National Insurance Law Forum

National Insurance Law Forum

Published By The Attorneys of the National Insurance Law Forum

Has SCOTUS Signaled Putative Class Action Defendants to More Aggressively Challenge the Merits of Plaintiff’s Case at the Class Certification Stage?

Posted in Declaratory Judgment Strategy

The holding in a recent opinion of the Supreme Court of the United States in a securities class action case raises broader questions regarding whether defendants should more aggressively challenge the merits of plaintiff’s case at the certification stage in other types of cases.  This includes product defects, energy, and health care, but also, of particular concern, insurance.

 

The case, Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398, 189 L.Ed.2d 339 (June 23, 2014), addresses the question presented of whether the defendant in a securities class action should be afforded the opportunity at the certification stage to rebut the presumption that the defendant’s misrepresentations affected the market price of the stock.  The presumption was established in Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), which held that investors could satisfy the requirement that they relied upon the defendant’s alleged misrepresentations by invoking a presumption that the price of a stock traded in an efficient market reflects all public, material information – including material misstatements.  Left undecided for over twenty-five years after Basic was the stage of the proceedings the putative class defendant could challenge the presumption.  The question was finally settled by Halliburton.

 

Halliburton is one of those rare cases appealed to the Supreme Court not once, but twice.  Plaintiff appealed after the trial court earlier denied class certification and the Supreme Court reversed, holding that loss causation is different from the issue of whether an investor relied on a misrepresentation in purchasing the stock.  On remand, Halliburton again challenged class certification, this time arguing that the evidence previously submitted rebutted the Basic presumption of reliance by showing no “price impact.”  Absent the presumption, investors would have to prove reliance on an individual basis, meaning that individual issues would predominate over common issues.  The trial court declined to consider Halliburton’s argument at the certification stage, applied the presumption, and certified the class.  This time, Halliburton appealed.

 

The Fifth Circuit affirmed, holding that price impact evidence could not be used to rebut the presumption of reliance at the class certification stage because “price impact evidence does not bear on the question of common question predominance [under Rule 23(b)(3)], and is thus appropriately considered only on the merits after the class has been certified.”  718 F.3d 423, 435 (2013).  The Supreme Court reversed, holding that whether an alleged misrepresentation had a price impact, “has everything to do with the issue of predominance at the class certification stage.”  134 S.Ct. at 2416.  Therefore, trial courts should consider both direct and indirect price impact evidence at the certification stage.   Id. at 2417.

 

The holding in Halliburton significantly impacts the defense of securities class actions at the certification stage, but its potential usefulness in defending other types of class actions should not be discounted.  As the concurrence from Justice Ginsburg noted, “[a]dvancing the price impact consideration from the merits stage to the certification stage may broaden the scope of discovery available at certification.”  Id.  This may have influence beyond the securities class action arena because, if defendants are allowed to challenge more aspects of plaintiff’s case at certification, they should similarly be able to obtain broader pre-certification discovery pertinent to those issues.

 

For example, when considering certification of a class against an insurance company, which is a type of case seemingly ever more common, courts often certify a class even though conceding that damages issues likely will eventually be decided on the merits on an individualized basis, perhaps acting on the reasonable assumption that certification of a class most likely will lead to settlement so that the individualized damage issues are never reached.  But should the trial court consider evidence at the certification stage that at least some of the putative class members did not rely on the insurer’s alleged misrepresentations to the putative class?  By analogy, the holding in Halliburton suggests the answer is likely “yes.”  There may be a common misrepresentation, whether in sales or claims handling, but the defendant should have the opportunity to show at the class certification stage that not all putative class members relied on the misrepresentation, i.e., there was no analogous “fraud on the market.”  This means class defendants need to identify these potential issues early in the case and be aggressive in seeking merits discovery regarding them prior to the trial court ruling on certification.

 

Nor should the reasoning of Halliburton limit its potential use in challenging commonality under Rule 23(a).  The Halliburton Court considered whether evidence was pertinent to common question predominance under Rule 23(b)(3), but one might also argue that its holding should be extended to question whether the same evidence is pertinent to whether there is even a common question under Rule 23(a).

 

So far, the holding in Halliburton has not been applied in cases beyond the securities class action arena.   That does not mean defense counsel should not continue to be creative in seeking ways to apply it more broadly to other types of class actions to oppose certification of a class.

When can an Insurer’s Representations during Policy Negotiations Prevent Enforcement of the Written Policy Terms? Recent Oregon case Deardorff v. Farnsworth offers insight.

Posted in Liability Coverage, Recent Cases

In Oregon, under certain circumstances when an insurer denies a defense, an insured may rely upon the doctrines of estoppel and oral binder to avoid the written terms of the policy.  Estoppel precludes an insurer, based on its acts, conduct, or silence when there is a duty to speak, from asserting a right that otherwise would have been available.  To establish estoppel: (1) there must be a false representation; (2) it must be made with knowledge of the facts; (3) the other party must have been ignorant of the truth; (4) it must have been made with the intention that it should be acted upon by the other party; and (5) the other party must have been induced to act upon it.  Bennett v. City of Salem et al., 192 Or 531, 235 P2d 772 (1951).  Estoppel cannot create coverage or negate an express exclusion in an insurance policy, but it can avoid a condition of forfeiture (e.g., a duty to cooperate).  ABCD…Vision v. Fireman’s Fund Ins. Companies, 304 Or 301, 744 P2d 998 (1987) (“ABCD”).

An oral binder may impose a duty to defend when the written terms of the policy do not.  An oral binder requires that the parties agree on the thing insured, the risk insured against, the amount of insurance, and the duration of the risk.  See United Pac. Ins. v. Truck Ins. Exch., 273 Or. 283, 541 P.2d 448 (1975).  An oral binder may supersede the terms of a subsequent written policy.  Oregon Rev. Stat. 742.043(1).

Recently, the Oregon Court of Appeals addressed the scope of estoppel’s application in a coverage action relating to an insurer’s refusal to defend.  Deardorff v. Farnsworth, 2015 WL 465329 (Or. Ct. App. 2015).  In Deardorff, the insured’s insurance agent was renewing a Farm and Business policy with Oregon Mutual Insurance (OMI).  The agent inquired about the possibility of adding liability coverage for others’ property in the insured’s care, custody, and control (“CCC”).  OMI responded that “liability exposure for property of others in the insured’s CCC, that is covered in liab form.”  That communication led to the agent procuring CCC coverage for the insured.  Coverage was bound and OMI sent a copy of the policy to the agent before the loss occurred.  The policy provided excess CCC property coverage but expressly excluded CCC liability coverage.

The insureds were sued for damage to others’ property that occurred while the property was in the insured’s custody.  The insureds tendered defense of the suit to OMI, which refused to defend because the policy did not provide CCC liability coverage.  The insureds successfully defended the claim, and they brought suit against their insurance agent and OMI to recover their defense fees and costs.

The Court of Appeals examined whether OMI’s representation that CCC liability was “covered” under the liability form could form the basis for estopping OMI from relying upon the express exclusion of CCC liability coverage.  Generally, estoppel cannot expand coverage or negate an express exclusion, but it can negate a condition of forfeiture.  See ABCD, supra.  An exception to the general rule, however, is that an insurer’s interpretation of an ambiguous policy provision may estop the insurer from relying on that provision.  Farley v. United Pacific Ins. Co., 269 Or 549, 525 P2d 1003 (1974).

The Court of Appeals held that OMI was not estopped from relying upon the express exclusion of CCC liability coverage.  CCC liability coverage was never included in policy’s coverage, and therefore the exclusion was not a “forfeiture.”   Estoppel would not negate the express CCC liability exclusion unless the exception recognized in Farley applied.  The insurer’s assertion that CCC liability coverage would be “covered” in the liability form, though, was not an interpretation of ambiguous language, and the Farley exception did not apply.

Deardorff may be interpreted to continue the Oregon courts’ line of cases limiting the estoppel doctrine with respect to its application to an insurer’s representations prior to the issuance of an insurance policy.  Deardorff did not address the possibility of an oral binder, but it may continue to be a concern in Oregon when a party seeks to modify the written terms of the policy, as reaffirmed recently by the Oregon Supreme Court in Stuart v. Pittman.  350 Or. 410, 255 P.3d 482 (2011).

Recent Oregon Case Describes Burdens of Proof Applicable to Claims for Liability Coverage for Claims Involving Continuous or Progressive Property Damage

Posted in Uncategorized

The Oregon Court of Appeals recently issued a decision impacting burdens of proof and allocation of damages in cases involving liability insurance claims for coverage of progressive or continuous property damage.  The case, FountainCourt Homeowners Ass’n v. FountainCourt Development, LLC, 264 Or. App. 468, 334 P.3d 973 (2014), arose from a construction defect lawsuit that a homeowners association brought against several builders, including a subcontractor (“the sider”) that had installed siding on a multi-unit project.

The homeowners association’s only claim against the sider was that the sider’s negligence caused physical property damage.  The jury found that the sider was 22% at fault, and the trial court entered a judgment for an amount that represented that percentage of the total damages.  American Family Insurance had issued a commercial-general liability insurance policy to the sider covering a period of time subsequent to the construction.  In a subsequent garnishment action to obtain insurance benefits American Family allegedly owed the sider, the association sought to recover from American Family the entire amount of damages awarded against the sider.

In the garnishment action, the trial court held that the association, standing in the shoes of the insured sider, had met its burden of proving coverage within the coverage grant of the policy, and that American Family failed to meet its burden of proving that some portion of the judgment against the sider was excluded.  On appeal, American Family argued that the jury in the underlying case had impermissibly awarded damages in the form of the costs to repair the sider’s own faulty work, which work was not “property damage” under the policy.  The Court of Appeals rejected American Family’s argument that, although insurers have the burden of proving the applicability of exclusions, it did not have the burden of proof regarding the “your work” exclusion, because the exclusion embodied a distinction inherent in the definition of “property damage.”

American Family argued that the evidence showed that some of the water damage occurred outside the American Family policy period, and that the association had the burden of establishing that all of the sider’s damages were for property damage that occurred during the policy period.  The Court of Appeals disagreed, explaining that given the progressive and continuing nature of the water damage, the award of damages could represent property damage that occurred entirely during the policy period, and nothing in the record required a conclusion otherwise.  The court explained:

In the case of continuing and progressive water damage, the award of damages is not tied to discrete instances of property damage along a time continuum; instead the liability for property damage may be the same in every triggered policy period. That is so because the scope of repair—to replace the damaged structural components and eliminate the water intrusion—does not necessarily change depending on the year in which the damage occurred.

In light of its decision, the Court of Appeals did not rule on the homeowners association’s argument that Oregon has essentially adopted an “all sums” allocation approach in which any one insurer whose policy is triggered has a duty to makes its insured whole, absent an applicable exclusion, up to available policy limits.  Nevertheless, the Court of Appeals decision describes an approach that appears somewhat akin to an “all sums” allocation.  In a continuous or progressive injury claim, an insured need only establish that the judgment reflects damages for property damage that occurred during the policy period; and that all of the awarded damages could have been for property damage sustained during that policy period.  At that time, the burden shifts to the insurer to prove that some portion of the damages did not reflect property damage occurring during the policy period.

NY Court of Appeals Interprets Noncumulation Clause In Favor of Insurer

Posted in Liability Coverage

In Nesmith v. Allstate Ins. Co., New York’s high court revisited the issue of the noncumulation clause in an insurance policy wherein a plaintiff was seeking to recover alleged damages as a result of exposure to lead-based paint. The Court last ruled on the effect of a noncumulation clause in 2005 in Hiraldo v. Allstate Ins. Co. The issue before the Court in Hiraldo was whether a single plaintiff, alleging exposure to lead paint over multiple policy periods wherein the policy was renewed in successive years, could recover more than one policy limit. The Court in Hiraldo held that due to the noncumulation clause, the plaintiff could only recover one policy limit regardless of the number of policy periods implicated by the alleged exposure.

In Nesmith, the Court was called upon to determine the effect of the noncumulation clause on the amount of coverage available wherein multiple plaintiffs from different families alleged exposure to lead paint in the same apartment in different policy periods. Allstate Insurance Company issued an insurance policy to the landlord of a two-family home in September 1991. The landlord renewed the policy in 1992 and 1993. The policy had a $500,000 limit per occurrence and contained the following noncumulation clause:

Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under the Family Liability Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss.

Felicia Young lived in one of the two apartments from November 1992 to September 1993. In July 1993, the landlord was informed by Monroe County that Young’s children had elevated lead levels and that various areas of the apartment were in violation of regulations regarding the presence of lead paint. The landlord did remediation work and Monroe County informed the landlord in August 1993 that the areas in violation had been corrected.

After Young and her children vacated the apartment, Lorenzo Patterson and Qyashitee Davis moved into the same apartment with two children in September 1993. Their children were diagnosed with elevated lead levels and the landlord was again cited in December 1994 for areas of the apartment that were in violation of regulations governing the presence of lead paint.

In 2004, guardians for Young’s children and the Patterson children filed two separate lawsuits alleging injurious exposure to lead paint in the apartment. The action brought on behalf of Young’s children settled in 2006 for $350,000. Allstate then took the position that due to the noncumulation clause, only $150,000 of coverage remained for the claims brought on behalf of the Davis children on the ground that exposure to lead paint during the separate policy periods was exposure to the same general condition, and therefore only one policy limit of $500,000 was available for both actions. The Davis plaintiffs settled their claims for $150,000 subject to a stipulation that would allow the plaintiffs to proceed with a declaratory judgment action against Allstate on the issue of whether a complete and separate $500,000 policy limit was available for the Davis claims.

The Davis plaintiffs pursued the declaratory judgment action against Allstate and Supreme Court granted the declaration sought by the plaintiffs, holding that the children in the two actions were not injured by exposure to the same conditions. The Appellate Division, Fourth Department, disagreed and reversed Supreme Court, holding that under Hiraldo and the plain language of the noncumulation clause, the injuries in both actions were the result of “continuous or repeated exposure to the same general conditions.” The Court of Appeals granted plaintiffs leave to appeal.

The Court of Appeals noted that plaintiffs could not argue that renewal of the policy over successive policy years increased the limits of available coverage due to the Court of Appeals’ decision in Hiraldo. Rather, plaintiffs only argument was that the Young children and Davis children were not injured as a result of “continuous or repeated exposure to the same general conditions.” The Court of Appeals rejected plaintiffs’ argument, noting that the Young children and the Davis children were exposed to the same hazard—lead paint—in the same apartment. The Court noted that the Young and Davis children may not have been exposed to the exact same conditions, but to find that they were not exposed to the same general conditions would deprive the word “general” in the noncumulation clause of all meaning. The Court went on to note that the plaintiffs did not claim a new lead paint hazard had been introduced to the apartment between the tenancies of the Young children and the Davis children, and also noted there was no evidence from the record to provide a basis for an inference that a new lead paint hazard had been introduced to the apartment. Rather, the only logical conclusion, according to the Court, was that the landlord’s initial remediation efforts were not completely successful and the Young children and Davis children were exposed to the same general conditions for which only a single $500,000 policy limit was available.

Justice Piggott wrote a dissent joined by Justice Lippman. The dissent disagreed with the majority on two grounds. First, the dissent would have found the children in the two actions were not exposed to the same general conditions because the landlord took remedial steps to address the lead paint conditions and was told by Monroe County in August 1993 that those conditions had been corrected. Second, the dissent wrote that the majority’s position was inconsistent with reasonable expectation of the insured in that the insured would not have continued to renew the policies at virtually the same premium rates if he had known that he had procured less protection with respect to lead paint claims in the later years if a claim were paid resulting from an exposure occurring in the earlier policy periods.

Submitted by Jeff Casey, Ward Greenberg Heller & Reidy LLP

Additional Insured Status under Excess and Umbrella Policies

Posted in Excess and Umbrella Insurance

Blanket additional insured endorsements often require examination of a contract between the named insured and the purported additional insured, as many of these endorsements provide insured status contingent on the named insured being required by contract to add the person or entity as an additional insured to an insurance policy.  As shown by a recent Court of Appeals decision in Washington, where additional insured status is sought under an excess or umbrella policy, this analysis should include the exact type of insurance required in the insured’s contract.  See Lewark v. Davis Door Servs., Inc., 180 Wash. App. 239, 321 P.3d 274, review denied sub nom. Lewark v. Am. States Ins. Co., 180 Wash. 2d 1026, 328 P.3d 902 (2014).

In Lewark, the named insured contractor entered into a contract with a storage facility which required the contractor to procure and maintain “Employer’s liability insurance of not less than $1,000,000, and commercial general liability insurance . . . in limits not less than $1,000,000 per occurrence.”  Id. at 242.  The contract further required provision of a certificate of insurance naming the storage facility as an additional insured.  Id.  As required by this agreement, the named insured purchased an employer’s liability policy and a commercial general liability policy (“CGL”).  Id. at 241.  The named insured also purchased an umbrella liability policy.  Id.

An injured patron of the storage facility brought an action against the storage facility and the named insured, and eventually settled her claims against both entities.  Id.  Pursuant to these agreements, the patron obtained an assignment of the storage facility’s claims against the named insured’s umbrella insurer.  Id.  The patron then brought an action against the umbrella insurer alleging that it breached its duty to defend and indemnify the storage facility as an additional insured, along with a number of extra-contractual claims.  Id.

The umbrella liability policy provided that insured persons or entities include “[a]ny person or organization for which an insured is required by virtue of a written contract entered into prior to an “occurrence” to provide the kind of insurance that is afforded by this policy, but . . . only to the extent of the limits of insurance required by such contract . . . .”  Id. at 242-43 (emphasis original).  Washington’s Court of Appeals found that the agreement between the named insured and the storage facility “requires a commercial general liability policy that covers not less than $1,000,000 per occurrence,” and that “[i]t is undisputed” that the named insured purchased “that kind of policy with the limits required by th[is] agreement.”  Id. at 243.  According to the court, the named insured “was not required to do more.”  Id.  As the umbrella policy provided coverage in excess of the limits of the CGL policy and in excess of the amounts required by the insured’s agreement, the court concluded that “[c]overage under the umbrella policy was not required by the . . . agreement.”  Id.  Thus, given that “[t]he umbrella policy only insures what is ‘required by virtue of contract,’” the court held that the storage facility was not an additional insured under the policy, and affirmed the trial court’s dismissal of all of the patron’s claims.  Id. at 244.

The Lewark decision illustrates how additional insured status can depend upon the details of the insured’s contract with the purported additional insured.  In addition to the type of coverage required by the named insured’s contract, the Lewark Court based its holding on a limitation in this contract on the duration of insurance required, “during the entire progress of the Work.”  Id. at 243-44.  Accordingly, the named insured’s contract should be scrutinized where additional insured status is sought under a blanket endorsement, particularly when such status is sought under an excess or umbrella policy.

EBOLA – First Party Insurance Implications???

Posted in Property Insurance

Shortly after a nurse infected with Ebola visited a wedding shop to look for wedding gowns, the owner of the shop put herself into quarantine and temporarily closed her shop.    Is that business interruption loss covered?    What about the “decontamination costs” that the shop owner undertook?   

 A health care worker that was linked to a Dallas Ebola patient was quarantined on a cruise ship.   The cruise ship was denied access to Conzumel, Mexico.  Thus, the passengers lost the “full value” of their cruise.  The cruise line gave each of the passengers a $200 ship line credit plus a discount on their next cruise.     As soon as the ship docked in Galveston, it was cleaned top to bottom with industrial foggers and a disinfecting agent.  Are any of those “extraordinary costs” covered under an insurance policy?   For an insightful discussion of the potential first party implications stemming from Ebola, see the article, published in Advisen Ebola Special FPN Edition, 10/28/2014, written by Tressler LLP attorneys Todd Rowe and Paul White,  The initial impact of Ebola on first-party property insurance coverage.

ILIA Launches Website

Posted in News

I’m pleased to announce that the Insurance Litigation Institute of America has launched a new website: www.insurancelitigationinstitute.org. ILIA, an institute of the Litigation Counsel of America, was founded by Diane Polscer, Julia Molander, Stacy Broman and me to provide a nationwide, but limited, network of highly skilled and experienced insurer and policyholder counsel to offer programs addressing critical insurance law and litigation issues. ILIA members recently presented a program, entitled Cloud Computing: Navigating the Coming Storm, at the LCA’s 2014 Fall Conference and Induction of Fellows in New Orleans. Our collective thanks to Heidi Hugo for her efforts in making the website a reality.

Insurance for Technology Problems

Posted in Uncategorized

In our increasingly digital age, we should expect a corresponding increase in the number of insurance claims involving lost data, security breaches, inadvertent dissemination of private information, and similar issues related to technology.  However, the usual insurance policies – such as general liability, first-party property insurance and errors and omissions coverage – are not a good fit for these types of losses.  Insurance carriers are therefore adapting, and creating new products to fill the gaps. Continue Reading

A Coverage Buy Out Can Preclude Coverage for TCPA Claimants Who Had Already Sustained Injury at the Time of the Agreement, As Long As They Had Not Yet Filed Suit.

Posted in Liability Coverage, Recent Cases

I addressed a portion of Central Mutual Insurance Company v. Tracy’s Treasures, Inc., 2014 IL App (1st) 123339 (September 30, 2014), in my last blog.   As you may recall, in that case the insured, Tracy’s, was sued for TCPA violations in March of 2007.  The Illinois Appellate Court  discussed the standards for evaluating whether the settlement of that class action suit (the Idlas action) under which Tracy’s agreed to a $14 million consent judgment collectible only against its insurer was collusive and non-binding on the insurer.  The second part of the decision addresses the effect of Central’s prior buy out of the “personal and advertising injury coverage.” 

Several years before the Idlas Action was filed, Tracy’s was a defendant in another TCPA action, the White action, involving the same type of unsolicited fax advertisements as in Idlas. Four of the named plaintiffs alleged that they received faxes in 2002; the remaining plaintiff received his fax in May 2003. Central defended Tracy’s and, in 2005, settled with certain of the Plaintiffs in the White case on behalf of Tracy’s for $12,000.  The action was then dismissed without prejudice.  In connection with Central’s settlement, Tracy’s agreed, in a confidential settlement agreement, that all of the insurance policies issued by Central were reformed to eliminate coverage for “personal and advertising injury.”

So, when Central was confronted with the Idlas settlement, in addition to contesting its reasonableness, Central also sought summary judgment on the basis that the insurance contracts no longer contained any coverage for “personal and advertising injury.”   The trial court denied Central’s motion, holding that Central and Tracy’s could not alter the availability of this coverage because Idlas’s rights under the policies had already vested prior to the time the White action was settled.  The trial court cited  Reagor v. Travelers Ins. Co., 92 Ill. App. 3d 99, 103 (1980), which held that an “injured person has rights under the [insurance] policy which vest at the time of the occurrence giving rise to his injuries.” The trial court ruled that Idlas’ rights vested on July 22, 2003, when he received the unsolicited fax, and Central and Tracy’s could not “agree to divest Idlas in a secret contract concluded in November of 2005.”   

The Appellate Court found that Reagor was not controlling with respect to the effect of the buyout of coverage that occurred in 2005.    It noted that in Olson v. Etheridge, 177 Ill. 2d 396 (1997), the Illinois Supreme Court adopted the third party beneficiary vesting rule set forth in the Restatement (Second) of Contracts, section 311(3) (1981).  Thus, in Illinois, “in the absence of language in a contract making the rights of a third-party beneficiary irrevocable, the parties to the contract `retain power to discharge or modify the duty by subsequent agreement,’ without the third-party beneficiary’s assent, at any time until the third-party beneficiary, without notice of the discharge or modification, materially changes position in justifiable reliance on the promise, brings suit on the promise or manifests assent to the promise at the request of the promisor or promisee.” Olson, supra, at 408-09 (quoting Restatement (Second) of Contracts § 311(2) (1981)).

The Appellate Court observed that prior to the modification of Central’s policies by agreement between Central and Tracy’s in 2005, Idlas had not materially changed his position in justifiable reliance on the existence of coverage nor had he brought suit for the TCPA violation. Prior to March 2007, Central and Tracy’s were unaware of Idlas’s claim.   In 2005 when they negotiated the buyout, they may well have concluded that no further claims were likely to or could be filed.  Thus, the Appellate Court stated that nothing prevented them from agreeing to the buyout of “personal and advertising injury” coverage under Central’s policies.

 The Appellate Court rejected Tracy’s reliance on cases addressing parties injured in automobile accidents.  The Court noted that in the automobile context, Illinois has a strong public policy in favor of mandatory liability insurance for those operating automobiles on Illinois roadways and in the protection of innocent claimants and that various statutes exist that differentiate the character of the automobile insurance policy from those of other policies. 

Nevertheless, the Appellate Court affirmed the denial of summary judgment to Central for two reasons.  First the agreement between Central and Tracy’s was not in the record. Second and more importantly, the Court held it could not determine, as a matter of law, that the amount paid by Central (i.e., $12,000) was adequate consideration for the buyout of the personal and advertising injury coverage.

 The court observed that the evidence may support a finding that in September 2005, more than two years after Tracy’s fax advertisement campaign ended and after the parties had the opportunity to conduct discovery in White, Central and Tracy’s reasonably believed that no further TCPA or related claims were likely to be filed. If that is the case, “then the buyout would appear to be supported by adequate consideration and it would therefore be effective as against Idlas.”   However, as the court could not predict what the evidence would show on that issue, it remanded the case back to the trial court.   

TCPA Class Settlement Collectible Only Against the Insurer “Smells” Collusive…

Posted in Liability Coverage, Recent Cases

In Central Mutual Insurance Company v. Tracy’s Treasures, Inc., 2014 IL App (1st) 123339 (September 30, 2014), the Illinois Appellate Court  shared its suspicions that  the insured’s entry into a consent judgment in a TCPA class action suit that was collectible only against its insurer was collusive, but found questions of fact that precluded such a finding as a matter of law.   The Court, however, provided the trial court with a road map to follow to determine whether the settlement was reasonable.   It further noted that any evidence presented in the trial court showing that there was an abdication of a true defense or that there were strategic efforts by the parties to implicate coverage up to the insurer’s policy limits bears directly on the reasonableness of the settlement. 

But, I am getting ahead of myself.   There are lots of noteworthy tidbits in this decision – including the Appellate Court’s holding that a trial court presiding over a class action has discretion to award less than $500 per violation as the TCPA statute was not designed to put those who advertise their products or services via fax out of business.      So let’s start from the beginning.   This matter involved a TCPA class action settlement under which the insured, Tracy’s, agreed to a $14 million consent judgment collectible only against its insurer, Central Mutual (“Central”),  with any unclaimed funds going to a charity.  The plaintiffs’ counsel was to receive 1/3rd of the settlement, plus costs.  (sound familiar?)

 

Central insured Tracy’s under a series of primary liability policies and excess policies.   Collectively, the face value of the policies was $14 million.  The class action complaint filed against Tracy’s, alleged that Tracy’s sent unsolicited fax messages advertising its dating services between March 5, 2003 and March 5, 2007.   The class plaintiff, Idlas, received his unsolicited fax on July 22, 2003.   Tracy’s tendered its defense to Central who denied coverage, but at the same time offered to provide Tracy’s a “courtesy defense.”    The attorney appointed by Central filed a motion to dismiss and discovery requests.     Shortly thereafter, Central filed its declaratory judgment action seeking a declaration that it owed no defense or indemnity obligation to Tracy’s for the Idlas complaint.   

 

Tracy’s new counsel, Gregory Ellis, contacted Central to advise of his retention due to the conflict between Central and Tracy’s.   Central agreed to pay a reasonable fee for Ellis’ services.  In the meantime and unbeknownst to Central, Ellis had already been negotiating a settlement with the class plaintiffs in which Tracy’s agreed to the entry of a $14 million judgment. The motion for preliminary approval of that settlement was filed without notice to Central. 

 

Interestingly, although the class action complaint alleged a class period from March 5, 2004 through March 5, 2007, the settlement agreement defined the class as those receiving faxes from Sept. 1, 2002 through July 22, 2003.  No class members came forward to allege receipt of an unsolicited fax prior to July 22, 2003, yet the class was expanded in a manner which “coincidentally” served to “trigger” a $5 excess policy issued by Central.    140,000 faxes were allegedly sent during the class period.  The expansion of the class period added 34,000 additional class members.   Tracy’s was only able to locate a list of approximately 10,000 fax numbers.    Of the 9,838 fax notices that were sent to identifiable recipients of the faxes transmitted in 2002 and 2003, 5561 faxes were successful and 4277 failed.  Thus only 4% of the total class actually received the class settlement notice.      The trial court entered a final approval order and reduced the $14 million settlement to a judgment.  Central moved for summary judgment arguing that the $14 million settlement was collusive and unreasonable.  The trial court denied the motion, finding that the claims raised several disputed issues of fact.     

 

  Central can challenge the reasonableness of the settlement. 

 

The first issue on  appeal was whether Central was allowed to challenge the settlement, given that Tracy’s had a right to settle without Central’s consent once Central ceded defense of the case to independent counsel.  The Appellate Court held that Central had the right to challenge the reasonableness of the settlement and also to contest whether the claims asserted in the underlying action fell within the policies’ coverage.  

 

  Was the settlement unreasonable as a matter of law?

 

The Appellate Court next addressed whether the settlement was unreasonable as a matter of law.    The court identified two reasonableness inquiries that must be satisfied.  The first is directed to the insured’s decision to settle.  The litmus test is “whether, considering the totality of the circumstances, the insured’s decision conformed to the standard of a prudent uninsured.”   The second test related to the amount of the settlement.  The test is what a reasonably prudent person in the position of the insured would have settled for on the merits of plaintiffs’ claim.    That latter test involves a commonsense consideration of the totality of facts bearing on the liability and damage aspects of plaintiff’s claim, as well as the risks of going to trial.       The burden of reasonableness rests with the plaintiff, since the plaintiff is the one who agreed to settle and has better access to the facts bearing upon the reasonableness of the settlement.  The insurer is entitled to rebut any preliminary showing with affirmative evidence bearing on the issue.

 

In the order approving the class settlement, the trial court included findings that the insured’s decision to settle conformed to the standard of a prudent uninsured and the agreed damages amount was what a reasonably prudent person in the insured’s position would have settled for on the merits of the claims in this litigation.  The Appellate Court observed that those findings were apparently included by the insured and the class plaintiff in an effort to short circuit Central’s ability to later challenge the settlement.  The Court determined that those findings were not binding on Central unless and until a hearing is conducted at which the class plaintiff sustains his burden to demonstrate the reasonableness of both the decision to settle and the amount of the settlement and Central is afforded the opportunity to rebut that showing. 

 

While the Appellate Court acknowledged that there were strong indications that the settlement was collusive, it determined that it could not resolve the issue as a matter of law.  However, the Appellate Court provided significant guidance to the trial court in addressing the “reasonableness” determination. 

 

  What are the characteristics of a “prudent uninsured?”

 

On the issue of who constitutes a “prudent uninsured,” the court determined that since it is hypothesizing a defendant with no insurance, the issue becomes whether the hypothetical defendant would reasonably have chosen to devote a portion of its assets to litigate certain issues designed to eliminate or, at a minimum, circumscribe its liability for the claims asserted in the class action complaint.    The court also determined that it must assume that the hypothetical defendants is not on the brink of bankruptcy and instead must posit that the uninsured defendant has assets sufficient to satisfy a substantial judgment and that it must weigh whether those assets are best put to use litigating certain issues that could lower the value of the case or whether any early settlement, presumably at a discount, is more advantageous.     The trial court will need to determine whether a prudent uninsured would have foregone the opportunity to litigate various motions before agreeing to a substantial settlement.   

 

  Would a “prudent uninsured” have compromised all liability defenses?

 

In the context of the Tracy’s settlement that will involve whether a prudent uninsured in 2007 would have conceded the applicability of the most generous statute of limitations on the TCPA claim or instead, would have pursued a motion to dismiss.  The court held that resolution of this issue will depend on evidence relating to, for example, the estimated cost of pursing the motion and the likelihood of success considering the trend of authority on the issue. 

 

 Would a “prudent uninsured” have agreed it faced staggering liability?

 

Another issue the trial court will be called upon to address is whether a prudent uninsured would have agreed that it faced staggering liability.   On this point the Appellate Court found that it is relevant that the class plaintiff waited nearly four years to file this TCPA class action and, by that time, Tracy’s  was only able to produce only a list of approximately 10,000 recipients of faces it sent in 2002 and 2003.   While the insured and class plaintiff stressed the number of faxes originally sent multiplied by $500 per class member was over $60 million, the Appellate Court observed that in 2007, less than 10% of those who received the faxes would receive actual notice of the settlement and, of those, significantly fewer were likely to file a claim.  Thus, the reasonably anticipated value of potential claims was vastly lower. 

 

Of course, the court seem to acknowledge that if the case were to go to trial, there might have been a judgment in an amount produced by multiplying the number of faces transmitted by $500, but the Appellate court held that in the context of TCPA claims, that result is by no means certain.      Now, comes the interesting part!!!

 

The Appellate Court held that in enacting the TCPA, Congress’ purpose was both to compensate recipients of unsolicited faxes for the admittedly minor annoyance such a communication entails and to deter transmitters from engaging in such conduct.  “The statute was not designed to put those who advertise their products or services via fax out of business.”   The appellate court added that a trial court presiding over a class action – “a creature of equity” –possesses the discretion to fashion a damage award that: (1) fairly compensated claiming class members,  and (2) included an amount designed to deter future violations, without destroying the defendant’s business.    The court cited several out of state cases where the courts had awarded far less than the $500 per fax penalty, finding under the cases before them that it  would be “manifestly unjust” to subject a TCPA violator to an enormous judgment.     In the context of the case before it, the Appellate Court held that the trial court upon remand will have to determine whether a prudent uninsured would have agreed that $14 million to settle a $60 million case was a good bargain or whether some effort to reach a significantly lower figure would have been made.  

 

  Would a “prudent uninsured” have agreed to allow all unclaimed funds to go to charity?

 

 In addition, the trial court will have to determine whether a prudent uninsured, settling the class suit with his own funds, would have agreed to settle on terms that allowed unclaimed funds to be distributed through cy pres.     The Appellate Court noted that at the time of settlement, the parties were aware that only relatively few class members were likely to actually receive notice.  Given this knowledge, “they hypothetically prudent uninsured’s decision to settle on terms that allowed millions of dollars in anticipated residual settlement funds to be donated to charity strikes us both as extraordinarily generous and extremely helpful to the class counsel’s quest for attorneys fees.”    It left to the trial court to make that determination. 

 

  Would a “prudent uninsured” have agreed to pay $14 million to resolve the claims in the Idlas suit?

 

The Court noted that this test focuses on the particular facts and circumstances relevant to the reasonableness of Tracy’s decision to agree to a $14 million settlement. Relevant to this determination was Idlas’ delay in filing suit, the chances of success on motion practice regarding   key defense available to Tracy’s, the parties’ inability to identify more than a fraction of the recipients of Tracy’s fax advertisements and predicted claimant response rates. Additional factors include: (1)  whether the settlement was the product of arm’s length negotiations, (2) what  facts were available to the Tracy’s attorney during the relatively brief time he represented Tracy’s to reliably value the Idlas claims, (3) what analysis did he make of the viability of various motions he could pursue on Tracy’s behalf,  (4) how he assessed the likelihood that, with a single class representative asserting a claim having of a maximum value of $1500, a trial court would enter a judgment after trial in excess of $60 million and (5)  how the parties arrived that the $14 million figure.    The trial court may also consider the factual bases for Ellis’s assertion in the motion for preliminary approval that he had “analyzed the risks and expenses involved in pursuing the litigation to conclusion, the likelihood of a damage award in excess of $14 million and the likelihood, costs and possible outcomes of one or more procedural and substantive appeals.     

 

The Appellate Court found it particularly troublesome that Tracy’s counsel agreed to expand the class definition to include a period outside the four year statute of limitations that Idlas had claimed was applicable. 

 

  Evidence of bad faith, collusion or fraud will render the amount of the Idlas settlement unreasonable

 

The Appellate Court held that a settlement “becomes collusive when the purpose is to injure the interests of an absent or nonparticipating party, such as an insurer or non-settling defendant.”   Among the indicators of bad faith and collusion are “unreasonableness, misrepresentation, concealment, secretiveness, lack of serious negotiations on damages, attempts to affect the insurance coverage, profit to the insured, and attempt to harm the interest of the insurer.”    Unfairness to the insurer is the hallmark of a collusive agreement.   

 

The court identified several factors that are relevant to the determination of collusiveness: “the amount of the overall settlement in light of the value of the case; a comparison with awards or verdicts in similar cases involving similar injuries;  the facts known to the settling insured at the time of the settlement;  the presence of a covenant not to execute as part of the settlement; and the failure of the settling insured to consider viable available defenses.  

 

The Appellate Court held it will be up to the trial court to determine whether counsel for rracy’s and Idlas colluded in agreeing to a settlement in an amount equal to the value of Central’s insurance and it expressed its doubts as to the existence of even the illusion of adversity or arms’ length negotiations.  

 

***

 

There were other issues addressed by the Appellate Court, including the effect of Central’s earlier “buy out” of coverage two years before the Idlas suit was filed.  That will be the subject of a future blog.  T he Court declined to address any of the coverage arguments or limits of liability provisions raised by Central, insofar as the trial court had not yet had the opportunity to consider them.