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.
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
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.
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.
I’m pleased to report that fellow bloggers, Mike Aylward and Shaun Baldwin, were contributing authors of Critical Issues in CGL, 3d Edition, published by National Underwriter. This edition has been fully revised and updated, and provides keen insights and practical guidance on a number of complex topics, including: additional insured and contractual liability, business risk exclusions, occurrences issues and cyber liability. National Underwriter is offering a 15% discount to our readers. You can take advantage of their offer by using this coupon code: Baldwin15.
Kudos, Shaun and Mike!
In National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., a New York appellate court holds that documents prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim—documents pre-dating an insurer’s rejection of the claim—are not protected from disclosure by the attorney client privilege, the work product doctrine, or as materials prepared in anticipation of litigation. The appellate court’s opinion appears to include among those non-privileged documents, documents prepared by counsel retained by an insurer to provide an opinion as to whether an insurance company should accept or deny the claim, i.e., coverage opinions. Does the decision represent an erosion of the attorney-client privilege in New York?
A recent Washington Court of Appeals Division I decision addresses a host of insurer related issues concerning extra-contractual liability.
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
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? Continue Reading
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).