Ninth Circuit Addresses Timing of Notice of Claim to Insured Under Claims-Made CGL policy

Posted on June 5, 2009 by Diane Polscer

In Evanston Insurance Company v. OEA, Inc., 2009 U.S. App. LEXIS 10921 (May 21, 2009), the Court of Appeals for the Ninth Circuit addressed the issue of “notice” under a claims-made policy. The Ninth Circuit upheld the decision of the U.S. District Court for the District of California, holding that, under a claims-made policy, the insured’s unreasonable subjective belief that a complaint does not evidence an intent to hold the insured liable for injuries will not create a genuine factual dispute as to when the insured’ received “notice” of the claim where the complaint clearly names the insured and specifically alleges that the insured is liable for injuries.

 

In Evanston, the insured, OEA, Inc., obtained a commercial general liability policy with an effective period of May 1, 1998 through May 1, 1999. The policy provided coverage for “CLAIMS FIRST MADE…DURING THE POLICY PERIOD,” defining a claim as “a notice received by the insured of an intention to hold the insured responsible for an Occurrence involving the policy and shall include service of suit or institution of arbitration proceedings against the insured.” Id. at *4.

 

In 1996 and 1997, two employees of OEA’s wholly-owned subsidiary, Aerospace, were injured in an accident and filed separate lawsuits against OEA and Aerospace. Their complaints alleged liability under theories of negligence, products liability, premises liability, and strict liability. Aerospace, which was not an insured under the Evanston policy, was served with the first complaint on June 10, 1997, and forwarded the complaint immediately to OEA. OEA was served with the second complaint on November 3, 1997. Upon receipt of both complaints, OEA claimed that it decided that the claims were exclusively workers compensation claims and notified its workers compensation carrier.

 

OEA settled both suits. Under a full reservation of rights, Evanston paid $1,544,924.32 in defense and settlement costs. Evanston then filed suit against OEA to recover the amounts paid. The U.S. District Court for the Eastern District of California granted Evanston’s motion for partial summary judgment, holding that the claims were not covered because they were first made in 1997, before the Evanston policy period began. The court also granted Evanston’s subsequent summary judgment motion, awarding Evanston reimbursement of the amounts it paid for settlement and defense of the claims plus prejudgment interest.

 

On appeal, OEA asserted that the district court wrongly decided a disputed fact. OEA asserted that OEA did not have notice of the complaints until the policy period began because it did not realize that the plaintiffs intended to hold OEA liable for their injuries until October 1998. OEA presented evidence that OEA and Aerospace were frequently confused as corporate entities, that the plaintiffs did not seek to serve OEA and Aerospace as separate entities in 1997, and that various individuals at OEA held subjective beliefs that the complaints did not state a cause of action against OEA. Relying on the district court’s statement that the policy’s definition of “claim” as a “notice” “incorporates a reasonable person standard,” OEA argued that the issue of “whether it was reasonable for OEA to read the complaints as not evincing an intent to hold OEA liable for injures” was a disputed fact, making summary judgment improper. Id. at * 8.

 

Based on the undisputed content of the complaints, along with the undisputed fact that OEA received both complaints before the policy period began, the Ninth Circuit held that there was no genuine dispute as to when OEA received notice of the plaintiffs’ intent to hold OEA responsible for their injuries. The court noted in particular that both OEA and Aerospace were clearly named as defendants and that the products liability claim “alleged that OEA alone sold the gunpowder, storage bins, and trays, protective gear, and other products that contributed to their injuries.” Id. at *10. OEA’s subjective beliefs were unreasonable, and the Ninth Circuit determined that summary judgment on the issue was proper because there was no room for a reasonable difference of opinion on the issue.

 

The Ninth Circuit also upheld the award of reimbursement of the defense and settlement costs that Evanston paid, stating that because the claims were made prior to the policy period, OEA received more than its bargained-for coverage. The Ninth Circuit rejected OEA’s argument that prejudgment interest should not apply in the insurer-insured context, holding, under Levy-Zentner Co. v. Southern Pac. Trans. Co., 74 Cal. App. 3d 762 (1977), “prejudgment interest is available to every person who is entitled to recover damages that are certain.” Evanston, supra, at * 15.

 

In affirming Evanston decision, the Ninth Circuit emphasized that “a foolish or overly sophisticated failure or refusal to realize that one is the intended object of suit would be of no assistance to an insured.” Id. at * 9. Conversely, notifications that are vague, confusing, or indefinite to a reasonable insured do not amount to a claim.
 
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PIP Insurer Required to Defend Process for Denying Claims

Posted on May 22, 2008 by Diane Polscer
Oregon courts have consistently held that an insurance company may only be liable for tortuous bad faith in situations where it is defending its insured.  In Ivanov v. Farmers Insurance Company of Oregon, the Oregon Supreme Court addressed an insurer’s obligations under personal injury protection (PIP) coverage.  The decision itself addresses an insurer’s obligation to pay medical payments under Oregon’s PIP coverage statutes.  Ivanov sought certification of a class and summary judgment regarding denial of PIP benefits “solely on the basis of generalized criteria not specific to claimants’ injuries” and that PIP benefits may not be denied “unless [the] determination is based on a contemporaneous physical examination of the insured by a physician selected by Farmers.”  The trial court granted summary judgment in favor of Farmers on Farmers’ corresponding motion for summary judgment on the ground that the PIP statute does not require an IME prior to denial of the claim and that the insured bears the burden of proving that medical expenses were reasonable and necessary.  The Court of Appeals affirmed the trial court decision, but held that plaintiff had failed to produce evidence from which a trier of fact could infer that the claimed expenses were necessary.
The plaintiffs’ claims are that the system Farmers uses to deny claims for medical expenses constitutes breach of contract, fraud, breach of the implied duty of good faith, and tortious breach of the duty of good faith. The Oregon Supreme Court notes that in the argument before both of the lower courts and the Oregon Supreme Court, there was no discussion as to the elements of the theories of recovery. The claims are based on Farmers’ use of a computer system to analyze claims that resulted in automatic deductions, rather than a case-by-case review of the particular claims. The court reviewed the PIP statutes and found that ORS 742.524(1)(a) provides a presumption in favor of the necessity of medical expenses incurred by a health care provider. Once a claim is denied, the presumption is removed as well. The court noted, however, that the plaintiffs are not challenging the validity of the denials, but the investigation of the claims prior to the denial. The court held that at the time an insurer decides whether to accept or deny a PIP claim, the medical expenses incurred to that date are presumed to be reasonable and necessary. The court also held that since the summary judgment record did not demonstrate that the process Farmers uses is valid as a matter of law, Farmers was not entitled to summary judgment.

The court discussed an insurer’s duties of good faith to its insured before reaching its decision. In reaching its conclusion, the Oregon Supreme Court found that “because Farmers’ review methodology was an impermissible one, Farmers needed to establish that the procedures it employed to deny plaintiffs’ claims satisfied its statutory and common law duties and did not violate the prohibitions set out in ORS 746.230(1)(d).” ORS 746.230(1)(d) prohibits an insurer from denying a claim without a reasonable investigation. Since Farmers did not present evidence that its claim review process was valid, the plaintiffs did not have to produce evidence that their medical expenses were medically necessary.
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Insurance Coverage and Claims Institute in April 2008

Posted on February 29, 2008 by Sara Thorpe

Sara Thorpe is the chair and speaker, and Mike Aylward, a speaker, at the DRI's Insurance Coverage and Claims Institute in Chicago in April 2008.  The topics to be covered include conflicts of interest, drafting effective reservation of rights letters, independent counsel, settlements, litigation management, e-discovery, emerging insurance coverage issues for commercial and personal lines carriers, and "bad faith."  This seminar is perfect for insurance professionals and lawyers who represent them, both the novice and the experienced.  More information available at: www.dri.org/open/CLE.aspx?sem20080155 or www.dri.org

 

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Texas Supreme Court Limits Claims Between Settling Co-Insurers

Posted on October 16, 2007 by Chris Martin

On October 12th, the Supreme Court of Texas issued a surprising decision of importance to liability carriers doing business in Texas regarding the reimbursement claims available to liability insurers against other insurers in Texas. 

In Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., No. 05-0261 (Tex. October 12, 2007), Mid-Continent provided a $1 million CGL policy which covered a general contractor as an additional insured. The general contractor also had its own $1 million CGL policy with Liberty Mutual and a $10 million excess policy. Neither insurer disputed that both owed a portion of the general contractor’s defense and indemnity expenses and both agreed that a total verdict for the injured parties would fall in the $2 to $3 million range, but they disagreed both on the settlement value of the case and the percentage of liability to be assessed against the general contractor. Mid-Continent would only agree to pay $150,000 to settle. Liberty Mutual then paid the $1.35 million needed to settle sued Mid-Con for the difference.  On appeal, the Texas high court held that Texas does not recognize a direct action by one insurer against another – they can only bring an equitable subrogation claim. Because the only extra-contractual tort claim recognized in Texas for an insured to assert against its liability insurer is a “Stowers” claim for the insurer’s failure to settle a covered claim within policy limits, the high court ruled that a liability insurer asserting an equitable subrogation claim against another carrier could only assert such a claim. 

This decision raises very significant questions for any carrier facing the settlement of tort claims where the insured has multiple primary carriers. If one carrier plays “hard ball,” can they be sued in Texas by the settling carrier who pays more than its “fair share?” Probably not, unless the insured contributes to the settlement and still possesses a claim against the recalcitrant insurer. Such a claim may also exist if the reluctant carrier is subject to a valid Stowers claim for failing to settle within limits. Otherwise, liability carriers may force more cases to trial due to the reluctance of co-carriers to fund tort settlements for their insureds due to this shift in Texas law. 
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