No Contribution For Defense Of Additional Insured

Posted on May 22, 2008 by Sara Thorpe

The duty to defend, in the context of a contribution lawsuit between insurers, and the right to pursue appeal after an unfavorable summary adjudication ruling, were the subjects of a decision from California’s Court of Appeal, Second Appellate District (Los Angeles).

In Monticello Insurance Company v. Essex Insurance Company (2008) __ Cal.App.4th __ (2008 WL 1851316), the court of appeal affirmed the trial court’s ruling that Monticello failed to prove on motion for summary adjudication/judgment that Essex had a duty to contribute to the defense of a general contractor (“GC”) in a construction defect case.  Monticello was the direct insurer of the GC and Essex insured the GC as an additional insured under a policy issued to a drywall subcontractor. While the legal principles of equitable contribution may not be new, the case is an example of what evidence was found to be inadequate to substantiate the right to contribution. Both the trial and appellate courts (even though reviewing by different standards) found Monticello failed to show there was a potential that the drywaller’s work caused damage to other property.

(What the court does not address, and perhaps Monticello did not feature, was that Essex must have concluded there was a potential for coverage as it was defending its direct insured, the drywaller.)

 

The case suggests the insurer seeking contribution should consider: (1) continuing to provide additional information to the other insurer, which information may impact a decision on the duty to defend, and (2) filing an earlier declaratory relief action (while the defense is ongoing).

The court also addressed whether the parties had standing to appeal. The appeal followed a ruling on summary judgment/adjudication. There were still issues that could have been litigated further, but it did not make much sense to litigate in light of the court’s ruling. Therefore, the parties stipulated judgment would be entered against Monticello for purposes of concluding the case so Monticello could immediately appeal. The court found this appropriate under the circumstances.
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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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Waiver Creates Coverage for Uninsurable Losses

Posted on January 26, 2008 by Kevin Merriman

An insurer that undertakes the defense of its insured for a sufficiently lengthy period of time without reserving its rights to deny coverage waives coverage defenses. So held the 7th Circuit in Nutmeg Ins. Co. v. East Lake Management & Development Corp. (7th Cir. (Ill.) Jan. 22, 2008) (unreported). In this case, the insurer hired counsel to defend its insured, but did not issue a reservation of rights until two years later. The insurer continued to defend for another two years before issuing a coverage denial. The court concluded that, whether the delay was two or four years, it was too long under Illinois law. The court rejected arguments that the insured was required to demonstrate prejudice by the delay; while prejudice would be required to establish a claim of estoppel, the delay in this case constituted a waiver for which no showing of prejudice was required. The court also rejected arguments that the loss was uninsurable as a matter of state law, and that neither waiver nor estoppel could create coverage for uninsurable losses. Finding no Illinois cases, the court cited precedent in California and New Jersey for the proposition that the defense of uninsurability may be waived or forfeited, and predicted that Illinois courts would agree. Compare this holding with the rule in New York that an insurer cannot through waiver create coverage that a policy was not written to provide (see Schiff Assoc. v. Flack, 51 NY2d 692 (1980); Zappone v. Home Ins. Co., 55 NY2d 131 (1982); Central General Hosp. v. Chubb Group of Ins. Cos., 90 NY2d 195 (1997)). While coverage may be created by estoppel (which requires prejudice), waiver applies only to defenses based on policy exclusions and breach of policy conditions.

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