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

There is a wealth of case law concerning the extent to which insurers may be entitled to contest the merits of consent judgment settlements in which their policyholders assign their contractual (and extra-contractual) rights against the insurer in return for a covenant not to execute. As many insurers have discovered to their misfortune, moreover, much of this case law is adverse to insurers and often limits their defenses to issues of coverage and claims of fraud and collusion. As a result, insurers very often seek to intervene in the tort case to challenge the amount of the agreed damages and create a detailed factual record to support subsequent claims of fraud and collusion. But may a liability insurer intervene to challenge the verdict itself by picking up its insureds’ abandoned post-trial motions or, if necessary, pursuing an appeal to set aside the excess verdict? 

That issue is due to be considered this October by the Supreme Judicial Court of Massachusetts in the matter of Bejarano v. Goldberg. In 2003, Jose Bejarno two obstetric residents,

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The risk of future liability exposures due to MSP issues have caused insurers and defense counsel to resort to various different stratagems in an effort to ensure that Medicare liens will be satisfied without subsequent risk to the settling parties. Among these stratagems is a demand that the plaintiff’s attorney agree to indemnify the defendant and its settling insurers for any ensuing liens due to the plaintiff’s failure to pay them out of the settlement proceeds. The willingness of plaintiff’s counsel to agree to such proposals or the ability of defense counsel to advance them has been significantly compromised by a series of recent state bar ethics opinions, however.

In the most recent such opinion, the Virginia State Bar has approvedLegal Ethics Opinion 1858 which concludes that a plaintiff’s lawyer may not ethically agree to indemnify a defendant’s insurer for future claims resulting from the plaintiff’s failure to satisfy liens which he is obligated to pay from the settlement proceeds because such an undertaking would, in effect, obligate the lawyer to pay the client’s debts in violation of Rule 1.8(e) of the Rules of Professional Responsibility and would create a conflict of interest between the plaintiff and his lawyer pursuant to Rule 1.7(a) as the lawyer’s personal interest in avoiding liability for the debts of his client may be at odds with his client’s desire to settle the case. The Ethics Committee further found that it was a violation of Rule 8.4(a) for defense counsel to include such a provision in settlement agreements owing to the fact that it created an inducement to the plaintiff’s lawyer to violate Rules 1.7(a) and 1.8(e).

The Virginia opinion is in accord with several other recent state or local bar ethics opinions, including Formal Opinion 2010-3 of the New York City Bar Association and Opinion 2010-154 of the Board of Professional Responsibility of the Supreme Court of Tennessee. Similar opinions that seem less specific to Medicare lien issues have also been adopted by Ethics Boards in Arizona, California, Florida, Illinois, Indiana, Kansas, Missouri, North Carolina, South Carolina, Vermont and Wisconsin.

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In Schorno v. State Farm Fire and Casualty Company, 2011 U.S. App. LEXIS 16211 (9th Cir August 3, 2011), the Ninth Circuit Court of Appeals in an unpublished opinion affirmed a ruling of the U.S. District Court for the Western District of Washington granting State Farm Fire & Casualty Co.’s motion for summary judgment that it had no duty to defend its insured, Schorno, against claims of sexual abuse.

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Where do bad opinions come from? We were taught in law school that “hard cases make bad law.” I’m not sure that’s true, but I have discovered in the past 30 years that a lot of really dumb appellate opinions result from cases where the insurer won at trial. Somehow less consideration is given to the unfortunate precedential value of an adverse ruling when an insurer is defending an appeal than contemplating taking one. In such circumstances, cases develops a momentum of their own that is resistant to rational disposition.

The latest unfortunate opinion in this category comes from Massachusetts where a small dispute concerning a neighbor’s air conditioner has generated a most unfortunate precedent adopting an expansive determination of what constitutes “loss of use” for purposes of finding general liability coverage for “property damage.” 

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Rhode Island has the distinction of being not only the smallest state in the union but also one of the few that still adhere to the principle of “manifestation” in resolving long-tail insurance coverage disputes. Both “manifestation” and “all sums” are similar in that the insured’s rights are initially limited to a single year of coverage. They differ dramatically, in that the “all sums” approach recognizes that bodily injury or property damage may have occurred over a period of years and allows the targeted insurer to seek contribution from insurers in other years where injury occurred (although generally not from the insured for uninsured or self-insured periods.) By contrast, the “manifestation” approach assumes that bodily injury or property damage has only occurred in the particular year where it was discovered or, as Rhode Island courts have ruled, when it was discoverable through the exercise of reasonable diligence. See CPC Int., Inc. v. Northbrook Excess & Surplus Ins. Co., 668 A.2d 647 (R.I. 1995) and Textron-Gastonia, Inc. v. Aetna Cas. & Sur. Co., 723 A.2d 1138 (R.I. 1999).

In light of this analysis, may a triggered insurer in Rhode Island ever seek contribution from other carriers? Such was the issue presented to the Rhode Island Supreme Court in its recent opinion in Employers Mut. Cas. of Wausau v. Arbella Protection Ins. Co., No. 2009-330 (R.I. July 12, 2011). At issue was the claim of a neighboring property owner that Viking Stone had allowed contaminated water from its rock quarry to spill onto his land over a period of years, killing trees and other vegetation and damaging the home’s foundation.

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Are attorney’s fees awarded in a class action settlement “damages” covered by a general liability policy?   Are they covered as “costs” under the “Supplementary Payments” Provision of a CGL policy?  Not according to the Eleventh Circuit in Alea London Limited v. American Home Services, Inc., 638 F.3d 768 (11th Cir. 2011). In that case, the Court of Appeals held that attorney fees awardable in a TCPA class action suit are not “damages” because of “personal and advertising injury” nor do they constitute costs payable under the Supplementary Payments provision of a CGL policy. Indeed, at the outset, the Court recognized that the ordinary and legal meaning of "costs" under Georgia law does not include attorneys' fees.   

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In March of this year, we noted that whether an insurer can seek reimbursement of defense costs paid, where it is later determined there was no duty to defend, is an open issue in Washington. While the issue has still not been addressed by the Washington Supreme Court, in National Surety Corp. v. Immunex, 2011 Wash.App. Lexis 1695 (2011), Division I of the Court of Appeals held that where an insurer defends under a reservation of rights, and even reserves the right to seek reimbursement of defense costs in the event a court decides there is no duty to defend, the insurer is still responsible for defense costs incurred up to the time the court rules there is no duty to defend. There is no right to reimbursement absent a provision in the insurance policy that allows such reimbursement.

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