Miller v. Kenny

 A recent Washington Court of Appeals Division I decision addresses a host of insurer related issues concerning extra-contractual liability. 

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Insured-Insurer Privilege Part II

As you likely know from my last blog, I am an advocate of a codified "Insured-Insurer Privilege." The need for such a privilege was also described in my last blog. Briefly, an insured who is seeking defense or indemnity from its insurer is contractually obligated to cooperate with his/her insurer in investigating and resolving the claim. That means providing meaningful information to the insurer so that the insurer can assess liability, damages, verdict potential and settlement value. The insurer needs timely information in order to set reserves and also to be prepared to participate in settlement opportunities. Continue Reading...

Is It Time for a Codified Insured-Insurer Privilege?


There is no common law "Insured-Insurer privilege" that protects communications between them, such as the privilege that exists for spousal communications or attorney client communications. Did you know that in some jurisdictions an insured who is being provided a defense by an insurer under a reservation of rights could risk the waiver of attorney client privilege or work product protection if its counsel provides the insurer with an analysis of liability, damages or verdict potential? How can that be?

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Policyholder's Claim against Insurer for Consequential Damages Survives Motion for Summary Dismissal

In Mutual Association Administrators, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, a New York appellate court affirmed a lower court order denying summary dismissal of a claim for consequential damages against an insurer arising from an alleged breach of the insurer’s obligation to defend and indemnify its policyholder in an underlying ERISA action. The insurer sought summary dismissal of the policyholder’s claim seeking consequential damages for “the demise of [the plaintiff] as an operating business” and “loss of income by [the plaintiff],” allegedly resulting from the breach. Acknowledging prior holdings that “consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting,” the appellate court found that the insurer had “failed to establish, prima facie, that it acted in good faith in recommending that the plaintiff accept a settlement offer, and then discontinuing the payment of defense costs once the plaintiff rejected the offer.” The court also held that an exclusion in the policy barring “loss of earnings,” which applied only to otherwise covered losses, did not apply to consequential damages for alleged breach of contract. The decision follows two New York high court decisions recognizing that consequential damages may be recoverable for breach of an insurance contract, Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200 (2008) and Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187 (2008) (discussed here).

CLIENT QUESTIONS REGARDING POLICY INTERPRETATIONS

One of the more common questions that clients ask coverage counsel is how a court will interpret a new policy provision. This is especially true of clients that make a point of using the latest endorsements which may not have been tested in a particular state's courts. The issue is complicated by the different policy interpretation approaches taken by different states, which make it difficult to apply out of state law even when the particular policy provision at issue is identical to one interpreted in a case from another jurisdiction. In states like Oregon and Washington, where case law interpreting newer policy language may be scarce, insurers can put themselves at increased risk if they rely too heavily on their own interpretation of the policy's "plain meaning" or their experience in other jurisdictions.

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WASHINGTON COURT OF APPEALS DECIDES WHAT CONSTITUTES A "SUIT" TRIGGERING THE DUTY TO DEFEND IN THE ENVIRONMENTAL LIABILITY CLAIMS CONTEXT

In Gull Industries, Inc. v. State Farm Fire and Casualty Company, et al., Court of Appeals of the State of Washington, Division I, No. 69569-0-I (June 2, 2014), a Washington Appellate Court, for the first time, addressed the question of "what constitutes a 'suit' for the purpose of triggering the insurer's duty to defend environmental liability claims against the insured." Id. at 10. In Gull, Gull undertook voluntary remediation of a gasoline service station site. Gull notified the Washington Department of Ecology ("DOE") regarding a release of petroleum at the site, and DOE sent a letter to Gull acknowledging the notice. The letter from DOE acknowledged that "Gull's report reveals the soil and groundwater are above the MTCA 'Method A Cleanup levels' and that DOE placed the property on the leaking underground storage tank list with an 'Awaiting Cleanup' status. The letter also advised Gull to be 'aware that there are requirements in state law which must be adhered to' but did not advise of any consequences that might attach to the failure to adhere to those requirements." Id. at 14. Gull then continued with its voluntary investigation and remediation of the site. No Potentially Liable Party (PLP) letter was issued.

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More Tripartite Trouble In Big Sky Country?

Fourteen years ago, the Montana Supreme Court heard a legal challenge that defense lawyers had brought against efforts by insurers to impose greater controls over case handling and billing.  The resulting decision in In Re Rules of Professional Conduct 2 P.3d 806 (Mont. 2000) put Montana at the forefront of the tripartite wars that were raging at the time between insurers and the insurance defense bar as the result of efforts by insurers to rein in the costs of litigation through aggressive audits and litigation management guidelines. 

In the wake of the Montana Supreme Court’s opinion, both sides pulled back from the brink and have enjoyed a reasonably peaceful if not always happy relationship since.  However, a new decision by the Montana Insurance Commissioner has brought auditing and guideline issues back into the news.

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Client Questions Regarding the Duty to Defend

Three common questions insurance companies ask regarding the duty to defend are:

 

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Preparing For the Aftermath of the Medicare Data Release

 The Centers for Medicare and Medicaid Services has just released a large set of data [http://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2014-Press-releases-items/2014-04-09.html] regarding the provision of services to Medicare patients and the payment of providers for those services.

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New York Federal Court Awards Excess Insurer Full Policy Limits in Bad Faith Claim Against Primary Insurer

In a March 31, 2014 decision, the Northern District of New York found a primary insurer liable to an excess insurer for bad faith settlement practices in the defense of its insured in an underlying motor vehicle lawsuit. After a bench trial in Quincy Mutual Fire Insurance Co. v. New York Central Mutual Fire Insurance Co., Civil Action No. 3:12-CV-1041, the Court found that New York Central, as the primary insurer, acted in bad faith and grossly disregarded the interests of Quincy, the excess carrier, by: (1) refusing to increase its settlement offer for almost four years; (2) refusing to tender its policy limits until three weeks before trial where the damages were indisputably in excess of the primary limits several years earlier; and (3) failing to conduct or obtain an analysis and valuation of the underlying litigation’s potential jury verdict value until mere weeks before the scheduled damages-only trial. The Court found that New York Central’s conduct caused it to lose two opportunities to settle the case at times in which liability against its insured was clear and Quincy’s excess exposure would have been none or significantly less than the full amount of its policy limits. Importantly, the Court recognized that Quincy, as the excess insurer, had no duty to undertake a defense in the underlying litigation, and therefore rejected New York Central’s argument that Quincy’s conduct in monitoring the litigation contributed to its damages. As a result, the Court awarded Quincy the full amount of its policy limits in damages, plus prejudgment interest.

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Seventh Circuit Rejects Staff Counsel Challenge

While most state courts have sustained the right of insurers to use staff counsel, nearly all require that the insured be advised that the lawyers in question are employees of the insurance company. A new Indiana case has raised and decided the question of whether this disclosure must be made at the time of representation or, as the insured argued in this case, at the time of the issuance of the subject insurance policy.

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DRI Offers CLE Registration Incentives For In-House Claims People

As much as insurers value the opportunity to attend excellent coverage seminars for CE/CLE credit and networking opportunties, the cost of registering can be a deterrent in these times of tightening education and training budgets. 

One of the jobs of the DRI Law Institute that I chair has been finding ways to get more in-house people to our programs.   Yes, we believe that more outside counsel will also show up if their clients are attending.  We also believe, however, that these programs are more interesting and engaging if the full specturm of the defense community is represented.  I

Here are three initiatives that DRI is taking to encourage in-house claims people to register:

1.  If your companyr schedules a meeting of its panel counsel in conjunction with a DRI seminar, DRI will provide a meeting room and will comp your employees attendance, hotel and travel costs in proportion to the number of people who attend and register.   A meeting can range anywhere from 5 people with a cup of coffee to 500 with coffee and cookies.  The more people, the greater the comped advantages for your company (see attached flyer).

2.  Alternatively, if you are a member of DRI and your duties focus on the hiring or supervision of outside counsel, you may attend any DRI seminar for free. (see attached flyer)

3,  Finally, even if you are not a DRI member, you are allowed to attend up to one free seminar a year if a member of DRI who is attending that seminar agrees to sponsor you.  (see attached flyer)

I hope to see you at a future DRI seminar.  For a list of upcoming programs, go to www.dri.org/events

 

Obstacles to Class Actions on Insurance Matters

Typically class actions and claims for insurance bad faith do not mix.  This is for the simple reason that insurance bad faith actions usually involve individualized facts, individualized policies and separate claims handling.  Uniform claims, therefore, are less prevalent in insurance bad faith, and thus less likely to satisfy the class action requirements under Civil Rule 23(a) of numerosity, commonality, typicality and adequate representation.  However, class actions can nevertheless play a role in insurance bad faith claims and insurance coverage cases. 

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Liability Caused by Hackers Not Covered by CGL Policies

Summary judgment was granted in favor of insurers (including Zurich and Mitsui Sumitomo), against Sony in a case of first impression on the issue of insurance coverage for cyber liabilities under commercial general liability primary policies. The New York state court ruled that primary insurers are not obligated to defend Sony against lawsuits brought by thousands of customers whose personal information was stolen when Sony's networks were hacked. Zurich American Insurance Co. v. Sony Corporation of America, et al., Case No. 651982/2011, in the Supreme Court of the State of New York, New York County, Judge Jeffrey K. Oing presiding. Sony's lawsuit followed the April 2011 incident when hackers broke in to the Sony PlayStation Network and obtained personally identifying information of up to 77 million customers. Sony was sued in 65 class action lawsuits around the country alleging various causes of action, including invasion of privacy. The lawsuits were consolidated in Multi-District Litigation ("MDL") now pending in the Southern District of California. Zurich filed a declaratory judgment action in New York state court. Cross-motions for summary judgment on the duty to defend were filed by the parties. The central question was whether the claims in the MDL implicated the Personal and Advertising Injury coverage the offense of "oral or written publication, in any manner, of material that violates a person's right of privacy" (the "Privacy Offense"). It was undisputed that privacy violations were alleged, so "publication" was the critical issue. Sony argued that the dissemination of information to the hackers constituted publication because the phrase "in any manner" gave an expansive meaning to the term publication. The insurers argued that coverage for P/AI Injury requires that the offense be committed by the insured and, in this case, Sony had not published anything. At most, the publication was the result of the hackers' conduct. In fact, Sony had tried to protect the information and was sued for negligent data security. The court ruled with the insurers, finding no duty to defend because there was no possibility of coverage under the policies' Privacy Offense coverage. There are more and more instances of breaches of security leading to disbursement of private information that customers believe to be protected by businesses. On the insurance market are products designed to cover "cyber" risks including data breaches. The New York court's ruling is important in addressing businesses' attempts to fit new technology-related risks into "brick and mortar" policies that were never contemplated to cover these types of risks.

Busy Month for NY Court of Appeals

 

There’s been a good deal of activity in New York’s high court this February. Here’s the round-up:

  • K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co.: In this much-anticipated decision, the Court of Appeals declined to overrule Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 NY2d 419 (1985), by holding that an insurer that breaches its duty to defend is not barred from later relying on policy exclusions as defenses to coverage. The court found no justification for overruling Servidone, in that there was no indication that “the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985.” Invoking the rule of stare decisis, the court also reasoned that “insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise.” Two justices dissented, concluding that “[a]n insurer should be subjected to some legal consequence for breaching its duty to defend an insured.” The dissent contends that such a rule would provide insurers with an incentive to defend their policyholders and would encourage declaratory judgment actions to resolve coverage disputes. The dissent also reasoned that “[b]ringing all of the interested parties—injured plaintiffs; insured defendants; and insurance carriers—together in a judicial forum further contributes to the efficient resolution of factual issues for the benefit of litigants without unduly burdening the ability of injured parties to obtain recovery for covered losses.”
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