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

The coverage dispute arose out of a pro se law suit brought by Carol Murphy, a local farmer who alleged that  dozens of state officials and other defendants (80 in all) had conspired to take away her animals by pursuing animal cruelty charges against her for failing to provide them with proper food, care and shelter.  Among the defendants was Dr. Robert Patterson,  who had examined the animals and testified about their condition at an Animal Possession hearing.

Patterson tendered the defense of Murphy's suit to Centennial, which had insured him under a Veterinarian's Professional Liability policy.  Centennial denied that testifying at a public hearing involved rendering "veterinary professional services" and commenced an action for declaratory relief in federal court.  Although Murphy's suit was soon thereafter dismissed with prejudice, Centennial's efforts to withdraw its coverage litigation as moot were denied by the U.S. District Court were denied owing to the fact that Dr. Patterson had incurred the cost of engaging his own defense counsel.  In 2006, the District Court ruled that Centennial owed coverage for the insured's defense costs ($121--hey, this is Maine) and DJ fees ($3036).  Centennial appealed.

On April 23, 2009, the First Circuit issued its opinion, affirming the lower court's finding of coverage.  Crucially, the court found that the conduct giving rise to Patterson's claimed liability was not just his public testimony but the examination and care for Murphy's animals that formed the basis for his testimony.  As a result, the court found that these actions involved his special training as a veterinarian and were properly the subject of coverage for "professional veterinary services” within the policy’s definition of a covered “veterinary incident.”

The court also observed that the policy would be triggered by the underlying complaint’s allegation that Dr. Patterson had committed libel and slander despite the fact that such allegations were apparently limited to various media outlets that were named as co-defendants in the Complaint. Furthermore, despite the fact that Centennial suggested that any covered libel or slander must occur in connection with the furnishing of professional veterinary services, the First Circuit observed that such events were unlikely to occur in the course of treating an animal and must therefore reasonably be given broader applicability to testimony that the insured was giving in the course of his special expertise and training as a veterinarian.

Finally, despite the fact that the underlying suit alleged that the statements were made with fraudulent intent, the First Circuit held that an exclusion to the policy for making knowingly false statements did not apply since allegations in a pro se Complaint characterizing Dr. Patterson’s actions as “criminal” for which he was “guilty” did not necessarily mean what they stated and might result in an ultimate determination that the insured was merely negligent.

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.