National Insurance Law Forum

The Increasing Trend to "Set Up" Carriers (and the Inability (or Unwillingness) of Courts to Do Much About It)

martin@mdjwlaw.com (Chris Martin) — Thu, 20 Nov 2008 11:09:31 -0500

Efforts by policyholder lawyers to "set up" a carrier to make a decision which will enable the lawyer to prosecute a bad faith claim are nothing new. The trend, however, seems to be increasing across the country as some policyholder lawyers resort to such tactics with more frequency than in prior years. Frustration among the insurance industry has also been growing as courts across the country fail to recognize a "set up" for what it is and, instead, find the facts giving rise to the set up simply create a "fact issue" that must be resolved by a jury at trial instead of by summary judgment. A federal court judge in Texas recently decided a bad faith summary judgment issue against a carrier who was "set up" illustrating how easily the "set up" can occur and the limits on a trial court to do much about it once the bad faith suit is filed.

Several days ago, a federal judge in Dallas held an auto carrier was entitled to summary judgment on a spouse’s extra-contractual claims related to UIM benefits, but denied summary judgment as to the insured driver’s extra-contractual claims related to UIM benefits. In Haralson v. State Farm Mutual Auto. Ins. Co., 2008 WL 4821326 (N.D. Tex. November 5, 2008), an insured driver sustained serious bodily injuries in an accident. His spouse and daughter were following behind in another car and witnessed the accident. After accepting the liable driver’s policy limits, the injured driver and his spouse (through counsel) filed separate claims for UIM benefits under their personal auto policy.

Subsequently, State Farm tendered its UIM policy limits (per person not per accident) payable to both the injured driver and his spouse. The next day, the insureds, through their attorney, rejected the check because it purported to settle both claims. Unable to resolve this dispute through negotiation, the insureds filed separate lawsuits which were later removed to federal court and consolidated. Later, the carrier tendered another check for policy limits payable only to the injured driver. This second check was also rejected.

The underlying UIM claim proceeded to trial on the issues of liability and damages. At the conclusion of the trial, State Farm moved for summary judgment on the insureds’ claims for breach of contract and violations of the Texas Insurance Code. The insureds argued State Farm breached the insurance contract and violated state law by failing to pay each of them $50,000 UIM policy limits in a timely manner. In response, State Farm argued the injured driver’s spouse is not entitled to recover on her contract and extra-contractual claims because she was paid in full within 60 days after the court established the amount of her bodily injury damages. Under Texas law, a “UIM insurer is under no contractual duty to pay benefits until the insured obtains a judgment establishing the liability of the underinsured status of the other motorist.” The trial court agreed and held the carrier was entitled to summary judgment on the spouse’s claims as she had been compensated. The court reached a different conclusion with respect to the claims for the injured driver.

Unlike the spouse’s claims for damages, the court noted the carrier never disputed the injured driver was legally entitled to recover his damages. The court then noted the carrier waited 10 months after the accident to issue a settlement draft to the injured driver and his attorney. Prior to that time, the spouse had been included on the settlement check. Denying summary judgment against the injured driver, the court concluded if the injured driver could convince a jury the carrier improperly conditioned payment of his UIM claim on the release of the spouse’s claim for bodily injury damages, the carrier may be liable for breach of contract and delay damages under the Texas Insurance Code.

This case provides a good lesson and predictor on a growing trend of artificially created opportunities to “set up” a carrier for bad faith claims even though the carrier attempts to pay a claim in a fair and timely fashion. In this case payment was issued within 30 days of the accident to both the injured driver and spouse. According to the court, if the carrier had issued payment only to the driver, then it could have avoided a potential EC claim for its delay in payment and alleged breach of contract. It appears the insured’s counsel manipulated the circumstances to set up the carrier in this instance. Once the bad faith suit was filed, the carrier found itself in the unfortunate position of having to defend itself for trying to pay the claim quickly, but still not in manner that gave the trial court the ability to completely exonerate it from all extra-contractual claims.

Hurricane Ike Insurance Litigation: Will It Be As Bad As Katrina?

martin@mdjwlaw.com (Chris Martin) — Mon, 17 Nov 2008 17:28:49 -0500

It didn’t take long for the first bad faith suits arising from Hurricane Ike to be filed in Texas. Last week, the first two Ike bad faith lawsuits that I am aware of were filed in Galveston and Ft. Bend Counties. In Fort Bend County, a breach of contract suit was filed last week titled Gatesco Inc. v. Steadfast Insurance Company in which plaintiffs claim the insurer failed to pay policy benefits after its property sustained damages during Ike. On November 7th, an Ike bad faith lawsuit was filed in Galveston County titled Williamson v. Brown & Brown Insurance Services of Texas and Chubb Lloyds Insurance Company of Texas for alleged failures to pay Ike-related damages. These are first of several thousand Ike lawsuits expected to be filed across Southeast Texas over the next several years. There doesn’t appear to be anything uniquely significant about them other than their apparently quick filing so soon after the storm. The big question being asked by carriers across the country is whether Hurricane Ike will generate the type and volume of litigation generated by Hurricane Katrina.

In the three years since Hurricane Katrina, it has been estimated that between 27,000 and 30,000 hurricane insurance suits were filed in southern Louisiana alone. Of the 12,565 suits filed in federal court, only slightly more than half -- 7,837 -- cases, have gone to judgment or settled. Some federal court judges have attempted to streamline the flow of cases by issuing form orders applicable only to Katrina-related cases. These efforts have not moved cases as quickly as was hoped and one federal judge recently predicted in an interview that it will be “a couple more years” to settle or try all the Katrina insurance litigation. Some of these cases have provided an opportunity to obtain clarification of the law on critical issues such as whether the flood exclusion in most Louisiana homeowner policies is ambiguous, whether Louisiana’s Valued Policy Law statute compels an insurer to pay policy limits even when some or most of the damage is attributable to a non-covered peril, and the extent to which recovery under a homeowners policy can be offset by prior flood policy payments. Much of what remains in New Orleans Katrina homeowner lawsuits are the many diverse individual claims that were initially brought as part of the several mass joinder lawsuits and are which now being evaluated for individual treatment.

With Hurricane Ike hitting Houston and the surrounding areas hard, many carriers are wondering whether Ike will be “Katrina II” in terms of the legal circus seen in Mississippi and Louisiana over the last three years. For several reasons, I don’t think so.

First, in Katrina the residents and business owners of New Orleans and the surrounding parishes saw much more extensive flood damage than Houston and its surrounding counties. Certainly Galveston, Orange and Jefferson Counties experienced significant flooding in Ike, but it didn’t involve anywhere near the numbers seen in Katrina. Second, the insurance laws have developed differently in Texas than in Louisiana or Mississippi. Texas, unlike Louisiana, has much better developed case law on flood coverage, wind damage, concurrent causation, and burden of proof issues. Texas has an extensive body of established case law on bad faith in contrast to Louisiana and Mississippi. Texas has two year and four year limitations periods in contrast to Louisiana’s one-year prescription period (that was extended by the Louisiana Legislature for Katrina claims). This will not only allow for the more “orderly” progression of the filing new suits, it will also lead to less suits being filed prematurely (which we saw in Louisiana with Katrina suits in the days before the running of the prescription period.) The required Texas Windstorm Coverage in coastal counties will result in more concentrated efforts to separate wind from flood damage than was seen in Katrina. Texas won’t have the “VPL” coverage fight the industry underwent in Katrina. Texas has more stringent class action requirements so less class action lawsuits are likely in Texas than we saw in Katrina. Texas has also utilized the Multi-District Litigation Panel concept much more than in Louisiana or Mississippi, including recently in Hurricane Rita litigation which might result in more easily managed individual litigation (at least at the pre-trial stage).

The differences in Ike litigation, however, may not all be considered good by carriers. The scope of litigation will be more geographically widespread. Most of the Katrina suits were centered in the state and federal courts New Orleans and Gulfport, MS. The Ike litigation will be extensive in the 14 Texas counties declared federal disaster areas as well as in as many as a dozen other Texas counties which were not declared disaster areas but which still experienced wind damage. Far more commercial property suits (including business interruption issues) seem likely given the larger number of commercial entities impacted by Ike in metro Houston. Suits in traditionally pro-policyholders venues such as Galveston, Beaumont, and Orange could make individual Ike lawsuits more expensive to resolve than their New Orleans and Gulfport counterparts. The wide diversity in policy forms among homeowner policies in Texas will likely lead to both more issues and more lawsuits as policyholder lawyers attempt to exploit such policy differences. So, while there will be many similarities in the litigation, it is more likely that there will be significant differences between the types, amounts, geographic diversity and costs of Ike lawsuits in comparison to the Katrina lawsuits.

Can't Have It Both Ways: ELI Coverage and Workers' Comp Exclusion

sthorpe@gordonrees.com (Sara Thorpe) — Sun, 16 Nov 2008 22:18:27 -0500

While not a new development, this case is a reminder that logic and common sense prevail in evaluating coverage, even in the face of tragedy. The California Court of Appeal for the Fourth Appellate District affirmed an order granting summary judgment in favor of an insurer in an action for breach of the duties to defend and indemnify under a policy’s Employer Liability Insurance (ELI) coverage, holding the underlying claim was within the scope of the workers’ compensation exclusion because it was covered by the workers’ compensation law and the insured did not assert any exceptions applied to the statute. Power Fabricating Inc. v. State Comp. Ins. Fund (2008) __ Cal.App.4^th __ [08 CDOS 13719].

This claim arose out of a fatal electrocution in the course of employment. State Compensation Fund issued insurance to Power Fabricating Inc., which afforded coverage for workers’ compensation and ELI coverage. State Fund paid workers’ compensation benefits to the deceased employee’s widow. However, the widow also sued Power and a related entity, Power Temporary Systems, Inc. (“PTSI”). Power tendered the suit to State Fund which denied coverage. Power then sued State Fund for breach of contract. The trial court granted summary judgment for State Fund.

On appeal, Power argued summary judgment was inappropriate because there was a disputed issue of fact as to whether Power, PTSI, or a joint venture of the two entities, was the deceased’s employer at the time of the accident. Power contended ELI coverage would apply if the deceased was an employee of the joint venture and was injured by Power’s negligent acts or Power’s employee but injured by acts of the joint venture for which Power was derivatively liable. The court disagreed, holding that ELI coverage only applied to injury arising out of or in the course of employment by the insured. To the extent the joint venture, as an entity distinct from either Power or PTSI, employed the deceased, the ELI coverage would not apply in the first instance. The court held Power could not invoke coverage under the ELI provisions, which required employment by an insured, but then attempt to avoid application of the worker’s compensation exclusion on the theory a non-insured entity was actually the employer.

The court also rejected Power’s second argument, holding the workers’ compensation exclusion would apply to Power’s derivative liability for the joint venture. The complaint alleged only Power, not PTSI, was negligent, eliminating any risk of derivative liability. Even if that risk existed, Power’s derivative liability did not fall within any exception to the workers’ compensation law.

Insurer Burned By Insured's Waiver of Right To Payment Credit

sthorpe@gordonrees.com (Sara Thorpe) — Sun, 16 Nov 2008 22:13:02 -0500

The Ninth Circuit, applying California law, issued a decision which charts new territory on the handling of workers’ compensation claims, and announces an approach contrary to enforceability of voluntary payment provisions in insurance policies. In Travelers Prop. Cas. v. Conoco Phillips Co., __ F.3d __ (9^th Cir. 2008) [08 CDOS 13285], the Ninth Circuit affirmed a judgment of the district court for ConocoPhillips Co., holding its predecessor-in-interest, Tosco Corporation, did not breach a workers’ compensation policy issued by Travelers Property Casualty Co. when Tosco waived the right to a statutory credit against future workers’ compensation benefits without Travelers’ consent in settling civil claims arising out of a refinery fire. The Ninth Circuit found the policy language at issue was clear and unambiguous and Tosco’s waiver did not force Travelers to make excess payments in violation of the policy’s excess payments clause or constitute a breach of the policy’s voluntary payments clause.

The dispute arose after several workers were killed or injured during a fire at a Tosco refinery. One injured worker and the estate of a deceased worker filed civil actions against Tosco in addition to claims for workers’ compensation benefits and for augmented penalties before the California Workers’ Compensation Appeals Board (“WCAB”). Tosco opted to settle the civil actions and agreed, without Travelers’ consent, to waive the statutory right to a credit against future workers’ compensation benefits provided by California Labor Code section 3600(b).

The WCAB awarded death and workers’ compensation benefits to the claimants covered by Travelers’ policy. Travelers petitioned the WCAB pursuant to Section 3600(b) for a credit in the amount of the settlement against any future benefits Travelers would have to pay. The WCAB denied the petition because Tosco had waived Travelers’ right to the credit under Section 3600(b). Travelers filed a lawsuit alleging Tosco breached the policy by waiving Travelers’ right to the statutory credit without its consent. The district court ruled for Tosco and against Travelers on cross-motions for summary judgment.

Travelers, which had paid $1.4 million in benefits and anticipated paying $2.1 million more in future benefits, argued Tosco breached the policy’s excess payments and voluntary payments clauses. The excess payments clause provided Tosco was “responsible for any payments in excess of the benefits regularly provided by the workers compensation law….” Travelers argued Tosco’s waiver of the credit provided by Section 3600(b) and failure to reimburse Travelers for the amount of the credit was a breach of the excess payments clause because benefits “regularly provided” by the workers compensation law would be offset by the right to a credit under Section 3600(b). Tosco’s waiver forced Travelers to make “excess” payments since the workers’ compensation benefits Travelers was paying and would continue to pay would have been reduced by the amount of the settlement but for Tosco’s waiver.

The Ninth Circuit disagreed, holding Travelers was not making “excess” payments since the payments were “regularly provided” workers’ compensation benefits. The court reasoned that while the amount of the benefits might have been reduced due by the settlement had the credit not been waived, the waiver did not increase the workers’ compensation benefits beyond those “regularly provided” by law. Noting that the WCAB held an employer has the authority to waive a compensation carrier’s right to a credit under Section 3600(b), such credits are not always included when calculating “regular” benefits.

Travelers also argued Tosco’s waiver breached the policy’s “voluntary payments” clause which provided the insured could not “voluntarily make payments, assume obligations or incur expenses, except at [Tosco’s] own cost.” Travelers argued Tosco’s waiver was a voluntary act that assumed an obligation to pay workers’ compensation benefits despite the statutory right to a credit for the settlement. The court disagreed and held the voluntary payments provision did not apply to a “non-monetary requirement simply to refrain from doing something.” Thus, the court found the policy did not require Tosco to refrain from waiving Travelers’ right to a credit under Section 3600(b) and, thus, Tosco’s waiver did not breach the policy.

Washington Supreme Court Reverses Court of Appeals' Ruling that an Insurer Should be Allowed to "Litigate to Finality" Defenses

dpolscer@gordon-polscer.com (Diane Polscer) — Fri, 14 Nov 2008 21:02:36 -0500

In Mutual of Enumclaw Ins. Co. v. T&G Construction, Inc., 2008 Wash. LEXIS 1041 (Oct. 23, 2008), the Supreme Court of Washington was “asked to balance the interests of an insured defendant in reaching a reasonable settlement with a claimant against the insurer’s interest in fully litigating its insured’s legal obligation to that claimant.” Although Mutual of Enumclaw (“MOE”) had “vigorously defended its insured,” a siding contractor, in the underlying construction defect case, “MOE declined to participate in the final round of settlement talks.” 2008 Wash. LEXIS 1041, 1. After those settlement talks resulted in a $3,300,000 settlement, MOE objected to the settlement in a reasonableness hearing, arguing that the insured should have prevailed on the basis of a statute of limitations defense and, therefore, the settlement number was considerably too high. Id. at 5. The judge at the reasonableness hearing reduced the settlement to $3,000,000 but otherwise upheld the settlement as reasonable. Id. at 6.

MOE responded with a declaratory judgment action arguing, among other things, that no indemnity obligation existed because, as a result of the statute of limitations, the insured was not “legally obligated” to pay anything. Id. at 6. Following a judgment for the insured, the Court of Appeals reversed, holding that in the absence of any showing of bad faith, the insurer “should be allowed to litigate to finality whether the statute of limitations had run on the underlying claims.” Id. at 7. The Supreme Court disagreed, reasoning that MOE already had a sufficient opportunity to be heard on the statute of limitations defense in the underlying case through an unsuccessful motion for summary judgment, the settlement negotiations and the reasonableness hearing. Id. at 12. The Court wrote that “[w]hen an insurer had an opportunity to be involved in a settlement fixing its insured’s liability, and that settlement is judged reasonable by a judge, then it is appropriate to use the fact of the settlement to establish liability and the amount of the settlement as the presumptive damage award for purposes of coverage.” Id. at 16. The Court held that, regardless of whether or not an insurer acts in good faith, the insurer “is not entitled to litigate factual questions that were resolved in the liability case by judgment or arm’s length settlement.” Id. at 18.

However, that determination did not resolve the extent of MOE’s indemnity obligation because the policy only covered “property damage” as defined and limited by the policy. As the Court correctly noted, “the coverage issue is different from the global damages issue.” Id. at 25. MOE argued that since the majority of the siding was not damaged, it should not be responsible for the cost to remove and replace the siding. Id. at 21. The Court rejected this argument, reasoning that “[r]emoving and repairing the siding is simply part of the cost of repairing the damage to the interior walls.” Id. at 22. Similarly, the Court rejected MOE’s argument that it should not be responsible for the cost of replacing siding because such costs fell within the “impaired property” and “your work” exclusions, concluding that “if the siding must be removed to repair damage” to other components of the building “then there is coverage for the cost of the removal and replacement of the siding.” Id. at 27. On the other hand, the Court found that the record was insufficient to determine the total amount of “property damage” covered by the policy because the settlement could have included amounts attributable to the diminution in value of the entire development “even if there had been no actual property damage to a particular wall.” Id. at 26. In other words, the Court could not tell whether the trial court’s ruling in the coverage action was based on an actual coverage determination or, rather, “merely” upon “the findings of the liability judge that the settlement was reasonable.” Id. at 26. Accordingly, the Court remanded for a closer examination of what damage had actually occurred.

Oregon Supreme Court Requires Auto Insurer to Reimburse Insured for Residual Diminution in Value

dpolscer@gordon-polscer.com (Diane Polscer) — Tue, 11 Nov 2008 20:50:57 -0500

In Gonzales v. Farmers Insurance Company, 2008 Ore. LEXIS 965, 1 (2008), the Supreme Court of Oregon considered the extent of an insurer’s indemnity obligation where repairs failed to restore an insured vehicle to its “pre-accident condition.” Following an accident which damaged the insured’s 1993 Ford pickup, the insured paid $6,993.40, minus the deductible, in repair costs. 2008 Ore. LEXIS at 3. The repairs were sufficient to get the truck back on the road, but the insured contended that, despite the repairs, “[t]he vehicle had a number of problems that did not exist before” the accident. Id. at 21. The insurer did not commence any further repairs and refused to make any payment for residual diminution in value. Litigation followed.

At the trial court level, the insurer successfully moved for summary judgment, contending that “the plain and ordinary meaning of the word ‘repair’ in the policy did not incorporate a duty to pay diminished value.” Id. at 5. At issue was the policy provision limiting the insurer’s liability to “[t]he amount which it would cost to repair or replace damaged or stolen property with other of like kind and quality…” Id. at 6. Naturally, the parties offered competing definitions for the term ‘repair.’ The insured argued that the term “includes restoration of the preloss condition and value of the insured property,” but the insurer argued that the term “refers only to the restoration of the function and appearance of the insured property.” Id. at 8. The Supreme Court found that the sixty-seven year old case of Dunmire Co. v. Ore. Mut. Fire Ins. Co., 166 Or 690 (1941) controlled – and dictated a decision in favor of the insured – because Dunmire interpreted the word “repair” in a “virtually identical” policy provision. Gonzales, 2008 Ore. LEXIS at 17.

The Gonzales Court held: “[U]nder the policy at issue, if an attempted ‘repair’ does not or cannot result in a complete restoration of the vehicle’s preloss condition, the vehicles is not ‘repair[ed],’ and the resulting diminution of value of the vehicle remains a ‘loss to [the] insured car caused by collision’ for which defendants are liable under their policy.” Id. at 18. However, the Supreme Court limited its holding by noting that the decision was based on the subject policy’s terms rather than upon “principles applicable generally to diminished value claims in property damage disputes of all kinds.” Id. at 6. In fact, the Court explicitly stated that nothing in the current decision or in Dunmire “prevents insurers from including a definition of repair in automobile policies that excludes diminished value from coverage.” Id. at 18-19.

The Gonzales decision sets the stage for further litigation over what qualifies as a compensable diminution in value. In Gonzales, the insurer asserted that the insured’s argument “reduced to its essence” would require an insurer “to pay for diminished value that results only from stigma attached to that vehicle because the vehicle has been involved in a collision.” Id. at 20-21. The Court declined to address that argument because the insured had asserted more than just stigma but actual physical problems that did not exist prior to the collision. The Court wrote: “[W]e need not decide whether the policy requires payment for a claim based solely on ‘stigma.’” Id. at 21. Accordingly, a decision on that issue will have to await another day.

Seventh Circuit Limits Application of Duty to Settle

maylward@mail.mm-m.com (Mike Aylward) — Mon, 10 Nov 2008 19:54:24 -0500

When is a policyholder not an insured? That was the issue considered by the Seventh Circuit last week in Iowa Physicians’ Clinical Medical Foundation v. Physicians’ Ins. Co. of Wisconsin, No. 08-1297 (7th Cir. October 31, 2008), an Illinois case in which the court declared that an insurer’s obligation to act in good faith in responding to offers to settle within policy limits only extends to insured entities.

The Estate of Dennis Goetz sued Dr. Randall Mullen and Iowa Health Physicians (IHP) for failing to properly vaccinate Goetz against malaria before he took a trip to Africa and, upon his return, for failing to properly diagnose or treat the malarial condition that ultimately killed Goetz. At the time, Goetz was insured under a medical malpractice policy issued by Physicians’ Insurance Company of Wisconsin with limits of $1 million. The policy was issued in the name of Iowa Health Physicians, Mullen’s employer, which also paid the premiums on behalf of Dr. Mullen as part of a financial package to entice him into working at the clinic. Although IHP was listed as the policyholder, the policy itself made clear that it was not an insured and, indeed, IHP declined to pay the additional premium that would have entitled it to coverage under its policy. Rather, IHP was covered through a combination of self-insurance and a separate commercial insurance policy.

Prior to trial, the Goetz Estate twice offered to settle for $900,000. Despite the opinions of several experts that Mullen had provided substandard care to Goetz and that his Estate had suffered a significant loss in earnings, PIC failed to respond to these offers. After a defense expert admitted in his deposition testimony that Mullen’s treatment was inadequate, the plaintiffs withdrew their $900,000 offer and demanded $1.5 million instead. PIC eventually countered at $200,000. Ultimately, the case went to trial and resulted in a verdict of $3.5 million against Mullen and IHP. In the ensuing coverage litigation, the District Cout held that Mullen could pursue a claim for damage to his reputation and for emotional distress even though IHP had paid the $2.5 million excess judgment over the $1 million PIC limit. However, the District Court ruled that IHP had no cause of action since it was not an insured under the policy.

Under Illinois law, an insurer is deemed to have a good faith obligation to settle within limits and may be liable for the entire judgment against its insured if it fails to act in good faith in responding to offers to settle. See, e.g. Haddick v. Valor Ins. Co., 763 N.E.2d 299 (Ill. 2001) Given the facts in this case, the Seventh Circuit opined that Dr. Mullen himself probably had a strong argument against his insurer. The issue before the court, however, was whether the district court had acted correctly in declaring that the same duty of good faith extended to PIC as the non-insured policyholder.

IHP argued that it should be treated as a de facto insured given its contractual relationship as a policyholder and customer of the insurer. The Seventh Circuit rejected this analysis, however, observing that what was important was not the mere existence of a contractual relationship but rather the substance of the insurance contract itself. The court emphasized the fact that IHP had chosen not to purchase insurance coverage. “The duty to settle is meant to protect the bargained-for insurance coverage, not extend it. An insurer who acts in bad faith may end up paying above the contracted policy limits but only when doing so protects the insured’s legitimate expectation of coverage under the policy. . . .”

The Seventh Circuit also emphasized the fact that the Illinois Supreme Court’s analysis of this issue in cases such as Haddick had analyzed the duty to settle as arising out of the insurer’s exclusive control over the duty to defend, including the right to settle. In this case, the court pointed out that although PIC had exclusive control over Dr. Mullen’s defense, IHP had arranged its own defense.

Finally, IHP argued that it was unfair to saddle it with an uninsured liability given the fact that it was blameless and merely faced vicarious liability as the result of the misconduct of its agent Mullen. The Seventh Circuit held that there was a distinction between blame and liability and that IHP’s remedy was not insurance coverage but rather a claim for contribution or indemnification against Mullen depending on what the terms of its employment contract with him permitted.

Ninth Circuit Upholds Punitive Damages Award Reduction, Agrees Evidence Such That Jury Could Have Found Insurer Acted With "Evil Mind"

dpolscer@gordon-polscer.com (Diane Polscer) — Mon, 10 Nov 2008 17:16:53 -0500

In Leavey v. Unum Provident Corporation, 2008 U.S. App. LEXIS 2114 (9th Circuit October 6, 2008), the Ninth Circuit in an unpublished decision affirmed an Arizona federal trial court’s reduction of a jury’s $15 million punitive damage award to an insured to $3 million because $15 million was constitutionally excessive.

The court noted the trial court had reduced the insured’s non-economic compensatory damages from $4 million to $1.2 million, and agreed that a $3 million punitive damages award was more in line with Supreme Court precedent on punitive damages. While the Supreme Court has deliberately chosen not to impose a bright line ratio which a punitive damages award cannot exceed (State Farm v. Campbell, 538 U.S. 408, 426 (2003)), it recently held that “few awards exceeding a single digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” Exxon Shipping v. Baker, 554 U.S. ___, 128 Ct. 2605 (2008).

Further, the Ninth Circuit found that the jury’s $1 million award for the insured’s emotional distress, while “generous,” did not shock the conscience of the court; nor did the $200,000 awarded for the insured’s self-inflicted hand injury and relapse.

The insured in Leavey, a prescription drug addict attempting to rehabilitate himself, cut his hand to get prescription drugs and otherwise went into a downward spiral after the insurer wrote him terminating his benefits. He testified he was “devastated” upon receiving that letter, and for six months was anxious, confused and depressed, moving to a cheaper apartment to save money and looking without success for a new job. When the insurer said it was reinstating the insured’s benefits, the insured remained anxious because he thought the insurer might once again change its mind.

There was evidence the insurer knew the insured could not perform the duties of his occupation, but still subjected the insured to a roundtable review, for the sole purpose of closing his expensive claim; that the insurer sought to influence the opinions of the independent medical examiners hired to examine the insured; that it misrepresented the opinions of those independent medical examiners when it announced it was closing the insured’s claim; and that it knew the insured was a vulnerable individual who suffered from anxiety and depression and was recovering from a serious drug addiction and was at a high risk of relapse. Knowing all this, the insured still sent a letter to the insured wrongfully terminating his benefits. The court ruled a jury could have found the insurer acted to serve its own interests and consciously disregarded a substantial risk its conduct might significantly affect the rights of the insured, and that it acted not only in bad faith but also with an “evil mind,” such that punitive damages were appropriate.

Minnesota Court Rejects Coverage For Spyware Claims

maylward@mail.mm-m.com (Mike Aylward) — Tue, 04 Nov 2008 17:13:59 -0500

A recent opinion of the federal district court in Minneapolis has for the first time construed the extent of liability insurance coverage for “spyware” claims. At issue in Eyeblaster, Inc. v. Federal Ins. Co., No. 07-4379 (D. Minn. October 7, 2008), was the availability of general liability or professional liability insurance coverage for a lawsuit brought in federal court in Houston wherein the plaintiffs claimed that Eyeblaster, a worldwide business involved in the creation, delivery and management of online internet advertising, had fraudulently enticed him to visit its website so that Eyeblaster could surreptitiously download its spyware onto its computer allowing it to install tracking cookies, executable code, java script and jifs that changed his security settings, installed pop-up advertising, renamed files and redirected his computer and web browsing. The plaintiff contended that this spyware had also caused his computer to freeze up, causing him to lose data on a tax return on which he was working and that required him to hire a computer technician to repair the damage.

Eyeblaster tendered the defense of the Texas lawsuit to Chubb, which had provided both GL and E&O coverage to it. Chubb denied any duty to defend and this coverage litigation ensued.
As a preliminary matter, Judge Montgomery declared that the plaintiff’s allegation that his computer froze up failed to allege any physical injury to tangible property, citing the Fourth Circuit’s opinion in America Online, Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89 (4th Cir. 2003). As with the America Online case, Judge Montgomery observed that the policy language clearly stated that “tangible property” does not include software. Although implying that damage to a computer hard drive would have been covered, the court declared that injury to software or lost data was not itself covered under the GL policy.

As to the E&O policy, the court ruled that the alleged intentional acts of Eyeblaster in placing spyware on the plaintiff’s computer failed to seek recovery for a covered “wrongful act.” Despite “fleeting references” to misrepresentation, trespass and invasion of privacy, the court ruled that the substance of the allegations were intentional conduct that failed to allege an “error, unintentional omission or negligent act” within the scope of coverage. The court noted that, “Had Eyeblaster intended to give its customers one type of software but instead mistakenly provided them with a different version that caused a problem, this error would be covered under the language of the E&O policy.”

In this case, however, where the insured specifically intended that the software would install itself on the plaintiff’s computer, the court ruled that the E&O policy did not apply whether or not the insured had also intended such acts to cause injury to the plaintiff.

Eyeblaster had argued to the district court that any such interpretation of its policy would render the coverage illusory because the very nature of its business required it to place cookies, flash technology and java script on user’s computers. Judge Montgomery rejected this argument, holding that the E&O policy would still require coverage in certain cases of this sort such as where the insured had installed incorrect software. The court observed that, “The E&O policy covers a bundle of risks and while this act by Eyeblaster may possibly be uninsurable, the policy is not illusory because there is no coverage.”

Maine Judge Rejects Insurer's Recoupment of Settlement Contribution

maylward@mail.mm-m.com (Mike Aylward) — Tue, 04 Nov 2008 16:58:53 -0500

The dispute with respect to whether insurers may recoup costs of settlement has moved north to the State of Maine. In American National Fire Ins. Co. v. York County, No. 2:06-cv-200 (D. Me. October 20, 2008), a federal district court ruled that a liability insurer’s failure to expressly reserve the right to recoup settlement costs precluded its ability to subsequently recover those sums from its insured. While leaving open the issue of whether recoupment is ever permitted, this opinion emphasizes the importance of insurers asserting these rights early and consistently if they ever hope to prevail on this question.

In 2004, York County was sued by three inmates of the York County Jail for strip searches that the plaintiffs claimed had violated their constitutional rights. York County tendered the defense of this case to American National and other insurers that had provided Law Enforcement Liability insurers that have provided LEL coverage to it during the period in question. American National agreed to defend under a reservation of rights noting the fact that its policy in question contained a $5,000 “per claim” deductible. A dispute arose between the parties as to whether this deductible applied to each individual class member or, as the insured contended, applied to its claim for coverage as a whole.

Despite this reservation, American National ultimately agreed to contribute $750,000 towards a package settlement of the claims. At the time, its agreement to contribute was not explicitly tied to any claim to reimbursement reflecting its position with respect to the $5,000 “per claim” deductible. Thereafter, American National sought to recover its settlement contribution, noting that it was undisputed that none of the members of the underlying class action had been subjected to strip searches during its policy nor had any of the claimants who were approved to payments from the class action settlement fund obtained recovery in excess of $5,000 per claimant.

In the ensuing coverage litigation, Judge Singal agreed with American National that the policy deductible was unambiguous and applied individually to each underlying claimant. The court ruled, however, that the application of this deductible to American National’s contribution to settlement was far from clear given the size and makeup of the class and the numerous parties participating in funding the settlement. Further, the district court held that American National had no right to recover back these payments as York County had proved that there was a binding agreement between it as of 2004 without any reservation to recoup these sums.
Alternatively, the district court held that York County had proved the affirmative defense of equitable estoppel that it had relied to its detriment on American National’s agreement to contribute these sums without any right to recoupment. The district court concluded that it was “unreasonable for [American National] as the insurer to ‘gamble’ in this manner without explicitly disclosing its position to the insured, who, in the absence of any such disclosure, reasonably believed that its own $50,000 contribution to the York County class action settlement fund was the maximum extent of its payment under the terms of the settlement.”

The district court held that accord and satisfaction would not exist so as to create a contract if American National had explicitly reserved its rights regarding the deductible at the time that the parties were agreeing on the various contributions to the settlement or, later, when it tendered its settlement contribution. The court took note of the fact, however, that American National had last pressed the issue of its deductible months earlier and had not sought clarification as to how the deductible would be reimbursed or reiterated its reservation of rights during the final stages of the settlement discussions, a period of time when it was well aware of its insured’s position that the County’s maximum contribution would be capped at $50,000.

As to the issue of estoppel, the court ruled that American National’s conduct was, in fact, unreasonable, not because of its willingness to contribute $750,000 but because of its failure to alert its policyholder that this sum was not the contribution it appeared to be. Rather, the district court concluded that American National had evolved its strategy of seeking recoupment after the fact without appropriate disclosure to its policyholder who had in the interim justifiably and detrimentally relied on the insurer’s “misleading offer.”

Judge Singal’s order did not reach the crucial question of whether an insurer ever has a right to recoup settlement payments. Courts around the country have reached different conclusions on this issue although most have ruled as a matter of equity that if an insurer funds a settlement at the request of the insured for which it is later held not to owe coverage, an insurer is entitled to recoupment and the insured would otherwise obtain a windfall. Compare. Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 22 P.3d 313, 106 Cal. Rptr.2d 535 (2001)(right to recoupment) with Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew and Rental Tools, No 02-0730 (Tex. February 1, 2008)(no right).

In all of these cases, however, courts have emphasized the need for transparency and, in particular, for disclosure of the insurer’s intent to seek contribution. Without such an explicit assertion, few courts will uphold or imply a right to recovery.

Stringfellow - A Continuing Coverage Saga

sthorpe@gordonrees.com (Sara Thorpe) — Wed, 29 Oct 2008 19:00:17 -0500

While it is often difficult these days to pay attention to any thing other than the upcoming elections and the roller-coaster economy, judges keep making decisions and lawyers keep lawyering.

On November 6, 2008, after the election results are in, the California appellate court, 4^th district (appeal from Riverside County), will hear oral argument on one aspect of the ongoing litigation between the State of California and its insurers relating to the the Stringfellow site. Part of the case is before the California Supreme Court (as we mention below). The appellate court hearing next week is on several issues including, importantly, “all sums” and “stacking.”

The Stringfellow litigation started as a pollution lawsuit in 1983, with the State of California being found in part responsible for the pollution in 1988. The coverage litigation started in 1993.

In an unusual move, in this latest phase of the case, the appellate court sent the parties an 88 page “tentative decision” in anticipation of the oral argument, thereby providing the parties with the court’s leanings so the parties could better prepare for each sides’ 30 minute arguments.

According to the tentative, the court is leaning towards confirming California follows an “all sums” approach to an individual insurer’s liability (once its policy is proven to provide cover) for property damage that continues over many years. The court is also inclined to rule the insured can “stack” the insurance policies. That is, the insured is permitted to stack policies across policy periods. The appellate court opined that FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4^th 1132(which held multiple policies’ occurrence limits could not be stacked) was not well-reasoned. While not criticizing the trial court for feeling it was bound by the FMC decision, the appellate court intends (unless persuaded otherwise) to hold FMC was wrong.

On other issues, the appellate court appears inclined to rule for the insurers. The court’s tentative indicates it agrees with the trial court’s finding of only one occurrence and that policy limits for multi-year policies were per occurrence not annual.

Meanwhile, briefing has been completed on other important pollution-coverage issues pending before the California Supreme Court in the Stringfellow case. Before the Supremes are the following issues: (1) Does application of the pollution exclusion clause turn on when waste material was discharged from the Stringfellow Acid Pits waste disposal site or when the waste was initially deposited into the site? (2) If pollution is caused by both uncovered intentional actions and covered accidents, does the insured have the burden at trial to prove that all of the damages it seeks to recover were caused by a covered event, or is there a duty to indemnify when two concurrent causes are responsible for an injury even if one of the causes is an uncovered act?

The Court of Appeal had rejected the insurers' contention, based on Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882, that the relevant release for purposes of applying the "sudden and accidental" pollution exclusion was the deposit of waste into the site. The Court distinguished Standun because the insured in Standun was held strictly liable as a waste generator that purposefully and regularly disposed of waste at the site. Here, the court held, the State's liability for the negligent design, construction and operation of the Stringfellow Site shifted the focus from the initial deposit to subsequent releases from the site.

The Court of Appeal also concluded Golden Eagle Refinery Co. v. Associated Internat. Ins. Co. (2001) 85 Cal.App.4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 184 are incompatible with the California Supreme Court's decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94. The court held, applying Partridge, that the State would be entitled to full coverage even if damage was partially caused by an excluded event and the damage was indivisible.

We will report further as these courts issue final rulings on the various aspects of the case.

First Circuit Hears Oral Argument On Pollution Issues

maylward@mail.mm-m.com (Mike Aylward) — Tue, 14 Oct 2008 14:45:04 -0500

The U.S. Court of Appeals heard oral argument last week in Emhart Ind. v. Century Ind. Co. a large and complicated insurance dispute that promises to say much about the future of environmental coverage jurisprudence in the Ocean State.

The dispute in Emhart involves a chemical manufacturer’s efforts to compel coverage for Superfund claims arising out of a former manufacturing facility in Rhode Island. After settling with most of its primary carriers, Emhart belatedly discovered that Century Indemnity’s predecessor (INA) had issued a primary liability insurance policy to it in the late 1960s. Only at the close of trial did the U.S. District Court (Smith, J.) declare that Century Indemnity had a duty to defend. Despite the absence of any statement in the underlying Notice of Responsibility from the U.S. EPA or other “charging documents” to the effect that pollution had become manifest during the INA policy period or otherwise satisfied Rhode Island’s “discoverability” standard for trigger of coverage, the court ruled that silence was sufficient to give rise to a potential for coverage triggering the policy under a Montrose-type analysis of the duty to defend.

Tthe Court is considering cross-appeals from a 93 page opinion of a Rhode Island District Court as to (1) whether a primary liability insurer’s failure to defend exposes it to an indemnity exposure without limits (notwithstanding a jury’s finding that the insurer’s policy was not actually triggered) and (2) whether the Rhode Island District Court erred in finding a duty to defend notwithstanding the absence of any statement in the “charging documents” suggesting that property damage had been “discoverable” within the policy period pursuant to Rhode Island’s “manifestation” analysis.

--The Century Indemnity Appeal

In its appeal (07-2806), Century Indemnity argued to the First Circuit that the District Court erred in finding a duty to defend in the absence of anything in the “charging documents” suggesting that pollution was discoverable during its policy period or that the insured had reason to test for pollution. The twist in this case is that Emhart denies that it was the source of this pollution and therefore was hard pressed at trial to present evidence as to the date when it had reason to look for pollution on its property.

In the alternative, Century Indemnity argued that if Rhode Island’s four corners “pleadings test” was to be applied so broadly, it should logically apply to all primary insurers such that Century Indemnity should only have been obligated to pay a pro rata portion of defense costs.

The panel questioned whether this was, in fact, inequitable as any insurer forced to bear the full costs of defense under such circumstances was free to seek contribution from other carriers. Counsel for Century Indemnity responded that this was bad public policy and would merely multiply the volume of litigation with respect to allocation issues.

Counsel for Emhart rejoined that the insurer had purchased a “defense” and that insurers were therefore obligated to defend, not merely to pay a portion of defense costs. As with Justice Boudin’s comment, Attorney Pirozollo argued that the insurer was free to seek recovery from other insurers for contribution. Pirozollo also argued that Rhode Island law was settled with respect to the scope of the “four corners” test even as applied to pollution claims as evidenced by the Rhode Island Supreme Court’s trigger decision in Truckaway. Justice Howard questioned, however, whether if Rhode Island law was so clear why the District Court (Smith, J.) hadn’t entered summary judgment against Century Indemnity early on rather than waiting until the conclusion of the trial to find that it had a duty to defend.

--Emhart's Cross Appeal

Turning to the second appeal before the Court, counsel for Emhart argued that the U.S. District Court had erred in failing to give literal application to the Rhode Island Supreme Court’s Conanticut rule. Under the Conanticut rule, an insurer that fails to defend is barred from raising indemnity defenses. In this case, the District Court questioned whether Conanticut was still good law, as it has not been followed in Rhode Island, has been criticized by out of state authority and is at odds with recent Rhode Island rulings holding that coverage cannot be created by estoppel. As a result, Judge Smith had refused to impose damages against INA beyond the insured’s costs of defense.

Emhart’s arguments met with skepticism from the First Circuit. Justice Boudin, who generally took the lead in the questioning, observed that the Conanticut rule had evolved in situations where policyholders had suffered grievous consequences as a result of an insurer’s failure to defend and questioned whether it made sense to extend the rule in this case where the insured was a large corporate conglomerate that had defended itself exactly in the same manner as would have been the case had an insurer been paying for independent counsel.

Counsel for Century Indemnity argued to the panel that unlike the facts in Conanticut, Emhart had not suffered any consequential damages. In the absence of such damages, applying Conanticut in this case would be equivalent to creating coverage through waiver or estoppel, which Rhode Island courts have made clear is not appropriate.

While appearing to be unimpressed by Emhart’s arguments, the panel did raise the possibility that the issue should be certified to the Rhode Island Supreme Court.

Given the exchange among the justices, it seems likely that Justice Boudin will write this opinion. It will be recalled that Boudin served on the panel that generated the Boston Gas opinion last June. A decision is unlikely before early 2009.

The First Circuit now has streaming audio of oral arguments: http://www.ca1.uscourts.gov/

U.S.D.C. for Southern District of Mississippi Allows Insurer to Correct Admission as to Operative Policy

dpolscer@gordon-polscer.com (Diane Polscer) — Fri, 10 Oct 2008 13:18:13 -0500

Geico Insurance Co. v. Hall, 2008 U.S. Dist. Lexis 77347 (S.D. Miss. Oct. 1, 2008) presents at least some evidence that in some states insurers are able to make mistakes and still prevail. When Geico filed its complaint, it included a copy of the insurance policy Geico claimed was the operative policy at issue. Under that policy, the limits were arguably as much as $200,000 for defendant’s claim against Geico’s insured. (Defendant also alleged that the insured’s copy of the policy was lost during Hurricane Katrina.) Later in the case, Geico discovered and presented what it claimed was the actual policy, with an endorsement that established available limits at $25,000.

Despite somewhat equivocal testimony provided by Geico as to whether the disputed endorsement was sent with the renewal policy, the court accepted the endorsement as established, relying primarily on Wells Fargo Bus. Credit v. Ben Kozloff, Inc., 695 F.2d 940, 944 (5th Cir. 1982) (“Placing letters in the mail may be proved by circumstantial evidence, including customary mailing practices used in the sender’s business.”). Citing Ben Kozloff, the court found that its decision was justified because no evidence was presented to rebut the legal presumption that “Once properly mailed, the endorsement is presumed to have been received by the insureds.” The court therefore allowed Geico to substitute what the court deemed to be the actual policy at issue for the one Geico had originally presented, and limited Geico’s liability to $25,000.

No Errors and Omissions Coverage for Fraudulent Mortgage Practices

dpolscer@gordon-polscer.com (Diane Polscer) — Thu, 09 Oct 2008 10:47:43 -0500

For insurance companies reminiscent of the surge in environmental pollution claims in the early 1980s and now wondering if they will be the ones “left holding the bag” with respect to the still unfolding mortgage crisis, the First Circuit’s recent decision in New Fed Mortgage Corporation v. National Union Fire Insurance Company of Pittsburgh, PA, 2008 U.S. App. LEXIS 20695 (1st Cir. Mass., September 30, 2008), should provide some reassurance.

During a four month period in early 2006, a commissioned mortgage broker for New Fed Mortgage arranged fifteen mortgages through the use of altered credit reports. The result was that the lender incurred greater risk than it had bargained for and, consequentially, faced a loss on resale of the loans. After the lender discovered discrepancies between credit reports submitted by New Fed and credit reports obtained independently, the lender demanded indemnification from New Fed. Following an internal investigation, New Fed concluded that one of its brokers had scanned legitimate credit reports into an outside computer system, altered those reports and then printed the fraudulent reports for submission to lenders. New Fed followed its investigation with a claim to its insurance company, National Union.

National Union denied coverage under an express exclusion for any claim “… alleging fraud, dishonesty, or criminal acts or omissions …”. New Fed responded with an argument that in order to rely on the fraud exclusion, the insurer must first prove that the insured intended to harm the injured party. The First Circuit rejected this argument, finding there was no legal basis for New Fed’s proposed rule and, moreover, found that even if there were such a requirement “it would likely be satisfied here” because the broker who falsified the credit reports “had to know that a false credit report was likely to lead to overpayment and loss.” The final conclusion: New Fed’s claim fit squarely within the fraud and dishonesty exclusion, so the insurer had no duty to defend or indemnify New Fed.

Oregon Court of Appeals Decides ZRZ Realty Co. v. Beneficial Fire, et al.

dpolscer@gordon-polscer.com (Diane Polscer) — Mon, 06 Oct 2008 19:48:37 -0500

In ZRZ Realty Co. v. Beneficial Fire, et al. (Or. Ct. App., Oct. 1, 2008), the Oregon Court of Appeals ruled on appeals brought by insureds, ZRZ Realty, Zidell Marine, and others (“Zidell”) and Lloyds of London (Lloyds”) regarding trial court rulings reached in 2002 and 2003. The appeal concerned a wide range of issues including burden of proof, the definition of occurrence, availability of attorney fees, and allocation. The Court’s primary holding was that since the insured had the burden of proving coverage, the insured had the burden of proving that the property damage was caused by an “unexpected and unintended” event when that language is used in the definition of occurrence. Oregon law had been clear that the burden was on the insured to prove coverage. Prior cases, however, seemed to not distinguish the unexpected and unintended requirement in the definition of occurrence with the exclusion for expected or intended injury. The Court of Appeals clarified that the insured bears the burden of proving that the event was unexpected and unintended. Since the trial court has placed the burden of proof on Lloyds, the Court remanded for a new trial.

In remanding for a new trial, the Court of Appeals also commented on several other issues, including that the definition of “fixed and moveable things” in a protection and indemnity policy does not include soil and river sediment. The Court declined, however, to comment on allocation. On cross-appeal, Zidell argued that the court applied the wrong allocation method based on Oregon statute and the Court’s decision in Cascade Corp. v. American Home Ins. Co., 206 Or. App. 1 (2006). The Court of Appeals declined to address the argument, waiting to see if it returned after remand. The Court of Appeals also reversed the trial court’s decision that led to the award of declaratory judgment attorney fees to Zidell.

Insurer's Dividend Decisions Protected By Business Judgment Rule

sthorpe@gordonrees.com (Sara Thorpe) — Mon, 22 Sep 2008 20:42:35 -0500

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.

CGL Insurance 2007 Edition--A Summary of Changes

ktm@wnhr.com (Kevin Merriman) — Thu, 11 Sep 2008 09:02:10 -0500

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.

Court Finds Insurers' Inadequate Investigation was Bad Faith, Imposes Coverage by Estoppel

dpolscer@gordon-polscer.com (Diane Polscer) — Mon, 08 Sep 2008 17:05:51 -0500

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.

The insurers argued as a threshold matter they could not be held liable for bad faith because their policies did not cover the claims against the general contractor. While acknowledging the insurers’ coverage position was correct, the court disagreed with their position on bad faith. Citing to Coventry v. American States, 136 Wn.2d 269 (1998) which holds that an insured may maintain a bad faith claim against an insurer even if the insurer owes no duty to defend or indemnify against the claim, the court held Aecon could maintain its bad faith claim against the insurers even in the absence of coverage.

Aecon tendered to the first insurer on May 3, 2006. That insurer requested and reviewed information from the insured and denied the claim seven weeks later on the grounds that its subcontractor insured’s work at the project, and the project itself, was complete before any property damage occurred. The court pointed out that the insurer knew there was water intrusion at the project but assumed it happened after the subcontractor completed its work on the project and did not attempt to determine whether the subcontractor may have performed deficient work that led to water intrusion while it was still working at the site. A year after this insurer denied another claim handler reviewed the file and determined Aecon was potentially covered as an additional insured. The insurer did not notify Aecon of the second claim handler’s conclusion.

Aecon also tendered to the second insurer, who denied coverage six months later. The second insurer denied coverage because (1) its subcontractor insured finished work on the project after its policy ended so the claim was barred under the “products completed operations hazard” and (2) the units were not turned over to Quinault during the policy period so Quinault had no claim damage during the policy period. This insurer’s denial letter did not explain how the “products completed operations hazard” applied to the claim or its position that Quinalt did not own the property during the policy period and so had no standing to make the claim.

Before denying coverage this insurer’s claim handler requested and received information from the insured and the broker, reviewed the claim file and hired an independent adjuster to determine certificates of occupancy dates for the project. He had a certificate of occupancy dated October 14, 2000 as well as a notation in his claim file showing the project was completed instead in June 2000. In his deposition the claim handler could not identify where he got the June 2000 date or whether it referred to the subcontractor or Aecon’s completion of work. Other than requesting pleadings from Aecon, this insurer did not investigate when property damage attributable to its subcontractor first occurred.

The court held the first insurer’s investigation before denying coverage was not adequate, but declined to rule on whether it had also acted in bad faith by failing to tell Aecon that a second claim handler had determined there was potential coverage. The court found the second insurer failed to establish why, even if its subcontractor’s work was completed after the policy ended and Quinalt did not own the property during the policy period, those facts precluded coverage. Because the insurers acted in bad faith and did not rebut the presumption of harm, the court applied the remedy of coverage by estoppel. The court also found the insurers violated the state Consumer Protection Act by failing to conduct the reasonable investigation required by Wash. Admin. Code § 284-30-330(4) before denying Aecon’s tender.

Mutual of Enumclaw v. USF Ins. Co. ― "Selective Tender" and its Effect on Contribution and Conventional Subrogation Claims Between Insurers in Washington

dpolscer@gordon-polscer.com (Diane Polscer) — Fri, 05 Sep 2008 16:44:08 -0500

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.

Based on the “selective tender” rule, which states that “where an insured has not tendered a claim to an insurer, that insurer is excused from its duty to perform under the policy or to contribute to a settlement of the claim,” the Court ruled that “if the insured has not tendered a claim to an insurer prior to settlement or the end of trial, other insurers cannot recover in equitable contribution against that insurer.” The Court further reasoned that because equitable contribution is a claim an insurer has of its own right to recover from another insurer that is independently obligated to cover the same loss, “the insurer who seeks contribution does not sit in the place of the insured and cannot tender a claim to the other insurer.”

Unlike the equitable contribution claim, the Court held that the “selective tender” rule did not apply to bar the conventional subrogation claim, which MOE and CUIC took by reason of assignment from the insured. (The Court distinguishes “conventional subrogation” from “equitable subrogation” and expressly states that its analysis does not apply to equitable subrogation.) By taking the assignment, the insurers were able to stand in the shoes of the insured and exercise the insured’s rights to tender the claim to the additional insurer. MOE and CUIC were then also able to assert the “late tender” rule to raise an issue of fact as to USF’s late notice defense. That rule provides that “even where an insured fails to give an insurer timely notice of a claim, the insurer is not relieved of its obligation to perform on the policy unless it can show that the late notice actually and substantially prejudiced it.” Significantly, the Court found that “While we need not decide whether conventional subrogation and assignment are equivalent in all respects, this court recognizes that an insurer who receives full contractual assignment of an insured’s rights may bring a conventional subrogation claim to enforce those rights.” This leaves open the question of whether an insurer’s subrogation claim against other insurers would be safe from the “selective tender” rule without a full assignment of the insured’s rights against those insurers.

The Court also provides insight as to what it will take to prove that an insurer was prejudiced by late notice under the “late tender” rule. The Court held that “in order to show prejudice, the insurer must prove that an insured’s breach of a notice provision had an identifiable and material detrimental effect on its ability to defend its interests.” The Court also provides a nonexhaustive list of factors to be considered. It also found that, contrary to a prior Washington Court of Appeals decision, a lost opportunity to conduct a meaningful investigation alone will not be enough.

Washington Supreme Court Tackles Tender and Prejudice Issues

maylward@mail.mm-m.com (Mike Aylward) — Fri, 05 Sep 2008 07:12:21 -0500

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.