National Insurance Law Forum

National Insurance Law Forum

Published By The Attorneys of the National Insurance Law Forum


Posted in Liability Coverage, News, Recent Cases

The Oregon Supreme Court held yesterday that an insurer may be liable for a full jury award for property damages against its insured if the insurer fails to refute the insured’s factual position that it was impossible to determine what portion of the damage occurred during the policy period, if some damage took place during the policy period.

FountainCourt Homeowners’ Association v. FountainCourt Development, LLC, et al., 360 Or 341 (2016), arose from a construction defect lawsuit concerning water damage to FountainCourt, a condominium and townhouse development in Beaverton, Oregon.  The FountainCourt homeowners’ associations sued the developers, the contractor, and some of the subcontractors responsible for FountainCourt’s construction.  Sideco, Inc. was alleged to have installed siding and windows that failed to protect against water intrusion.  A jury awarded plaintiffs over $2 million, apportioning $485,877.84 in damages to Sideco.  FountainCourt, standing in the shoes of Sideco, then instituted a garnishment proceeding against Sideco’s insurers, including American Family Mutual Insurance Company (AFM).

AFM answered that it was not required to pay the Sideco judgment because some or all of the damages did not arise from “property damage” or an “occurrence” as defined in the insurance policy, because some or all of the damage fell outside the policy period, or because exclusions applied.  The trial court, concluding FountainCourt had met its burden to prove coverage under the policy and AFM had failed to prove an exclusion applied, entered judgment for FountainCourt.  (The trial court found the other insurer had proven an exclusion applied, so it was not liable.)   The Oregon Court of Appeals affirmed.

The Oregon Supreme Court accepted AFM’s petition for review, and affirmed.  The Court agreed FountainCourt had made a prima facie case that coverage under the policy was triggered and that AFM had failed to offer evidence in rebuttal.  But the Court declined to review the prior rulings concerning exclusions, reasoning that AFM failed to preserve any alleged error for review.  See id. at 352, 361-65.  The Court rejected AFM’s assertion that the damages awarded by the jury in the underlying case were not necessarily for “property damage” as defined by the insurance policy, but also could have included the cost to repair Sideco’s “defective work.”  See id. at 361.  The Court rejected this concern, reasoning that the jury was instructed FountainCourt was required to “prove physical damage to their property,” and “was not instructed that it could award damages for ‘defective work.’”  Id.  The Court explained AFM had failed to persuade “that actual physical damage to property is not covered under an insurance policy merely because it may be associated with defective workmanship by an insured.”  Id. 

The Court decided FountainCourt had proven an “occurrence” within the meaning of the policy because there was no genuine dispute that “at least some property damage occurred when the AFM policies were in effect.”  Id. at 365.  Accordingly, when exactly portions of the damage occurred was not relevant to whether coverage under the AFM policy was triggered in the first place.  See id.  The timing of the damage was relevant, however, to allocation among multiple insurers.  Because AFM had argued on appeal that it was not liable at all, not that liability was allocated incorrectly, the Court affirmed the trial “court[’s] implicit[] conclu[sion] that AFM was responsible for the entire amount and not a prorated amount, although some of the damage necessarily had occurred when the [other insurer’s] policy was in effect, given the court’s conclusion that that policy was triggered.”  Id. at 367.  The Court did not address how the timing of the damage might relate to exclusions, as it did not reach AMF’s exclusion arguments.

In the future, insurers should be mindful of the need to provide evidence of what portion of property damage fell within and outside the policy period in situations where the insurer is liable because at least some damage happened during the policy period.

Client Questions About Settlement

Posted in Client Questions About Settlement

One of the most common mistakes that insurance adjusters, and even some attorney practitioners, make during settlement negotiations is failing to anticipate all of the essential elements of the settlement agreement. Such oversights may result in significant negative consequences for insurers and their insureds. This is particularly true in the context of negotiating casualty claims.

For example, an insurer may agree to settle a bodily injury claim during a telephone call with a claimant’s attorney. Such telephone discussions will almost certainly include agreement on the settlement amount, but it is not uncommon for parties to omit discussion of non-monetary terms, such as the scope of indemnity or hold harmless obligations. When the claimant’s attorney receives the standard release agreement from the insurer, the attorney may then argue that the settlement does not include such terms or may request revisions that significantly weaken the provisions. Such disputes are becoming increasingly common in Oregon, and often lead to costly delays in closing a claim, may require the involvement of coverage counsel to assess the impact of subsequent revisions to the form release, and may even cause a claimant to back out of the settlement and file a lawsuit, thereby requiring the appointment of defense counsel. An insurer can avoid these outcomes by being aware of the way courts view insurance settlements.

Oregon courts view insurance settlement agreements, including verbal agreements to settle, like any other contract. The essential elements are a mutual intent to settle, offer, acceptance and consideration.  Wheeler v. White Rock Bottling Co., 229 Or. 360 (1961) (the established rules of contract law apply to releases); Raymond v. Feldman, 120 Or. App. 452 (1993) rev. den. 318 Or 381 (1994) (verbal insurance settlements are enforceable). The parties must reach agreement on all material terms of the agreement or there is no contract.  See Baldwin v. Baldwin, 215 Or. App. 203 (2007). A term is “material” when it goes to the substance of the agreement and, if breached, would defeat the parties’ purpose in entering the agreement. Id. Oregon subscribes to an objective theory of contracts, which means that whether the parties entered into a contract does not depend on the parties having the same subjective understanding of the agreement. Rather, it depends on whether the parties agreed to the same express terms. Id.

Thus, settlement discussions between an insurer and claimant’s counsel should address all material terms of the settlement. At a minimum, the material terms involved when settling the typical insurance casualty claim are:

  1. Settlement Amount;
  2. Scope of Release;
  3. Scope of indemnity and hold harmless obligations;
  4. How personal injury protection (“PIP”), Medicare/Medicaid, and third-party interests (such as unpaid medical providers) are to be handled, if any.

Each of these terms should be discussed independently at the time the settlement offer is made. If the offer is made over the telephone, we recommend that insurers follow-up with claimant’s counsel immediately with a writing that addresses all material terms and how they are to apply. Taking these simple steps should significantly reduce the ability of a claimant to dispute a settlement or renegotiate settlement terms.

Attorney-Client Privilege

Posted in Attorney-Client Privilege, Recent Cases

The Washington Court of Appeals’ recent decision in Steel v. Philadelphia Indemnity Insurance Co., 2016 WL 4001431 (2016) should be of interest to those seeking (or seeking to preclude) the production of attorney-client privileged and work product documents from the underlying attorneys in the context of settlement reasonableness hearings under RCW 4.22.060 (Effect of Settlement Agreement).

In October 2012, Philadelphia Indemnity Insurance Company (“Philadelphia”) moved to intervene and conduct “focused discovery” related to the reasonableness of a $25 million covenant judgment settlement entered between its insureds and underlying plaintiffs in a child sexual abuse case. The trial court allowed Philadelphia’s intervention and ordered the plaintiff’s to produce all discovery exchanged by the parties and all attorney work product related to the settlement. What followed was a series of motions by Philadelphia trying to expand the scope of discovery and by plaintiffs trying to limit the discovery of their attorney’s work product and privileged communications. The Superior Court concluded that plaintiffs impliedly waived their attorney-client communications and work product privilege when they sought the reasonableness determination under RCW 4.22.060.

On appeal, the insureds argued that the implied waiver doctrine, which generally states that attorney-client privilege is impliedly waived when a party puts privileged communications directly at issue, for instance in the pleading an affirmative defense, was limited to legal malpractice claims. In an apparent first for Washington, the Court of Appeals expressly disagreed, ruling that the implied waiver analysis should be considered on a case by case basis and specifically holding that implied waiver of the attorney-client privilege may occur in the context of settlement reasonableness hearings.

The Court of Appeals then provided a detailed discussion of the implied waiver analysis, reiterating the holding in prior cases that the doctrine requires consideration of the following three factors before privilege is waived: “(1) [A]ssertion of the privilege was the result of some affirmative act, such as filing suit, by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.” Moreover, as an overarching consideration, privilege is waived only where allowing the privilege to prevent disclosure “would be manifestly unfair to the opposing party.” The party asserting that waiver has occurred bears the burden to prove that the three factors are met.

While the Court agreed with Philadelphia that implied waiver may occur in the covenant judgment settlement reasonableness determination context, it concluded that the factor analysis weighed against waiver of the insured’s claim of privilege in this case. Specifically, the court reasoned that Philadelphia had failed to show that the insured’s argument that the settlement was reasonable or its own defense that the settlement is unreasonable “depends on,” “relies on,” or makes plaintiffs’ attorney-client communications “integral to” resolution of the dispute or that non-disclosure of the communications would result in “manifest unfairness.”

While not recited in detail here for brevity’s sake, the court’s factor by factor analysis makes the case a valuable resource for those looking to compel, or preclude, attorney work product and privileged communications in settlement reasonableness hearings.





DRI Schedules Free Seminars For Claims Executives in Atlanta and Hartford

Posted in Uncategorized

As part of its ongoing outreach to the insurance industry, DRI Insurance Law Committee will be presenting two one day seminars in Hartford and Atlanta next month at which senior claims executives and outside coverage counsel will partner to explore emerging legal issues confronting insurers in 2016.   Registration is free for industry people; $495 for outside counsel ($395 if you register by August 21).  Six hours of CLE/CE credits are available.

Northeast Regional Claims Conference:   September 20  

  • Big Data and The Challenge of Technology
  • Attorney-Client Privilege Issues for In-House Counsel
  • Developing Trends in Advertising and Personal Injury Litigation
  • Update on the ALI Restatement of the Law of Liability Insurance
  • Cyber-Threats and Digital Coverage Issues
  • Preparing the Corporate Designee for Deposition
  • CTE and Other Sports-Related Claims
  • Ethics and Confidentiality Issues in Mediation

The following week, DRI will present an entirely different program at the Cobb Energy Performing Arts Center in Atlanta.

Southeast Regional Claims Conference:   September 28  

  • Lessons Learned From Bad Faith Trials
  • Ethical Considerations for Claims Investigations”
  • Navigating Construction Defect Claims
  • Evolution of Catastrophic Injury Modeling
  • Update on Medicare Issues
  • Eight Corners: The Duty to Defend and Beyond
  • Diminution in Value and Auto Claims


Both programs include a networking lunch and cocktail reception.

For more information about these seminars, click on or call (312)795-1101.  

CyberAttacks and Superstorm Sandy: Implications for the U.S. Power Grid

Posted in Property Insurance

Much has been written about business interruption losses following Superstorm Sandy and still more, of late, concerning the type of losses that might flow from a directed cyber-attack targeting U.S. infrastructure.  As yet, however, no one has looked at what happened after Superstorm Sandy and connected the dots to the implications it might have for future cyber-attacks.  That is until now.

Johns Hopkins has just published a monograph by Dr. Paul Stockton:  “Superstorm Sandy: Implications for Designing A Post-Cyber Attack Power Restoration System.”  The monograph discusses the remarkable speed with which electric power was restored in New Jersey and other Mid-Atlantic states post-Sandy and analyzes how the lessons learned as the result of Sandy might industry in planning against the risk of future cyber-attacks designed to bring down the power grid.

Stockton is a cyber-consultant in DC and one of the brighter guys in this growing field.  Before founding his own shop last year, he was the Assistant Secretary for Homeland Security at DoD and oversaw the Pentagon’s response to Sandy, Irene and other disasters.

American Law Institute Votes to Approve Restatement of Liability Insurance

Posted in Liability Coverage

Houston, we have an insurance Restatement.  Well, almost.

The American Law Institute voted at its annual meeting in Washington, D.C. yesterday  to approve Chapters One, Two and Three of the Restatement of the Law of Liability Insurance.  The final vote came at 5:42 p.m. after three hours of debate and nearly a dozen substantive motions by policyholder and insurer advocates.  As the meeting had already run past its scheduled ending time, the ALI did not reach a motion to restore “all sums” as the default allocation model in Section 44 that fifty leading policyholder counsel had signed.

The approved sections run the gamut of important principles of insurance law, ranging from policy interpretation, waiver and estoppel, misrepresentation, duty to defend, right to independent counsel, recoupment, duty to make reasonable settlement decisions, conditions, exclusions, coverage for punitive damages, excess/drop down and trigger of coverage.

The meeting got off to a confused start when the ALI began debate at 11:30 instead of the scheduled 2 p.m. with the result that several attendees were still en route from the airport.

Section 3:  A motion by Vanita Bank to restore the traditional “plain meaning rule” in place of the proposed “plain meaning presumption” was defeated despite comments by several judges that they foresaw the new rule causing confusion.

Section 12:  The Reporters were noncommittal about my concern that allowing insurers to be vicariously liable for the acts of defense counsel if the counsel is an insurer “employee” would inadvertently sweep within its ambit all staff counsel.  Tom Baker has agreed to review a paper that I will send him explaining the separation between staff counsel and claims operations.

Section 13(3):  Following last October’s Advisor’s meeting, the Reporters had eliminated their original language–which enumerated a few examples of situations where insurers could avoid a defense based one extrinsic facts where it was undisputed that they had not insured the claimant and the like–and adopted the California rule that a duty to defend can be avoided in all cases of undisputed facts.  Policyholders, led by John Buchanan moved to restore the old language, arguing that this gave to much discretion to non-lawyer claims handler.   The Reporters agreed to accept the motion without a vote and restored the old language.  They are adding a further exception for cases involving undisputed late notice under “claims made” forms.  At my request, they will also consider other possible exceptions where courts have permitted this (e.g. undisputed fact of insured’s criminal conviction for homeowner’s exclusions). consider other examples in October

Section 19: Despite policyholder objections, the Reporters declined to revisit the “failure to defend estops right to contest indemnity” rule that they dropped this Spring in favor of a rule of no estoppel if the insurer had a “reasonable basis” for failing to defend.  They stated, however, that might ultimately need to tweak Section 19 to reconcile it with their forthcoming analysis of bad faith issues in Chapter 4

Section 22: Bill Barker’s motion to permit recoupment defeated.

Section 24: Bob Cusumano’s motion to delete language holding insurers liable for excess judgments in any case where they fail to accept a reasonable offer of settlement was defeated after a spirited debate.  In response to the motion, Reporters had deleted language in Comment d. holding insurers liable even if the offer was at the “high end of the range of reasonableness.”  Insurer advocates argued that this did not go far enough and that the established rule was that insurer’s conduct should be evaluated based upon whether its conduct as a whole was reasonable.

Section 32:  Victor Schwartz’ motion to eliminate language in Section 32 adopting subjective intent as the default standard for expected or intended exclusions unless otherwise stated was defeated.  Victor’s motion had argued that the issue was far more nuanced than this simplistic rule would allow and that public policy disfavored creating coverage for intentional acts in most cases.

Section 33:    No motions but Reporters have confirmed that they will be revising their “trigger” discussion to set an end point of some sort to cut off a continuing trigger (e.g. loss in progress, post-manifestation, known loss).

Section 34:   As originally drafted, Section 34 would have required coverage for “aggravated fault’ (e.g. criminal acts, fines and penalties and punitive damages) unless expressly excluded.   the Tentative Draft issued last Spring revised it to state that if allowing such coverage conflicted with the public policy of a state, the insurer should still issue payment to the claimant but could sue its policyholder for reimbursement.  In the face of intense criticism and motions from Sheila Birnbaum and myself, the Reporters relented and have agreed to revise Section 34 to state that coverage is allowed “unless contrary to public policy.”  This will preserve the rule in most states that public policy forbids coverage, except in cases of vicarious liability.

Section 37:  This Section dealt with notice issues in “claims made” policies.  I had filed two motions, arguing that (1) the “notice-prejudice” rule did not apply to any notice requirement in “claims made,” not just the requirement that claims be reported during the policy period and (2) that language allowing insureds a “reasonable extra” time after the policy expired to report a claim would introduce uncertainty and engender more litigation in a market where additional time is almost always automatically available through 60 day ERPs.  The Reporters accepted these comments and have agreed to withdraw Section 37 for further consideration.

Section 38(3):  I originally filed a motion suggesting that the right to assign whole classes of claims should be limited to mergers but withdrew it upon receiving assurances from the Reporters that asset acquisitions did not create allow the acquiring entity to make claims “by operation of law” and must be accompanied by an express assignment of rights in the transaction.  This is consistent with the case law in most states.

Section 42:  The Reporters had adopted Zeig as the default rule unless excess policies expressly state that the underlying insurer had actually paid its policy limit as a condition to exhaustion.  Professor Stempel had moved to only give effect to such language if it had been specifically negotiated with the insured.  I and others pointed out that this was inconsistent with the general rule of policy interpretation in Section 3 and would create special treatment for the class of policyholders (directors and officers) probably least in need of special assistance.  The motion failed narrowly.

Section 43: No motions but Reporters urged to use wording other than “joint and several” liability to express their position.  Tort concept.

Meeting adjourned at 5:40 without taking up Section 44. Sections 37, 44 and 45 will be held over for consideration at the ALI’s next meeting along with Chapter 4 (bad faith, contribution actions


Washington Appellate Court Finds No Conflict of Interest for Law Firms that Represent Insurers and Defend Insurer’s Policyholders

Posted in News, Recent Cases

In a matter of first impression in Washington, the Washington Court of Appeals in a published decision, Arden v. Forsberg & Umlauf, et al., Washington Court of Appeals Division II, May 3, 2016, held a law firm with an insurer for a client may defend that insurer’s policyholder in an unrelated matter without creating a conflict of interest, or even disclosing that it also regularly represents the insurer in coverage matters.  The court held this as a matter of law.  The court also held a lawyer defending an insured under reservation of rights does not breach its fiduciary duties to its insured client or commit legal malpractice by (1) not persuading the insurer to accept the claimants’ first demand to the insureds; (2) not engaging in settlement discussions with the claimants until receiving the claimants’ written discovery responses, notwithstanding the insureds’ request for prompt resolution;  or (3) failing to consult with the insureds before rejecting the claimants’ first and second demands when there was no evidence the insureds were harmed by same.

Forsberg & Umlauf is a law firm in Seattle, Washington that represents insurers in coverage disputes and defends its insurance clients’ insureds in unrelated matters.  One of its insurance clients is Hartford, whom it represents in coverage matters.  In this case, a couple insured under a Hartford homeowners’ policy, the Ardens, shot and killed their neighbors’ puppy.  The neighbors sued the Ardens for willful conversion, malicious injury, intentional or reckless infliction of emotional distress, gross negligence and willful or reckless property damage.  The Ardens sought coverage under the liability portion of their homeowners’ policy with Hartford.  After initially denying a defense due to the policy’s intentional act exclusion, Hartford agreed to defend  the Ardens under a reservation of rights to deny coverage after the Ardens retained personal counsel, Jon Cushman, to assist them on coverage matters and monitor their defense.

When Hartford told Cushman it intended to use panel counsel (Forsberg) to defend the Ardens, Cushman said okay.  Forsberg sent the Ardens a letter explaining it was defending them in the suit against them and that it would not provide coverage advice to them or to Hartford.  The letter stated that, unless instructed otherwise, Forsberg would assume any settlement authority or instructions received from Hartford to settle were given with the Ardens’ consent and it would proceed accordingly.  (The Ardens and Cushman made it clear notwithstanding the reservation of rights that they expected all settlement monies to come from Hartford.)  Forsberg did not, in this letter or at any other time, tell the Ardens it represented Hartford in coverage matters.  Forsberg attorney Chris Gibson, assigned to the Ardens’ defense, met with the Ardens and explained they were his only clients and his goal was for Hartford to pay full indemnity for the suit against them despite the reservation of rights.

After Forsberg served discovery requests on the claimants but before they answered, the claimants made a timed settlement demand of $55,000 on the Ardens.  Cushman demanded Forsberg accept the demand and Hartford pay it.  Hartford declined because it needed documentation from the discovery responses regarding claimed damages and information about case value.  Forsberg explained to Cushman it wanted to wait until it had received claimants’ discovery responses, and requested and received an extension from the claimants.  Cushman did not at the time object to the extension.

After receiving the claimants’ discovery responses, Forsberg prepared a detailed litigation report and case evaluation and shared it with Cushman before sending it to Hartford.  It included a number, $35,000, Forsberg believed the case could be settled for.  It told Cushman it would allow the timed $55,000 demand to expire, then offer $18,000 with the goal of ultimately getting to $35,000.  Neither Cushman nor the Ardens objected.  The claimants then made another timed settlement demand, this time for $40,000.  Hartford told Cushman it would allow this demand to expire then counter at $25,000.  Cushman did not object to this offer at the time but later argued Hartford acted in bad faith by not accepting the $40,000 demand.  The claimants rejected the $25,000 offer, but the parties ultimately settled at mediation a few months later.  The only claims reserved were the Ardens’ claims for breach of fiduciary duty and legal negligence against Forsberg.  The trial court granted Forsberg’s summary judgment motion, dismissing all claims against it.  The Ardens appealed.

The Ardens argued Forsberg breached its fiduciary duty of loyalty to them by defending them under reservation of rights while Hartford was a firm client.  The appellate court dismissed this argument, holding as a matter of law that Forsberg’s representation of the Ardens while it also represented Hartford did not create a conflict of interest and that Forsberg had no obligation to even tell the Ardens Hartford was a firm client.

The Ardens also argued Forsberg breached its fiduciary duty of loyalty to them during settlement negotiations.  The appellate court disagreed.  The court held as a matter of law Forsberg owed no duty to the Ardens to persuade Hartford to accept the claimants’ initial $55,000 settlement demand, received while discovery responses were outstanding; that there was no evidence Forsberg breached a fiduciary duty regarding the Ardens’ interest in a swift resolution of the suit against them by seeking an extension to engage in settlement negotiations while waiting for discovery responses (especially when the Ardens and Cushman were adamant that Hartford wholly fund the settlement notwithstanding its reservation of rights);  that while a question of fact existed as to whether Forsberg breached its duty to consult the Ardens before rejecting the claimants’ first and second settlement demands, there was no evidence any breach injured the Ardens; and that even if Forsberg had a duty to consult the Ardens before making settlement offers, there was no evidence Forsberg breached that duty with respect to the first settlement offer, or that any breach regarding the second settlement offer injured the Ardens.

The appellate court upheld the trial court’s grant of summary judgment for Forsberg on both breach of fiduciary duty of loyalty and legal negligence.  The court stated a lawyer’s duties of loyalty and disclosure to its clients arise under the RPCs and Tank v. State Farm, 105 Wn.2d 381 (1986) and noted the parties’ experts disagreed about whether Forsberg’s longstanding representation of Hartford in coverage cases precluded it from defending a Hartford insured in a reservation of rights context.  Answering a question of first impression in Washington, the court held an attorney who represents an insurer in coverage cases is not automatically prohibited from representing that insurer’s insured when the insurer reserves its right to deny coverage.

The appellate court held under RPC 1.7 Hartford’s interests were not directly adverse to the Ardens with regard to Forsberg’s defense of them.  Hartford and the Ardens did have adverse interests with respect to coverage issues, but Forsberg made it clear it did not represent Hartford or the Ardens on those issues.   Moreover, the appellate court held an attorney who follows Tank protects herself against claims that a conflict of interest automatically arises under RPC 1.7 when she defends an insured under reservation of rights but also represents that insured’s insurer.  The appellate court also dismissed the Ardens’ attempt to follow California’s Cumis rule, pointing out that Tank, decided just two years after Cumis, specifically rejected Cumis by crafting its own set of rules for defense counsel.  So long as the specific Tank criteria are followed, an insurer-retained attorney does not violate her duty of loyalty to an insured.  The court held as a matter of law that Forsberg did not breach its fiduciary duty of loyalty by undertaking the reservation of rights defense of the Ardens.

The appellate court similarly dismissed the Ardens’ claim that Forsberg breached its fiduciary duty of loyalty by failing to give them notice of its long-standing relationship with Hartford and of potential conflicts of interest arising from Hartford’s reservation of rights, stating RPC 1.7 does not create an automatic conflict in this situation and Tank does not require the defense attorney disclose its relationship with the insurer defending under reservation of rights.  The fact that attorney Gibson specifically told the Ardens under Tank his obligations were solely to them and it was his practice to get the insurance company to pay everything, even in a reservation of rights situation and that the Ardens had their own personal counsel engaged in the reservation of rights process, further bolstered the court’s conclusion that there was no evidence Forsberg breached its duty to disclose a potential conflict of interest between Hartford and the Ardens.

The appellate court disagreed that Forsberg put Hartford’s interests above the Ardens’ during settlement negotiations by failing to consult with them before rejecting the claimants’ settlement demands and making counteroffers.  The court held a defense attorney has no obligation to persuade an insurer in a reservation of rights context to settle a case.  When coverage is disputed, an insurer’s decision necessarily involves an evaluation of the strength of its coverage defenses.  Imposing a duty on defense counsel to persuade an insurer to settle would require that attorney either to argue the insured’s position on coverage or advise the insurer on coverage issues, both of which would give rise to actual conflicts of interest.  Moreover, the Ardens had personal counsel who was in the best position to advocate for settlement with the insurer.  The court ruled a defense attorney’s duty is to give a fair evaluation of the liability and damages without regarding to coverage.

The appellate court acknowledged Forsberg did not expressly consult with the Ardens or Cushman before rejecting the claimants’ two settlement demands.  But Forsberg’s initial representation letter stated unless instructed otherwise it would assume any settlement authority or instructions from Hartford to settle are given with your [the Ardens’] consent; and the Ardens clearly stated they would not personally pay any part of a settlement and expected Hartford to pay it all.  Based on this competing evidence the court found a question of fact whether Forsberg breached its duty to consult with the Ardens, but pointed out an attorney can be liable for breach of fiduciary duty only if the breach caused some injury, and there was no evidence Forsberg’s breach harmed the Ardens.  (There was no evidence if Forsberg had consulted with the Ardens they would have funded the settlement themselves or negotiated a separate settlement with the claimants.)

The court ruled the same way on the Ardens’ argument that Forsberg was required to consult with them before making counteroffers.  With respect to the $18,000 counteroffer, Cushman expressly approved it.  And with respect to the $25,000 counteroffer, Cushman did not disagree with it or object to it after it was made.  Even if Forsberg breached some duty to consult with the Ardens, there was no evidence its breach harmed the Ardens.

Finally, the appellate court found no evidence Forsberg was negligent in making a judgment decision extending the time for settlement negotiations, despite the Ardens’ desire to settle promptly to minimize criminal charges arising from their shooting the claimants’ dog and to avoid exacerbating Mr. Arden’s PTSD and depression.  The court observed the Ardens’ predominant interest was for Hartford to fully fund any settlement.  Because at the time the first settlement demand came in Forsberg had not yet received the claimants’ responses to its written discovery so Hartford did not have the necessary information to evaluate the case, Forsberg was not negligent in delaying the beginning of settlement negotiations.

Upcoming ALI CLE

Posted in News

Please join me for an upcoming American Law Institute CLE (ALI CLE) program–Additional Insured Coverage: Avoid Liability and Indemnification Pitfalls. The program is broadcasting live on April 20, 2016 from 1:00 — 2:30 p.m. ET, as a webcast and telephone seminar. ALI CLE is extending a 50% discount to referrals registering for this course. Please contact me if you’re interested in attending; I’ll provide you with the coupon code to access the discount. I hope you enjoy the program!

Potential Uncertainty Regarding Liability Coverage for Bodily Injury and Property Damage Caused by Cyber Attacks

Posted in Liability Coverage, News

While liability insurance for cyber risks was initially created to address the risk of privacy breaches, evolving cyber threats pose risks of bodily injury and property damage that may test the scope of coverage under existing cyber liability insurance.

The traditional risk addressed by cyber liability insurance includes, for example, unauthorized access to a business’s electronically stored customer financial information.  A business that suffers a privacy breach may be exposed to liability for identify theft or fraud suffered by its customers.  New cyber threats seek to exploit the evolving ways that physical systems are becoming connected via the internet.  Examples you may have heard of include: the Internet of Things, Industrial Internet, Smart Cities, Smart Grid, or “Smart” Anything (e.g., cars, buildings, homes, manufacturing, hospitals, appliances).  See the National Institute of Standards and Technology homepage at

Each new avenue of interconnectivity simultaneously provides a new potential means of unauthorized access.  To illustrate, cyber threats may target:

Furthermore, the new types of unauthorized access no longer implicates only privacy breaches.  Cyber threats to interconnected “things” pose risks that include property damage and bodily injury.  It is not hard to imagine a malfunctioning car that may cause harm to person or property.

Furthermore, cyber attacks now also include threats to critical infrastructure facilities that pose even broader risks of harm.  For example, there have been documented cyber attacks that disabled oil pipeline leak-detection systems, gained control of the gas flow in pipelines, disabled water filtration systems in public water supplies, remotely derailed trains, pumped raw sewage into waterways as well as onto public and private property, manipulated facilities systems in hospitals, disabled electric grids and cut off electricity to an entire city, disabled nuclear power plant safety monitoring systems, and disabled critical airplane warning systems.  See Lucy L. Thomson, Cyber Physical Risks, ABA Litigation Section Insurance Coverage Litigation Committee, 7-12 (2016).

These new cyber threats pose apparently untested issues regarding coverage for bodily injury and property damage caused by cyber attacks.  Historically, typical CGL coverage and supplementary cyber coverage were intended to dovetail and to avoid providing overlapping coverage.  Thus, CGL coverage forms would cover bodily injury and property damage (but not injury to or loss of use of electronic data), while cyber coverage would typically exclude coverage for bodily injury and property damage.  See, e.g., Electronic Data Liability Coverage Form (CG 00 65).

In 2004, the ISO continued this trend by introducing Exclusion P for the CGL coverage form.  The new provision excluded “[d]amages arising out of the loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data . . . used on . . . data processing devices or any other media which are used with electronically controlled equipment.”   The term “electronic data” was defined to include “information, facts, or programs.”   In certain circumstances, it might be argued that a cyber attack may disable, modify, or prevent operation of a computer program of computer code, and therefore may constitute “damage to . . . electronic data,” in which case, any resulting “property damage” or “bodily injury” might be excluded.  Of note, application of Exclusion P could depend on the mechanics of how the cyber attack is conducted (e.g., introducing new code as opposed to disabling existing code).

It appears that the issue of coverage for property damage or bodily harm resulting from a cyber attack has not been tested in reported court decisions, and it is unclear how the issue would be resolved.  Nonetheless, there remains a possibility that current cyber liability coverage might not cover bodily harm or property damage caused by cyber attacks.  For arguments from the policyholder’s perspective, see John Buchanan and Dustin Cho’s When Things Get Hacked: Coverage for Cyber-Physical Risks.  ABA Litigation Section Insurance Coverage Litigation Committee (2016).   The trend toward increasing internet connectivity of physical systems and the risks of resulting harm they pose will only make more relevant the issue of coverage for bodily injury and property damage caused by cyber attacks.

When Does The Statute of Limitations For An Insurer’s Failure to Settle Run?

Posted in Bad Faith/Extra Contractual

Although bad faith lawsuits against liability insurers for failing to settle within policy limits are all too common, there is significantly less case law addressing the issue of when such a cause of action accrues and, in particular, whether bad faith suits filed years after the fact may therefore be time-barred by applicable state statutes of limitation.       Such was the case in Connelly v. State Farm Mutual Automobile Ins. Co., No. 426, 2015 (Del. March 4, 2016),  a recent opinion issued by the Delaware Supreme Court.

Christina Connelly was rear-ended on October 12, 2007 by State Farm’s insured, Ronald Brown. At the time, Brown was insured under a State Farm policy with limits of $100,000/$300,000.  After the case went into suit, Brown offered to settle for $35,000.00 but State Farm insisted on taking the case to trial.  At trial, however, the jury entered an award of $224,271.00 along with interest and costs of nearly $110,000.00.  State Farm only paid its $100,000.00 policy limit plus interest for a total of $151,601.00 leaving half of the verdict unsatisfied.

After Connelly’s suit against State Farm as a judgment creditor and for bad faith was dismissed it was challenged by State Farm for lack of standing, Connelly obtained an assignment of Brown’s rights and proceeded forward.  In 2015, however, the Superior Court granted State Farm’s motion to dismiss, declaring that her action was untimely as the 3‑year statute of limitations under 10 Del. C. § 8106 had begun to run either on May 10, 2011 when Connelly made her settlement offer or on June 9, 2011 when State Farm had failed to accept it.  The Superior Court concluded that the statute of limitations had begun to run at the time of breach as that was when the insured was made aware of the possibility that her claims would be denied putting her on notice as to possible causes of action.

On appeal, however, the Delaware Supreme Court ruled that the statute of limitations against the liability insurer for failing to settle within policy limits accrues when the underlying judgment becomes final and non‑appealable and therefore reversed a lower court’s declaration that the plaintiff’s claim was time barred on the grounds that Delaware’s three year statute of limitations had begun to run as of the date of State Farm’s alleged breach of its duty to settle by rejecting an offer within limits.