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

American Pride, a Florida home builder, was sued by a competitor for copyright infringement and unfair competition for distributing flyers copying the plaintiff’s designs for local homes.  Its liability insurer, Mid-Continent, initially denied coverage but six months later agreed to appoint defense counsel pursuant to a reservation for rights.  Mid-Continent’s reservation of rights letter did not advise American Pride that it had the right to reject the proffered defense and insist on defense counsel of its own.  Nor did the letter advise American Pride that Mid-Continent might later seek to recoup its costs of defense.

Prior to trial, defense counsel advised Mid-Continent that liability was certain and the damages could exceed $10 million.  Nevertheless, counsel opined that the case could probably settle within policy limits and recommended an offer of $550,000.  In response, Mid-Continent declined to offer more than $75,000. 

Following the collapse of mediation talks, the insured engaged independent counsel who insisted that Mid-Continent either withdraw the reservation of rights or permit the insured to take over its own defense.  In response, Mid-Continent took the position that under Florida law once an insured accepts a defense it cannot thereafter reject it and would, in fact, lose its right to coverage if it proceeded on its own. 

Despite these strains in their relationship, Mid-Continent and American Pride continued to cooperate towards a settlement.  Mid-Continent raised its offer to $100,000 at which point the plaintiff’s demand was reduced to $250,000.  Defense counsel warned Mid-Continent at that point that if it did not accept the reduced demand, American Pride would “fire” him and settle on its own.  Mid-Continent ignored this warning and stated that its coverage concerns precluded it from offering more than $100,000.  As a result, American Pride filed a coverage suit against Mid-Continent and advised Mid-Continent that it was “respectfully rejecting any continued defense under a reservation of rights.”  A week later, the insured entered into a $1.7 million stipulated judgment and assigned its coverage rights against Mid-Continent to the plaintiff.

In the ensuing coverage litigation, the District Court granted summary judgment to Mid-Continent, holding that American Pride’s settlement in a case where it was already being defended by its insured violated the duty to cooperate.  These findings were reversed on appeal to the Eleventh Circuit. 

As a preliminary matter, the Eleventh Circuit ruled that a policyholder was not obliged to accept a defense under a reservation of rights.  Citing the Florida District Court of Appeals decision in Taylor v. Safeco Ins. Co., 361 So.2d 743 (Fla. 1st DCA 1978), the court opined that, “If the insurer offers to defend under a reservation of rights, the insured has the right to reject the defense and hire its own attorneys and control the defense.”  In this case, the court questioned whether Mid-Continent had acted in good faith in the manner in which it conducted the insured’s defense.  Nevertheless, as the insured had accepted a defense under a reservation of rights, the court found that American Pride was required to cooperate with Mid-Continent so long as it was being defended.

Without reaching the issue of whether American Pride had breached the duty to cooperate, the Eleventh Circuit found disputed issues of fact with respect to whether Mid-Continent had changed the terms pursuant to which its defense was being provided when it added a later condition that it be entitled to recoup its defense costs if coverage was held not to apply.  If such facts were found to exist, the Eleventh Circuit ruled that Mid-Continent would have been entitled to withdraw its assent to the defense being provided and would therefore have been free to enter into a settlement of its own volition without breaching the duty to cooperate.  The court ruled that American Pride would only have violated the policy’s cooperation clause if it had secretly negotiated a settlement prior to rejecting Mid-Continent’s defense.  In this case, the court found that the district court had erroneously granted summary judgment to Mid-Continent based upon its conclusion that the settlement had been negotiated in secrecy, citing contrary facts to the effect that Mid-Continent’s appointed defense counsel had been aware of these ongoing discussions and had reported that information to the insurer. 

The consolidated insurance coverage cases decided in New York Marine & General Ins. Co. v. Lafarge North America, Inc., No. 08-5504 (2nd Cir. March 15, 2010) had their origins in a barge (Barge ING 4727) that broke loose from its moorings on the Mississippi River on August 29, 2005 during Hurricane Katrina and came to rest against a house on the land side of the levee protecting the Lower Ninth Ward of New Orleans. On September 9, 2005, an article in the Wall Street Journal suggested that the barge itself might have been responsible for the disastrous breach of the levee that flooded the Lower Ninth Ward in the days that followed Katrina. As a result, Barge ING 4727 figured prominently in the ensuing flood of Katrina litigation in Louisiana.

At the time of this loss, Barge ING 4727 was owned by Ingram Barge Company and was under contract to transport materials for Lafarge, one of the largest suppliers of construction materials in the United States and Canada. Upon reading the Wall Street Journal article blaming Barge ING 4727 for the levee breach, Lafarge immediately engaged the Goodwin Procter law firm to coordinate and plan its defense against anticipated class action and mass tort litigation. Lafarge also retained the Holland & Knight law firm to investigate maritime issues presented by the loss. The following day, at Goodwin Procter’s recommendation, Lafarge hired the New Orleans law firm of Chaffe McCall, which had a sizeable maritime practice, to advise it on local concerns.

The day after receiving the Wall Street Journal report (September 9), LaFarge also notified its primary insurer (NYMAGIC) that litigation was likely. At the time, LaFarge only disclosed that it had engaged Holland & Knight to investigate maritime issues. No mention was made of the role of Goodwin Procter or Chaffe MCall.

On September 13, NYMAGIC acknowledged receipt of the notice and advised LaFarge that it had excellent law firms in New Orleans ready to defend any resulting suits. It was not until September 20 that LaFarge advised NYMAGIC that it had already engaged both national and local counsel. Two days later, NYMAGIC told LaFarge that it:

Lafarge ignored NYMAGIC’s offered list of counsel and continued to insist that NYMAGIC agree to pay for the defense provided by Goodwin Procter, Chaffe and Holland & Knight. As a result, NYMAGIC appointed the New Orleans law firm of Sutterfield & Webb to act as defense counsel, which thereafter associated with these other law firms in the In Re: Katrina Canal Breaches Consolidated Litigation.

Although the Holland & Knight law firm was discharged after completing its initial investigation of maritime issues, its bills, combined with the substantial legal fees charged by Goodwin Procter and local counsel ultimately totalled over $10 million, far more than the $5 million primary limit provided by the NYMAGIC policy.

The issued presented to the Second Circuit was whether NYMAGIC and various excess insurers of LaFarge were required to reimburse its insured for fees incurred by law firms that were not of the insurers’ choosing. Alternatively, the court was asked to consider whether the daunting exposure presented by these Katrina claims, which far exceeded the $50 million in total available limits, was in and of itself a "conflict" that would permit the insured to ignore the provisions of the policies and appoint its own counsel.

The NYMAGIC policy contained non-standard provisions that were claimed to be in conflict here. The so-called "Naming Clause" stated that the insurer, in consultation with Lafarge, "shall have the option of naming any mutually acceptable attorneys to defend Lafarge." However, the policy also contained a so-called "Protection Clause" which required the policyholder to take all reasonable steps to protect NYMAGIC’s interests in the event that a claim was likely to arise under the policy.

The Second Circuit ruled that under the extraordinary circumstances presented by Katrina, as borne out by the successive waves of Katrina litigation since 2005, it was appropriate for Lafarge to immediately engage skilled national counsel (Goodwin Proctor) as well as a law firm with specialized maritime experience (Holland & Knight) and local counsel (Chaffe) in fulfillment of its obligations under the protection clause. The court ruled that the immediate assistance of these firms was vital to promptly identifying and preserving evidence and positioning Lafarge with respect to its strategy for the ensuing litigation. Indeed, the court took the view that the Holland & Knight fees were separately covered under the policy as involving a cost of investigation since Holland & Knight’s role was not so much as defense counsel as providing a specific opinion to Lafarge on maritime issues.

On the other hand, the court ruled that nothing in the Protection Clause suggested an intention to trump the significance of the naming clause, even in cases of extreme liability, as here. The court observed that, "While Goodwin Procter, H&K and Chaffe were reasonably retained to minimize potential liability arising from the extraordinary circumstances here, the protection clause does not qualify NYMAGIC’s option to name mutually acceptable counsel pursuant to the naming clause. . . ." As a result, the court found that, "Once NYMAGIC clearly expressed its intention to fulfill its obligations and offered Lafarge a choice of six qualified law firms, it was incumbent upon Lafarge to act in good faith to consider agreeing to retain a firm from NYMAGIC’s list." The Court therefore refused to require NYMAGIC to reimburse Lafarge for those fees that were incurred by Goodwin Procter and Chaffe after NYMAGIC had provided a list of proposed defense counsel to Lafarge.

The Second Circuit rejected Lafarge’s argument that the Sutterfield & Webb law firm, which had only five attorneys, had inadequate resources to provide a proper defense to it. The Second Circuit pointed out that the initial list of law firms proposed by NYMAGIC included law firms of between 40 and 160 attorneys specializing in maritime law and experienced in class actions and that it was only after Lafarge refused to consider any of these larger firms that NYMAGIC retained Sutterfield to associate in the defense. In any event, the court rejected any unqualified suggestion that a small law firm is less competent than a larger firm pointing out that the Rules of Professional Responsibility would prohibit a law firm from undertaking a representation that it was unqualified to accept.

The court also rejected Lafarge’s suggestion that the sheer size of the anticipated Katrina claims created a conflict of interest that allowed it an independent right to select counsel of its own choosing without regard to the wording of the policies. The Second Circuit pointed out that, under New York law, "Independent counsel is only necessary in cases where the defense attorney’s duty to the insured would require that he defeat liability on any ground and his duty to the insurer would require that he defeat liability only upon grounds which would render the insurer liable." Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 401 (1981). In contrast to the issues in Goldfarb, the Second Circuit pointed out that both NYMAGIC and Lafarge shared a common interest in defeating Lafarge’s liability in the barge litigation. The court declined to find that the mere fact that Lafarge’s potential exposure far exceeded the limits of liability was itself a basis for finding a conflict. Indeed, the Second Circuit pointed out that the New York Court of Appeals had implicitly rejected a similar characterization of a "conflict" in Goldfarb when it observed: