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

In making its decision, the Court noted that some jurisdictions have held that an insurer is not vicariously liable for the actions of insurer retained defense counsel, while other jurisdictions have held that the insurer is so liable. The Court then noted that where an insurer is defending under a reservation of rights, as here, the Court had previously adopted the enhanced good faith standard that the insurer and retained defense counsel must follow, as established by the Washington Supreme Court in Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1133 (1986). In this context, defense counsel represents only the insured, and not the insurer. Furthermore, Admiral would not control counsel’s professional judgment as that would be prevented by the attorney’s ethical obligation to the client, Lifestar. The Court further adopted the reasoning of Feliberty v. Damon, 72 N.Y.2d 112, 120, 527 N.E.2d 261, 265 (1988) that 1) the duty to defend is delegable by its very nature because insurers are not attorneys, 2) the paramount interest counsel represents is the insured’s, not the insurer’s, and 3) the insured’s remedy for defense counsel malpractice is an action against defense counsel. The Court then held that Admiral could not be vicariously liable for defense counsel’s alleged negligence or wantonness, further pointing out that “an insurance company is prohibited from practicing law and must rely on independent counsel to conduct litigation.”

Regence Bluecross successfully argued to the trial court that the claim was barred by the six year statute of limitations, ORS 12.080, because any breach occurred in May of 1999 when the company first changed the amount of its payments. The insured argued on appeal that there were multiple breaches: one for every month when Regence Bluecross paid 50% rather than 80% of the medication costs. While conceding that the statute of limitations barred her claim with respect to deficient payments prior to December of 2000, the insured argued that the statute did not bar her claim with respect to deficient payments after that time. The Court of Appeals agreed with the insured. After acknowledging the general rule that “an insurance contract is breached when benefits are wrongfully denied by the insurer,” the Court ruled that “each wrongful denial of a claim for benefits constitutes a discrete act by the insurer that causes harm to the insured separate from and independent of the injuries caused by the denial of other claims, and accordingly, constitutes a discrete breach of the obligation to pay benefits under the policy.”

The effect of the Pritchard ruling extends beyond the health insurance context. Take, for example, a coverage dispute over pollution clean-up costs. If the insurer denies a claim outright, that denial date should control for purposes of calculating the statute of limitations. Because, as the Pritchard court commented, “an ongoing accrual of economic damages does not extend the statute of limitations to revive a stale claim,” it should not matter if the insured continues tendering new bills related to the same clean-up claim: the original denial date will continue to control. However, if the insurer accepts coverage but disputes the amount that should be paid, there will be a new statute of limitations date for each time the insured tenders an invoice and the insurer pays less than what the insured claims is due. According to the Pritchard court’s reasoning, it would not matter if the insurer clearly stated more than six years ago that it would only pay a certain portion of any invoices submitted. Instead, each disputed payment would trigger a new statute of limitations date.
 

In May of 2002, the insureds sought coverage under a policy’s “collapse” provision after they learned that “hidden decay” had progressed to such a point that their home was in danger of an imminent collapse. Fabozzi, 2009 U.S. Dist. LEXIS 1109, at *7. Lexington sent a representative to investigate the claim, and the insureds alleged that the representative had assured them that the claim was covered and would be paid. Id., at *8. However, about two weeks later, Lexington sent a letter to the insureds advising them that an investigation was being conducted and that the company was reserving all of its rights under the policy. Id. at **8-9. The insureds asserted that over the next two-and-a-half years they repeatedly contacted their insurance broker who continued to reassure them that “Lexington is a good company,” and the claim would be paid. Id., at **10-11.

In October of 2004, the insureds filed suit against Lexington, alleging that it breached the insurance contract by failing to pay the claim. Id., at *13. In response to Lexington’s argument that the suit was barred by the policy’s two-year limitation on suits clause, the insureds argued that the “two-year limitation period did not begin to run until July 2003, after the cause of damage was determined.” Id., at *14. The Court reviewed case law from 1856 through 2008 in an attempt to determine when the two-year period commenced running. The review included a 1992 case wherein a New York court had held that a similar limitation of suits clause “did not begin to run until the full extent of the loss was known.” Id., at *20. However, the Court found that in more recent cases, “New York courts appear to have abandoned the rigid approach that underlay the ancient cases … in favor of a more flexible approach that considers the plain meaning of the contractual language.” Id., at *21. Accordingly, the Court applied the limitation of suits clause according to its plain language and held that the claim was time-barred. Id., at *22.

With respect to the insureds’ estoppel argument, the Court held that the letter Lexington sent to its insureds about two weeks after the Lexington representative visited the insureds’ home, “undercut any assurances that [the insureds] may have previously received.” Id., at *8. Moreover, due in part to the insurance broker’s reference to Lexington as a third-party, the Court held that the insureds “either knew or should have known that [they] could not rely on assurances” from the broker. Id., at *25. At the very least, the Court noted, the insureds should have realized that the claim would not likely be paid when Lexington took one of the insured’s depositions, prior to the litigation and prior to expiration of the two-year limitation period, that included several questions “which suggested Lexington’s belief that [the insured] had not given prompt notification of the damage.” Id., at *26.

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.
 

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.

The insured and its subsidiaries, as well as several other hospitals, had entered into a joint venture agreement for the delivery of health care services. The agreement provided for the sharing of governance structure, clinical planning strategies, and financial risks; however, the joint venture was not itself a separate legal entity.

The claim arose when the joint venture was served with investigative subpoenas and interrogatories by state and federal agencies in connection with investigations into whether the activities of the joint venture and member hospitals had violated state and federal antitrust statutes.
The insured incurred substantial fees in responding to the subpoenas, and sought coverage under a not-for-profit insurance policy issued to it and its subsidiaries, contending that the subpoena and interrogatories were “claims” within the meaning of the policy. The policy provided coverage for “claims” against an “insured” for “wrongful acts.” A “claim” was defined as “a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document.” A “wrongful act” was defined to a violation of the Sherman Antitrust Act or similar federal or state law. The carrier had denied coverage for the fees.

The court never reached the issue whether the investigative subpoenas constituted “claims” under the policy, concluding instead that there was no coverage because the joint venture was not itself a named insured on the policy. The court reasoned that because the joint venture was the designated recipient of the subpoena, and was the target of the investigation, the attorney’s fees and costs were incurred by the insured indirectly and “’solely by virtue of an independently imposed contractual obligation contained’ in the joint venture agreement to pay a share of the fees proportionate to its ownership interest.”

Can the court’s holding be reconciled with its findings? The court found that the subpoena sought material relevant to the activities of not only the joint venture, but the joint activities of the hospitals within the joint venture, including the inured. Moreover, the court found that the interrogatories defined joint venture broadly to include the insured. Finally, the court observed that the joint venture was not a separate legal entity.

It appears from these findings that the insured was as much a target of the investigation as the joint venture, and that the insured’s potential liability for violations of antitrust statutes was at least co-extensive with that of the venture. Therefore, the attorney’s fees and costs incurred by the insured in responding to the subpoena would have directly benefited the insured, not just the joint venture. Referring to the insuring agreement, these findings support the conclusion that a “claim” was made against the “insured” for “wrongful acts,” for which coverage was afforded under the policy.

The more interesting question, the answer to which might have justified the court's holding, is whether the investigative subpoenas and interrogatories were "claims," i.e., whether they constituted formal administrative or regulatory proceedings. This question was not addressed by the court.