004 VT 124, ¶ 15, 177 Vt. 421, 869 A.2d 82 (“We determine whether the insurer has a duty to defend by comparing the allegations in the underlying claim to the policy’s coverage terms”).

Virginia: AES CORP. v. Steadfast Ins. Co., 715 S.E.2d 28, 31-32 (2011)(only the allegations in the complaint and the provisions of the insurance policy are to be considered in deciding whether there is a duty on the part of the insurer to defend).

West Virginia: Bowyer v. Hi-Lad, Inc., 609 S.E.2d 895, 912 (2004)(“An insurance company has a duty to defend an action against its insured if the claim stated in the underlying complaint could, without amendment, impose liability for risks the policy covers”).

Wisconsin: Olson v. Farrar, 809 N.W.2d 1, 8 (2012)(explaining and embracing the four-corners rule which holds that an insurer must defend all suits where there would be coverage if the allegations were proven, even if the allegations are “utterly specious”).

Wyoming: First Wyoming Bank v. Continental Ins. Co., 860 P. 2d 1094, 1097 (1993) (“we analyze the duty to defend by examining the facts alleged in the complaint that the claim is based upon”).

Extrinsic Evidence: when can it be considered in determining the duty to defend?

Posted in Duty to Defend
  •  Duty to defend:  Insurers cannot always rely on extrinsic evidence to determine a duty to defend.   

While there are circumstances where Illinois courts will look at extrinsic evidence to determine the duty to defend, courts will not look at extrinsic evidence that contradicts the allegations of the complaint.   Nor, apparently, will Illinois courts look at extrinsic facts when the complaint is silent as to when the injuries occurred.  That was the ruling in Illinois Tool Works Inc. v. Travelers Cas., case number No. 1-13-2350., (1st Dist. 2015).    In that case, Illinois Tool Works (“ITW”) was  sued is a series of  toxic tort cases alleging that the plaintiffs were injured as a result of exposure to asbestos, benzene, manganese, and other harmful materials.    The court observed that ITW had been successful in getting the claims against it dismissed or obtaining summary judgment on the basis that it was not in the welding consumable business before 1993.   However, those same undisputed facts were not sufficient to relieve ITW’s pre- 1993 insurers from owing a duty to defend.

In the declaratory judgment action, the court held that the duty to defend must focus on whether the facts pled by the plaintiffs, if true, would potentially bring the claims within coverage.  It must even consider false and groundless allegations. Thus, where the complaints contained allegations of direct liability against ITW with exposure dates during the policy period (which were false allegations), the insurer owed a duty to defend.  So too did it owe a duty to defend where the complaint was silent as to when the exposure occurred.  The court determined that vague, ambiguous allegations against an insured should be resolved in favor of finding a duty to defend, as the bare allegations of the underlying complaints leave open the possibility that the plaintiffs’ exposure or injury occurred during the policy periods.

The court did not address earlier IL decisions that have allowed the consideration of extrinsic evidence in a declaratory judgment action on the duty to defend.  Those decisions accept the consideration of extrinsic evidence as a foregone conclusion – with only one exception: “the only time such evidence should not be permitted is when it tends to determine an issue crucial to the determination of the underlying lawsuit.” Pekin Ins. Co. v. Wilson, 237 Ill. 2d 446, 461 (Ill. 2010), quoting Fid. & Cas. Co. of N.Y. v. Envirodyne Eng’rs, Inc., 122 Ill. App. 3d 301, 304-05 (Ill. App. 1983).    In Envirodyne, the court considered the contract between the insured and the highway authority which confirmed that the duties of the insured at the construction site were solely those of a consulting engineer.  As such, the court found that the professional services exclusion precluded a duty to defend under the CGL policy.    The court found that the fact that the insured performed as a consulting engineer in no way diminished the theory of recovery advanced by the underlying plaintiff nor was it crucial to the insured’s liability in the underlying case.

  •   Duty to Defend:   The insured can rely on extrinsic evidence to trigger a duty to defend, thus dispelling any argument that the complaint was not seeking damages

In Country Mutual Insurance Co. v. Bible Pork, Inc., 2015 IL App (5th) 140211., numerous plaintiffs, who owned property near Bible Pork’s proposed hog factory facility, alleged Bible Pork’s facility would be a source of disagreeable noises, odors, dust particles, surface water contamination, and loss of property values which would interfere with their lives and render the facility a public and private nuisance. The plaintiffs sought not only declarations that the facility constituted a public and a private nuisance, but also “such other relief as deemed appropriate.”  Country Mutual denied coverage on the basis that no damages were sought in the complaint, among other grounds.  Bible Pork disagreed and informed Country Mutual of statements made by the plaintiffs’ attorney, that plaintiffs sought both monetary damages and injunctive relief. Bible Pork requested Country Mutual reconsider its earlier denials, but Country Mutual again denied coverage and later filed a declaratory judgment action.

On the issue of whether the underlying lawsuit constituted a claim for covered damages, Country Mutual argued that the language in the complaint “other relief deemed appropriate” is not a factual claim determined in construing potential coverage and that the allegations of fact in the complaint did not assert such a claim.  The Court disagreed.      Significantly, the court considered that the plaintiffs’ counsel in the underlying lawsuit made statements at a hearing, explaining he styled the claims as declaratory judgment claims because plaintiffs would decide what remedies they preferred after a jury found in plaintiffs’ favor.   He later commented at another hearing that some of some of the plaintiffs might seek an injunction while others might opt in favor of damages.   The court held that extrinsic evidence could be considered on the issue of whether an insurer owes a duty to defend. According even if the complaint did not fully apprise Country Mutual that the underlying lawsuit claims fell within coverage, Country Mutual was obligated to defend because it had “knowledge of true but unpleaded facts, which, when taken together with the complaint’s allegations, , indicate that the claim is within or potentially within the policy’s coverage.”     Net result: Country Mutual was liable for over $2 million in defense costs incurred by the insured.

Three Cases You Need to Know for Northwest Insurance Law

Posted in Bad Faith/Extra Contractual, Duty to Defend, Duty to Indemnify, Uncategorized

1. Reasonable or Questionable?

Generally, to establish bad faith, the insured must show that the insurer’s breach of the insurance contract was “unreasonable, frivolous or unfounded.”  Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 561, 951 P.2d 1124 (1998).  However, under Washington law, an insurer that fails to defend based on “a questionable interpretation of law” may be found to have acted in bad faith as a matter of law.  Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 405, 229 P.3d 693, 696 (2010).

2. The Magic Words:  “At Any Time” 

Under Oregon law, once an insurer “has commenced its representation of the client it cannot withdraw if such withdrawal would prejudice the client.  Where, however, the company expressly reserves the right to withdraw from the defense, the client cannot legitimately claim prejudice when the company exercises that right.”  United Pacific Ins. Co. v. Pacific Northwest Research Foundation, 39 Or. App. 873, 877 (1979) (internal citations omitted).  To be potentially effective, the letter must state that the insurer reserves the right to withdraw “at any time.”  If other language is included, such as “at any time there is a determination that there is no duty to defend,” then the insurer may be held to an objective standard in that determination, meaning that a declaratory judgment action may be required before an insurer can withdraw.

3. Fiduciary Duty Even If No Coverage?

Under Oregon law, an insurer’s acceptance of a tender of defense creates a fiduciary obligation to make reasonable efforts to settle a case even if no coverage actually exists under the policy.  Safeco v. Barnes, 133 Or. App. 390, 395-97 (1995).  In Barnes, the insurer obtained a declaration there was no indemnity owed under the policy, but the Court of Appeals nonetheless reversed dismissal of the insured’s counterclaim for breach of fiduciary duty.  Because the insurer accepted defense of its insured, it retained a fiduciary obligation to attempt a reasonable settlement, even in the absence of any coverage obligation.  The court held that there was a question of fact whether the insurer breached its fiduciary duty when it rejected defense counsel’s recommendations to settle before and during trial.

Excess Insurance: Issues Regarding Exhausting the Underlying Policy Limits

Posted in Duty to Indemnify, Excess and Umbrella Insurance

A basic premise of excess insurance coverage is that it applies only after the underlying insurance limits have been exhausted.  Problems may arise, however, when a primary insurer refuses to pay the full limits toward a claim that exceeds the underlying policy limits.  An insured may be left with either (1) settling with the primary carrier for less than full policy limits or (2) litigating a coverage action seeking payment of the underlying policy limits.  Depending on the exhaustion language at issue and the jurisdiction enforcing it, an insured could jeopardize its excess coverage by settling for less than policy limits.

One of the touchstone cases dealing with the exhaustion issue is Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928).  In Zeig, the insured had excess insurance that applied “only after all other insurance herein referred to shall have been exhausted in the payment of claims to the full amount of the expressed limits of such other insurance.”  Id. at 665.  The insured’s primary carrier paid less than the limits, and the insured sued for coverage under the excess policy.  The court ruled that the policy was ambiguous as to whether “payment” means payment of money, and reasoned that it could also mean an insured’s settlement with the primary insurer.  Thus, the primary policy was effectively “exhausted” if the loss exceeded the primary limits.  The Zeig court also explained that the public policy of encouraging settlement supported its decision.

Subsequent cases typically cite Zeig and either distinguish it or follow it, depending on whether the court finds the exhaustion language to be ambiguous.  See, e.g., Maximus, Inc. v. Twin City Fire Ins. Co., 856 F.Supp.2d 797 (E.D. Va. 2012) (policy was ambiguous as to whether the insured could make the “actual payment” exhausting the underlying policy limits); JP Morgan Chase & Co. v. Indian Harbor Ins. Co., 98 A.D.3d 18 947 N.Y.S.2d 17 (2012) (policy clearly required payment by the underlying insurer exhausting the policy limits) (applying Illinois law).  Nonetheless, a few courts have refused to enforce exhaustion language based solely on the public policy concerns noted in ZeigMassachusetts Mutual Life Insurance Company v. Certain Underwriters at Lloyd’s of London, 2014 WL 3707989 (Sup.Ct. Del. 2014) (Not reported); Gould, Inc. v. Arkwright Mutual Ins. Co., 1995 WL 807071 (M.D. Pa. 1995) (Not reported).

In a recent case, the Washington Court of Appeals has, in a matter of first impression under Washington law, strictly enforced exhaustion language in two excess policies while rejecting the public policy concerns addressed in ZeigQuellos Group LLC v. Federal Ins. Co., 177 Wash. App. 620 (2013).  Of note, not only was the clarity of the exhaustion language critical in Quellos, but the insurer’s offer of alternative exhaustion language that permitted the insured to pay part of the underlying limits, even though not a part of the policy, was also a material part of the court’s reasoning.

In Quellos, the insured was an investment firm that was facing fraud claims.  It settled claims with its investors for $35 million and incurred $45 million in defense costs relating to IRS investigations.  For the subject policy period, the insured had $10 million in primary coverage, $10 million in first-tier excess coverage, and $20 million in second-tier excess coverage.  The insured settled with the primary insurer for less than full policy limits.  The insured agreed to fund the gap between the amount the primary insurer paid and the amount of the primary policy limits.

The insured filed suit against the first-tier and second-tier excess carriers, both of which denied coverage based on, among other things, the failure to exhaust the primary policy.  The court first looked at the policy language to determine whether the policies unambiguously required exhaustion by payment from the underlying insurer.  The first-tier policy insuring agreement provided:

Coverage hereunder shall attach only after the insurers of the Underlying Insurance shall have paid in legal currency the full amount of the Underlying Limit for such Policy Period.

The second-tier excess policy insuring agreement provided:

The coverage hereunder will attach only after all of the Underlying Insurance has been exhausted by the actual payment of loss by the applicable insurers thereunder and in no event will the coverage under this Policy be broader than the coverage under any Underlying Insurance.

The Washington Court of Appeals concluded that both policies unambiguously required payment by the underlying insurers of the underlying limits before the excess coverage was triggered.  Because the policy required payment by the underlying insurer, the insured could not exhaust the primary policy by funding the gap between the primary insurer’s payment and the primary limits.

The insured argued, consistent with Zeig, that strict interpretation of the policy language would contravene public policy encouraging settlement.  The court rejected this argument, noting that a policy amendment was available to the insured that would have allowed it to use its own funds to exhaust the policy if the primary insurer refused to tender its limits.

In conclusion, it appears that, in some jurisdictions, an excess insurer may take certain steps in drafting its policies to strengthen the exhaustion language.  These steps include:

  1. Making clear that exhaustion requires actual payment of money of the underlying policy limits, so as to avoid the argument that “payment” is ambiguous per Zeig;
  2. Making clear that the underlying insurer is the party that must make the payments exhausting the underlying limits, so as to avoid the argument that the policy is ambiguous as to who may make the payments; and
  3. Per Quellos, offering an endorsement that allows the insured to make payments to exhaust the underlying limits.

West Hills Development Company v. Chartis Claims, Inc., et al., 273 Or App 155 (2015)

Posted in Duty to Defend

In the recent case West Hills Development Company v. Chartis Claims, Inc., et al., 273 Or App 155 (2015) (“West Hills”), the Oregon Court of Appeals provided further guidance to Oregon insurers on their handling of tenders of defense from parties who contend that they are additional insureds. In particular, the court addressed the scope of an exception to the four-corners rule. The four-corners rule generally limits an insurer’s determination of the duty to defend inquiry to the facts alleged in the underlying complaint. The exception, which has only recently been recognized in Oregon, allows the consideration of facts not alleged in the complaint when the issue is whether the tendering party has the status of an insured under the insurance policy, as opposed to the issue of whether liability for the insured’s conduct is covered. In West Hills, the court explained that such extrinsic facts need not rise to the level of “evidence” that would be admissible in court. Instead, the court held that, where a tender letter contained the tendering party’s representations of information that was relevant to the issue of whether the tendering party was an additional insured, and the insurer could readily verify that information, that information was sufficient to establish additional insured status.

West Hills involved a general contractor involved in the construction of townhomes. The townhome owners association brought a lawsuit against the general contractor, alleging that the general contractor negligently supervised its subcontractors, and that there was inadequate weatherproofing at wood posts. The general contractor was expressly designated in its subcontractor’s insurance policy as an additional insured, but only for liability arising from the subcontractor’s ongoing operations performed for the general contractor.

Asserting additional insured status under that provision, the general contractor tendered the complaint to the subcontractor’s insurer. The complaint did not mention the subcontractor, and as such, contained no facts necessary to establish additional insured status because it contained no facts to show that any of the general contractor’s liability arose from the subcontractor’s work for it. However, in its tender letter the general contractor reported that the subcontractor performed work for the general contractor that was described in the complaint. The insurer denied the tender.

The insurer argued to the Court of Appeals that information about the subcontractor’s work was not extrinsic “evidence” that could be considered in determining whether the insurer had a duty to defend, because they were arguments that would not be considered as “evidence” at trial. The Court of Appeals rejected that argument, explaining that the existence of duty to defend did not depend upon whether facts from outside the complaint met any evidentiary standard. Instead, it was enough that the tender letter’s report that the subcontractor had been involved in the construction put the insurer on notice that that its duty to defend was at issue, particularly in light of the fact that that the insurer could readily verify the reported information. The court, however, did not say that the insurer had to accept the information as true.

The court, however, did not resolve the parties’ dispute regarding the meaning of the additional insured provision’s limitation of “liability arising out of [the subcontractor’s] ongoing operations.” The insurer had argued that phrase meant that in order for coverage to apply, property damage must occur while the subcontractor was still on the job. The general contractor argued that phrase to provide broader coverage for any liability for property damage that arose from the subcontractor’s operations, even if such damage occurred after the subcontractor completed its work and left the job.   The court held it unnecessary to decide that issue, because the allegations of the complaint pleaded the possibility of damage occurring within the narrower meaning offered by the insurer. The issue of the meaning of the “ongoing operations” limitation will continue to be litigated before Oregon trial courts until the Court of Appeals resolves it.

Finally, the West Hills decision provides no guidance on the related issue of whether an insurer who provided additional insured coverage limited to the subcontractor’s “ongoing operations” may rely upon evidence from outside the complaint to show that the subcontractor did not conducted any relevant operations during the policy period, in order to deny the duty to defend.

 

 

Client Questions Regarding Settlement

Posted in Practice and Procedure, Uncategorized

In working to settle coverage actions, insurers often seek to include non-monetary terms in a settlement that insureds may resist.  Such non-monetary terms often are as hotly debated as the amount of money to be paid.

Insurers often seek to include an indemnity term in a settlement whereby the insured must indemnify the insurer against future claims. Despite resistance from insureds, an indemnity provision is important because some states, like Oregon, allow claims for contribution by non-settling insurers against settling insurers under certain circumstances.  Certain Underwriters v. Mass. Bonding and Ins. Co., 235 Or. App. 99, 230 P.3d 103 (2010).  In addition to potential claims by non-settling insurers, complicated claims often involve situations where one or two parties are left standing for trial.  Depending on the nature of the settlement, indemnity could be necessary to prevent a direct action.

Insurers sometimes also seek policy buy backs, but a buy-back may not be available in states like Washington.  See, RCW 48.18.320.  One way around this issue is to include the underlying claimant in the settlement.  This alternative is often not practical in environmental claims where one of the “claimants” could be the federal or state agency guiding the remediation.  If the settlement also includes a release of future claims, that may be enough given that the injured party could only pursue the insurer through the insured, and the insured’s release of the insurer should be effective.  The statute should be limited to situations where there is a cancellation or annulment, which should not be considered the same as a release of insurance liability for a particular claim.

Some courts will also allow the entry of a claims bar order as part of a finding that a settlement was reasonable.  See, e.g., Cadet Mfg. Co. v. Am. Ins. Co., Case No. 04-5411, docket no. 245 (W.D. Wash. March 30, 2006).  Upon proper notice to other parties, the claims bar order can be more effective than indemnity, since it does not depend on the financial ability of the indemnitor to provide the promised indemnity. 

 

Insurers (in some situations) can directly sue independent counsel for reimbursement

Posted in Duty to Defend

The California Supreme Court in Hartford Casualty Insurance Company v. J.R. Marketing, L.L.C., 190 Cal. Rptr. 3d 599 (Cal. 2015), has held an insurer has the right to seek reimbursement of unreasonable and excessive attorneys’ fees directly from the insured’s independent counsel, which firm “provide[d] no convincing reason why they should be absolutely immune from liability for enriching themselves” by collecting such fees.

This decision has its roots in the general proposition that an insurer with a duty to defend has an obligation to pay reasonable and necessary defense costs.  See Aerojet Aerojet-General Corp. v. Transport Indemnity Co., 17 Cal. 4th 38 (1997).  In California, by statute (Calif. Civil Code section 2860), an insured has the right to select its own counsel (referred to as “Cumis” or independent counsel) if there is a conflict of interest between insurer and insured because of the particular rights the insurer reserves.  Section 2860 mandates that fee disputes involving independent counsel’s rates and fees are to be arbitrated.  Further, under Buss v. Super. Ct., 16 Cal. 4th 35 (1997), the insurer has the right to seek reimbursement from its insured of fees not covered by the policy.

In the case before California’s highest court, the insurer was late in its decision to defend and did not recognize the insured’s right to independent counsel.  However, the “breaching” insurer was still permitted to seek recovery of amounts it had overpaid (because unreasonable and excessive) based on an Order entered in the case which allowed for this right but did not specify against whom the insurer could seek that reimbursement.  The court held that, based on the circumstances and the equities, the right of reimbursement could be pursued against the independent counsel.  While limited to its facts, this decision is consistent with the general rights in California of an insurer who defends, to seek reimbursement on the back end so as not to be paying more than it agreed to insure.

Background

In this case, the insurer (Hartford) initially refused to defend its insureds against various lawsuits. The insureds sued Hartford, which then agreed to defend, but refused to pay for independent counsel.  The trial court granted the insureds summary judgment, ruling Hartford was required to defend and pay for independent counsel (Squire Sanders, now known as Squire Patton Boggs). The trial court entered a subsequent order (drafted by Squire Sanders and approved by the court) enforcing Hartford’s duty to defend, ordering Hartford to pay all past and future attorneys’ fees, and prohibiting Hartford from relying on the rate provisions of California Civil Code section 2860(c) because Hartford initially breached the duty to defend. However, the Order also expressly reserved Hartford’s right to seek reimbursement of unreasonable and unnecessary legal charges after the underlying lawsuits had concluded.

After the underlying actions resolved, Hartford cross-complained against the insureds and Squire Sanders, alleging that law firm had “padded” its bills. Squire Sanders filed a demurrer on the basis that the claim for reimbursement could not be maintained against the law firm (only the insured).  The demurrer was sustained by the trial court and affirmed on appeal.

The Supreme Court’s Holding

The California Supreme Court reversed, holding that, when an insurer is ordered to pay all fees billed by independent counsel with only a post-litigation right to challenge unreasonable billings, the insurer has a right to seek post-litigation reimbursement directly from independent counsel.

The court rejected Squire Sanders’s contention that it was immune to restitution claims because it was merely the incidental beneficiary of Hartford’s duty to defend its insureds. Squire Sanders was not an incidental beneficiary because Hartford only had an obligation to pay defense costs and was seeking reimbursement to the extent those defense costs were unreasonable, and the law firm under the terms of the Order it obtained and, indeed, drafted, had submitted bills to Hartford and obtained payment subject to the express provision that such bills must be reasonable, and that Hartford could later obtain reimbursement for unreasonable charges.

The court also rejected Squire Sanders’s argument that a dispute over fees affects independent counsel’s judgment and loyalties, frustrating public policy. In doing so, the court noted that attorneys represent their clients in numerous settings where they have to later justify their fees to third parties (e.g., class-action settlements, bankruptcy).  Moreover, arbitration under Section 2860(c) specifically addresses disputes over independent counsel’s fees and provides for resolution of those disputes. Finally, the court dismissed Squire Sanders’s argument that any financial responsibility for the allegedly excessive billing should fall first on the firm’s clients, noting that insureds that pay to receive a defense of potentially covered claims, do not expect to face additional rounds of litigation and possible monetary exposure due to the conduct of their lawyers.

This holding, the court indicated, was limited to the unique procedural history of the case before it. The trial court’s enforcement Order permitted Hartford to pursue reimbursement from someone, and that someone includes Squire Sanders. Thus, the issue before the court was whether – assuming Hartford may seek reimbursement of unreasonable charges after the underlying litigation has concluded – that claim may be made directly against independent counsel. The court noted that it need not and did not decide whether, absent such an order, an insurer that breaches its defense obligations has a right to recover (from independent counsel or the insured) unreasonable fees it paid independent counsel.

The court expressly declined to address the issues of: (1) whether, absent the enforcement order’s express provision authorizing Hartford to seek reimbursement for excessive fees, an insurer that breaches its defense obligations has any right to recover excessive fees it paid independent counsel; (2) whether a dispute over allegedly excessive fees is more appropriately decided through a court action or through Section 2860 arbitration; and (3) when fee disputes ought to be decided relative to the underlying litigation.  The decision also does not address an insurer’s rights when there has not been any breach of the duty to defend and that insurer pays more than reasonable and necessary defense costs, reserving its right to get money back after the case is over.

Hawai’i declines to adopt Cedell, for now . . .

Posted in Uncategorized

It has been more than two years since Washington’s Supreme Court issued its opinion in Cedell v. Farmers Ins. Co. of Washington, 176 Wash.2d 686, 295 P.3d 239 (2013), radically changing the attorney-client privilege for insurers in Washington.

In Cedell, the court held that there is a presumption of no attorney-client privilege in “first party insurance claims by insured’s claiming bad faith in the handling and processing of claims, other than UIM claims.” Id. at 700. The insurer “may assert an attorney-client privilege upon a showing in camera that the attorney was providing counsel to the insurer and not engaged in a quasi-fiduciary function.” Id. However, the insured may still be entitled to “pierce the attorney-client privilege” by asserting the crime fraud exception. Id.

While the Cedell opinion has been cited by a number of federal courts in Washington, its application still may not be clear. As one district court observed, “the opinion creates rather than alleviates confusion about what must be produced, and under what circumstances.” Philadelphia Indem. Ins. Co. v. Olympia Early Learning Ctr., 2013 WL 3338503, at *3 (W.D. Wash. July 2, 2013). Nevertheless, a federal district court in Idaho adopted Cedell, Stewart Title Guar. Co. v. Credit Suisse, Cayman Islands Branch, 2013 WL 1385264 (D. Idaho Apr. 3, 2013), leading many across the country to wonder whether their states are next.

In Hawai’i, this question has been answered, at least for now. In Anastasi v. Fid. Nat. Title Ins. Co., 134 Haw. 400, 341 P.3d 1200, 1216-17 (Ct. App. 2014) cert. granted, 2015 WL 3384471 (Haw. May 22, 2015), an insured asked the Intermediate Court of Appeals of Hawai’i to adopt Cedell. The court specifically declined the invitation, observing that the statutory provision setting out the attorney-client privilege in Washington “is fairly limited,” whereas in Hawai’i it has been “codified in much more detail.” Id. at 416-17. The Court concluded that “[t]he rule adopted in Cedell is inconsistent with the privilege as codified in Hawai‘i.” Id. at 417.

Now that the Supreme Court of Hawai’i has accepted review in Anastasi, the Cedell decision could potentially be addressed by Hawai’i’s highest court. This is not guaranteed, however, as the holdings of Anastasi were not limited to the application of the attorney-client privilege. Both the insured and the insurer petitioned for review, the Court of Appeals having vacated the grant of summary judgment in the insurer’s favor. That being said, if Cedell is addressed, Hawai’i will not be the only state listening.