National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

The California appellate court (Los Angeles County) held the trial court was correct in granting summary judgment in State Farm’s favor in a class action that sought to question decisions made as to the amount of dividends paid to policyholders. Hill v. State Farm Mut. Auto. Ins. Co. (2008) __ Cal.App.4^th __ (08 C.D.O.S. 12449). The policyholders claimed State Farm breached a duty to pay billions of dollars as dividends, which created an excessive surplus.

This decision in the case comes after ten years of litigation. Initially the case was dismissed on demurrer, but the appellate court reversed that decision, ruling plaintiffs had plead enough to proceed with their lawsuit for breach of contract, breach of the covenant of good faith, and unfair business practices. Thereafter a nationwide class of 50 million present and former policyholders was certified. The court, after reversal by the appellate court, determined Illinois law applied since State Farm’s corporate business was handled in Illinois.

In 2005, State Farm filed a motion for summary judgment/adjudication. The trial court granted the motion on the basis that policyholders could not question the decisions of the board of directors of State Farm. California’s appellate court affirmed, ruling that while policyholders of this mutual insurance company do not have a right to a dividend, State Farm “was obligated to consider from time to time whether dividends should be declared.” (Emphasis by court.)  In its considerations, State Farm “was bound by a duty of care, requiring the Board to make decisions in a prudent manner.” The policyholders argued that State Farm failed to act prudently, failed to deliberate, and merely rubberstamped management’s decisions.

State Farm relied in part on the business judgment rule, which (under Illinois law) presumes that directors of a corporation make business decisions on “an informed basis, in good faith, and with the honest belief that the course taken was in the best interests of the corporation.” This is a rebuttable presumption. Exceptions to the rule exist where, in the process, there is evidence of fraud, oppression, dishonesty, total lack of merit, illegality, or failure of the board to become sufficiently informed to make an independent decision. The business judgment rule does not focus on the merits of the board’s decision.

The court found State Farm’s decisions were protected by the business judgment rule and no exception applied. The evidence presented showed the board was involved, considered various factors, and made its own decisions on whether dividends would be paid.

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Craig Stanovich of Austin & Stanovich Risk Managers LLC has posted a concise summary of revisions to the December 2007 edition of the Insurance Services Office, Inc. CGL policy form and endorsements that is worth a read.  While noting that recent revisions to the form and endorsements are not sweeping, Craig highlights clarifications to the Supplementary Payments provision and incorporation of exclusion q. , which was previously an exclusion endorsement for violation of communication laws such as the TCPA and the CAN-SPAM Act of 2003.  Craig also explains changes to several endorsements, including the Employment-Related Practices Exclusion Endorsement, and expanded coverage offerings for snow plow removal operations and the availability of a more restrictive Abuse and Molestation Exclusion for Specified Professional Services.  Craig's article, CGL Insurance 2007 Edition—A Summary of Changes , can be found as expert commentary on IRMI.com.

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In Aecon Bldgs., Inc. v. Zurich, et al., 2008 U.S. Dist. LEXIS 59515 (W. D. Wash.) (August 4, 2008), the Western District of Washington held two insurers liable for bad faith as a matter of law for inadequately investigating a construction defect claim before denying the claim, which was not covered. The two insurers insured two subcontractors who worked for the general contractor and named as an additional insured the general contractor, Aecon Buildings, who built a casino and hotel project for the Quinalt Indian Nation in Washington. After the project was completed the Quinalt nation sued Aecon for construction defects Aecon tendered the claim to the two insurers as an additional insured under the subcontractors’ policies. The insurers both denied Aecon’s tender on the grounds that their policies ended before the project was completed. Aecon sued for coverage and bad faith.

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As Washington counsel, we agree with Michael Aylward that this is an interesting case that warrants review by the coverage world, particularly those doing business in Washington, and add our review to his:

In Mutual of Enumclaw V. USF Ins. Co., Supreme Court of Washington (Sept. 4, 2008), the insured, Dally Homes, Inc. was sued for construction defects in a condominium development. Dally tendered to two of its insurers, Mutual of Enumclaw Ins. Co. (MOE) and Commercial Underwriters Ins. Co. (CUIC), but not to a third insurer, USF Ins. Co. (USF). By agreement with Dally, MOE and CUIC funded the underlying action settlement and received from Dally an assignment of rights against other insurers. MOE and CUIC then brought a claim against USF on the basis of equitable contribution and subrogation.
 

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Washington just got a little stranger.  (No, not Washington, D.C.--the other one).  In a lengthy and fascinating opinion that the Washington Supreme Court released on September 4, a unanimous court (unusual in any of itself) has ruled that defending insurers can pursue a claim for subrogation but not equitable contribution against a carrier who was not identified until after the underlying construction defective claims were resolved.  As regards the claim for equitable contribution, the court ruled that the "selective tender" rule (insured chooses to tender to certain carriers but not others) trumped the "late tender" rule (delay in tender doesn't defeat coverage unless it causes prejudice). 

Does the Enumclaw opinion mean that Illnois is now no longer the only state that allows "targeted tenders"?   Frankly, it's not clear since it's not apparent that the insured in this case made a deliberate decision not to notify USF Insurance (or maybe they just confused USF with U.S. Fire!).  Even so, the broad language in the opinion made lead future litigants to press "targeted tender" claims in Washington State.

The real question is what difference it makes, since the court ruled that the settling insurers, who had obtained an assignment of the insured's rights, could still pursue a claim for subrogation.  Indeed, subrogation might be a preferred remedy since some courts have blocked claims for equitable contribution if the insurer asserting the claim was itself previously derelict in some respect such that it doesn't deserve to get equity.

The most interesting aspect of the claim is the court's treatment of the prejudice issue.  In most states, prejudice will be presumed as a matter of law if the insured's isn't notified of a claim until it has already settled.   In this case, however, the Supreme Court adopted a "flexible" or "nuanced" approach that will require USF to show exactly how its inability to participate in the insured's defense affected the outcome of the case or why its inability to conduct a timely investigation of the underlying claims impaired that investigation.  

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