National Insurance Law Forum

National Insurance Law Forum

Published By The Attorneys of the National Insurance Law Forum

The Question of Allocation in Contribution Claims Between Insurers

Posted in Liability Coverage, Recent Cases

Often a number of insurers are involved in claims that concern damage that takes place over several years such as environmental damage claims.  Oregon law allows claims for contribution by non-settling insurers against settling insurers under certain circumstances, Certain Underwriters v. Mass. Bonding and Ins. Co., 235 Or. App. 99, 230 P.3d 103 (2010), and equitable contribution claims between insurers are becoming more common.  Yet there is little guidance for how to allocate defense costs or indemnity among insurers on the risk.

For coverage litigation concerning environmental claims, the 2013 amendments to the Oregon Environmental Cleanup Assistance Act (“OECAA”) provide that an insurer that has paid all or part of an environmental claim may seek contribution from any other insurer that is liable or potentially liable to the insured and that has not entered into a good-faith settlement agreement with the insured regarding the environmental claim.  ORS 465.480(4)(a).

Oregon’s Supreme and appellate courts have not addressed the method to allocate defense costs or indemnity among insurers on the risk when the claims are subject to the OECAA.  And while a few Oregon district courts have addressed the allocation question under the OECAA, the rulings on the method of allocation have varied.  Some Oregon district courts have ruled that the OECAA requires consideration of time on the risk only, whereas another ruled that the OECAA requires that both time on the risk and policy limits be considered.  Addressing this last ruling, the Ninth Circuit opined that the district court did not abuse its discretion in considering time on the risk and the applicable policy limits when allocating defense costs under the OECAA.  Nw. Pipe Co. v. RLI Ins. Co., 649 F. App’x 643 (9th Cir. 2016).  It is of note, however, that the Ninth Circuit’s reliance on whether the district court abused its discretion, rather than on whether its interpretation of the OECAA was correct, may viewed to permit the latitude to apply a different statutory interpretation.

Until an Oregon higher court is presented with, and decides, the issue of how to allocate defense costs or indemnity among insurers on the risk under the OECAA, there will continue to be limited guidance to insurers who are parties to such contribution claims.

Colorado Court of Appeals follows national equitable subrogation trend rejecting excess carrier’s bad faith claim against primary carrier.

Posted in Bad Faith/Extra Contractual, Excess and Umbrella Insurance, Recent Cases

By Stacy Broman and Danielle Dobry on April 11, 2018

Recently, the Colorado Court of Appeals in Preferred Professional Ins. Co. v. The Doctors Co., No. 17CA0405, 2018 WL 1633269 (Colo. Ct. App. Apr. 5, 2018) determined whether an excess insurer pursuing recovery under an equitable subrogation theory for a primary insurer’s failure to settle “steps into the shoes of the insured” and must plead the primary carrier’s bad faith. Preferred arose from an underlying medical malpractice suit. The court held that the derivative nature of equitable subrogation required the excess carrier to “step into the shoes of the insured” and plead a primary carrier’s bad faith refusal to settle. Because the excess insurer did not assert that the primary carrier acted in bad faith in refusing to settle underlying claims, the Colorado Court of Appeals reversed the lower court and remanded for entry of judgment of dismissal in the primary insurer’s favor.

In Preferred, the primary insurer defended the insured in the underlying suit.  The primary policy provided a $1 million coverage limit and required the insured’s consent before accepting any settlement offers. However, the primary carrier had the discretion to accept or reject any settlement offer. The excess carrier covered any loss exceeding the primary policy’s limit up to an additional $1 million. The plaintiff in the underlying suit offered to settle the case with the insured for $1 million and the insured expressed his desire to settle. The primary insurer rejected the settlement. However, the excess insurer advised that the insured should accept the offer and paid its $1 million to settle the case. Thereafter, the excess insurer sued the primary insurer under an equitable subrogation theory to seek payment of the $1 million paid to settle the underlying suit.

The court first held that the excess carrier must proceed on a theory of equitable subrogation based on the rights of the insured in his contract with the primary carrier and therefore must “step into the insured’s shoes.”  The court reasoned that equitable subrogation is derivative of the rights of the insured. The court further held that the excess insurer must plead the primary insurer’s bad faith refusal to settle. The court reasoned that the derivative nature of equitable subrogation held the excess carrier to the same requirements as the insured. The court further reasoned that under Colorado law the insured would be required to plead bad faith refusal to settle against its primary carrier and therefore, an excess insurer pursuing recovery under an equitable subrogation theory is held to the same standard.

While the Court of Appeals relied upon Colorado insurance law in its holdings, it also cited national case law in support of its position. The court recognized that other jurisdictions created an equitable subrogation remedy which required the excess carrier to be protected at least as much as the insured in its primary policy. See Twin City Fire Ins. Co. v. Country Mut. Ins. Co., 23 F.3d 1175, 1178 (7th Cir. 1994); Great Sw. Fire Ins. Co. v. CAN Ins. Co., 547 So.2d 1339, 1348 (La. Ct. App. 1989).

Further, the court cited to a national trend allowing an excess insurer to be equitably subrogated to the insured’s right to seek relief for a primary insurer’s alleged bad faith refusal to settle. See W. Am. Ins. Co. v. RLI Ins. Co., 698 F.3d 1069 (8th Cir. 2012); Nat’l Sur. Corp. v. Hartford Cas. Ins. Co., 493 F.3d 752 (6th Cir. 2007); Twin City Fire Ins., 23 F.3d at 1178; Hartford Accident & Indem. Co. v. Aetna Cas. & Sur. Co., 792 P.2d 749 (Ariz. 1990); Morrison Assurance Co., 600 So.2d at 1151; St. Paul Fire & Marine Ins. Co. v. Liberty Mutual Ins. Co., 353 P.3d 991 (Haw. 2015); Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818 (Mo. 2014); Truck Ins. Exch. of Farmers Ins. Grp. v. Century Indem. Co., 887 P.2d 455 (Wash. Ct. App. 1995).

This national trend can be traced back to cases such as Northfield Ins. Co. v. St. Paul Surplus Lines Ins. Co., 545 N.W.2d 57, 60 (Minn. Ct. App. 1996) that recognized the excess insurer is subrogated to its insured’s rights against the primary insurer for breach of the good faith duty to settle. For instance, in St. Paul Fire & Marine Ins. Co. v. Liberty Mutual Ins. Co., the Hawaii Supreme Court held that an excess insurer can bring an action against a primary insurer under equitable subrogation because of the broad nature in which Hawaii state courts apply the doctrine “in line with the majority of jurisdictions.” St. Paul Fire & Marine Ins. Co. v. Liberty Mutual Ins. Co., 353 P.3d 991, 993 (Haw. 2015). Similarly, the court in Scottsdale Ins. Co. v. Addison Ins. Co. noted in its equitable subrogation holding the national case law trend permitting equitable subrogation claims by an excess carrier against a primary carrier. Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818, 833 (Mo. 2014). Recent court decisions regarding equitable subrogation claims by an excess insurer against a primary insurer appear to rely at least in part on this body of case law.

Regarding the excess insurer’s requirement to plead and prove bad faith, the court in Preferred held that under Colorado law, “[t]he basis for tort liability is the insurer’s conduct in unreasonably refusing to pay a claim and failing to act in good faith, not the insured’s ultimate financial liability.” The court did not accept the primary insurer’s proposed bad faith test which would also require proof of the insured’s liability. See contra, Continental Cas. Co. v. Reserve Ins. Co., 238 N.W.2d 862 (Minn. 1976); Northfield Ins. Co., 545 N.W.2d 57.  This holding highlights that while states may allow subrogation by a primary carrier against an excess carrier, bad faith claims are not well accepted.

The Preferred holding reinforces a checks and balances system between primary and excess carriers. Allowing an excess carrier to only show a reasonable, good faith belief it should make a payment to settle a claim would extinguish a primary carrier’s right to control the insured’s defense by surrendering all settlement power to the excess insurer. Further, it would encourage excess carriers to settle an insured’s claim within primary policy limits without consideration of damages or liability. While the Preferred holding reinforces the principle that primary insurers retain discretion to act reasonably in response to settlement offers, the excess insurer is prevented from using unrestrained discretion it does not have. Preferred appears to be in line with national case law.

Identity Restoration Insurance: Why Would I Need That?

Posted in Property Insurance, Uncategorized

When retired nurse Helen Anderson[1] flew to visit her sick daughter, she let her niece, Samantha, housesit. Though she had instructed her niece that no friends were allowed over, Helen found Samantha in the house with her friend, Alice Lipski, when she returned. After asking Alice to leave, Helen didn’t think more about her friend being in her house.

It turns out that Alice was an expert identity thief and meth addict. After stealing mail and receipts from Helen’s home, she completely took over Helen’s identity, withdrawing money from existing bank accounts and opening new credit cards. She even signed up for a credit monitoring service so she could view Helen’s entire credit history. Alice reported every inactive card on Helen’s credit history as lost or stolen so she could get new cards, usernames, and passwords – effectively locking Helen out of her own accounts. The relevant bills and statements were rerouted to a different mailing address.

“I would call a credit card company. They’d ask for the account number and password, but I couldn’t give them either one.” All she could do was go to the stores and banks in person, and show her driver’s license to prove who she was. She would cancel the cards, and then later learn of a new wave of attacks.

Alice was finally caught after forgetting her purse at a Macy’s. She was charged with ten counts of identity theft; she and her friends had stolen nearly $1 million using the personal identification information of other people.

In the wake of the attacks, Helen sold her house of more than 40 years and moved in with her 95-year-old mother. Although her stolen funds were restored after she filed police reports, Helen’s credit score sunk 100-points during the months Alice was active. Nearly two years later, Helen was still cleaning up her damaged credit. She was stymied by the paperwork involved in getting the credit bureaus to correct her record and is fatalistic about the possibility of future fraud, “my information is out there.”[2]

Identity Theft and Fraud: Growing Concerns

Although the terms are often used interchangeably, an important distinction is made between them:

  • Identity fraud is generally used to refer to the unauthorized use of someone’s personal information for illicit financial gain. Identity fraud ranges from using a stolen payment card account for a fraudulent purchase to opening fraudulent new accounts.
  • Identity theft is unauthorized access to personal information. It can occur without identity fraud, such as through data breaches. Once the theft is used for illicit financial gain, some industry standards consider it fraud.

Despite high-profile efforts to combat the problems, the IRS has been challenged by identity theft and tax fraud. For the 2015 filing season, the IRS reported identifying 163,087 tax returns with more than $908.3 million claimed in fraudulent refunds and preventing the issuance of approximately $787 million (86.6%) in fraudulent refunds.[3]

According to Javelin Strategy & Research’s (Javelin) yearly Identity Fraud Study for the reporting year of 2016,[4] about 1 in every 16 U.S. adults were victims of ID theft (6.15%) — an increase in the incidence rate by 16% year over year.[5] The study also found that, despite industry efforts to prevent identity fraud, fraudsters victimized two million more U.S. consumers than in the prior year, with the amount stolen rising by one billion dollars, for a total of $16 billion.[6]

Javelin’s 2018 Identity Fraud Study reported that the number of identity fraud victims increased by eight percent (rising to 16.7 million) in 2017.[7] The study found that despite industry efforts to prevent identity fraud, fraudsters successfully adapted to net 1.3 million more victims in 2017, with the amount stolen rising to $16.8 billion.[8]

The Cost

The most obvious consequence that identity theft victims encounter is financial loss, which comes in two forms: direct and indirect. Direct financial loss refers to the amount of money stolen or misused by the identity theft offender.[9] Indirect financial loss includes any outside costs associated with identity theft, like legal fees or overdraft charges.[10]

Overall, in 2012 and 2014, victims who experienced a direct and indirect financial loss of at least $1 lost an average of $1,343, with a median loss of $300.[11] In addition to any direct financial loss, 5% of all identity theft victims reported indirect losses associated with the most recent incident of identity theft.[12] Victims who suffered an indirect loss of at least $1 reported an average indirect loss of $261 with a median of $10.[13]

In addition to suffering monetary losses, some identity theft victims experienced other financial and legal problems. They paid higher interest rates on credit cards, they were turned down for loans or other credit, their utilities were turned off, or they were the subject of criminal proceedings.[14] Victims who experienced the misuse of an existing account were generally less likely to experience financial and legal problems as a result of the incident than victims who had other personal information misused.[15] Thirty-six percent of identity theft victims reported moderate or severe emotional distress as a result of the incident.[16]

Insurer Response

Identity restoration insurance is widely available.  Allstate, Liberty Mutual, State Farm, and Travelers, all offer such coverage through an endorsement to homeowners or renters policies.[17] While it does not protect you from identity theft, identity restoration insurance can make the recovery process easier, faster, and less expensive.

The coverage would not reimburse an insured for fraudulent credit card charges, stolen money or missing tax refunds. Instead, it would provide coverage for expenses related to dealing with the aftermath of having your identity stolen and/or used to commit fraud. This coverage is typically offered for about $35 per year, and would be added an existing policy insuring a home, apartment, condominium, manufactured home, or farm. Coverage would extend to the named insured’s household (ie, spouse, and relatives/dependents (under 21 years old) living in the subject residence). Limits range around $15,000 per occurrence and $30,000 per policy period, with deductibles from $100 to $500.[18]

Coverages typically exist for the following types of expenses:

  • Approved reasonable attorney fees. Victims have been known to spend thousands of dollars on attorney fees as they work to restore their good name.
  • Employer-documented lost wages for work time lost to meet with attorneys, law officials, and others concerning your claim.
  • Loan application fees when reapplying for a loan that was rejected due to credit fraud.
  • Costs for notarizing the appropriate official documents.
  • Costs for certified mail to appropriate law enforcement agencies, financial institutions, etc.
  • Related long-distance phone calls to merchants, law enforcement agencies, creditors, etc.

In addition to expense reimbursement, some identity restoration insurance may include the assignment of a case manager who would work directly with an insured’s credit card companies, credit bureaus, creditors, and other financial institutions for up to one full year for a covered incident.

Conclusion

What happened to Helen Anderson is a nightmare that has taken her years to overcome. But her situation appears to be an extreme case. In fact, you are unlikely to be a victim of identity theft and/or fraud, although data breaches like those at Yahoo (2013-2014), eBay (2014), Anthem (2015), and Equifax (2017), appear to be ‘improving’ your odds. Even if a person’s identity is stolen and used to commit fraud, however, the DOJ’s study shows the impact is likely to be more manageable than what Ms. Anderson has experienced.

Nevertheless, beyond money lost, identity theft and/or fraud can negatively impact credit scores. While credit card companies detect a majority of credit card fraud cases, the rest can go undetected for extended periods of time. A criminal’s delinquent payments, cash loans, or even foreclosures slowly manifest as weakened credit scores. Victims often only discover the problem when they are denied for a loan or a new credit card.

Therefore, a real value of the $35 per year coverage may be having the assistance of a dedicated counselor to help you through the process of restoring your credit. Having a case manager working on your behalf can streamline the process, and his or her experience and contacts can make it more effective. If you’d rather do the work yourself, a case manager can provide an identity recovery guide that shows what steps to take after discovering identity theft and/or fraud, and has other useful information to aid with the identity restoration process.

Another valuable benefit of some identity restoration insurance is a year of credit monitoring service provided after you’ve been victimized. As it is a service which typically costs $120 to $180 per year,[19] having it could make the coverage worthwhile on its own.

Whether or not identity restoration insurance makes sense is a decision for the individual consumer. Along with the cost, other considerations to include are your ability to conduct your own research as to identity and credit restoration, comfort level in dealing with banks and credit bureaus, and the amount of time you will be able to dedicate to the process.

[1] Name changed to protect identity.

[2] “She Stole My Life,” by Doug Shadel, AARP The Magazine, Oct/Nov 2014.

[3] Treasury Inspector General for Tax Administration – Press Release, Sep. 21, 2015. ttps://www.treasury.gov/tigta/press/press_tigta-2015-28.htm

[4] Javelin Strategy & Research. Under the heading, “Contributing Organizations,” the report states:

The study was made possible in part by LifeLock, Inc. To preserve the project’s independence and bjectivity, the sponsors of this project was not involved in the tabulation, analysis, or reporting of final results.

[5] https://www.javelinstrategy.com/press-release/identity-fraud-hits-record-high-154-million-us-victims-2016-16-percent-according-new

[6] Id.

[7] A record high since Javelin Strategy & Research began tracking identity fraud in 2003. 2017 Identity Fraud Study, Javelin Strategy & Research. https://www.javelinstrategy.com/press-release/identity-fraud-hits-all-time-high-167-million-us-victims-2017-according-new-javelin

[8] Id.

[9] “Victims of Identity Theft,” Bulletin, at p. 6, Erika Harrell, Ph.D., BJS Statistician, Sep. 2015. https://www.bjs.gov/content/pub/pdf/vit14.pdf

[10] Id.

[11] Id.

[12] Id. at p. 7.

[13] Id.

[14] Id. at p. 8.

[15] Id.

[16] Id. at p. 1.

[17] “Identity Theft Insurance: What Does It Cover And Is It Worth it?” Forbes Mar. 31, 2016, Janet Berry-Johnson.

[18] Id.

[19] “Identity Theft Insurance: What Does It Cover And Is It Worth it?” Forbes Mar. 31, 2016, Janet Berry-Johnson.

P.F. Chang’s China Bistro, Inc. v. Fed. Ins. Co.

Posted in Recent Cases

Whether it is Russian election hacking or the major data breaches that have made headlines recently, it is difficult to think of a day in recent memory in which we haven’t heard about hacking or data breaches.  In light of this climate, it is no surprise that the market of insurance against cyber risks and data breaches is growing rapidly.  Because of the novelty of cybersecurity insurance policies, there appears to be very little judicial guidance as to what types of losses are covered and what losses may be properly excluded from coverage.  However, the case of P.F. Chang’s China Bistro, Inc. v. Fed. Ins. Co.[1] may provide insight into how courts may address coverage of losses common to data breaches as similar cases are litigated in the future.

In 2014, Federal Insurance Company (“Federal”) sold a “CyberSecurity Policy” (“the Policy”) to P.F. Chang’s, parent company, which it marketed as “a flexible insurance solution designed by cyber risk experts to address the full breadth of risks associated with doing business in today’s technology-dependent world.”  The majority of P.F. Chang’s customer transactions were made with credit cards and it contracted with Bank of America Merchant Services (“BAMS”) to service all of its credit card transactions.  Under that agreement, P.F. Chang’s agreed to compensate BAMS for all “fees, fines, penalties, or assessments” imposed on BAMS by credit card associations.

On June 10, 2014, P.F. Chang’s learned that hackers had breached their systems and stolen approximately 60,000 customer credit card numbers, and it notified Federal the same day.  Federal paid more than $1,700,000 to P.F. Chang’s for covered losses incurred as a result of the data breach.  However, on March 2, 2015, BAMS requested that P.F. Chang’s pay, pursuant to their agreement, an assessment of $1,716,908.85, which the credit card companies claimed was the total cost that they incurred as a result of the data breach for issuing new cards, changing account numbers, paying fraud protection, etc.  P.F. Chang’s submitted the assessment to Federal for payment under the Policy.  Federal denied the claim and P.F. Chang’s filed suit for breach of contract.

On Federal’s Motion for Summary Judgment, it argued that the loss was not covered by the applicable insuring agreements, and was otherwise excluded by the Policy.  Federal argued that the primary insuring agreement did not cover the loss because it only applied to “Privacy Injury”, which was defined as “injury sustained or allegedly sustained by a person because of actual or potential unauthorized access to such person’s record.”  Federal argued that the BAMS assessment was not a “Privacy Injury” because none of BAMS’s or the credit card companies’ records were breached.  The Court agreed.

However, the Court did find that the Policy covered the BAMS assessment under two other provisions.  First, the “Privacy Notification Expenses” clause provided that Federal would pay all costs incurred by P.F. Chang’s to notify “those persons who may be directly affected by the potential or actual [data breach] and changing such person’s account numbers, other identification numbers and security codes.”  Federal argued that because the costs were “incurred” by the credit card companies and BAMS, rather than P.F. Chang’s directly, the Policy did not cover them.  The Court disagreed finding that the term “incur” included P.F. Chang’s contractual obligations to pay such costs.  Second, Federal argued that the loss was not covered under the catch-all “Extra Expenses” provision, because the loss was paid after the “Period of Recovery Services.”  The Court flatly rejected that argument because P.F. Chang’s contended that it’s recovery from the breach was ongoing.

Nonetheless, the Court granted summary judgment in favor of Federal because two exclusions and the definition of “Loss” in the Policy did not allow P.F. Chang’s to recover for contractual losses.  The Policy defined loss broadly but specifically did not include “any costs or expenses incurred to perform any obligation assumed by, on behalf of, or with the consent of any insured.”  Similarly, one provision excluded coverage for “any loss on account of any claim, or for any expense based upon, arising from or in consequence of any…liability assumed by any insured under any contract or agreement.”   Another provision excluded coverage for “any costs or expenses incurred to perform any obligation assumed by, on behalf of, or with the consent of any insured.”  P.F. Chang’s argued that the loss was common to data breaches and that it could be liable for the costs of the assessment under a number of theories.

In making its decision, the Court acknowledged that “because cybersecurity insurance policies are relatively new to the market,” it looked to cases analyzing commercial general liability policies in order to interpret the Policy.  Ultimately, the Court ruled that the only conclusion a jury could reach was that the assessment was contractual and that it was excluded under the Policy.

While we have yet to see much litigation of these coverage issues, this case may provide meaningful insight for the future.  The important takeaways here are that the Court interpreted coverage broadly, but upheld the contractual damages exclusions by relying on existing cases interpreting commercial general liability policies.  It seems likely that Courts will continue to rely on interpretations of existing policy types when analyzing the relatively new category of cybersecurity policies.

[1] P.F. Chang’s China Bistro, Inc. v. Fed. Ins. Co., 2016 U.S. Dist. LEXIS 70749, 2016 WL 3055111 (May 31, 2016, D. Ariz.)

Tenth Circuit finds no duty to defend alleged TCPA violations.

Posted in Duty to Defend, Liability Coverage, Recent Cases

By Stacy Broman and Danielle Dobry on March 7, 2018

Posted in Duty to Defend, Liability Coverage, Recent Cases

The Tenth Circuit Court of Appeals recently decided ACE American Insurance Co. v. Dish Network, LLC, No. 17-1140, 2018 WL 988404 (10th Cir. Feb. 21, 2018), a case involving whether statutory damages and injunctive relief  under the Telephone Consumer Protection Act (“TCPA”) were insurable “damages” triggering a duty to defend or uninsurable “penalties.” The Tenth Circuit held that the insurer had no duty to defend or indemnify. The court reasoned that the statutory claim for damages under the TCPA was penal in nature. The Dish Network case serves as an example of the particularity in which alleged damages may be analyzed by the courts in order to determine the duty to defend.

In Dish Network, the federal government and state plaintiffs of California, Illinois, North Carolina, and Ohio sued DISH Network (“DISH”) for violations of the TCPA. The TCPA allows states to bring a civil action on behalf of its residents to enjoin calls, an action to recover for actual monetary loss or receive $500 in damages for each violation, or both. 47 U.S.C. § 227(g)(1). Further, each violation committed “willfully or knowingly” allows up to $1,500 in treble damages. Id.

In the complaint, plaintiffs alleged that DISH violated the TCPA and sought “a permanent injunction and other equitable relief.” Further, the complaint alleged that DISH’s TCPA violations were willful and knowing. The complaint further alleged that “[c]onsumers in the United States have suffered and will suffer injury as a result of [DISH’s] violations of the…TCPA… Absent injunctive relief by this Court, [DISH] is likely to continue to injure consumers and harm the public interest.” The complaint additionally requested in its prayer for relief to permanently enjoin DISH from violating the TCPA, and to award $1,500 for each willful and knowing violation and $500 for each violation of TCPA that was not willful or knowing.

ACE insured DISH from 2004 to 2012 under general liability policies. Coverage B of the CGL policy had a broadcaster exclusion for personal or advertising injury when committed by an insured whose business is “[a]dvertising, broadcasting, publishing or telecasting.” From 2006 to 2012, Coverage B also had a specific TCPA exclusion.

Following tender of the initial complaint, ACE denied coverage under Coverage A, and reserved rights as to potential coverage under Coverage B. After the second amended complaint was filed, ACE again reserved rights as to potential coverage under Coverage B. In December 2013, ACE, according to the opinion, determined that DISH was entitled to coverage and issued a check for $913,650.

Subsequently, ACE reversed its coverage determination and filed a declaratory judgment action. ACE sought a declaration that it had no duty to defend or indemnify DISH. The district court held there was no coverage and therefore no duty to defend or indemnify. The court reasoned the TCPA statutory damages were a penalty and uninsurable as to Coverages A and B under Colorado public policy. Further, the district court held that the injunctive relief did not constitute “damages” under the policies. The court additionally held that the broadcaster exception barred coverage. DISH appealed the district court’s ruling.

First, the court analyzed the statutory claim for damages under the TCPA. DISH asserted that the TCPA damages for non-willful violations were not penal because they were liquidated damages and not punitive damages. First, the court used the punitive damages test in Kruse v. McKenna, 178 P.3d 1198 (Colo. 2008). The three-part tests includes whether (1) the statute asserted a new and distinct cause of action; (2) the claim would allow recovery without proof of actual damages; and (3) the claim would allow an award in excess of actual damages. While the Kruse case dealt with the issue of assignability, the Dish Network court found that its test and holding applied to insurance coverage. The court held that under Colorado law the TCPA statutory damages were penalties. The court ultimately reasoned that Colorado courts focus on the particular TCPA remedy sought, and that when the claim is for statutory damages, the remedy is penal in nature.

Further, DISH maintained that the TCPA’s provision regarding actual monetary loss was an insurable remedial provision under Colorado law to trigger a duty to defend. The court first acknowledged Colorado law addressing the distinction between penal and remedial remedies when they arise from the same statutory section. Whereas penal damages are in excess of actual damages to deter certain conduct, remedial damages constitute the recovery of the actual amount of damages suffered. Further, the court relied on the Colorado Court of Appeals holding in U.S. Fax Law Ctr., Inc. v. T2 Techs, Inc., 183 P.3d 642 (Colo. Ct. App. 2007) which determined that alleged TCPA statutory damages are penal. The court determined that it must engage in a fact-specific inquiry to determine whether a plaintiff alleged remedial or penal damages. The court held that the plaintiffs explicitly alleged penal damages. The court reasoned the way in which plaintiffs pled their requested relief requested statutory damages.

DISH also argued that Colorado public policy did not apply to claims against DISH for unknowing violations of the TCPA. The court held that statutory damages were uninsurable under Colorado public policy and barred coverage. The court reasoned that Colorado law prohibits insuring against punitive damages and that the TCPA’s statutory damages are penal. Therefore, ACE had no duty to defend DISH.

Next, the court analyzed the equitable relief claim for damages under the TCPA. DISH claimed the term “damages” was broad enough to cover equitable relief. DISH also asserted costs associated with compliance with an injunction were insurable damages under its policies. The court held that damages for equitable relief were not covered by the policies because the equitable remedy requested was to prevent future damages. The court reasoned that the policies provided indemnification for past injuries, not the costs to prevent future injuries. Finally, DISH argued that its request for “other ancillary relief to remedy injuries caused by DISH Network’s violation of the TCPA” qualified as a request for compensation for past injuries. The court held that the “other ancillary relief” provision did not trigger the duty to defend. The court reasoned that it would not interpret the “other ancillary relief” provision to make it virtually impossible for insurers to avoid the duty to defend. The court ultimately concluded that because the equitable relief claims created no duty to indemnify, there was no duty to defend the equitable relief claims.

In light of Dish Network, the intersection of alleged statutory and equitable damages arising under statute creates compelling arguments for an insurer regarding non-covered “penalties” versus covered “damages.”

GOOD FAITH DEFENSE OF WASTING LIMITS POLICIES

Posted in Duty to Defend

Defending under a policy with a wasting limit is rife with pitfalls for both the insurer and defense counsel.  Provisions that transform a policy into a “wasting limits policy” often appear in professional liability policies, drop-down coverage situations, and excess policies. Policies with such wasting limits provisions go by many names: wasting, eroding, burning, exhausting, self-consuming, self-reducing, self-liquidating, and cannibalizing, to name a few.  When a policy contains a wasting limits provision, the limits of the policy are reduced by defense costs and when the limit is exhausted, the duty to defend and indemnify is extinguished.  Such policies are also said to provide a defense “within limits.”  A wasting limit presents unique issues for insurers and defense counsel alike and failure to navigate these potential conflicts raises the risk of bad faith litigation down the line.  The following are a few issues to consider when defending wasting limits policies.

As with any policy, before relying on a wasting limits provision, it is important to determine whether it is enforceable.  See, e.g., Ill. Union Ins. Co. v. N. County Ob-Gyn Med. Group, Inc., No. 09cv2123, 2010 U.S. Dist. LEXIS 50095 (S.D. Cal. May 18, 2010) (ambiguity as to definition of “Costs, Charges, and Expenses” defeated insurer’s claim that its policy was wasting).  In Ill. Union Ins. Co., one of the many issues with the policy was that it provided for a duty to defend, but did not contain any limit on that duty.  Id. at *7.  Cf. Amerisure Mut. Ins. Co. v. Arch Specialty Ins. Co., 784 F.3d 270 (5th Cir. 2015) (holding that wasting limits endorsement was unambiguous and insurer did not “improperly exhaust” the limits by paying defense costs).

A wasting limits policy may complicate an insurer’s duty and ability to settle claims. See, e.g., Okada v. MGIC Indem. Corp., 823 F.2d 276, 283–84 (1986) (reversal of summary judgment against insurer that it acted in bad faith by not participating in settlement discussions because its wasting limits policy had been exhausted by defense costs).  An underlying issue that complicates settlement is the relationship of defense counsel to the insured.  Because insurance policies often allocate both the authority to settle and hire defense counsel to the insurer, this can create problems in the context of wasting limits policies.

For example, under a conventional policy, the insured may have little interest in keeping defense costs and attorney fees down, while under a wasting limits policy, the insured has a vested interest in having limits sufficient to cover damages.  This unique situation somewhat alters the general duty of insurers to settle within policy limits because the limit is constantly decreasing.  In the case of an actual excess judgment scenario, an insured will almost certainly scrutinize the insurer’s decision to continue to litigate because every dollar spent in defense costs by the insurer is another dollar that the insured will have to pay in excess of whatever limits are left at the end of a case.  If such a conflict is foreseeable, one way to prevent later disputes would be to openly communicate defense cost choices with the insured or even to completely relinquish the right to control defense costs.

Ultimately, open and frequent communications are essential in good faith handling of wasting limit policy cases.  A reservation of rights letter communicating the implications of the wasting limit is essential.  In fact, in at least one case, it appears that a lack of communication by the insurer worked to the insurer’s disfavor with the court.  See Ill. Union Ins. Co., supra at *17.  Frequent communication about settlement and the available limits are especially important in the context of wasting limits policies and may help in the event claims are made against the insurer after an excess judgment.

A Theoretical Safety on the Trigger of the Duty to Defend

Posted in Duty to Defend, Liability Coverage, News, Recent Cases

The Eleventh Circuit of the United States Court of Appeals recently decided Selective Insurance Company of the Southeast v. William P. White Racing Stables, Inc., et al., 2017 WL 6368843 (December 13, 2017), a case addressing limits upon what facts and legal theories may give rise to a duty to defend. In an unpublished opinion,[1] the court held the district court erred in finding a duty to defend based upon a theory of liability which was not pled, even though it agreed the facts alleged in the complaint could support a claim apparently within the scope of coverage provided by the liability policy.

Selective Insurance Company of the Southeast (Selective) filed an action for declaratory judgment in the Southern District of Florida of the United States District Court, invoking the court’s diversity jurisdiction. Selective asserted it had no duty to defend its insured, William P. White Racing Stables (White Racing), in a lawsuit brought by a former employee, James Rivera. The district court determined Selective owed a duty to defend, and entered a partial declaratory judgment in favor of White Racing.

Rivera had been paralyzed from the neck down as the result of an accident at the Calder Race Track in Miami Gardens, Florida. Rivera was injured when the horse he was riding at full gallop suddenly collapsed. Rivera asserted the horse was unfit to be exercised or raced due to an injury which had been concealed by steroids and other medications.

Rivera sued White Racing, the track, and several veterinarians, alleging the negligence of nearly all defendants caused his injuries. But Rivera did not assert a negligence claim against White Racing. Instead, the two counts against White Racing were based upon its alleged failure to preserve the remains of the horse (preventing any testing for performance-enhancing drugs): Count VIII asserted a claim under the Florida Worker’s Compensation Statute for failure to cooperate in investigating and prosecuting Rivera’s claims against a third-party tortfeasor; and Count IX asserted a claim for spoliation of evidence.

White Racing had been issued both a worker’s compensation policy and an employer’s liability policy by Selective. Selective paid benefits to Rivera under the worker’s compensation policy, but maintained there was no duty to defend against the claims of Counts VIII and IX because they did not fall within the terms of the liability policy’s coverage for damages arising from “bodily injury by accident.” Arguing Rivera’s claims against White Racing were for economic damages that arose from duties to preserve evidence, and not bodily injury, Selective sought the district court’s declaration that it had no duty to defend.

White Racing conceded Counts VIII and IX did not fall within the coverage afforded by the liability policy, but argued that Selective was obligated to defend because the facts alleged in the complaint could support a negligence claim against White Racing for Rivera’s injuries. Ruling on competing motions for summary judgment, the district court entered partial declaratory judgment in favor White Racing. Selective appealed.

Under Florida law (and the law of a majority of states), an insurer’s duty to defend depends solely upon the facts and legal theories alleged in the pleadings and claims against the insured. For the duty to be triggered, “[t]he allegations within the complaint must state a cause of action that seeks recovery for the type of damages covered by the insurance policy in question.”[2] Broadly interpreting the duty to defend, the Eleventh Circuit reasoned the “insurer must defend even if facts alleged are actually untrue or legal theories unsound.”[3]

Turning to the Complaint, the Eleventh Circuit noted the Florida Supreme Court previously found claims against an insured for breaching a duty to preserve evidence fell outside the coverage provided by a liability policy applying to “bodily injury by accident.”[4] Accordingly, the Eleventh Circuit held Counts VIII and IX did not give rise to a duty to defend.

The Eleventh Circuit next considered White Racing’s argument that the duty to defend is determined by the totality of the factual allegations in the complaint, irrespective of the specific counts pled, with all doubts resolved in favor of the insured. The district court had agreed with this argument, and concluded the facts alleged in the complaint could support a finding of negligence against White Racing for Rivera’s injuries. Selective objected to the argument on two grounds: first, the duty to defend cannot be based on a theoretical claim that was not actually pled; and second, no negligence claim against White Racing could be pursued because of a worker’s compensation exclusion in the liability policy.

With no Florida decision directly on-point, the Eleventh Circuit found the instant facts fell between two broad principles:

  1. Insureds generally may not trigger the duty to defend by invoking theories of liability that were not alleged in the complaint.[5]
  2. Allegations that support alternative theories of liability, some covered by the policy and some not, still trigger the duty to defend.[6]

Under Florida law, an insurer “is not required to defend if it would not be bound to indemnify the insured even though the plaintiff should prevail in his action.”[7] The Eleventh Circuit found the complaint clearly sought recovery for damages due to Rivera being unable to prove a cause of action, as a consequence of White Racing’s failure to preserve evidence. The Florida Supreme Court determined that such damages are not covered by a liability policy.[8] Because the complaint did not seek damages arising from “bodily injury by accident,” the Eleventh Circuit found Selective would not be bound to indemnify White Racing, even if Rivera prevailed in the lawsuit. Accordingly, the court held Selective had no duty to defend White Racing against Rivera’s claims.[9]

Though it agreed the facts alleged in the complaint could support a claim of negligence against White Racing, the Eleventh Circuit did not conclude the Florida Supreme Court would find a duty to defend based on the “mere theoretical possibility” that Rivera could later assert such a claim. The Eleventh Circuit noted no such claim was asserted against White Racing, though it had been asserted against other parties, suggesting Rivera’s available remedies were limited by complications arising from his receipt of worker’s compensation benefits. Distinguishing Baron Oil Co. (a decision by an intermediate Florida appellate court, see FN 6) and similar authority that permit evaluation of alternative theories of liability suggested by, but not expressly alleged in, the complaint, the Eleventh Circuit found the possible negligence claim constructed by White Racing to be entirely distinct from, and not an alternative to, the spoliation claims alleged in the complaint. As a consequence, the court concluded a claim of negligence was only a “hypothetical possibility,” that did not trigger Selective’s duty to defend. However, the court noted the duty could arise later if Rivera subsequently raised a bodily-injury negligence claim.

The Eleventh Circuit’s decision is unpublished. According to Rule 36-2 of the U.S. Ct. of App. 11th Cir., “[u]npublished opinions are not considered binding precedent, but they may be cited as persuasive authority.” In support of its persuasive authority is the decision of the Florida intermediate appellate court in Chicago Title Ins. Co., holding that insureds generally may not trigger the duty to defend by invoking theories of liability that were not alleged in the complaint.[10] The court’s suggestion that White Racing’s argument was doomed, or at least too unrelated to the theory of recovery actually pled, to be considered as an alternative theory under Baron Oil Co., is dicta and therefore may have less persuasive authority. Though not precedent, the Eleventh Circuit’s opinion in Southeast v. William P. White Racing Stables, Inc., et al. is an interesting consideration of the two analyses of when the duty to defend is triggered, and suggestive of how the competing arguments can be framed.

 

[1] U.S. Ct. of App. 11th Cir. Rule 31-2. Citing Judicial Dispositions

(a) Citation Permitted.  A court may not prohibit or restrict the citation of federal judicial opinions, orders, judgments, or other written dispositions that have been:

(i) designated as “unpublished,” “not for publication,” “non-precedential,” “not precedent,” or the like; and

(ii) issued on or after January 1, 2007.

. . .

U.S. Ct. of App. 11th Cir. Rule 36-2. Unpublished Opinions

An opinion shall be unpublished unless a majority of the panel decides to publish it. Unpublished opinions are not considered binding precedent, but they may be cited as persuasive authority. If the text of an unpublished opinion is not available on the internet, a copy of the unpublished opinion must be attached to or incorporated within the brief, petition, motion or response in which such citation is made. But see I.O.P. 7, Citation to Unpublished Opinions by the Court, following this rule.

[2] State Farm Fire & Cas. Co. v. Tippett, 864 So.2d 31, 35–36 (Fla. Dist. Ct. App. 2003).

[3] Lawyers Title Ins. Corp. v. JDC (Am.) Corp., 52 F.3d 1575, 1580 (11th Cir. 1995)

[4] Humana Worker’s Comp. Servs. v. Home Emergency Servs., Inc., 842 So.2d 778, 781 (Fla. 2003).

[5] Citing Chicago Title Ins. Co. v. CV Reit, Inc., 588 So.2d 1075, 1076 (Fla. Dist. Ct. App. 1991) (“[W]hether or not a duty to defend exists arises from the allegations of the complaint itself, not on some conclusions drawn by the insured based upon a theory of liability which has not been pled.” (citations omitted))

[6] Citing Baron Oil Co. v. Nationwide Mut. Fire Ins. Co., 470 So.2d 810, 813–14 (Fla. Dist. Ct. App. 1985) (“If the complaint alleges facts showing two or more grounds for liability, one being within the insurance coverage and the other not, the insurer is obligated to defend the entire suit.”)

[7] Capoferri v. Allstate Ins. Co., 322 So.2d 625, 627 (Fla. Dist. Ct. App. 1975).

[8] Humana Worker’s Comp. Servs.

[9] Because it concluded there is no duty to defend based on the allegations in the complaint, the court did not consider Selective’s arguments that the worker’s compensation exclusion negated any duty that it would have had to defend a possible negligence claim

[10] Chicago Title Ins. Co. v. CV Reit, Inc.,FN 5 supra

Lessons learned from the Georgia Court of Appeals’ ruling in Hughes concerning an insurer’s good faith settlement obligations.

Posted in Bad Faith/Extra Contractual, Recent Cases

By Stacy Broman and Danielle Dobry on January 16, 2018

The Georgia Court of Appeals recently decided Hughes v. First Acceptance Ins. Co. of Georgia, No. A17A0735, 2017 WL 5013371 (Ga. Ct. App. Nov. 2, 2017), a case involving whether an insurer was liable for negligence or bad faith failure to settle. The Court of Appeals found that genuine issues of material fact precluded summary judgment. The Court reasoned that an insurer may, in good faith and without notification to others, settle part of multiple claims against its insureds even though such settlements deplete or exhaust policy limits. The Court reasoned that under the facts of the case, the possibility of settling other claims within policy limits and an insurer’s knowledge of the possibility were not dispositive of the failure to settle a claim. The Hughes case serves as a reminder to keep an insurer’s good faith settlement obligations in mind when confronted with similar scenarios.

In Hughes, Ronald Jackson caused a five-vehicle collision. The collision resulted in Jackson’s death and injured others, including Julie An and her minor child, Jina Hong. Jackson was insured by First Acceptance of Georgia, Inc. Jackson’s policy had liability limits of $25,000 per person and $50,000 per accident. Following the collision, letters were exchanged between An & Hong’s counsel and First Acceptance’s counsel regarding potential settlement demands and settlement conferences.

On June 2, 2009 An & Hong’s counsel sent two letters which An & Hong would later assert were an offer to settle with a 30-day response deadline. The first letter recognized First Acceptance’s interests in a settlement conference, provided that An & Hong were interested in resolving the matter within the insured’s policy limits and expressed interest in participating in a settlement conference. The second letter requested First Acceptance provide insurance information in 30 days and that any settlement would be conditioned upon receipt of the insurance information.

On July 10, 2009 An & Hong filed a personal injury action against Jackson’s estate. On July 13, 2009, An & Hong withdrew their June 2, 2009 offer to settle. On July 17, 2009 First Acceptance sent a letter to An & Hong’s counsel and asserted that the June 2, 2009 letters had been temporarily lost which resulted in no response. On July 20, 2009, First Acceptance’s counsel responded to An & Hong’s counsel and advised that a settlement conference with all potential claimants would be scheduled within two weeks. On July 30, 2009, First Acceptance’s counsel wrote to all parties that a settlement conference would take place on September 1, 2009. An & Hong’s counsel did not participate in the conference.

On January 18, 2010 First Acceptance offered $25,000 to settle Hong’s claims which was rejected. On October 1, 2010, An & Hong rejected an offer of $50,000 to settle their claims collectively. The personal injury lawsuit went to trial in July 2012 and final judgement was entered in favor of An & Hong. The jury entered an award of $5,334,220 for Hong’s injuries.

In June 2014, the administrator of Jackson’s estate filed an action against First Acceptance. The administrator alleged that First Acceptance either negligently or in bad faith failed to settle Hong’s claim. The administrator requested damages in the amount of the difference of the jury award and First Acceptance’s $25,000 tender as well as punitive damages and attorney’s fees.

Following a hearing on cross-motions for summary judgment, the trial court denied the administrator’s motion and granted First Acceptance’s motion. The Court of Appeals held that there were issues of material fact regarding the failure to settle claim.

First, the Court of Appeals reasoned there was a genuine issue of material fact as to whether An & Hong’s June 2, 2009 letters were offers to settle within the insured’s policy limits and whether the offer included a 30-day response deadline.

Next, the Court of Appeals found that there were issues of fact regarding whether First Acceptance acted reasonably in responding to the offer. While the trial court held that summary judgment for First Acceptance was appropriate because there was no evidence to show it knew or should have known claims against the insured could have been settled within policy limits, the Court of Appeals found this reasoning misplaced. In holding that the trial court erred in granting summary judgment to First Acceptance, the Court of Appeals made clear that an insurer may, in good faith, and without notice to others, settle parts of multiple claims against its insured even though such settlements depleted or exhausted policy limits. Ultimately, under the facts of Hughes, the possibility of settling other claims within policy limits and an insurer’s knowledge of the possibility were not dispositive of the failure to settle claim. The Court of Appeals determined that those are factors a jury could consider to decide whether an insurer acted reasonably in response to an offer to settle within policy limits.

The Court of Appeals additionally held that the trial court did not err in granting summary judgment in favor of First Acceptance on the claim for attorney fees and punitive damages. The Court of Appeals reasoned that the administrator showed no evidence of bad faith or willful or wanton conduct to support those claims. The Court found fact questions regarding whether a time-limited demand existed and whether the insurer acted reasonably in responding to any such demand.

In light of Hughes, it is imperative that insurers understand their settlement obligations. An insurer is obligated to act reasonably in responding to settlement offers. To determine whether an insurer was negligent in failing to settle, Georgia courts, similar to several other jurisdictions, use the ordinarily prudent insurer standard.  The ordinarily prudent insurer standard assesses whether an ordinarily prudent insurer would consider choosing to try the case an unreasonable risk of subjecting the insured to an excess verdict. In responding to a settlement offer, the insurer must give equal consideration to an insured’s interests.

Washington Supreme Court decision raises questions for law firms that both represent insurers and defend the insurer’s policyholders

Posted in Duty to Defend, Liability Coverage, Recent Cases

The Washington Supreme Court recently decided Arden v. Forsberg & Umlauf, P.S., 2017 Wash. LEXIS 911 (September 14, 2017), a case involving the ethical obligations of law firms retained by an insurer to defend the insurer’s policyholder.  While the Court of Appeals had held that a law firm with an insurer for a client may defend that insurer’s policyholder in an unrelated matter without creating a conflict of interest, or even disclosing that it also regularly represents the insurer in coverage matters, the Supreme Court affirmed only on the basis that the plaintiffs had not established damages as a result of any potential failure to disclose.  In dicta, the Supreme Court suggested the seminal case recognizing the duty of good faith owed by insurance defense counsel, Tank v. State Farm Fire and Casualty Co., may not apply because the “inherent conflict of interest concern in Tank did not fully materialize.”  The Court also suggested that because the law firm provided coverage advice on unrelated cases, it may have needed to disclose that relationship before representing the insurer’s policyholder.  The majority opinion carried a narrow 5-4 margin, with the minority concurring in the result but disagreeing with the dicta regarding application of Tank and defense counsel’s duty to disclose its relationship with the insurer.

 

In this case, a couple insured under a Hartford homeowners’ policy, the Ardens, shot and killed their neighbors’ puppy.  The neighbors sued the Ardens for willful conversion, malicious injury, intentional or reckless infliction of emotional distress, gross negligence and willful or reckless property damage.  The Ardens sought coverage under the liability portion of their homeowners’ policy.  After initially denying a defense due to the policy’s intentional act exclusion, Hartford agreed to defend  the Ardens after the Ardens retained personal counsel, Jon Cushman, to assist them on coverage matters and monitor their defense.

 

Hartford retained the Seattle law firm Forsberg Umlauf, which regularly represents Hartford in coverage matters and Hartford’s insureds in unrelated defense matters, to defend the Ardens in a lawsuit by the neighbors.  Forsberg sent the Ardens a letter explaining it was defending them in the suit against them and that it would not provide coverage advice to them or to Hartford.  Hartford did not initially indicate that the defense was subject to a reservation of rights to deny coverage.  Hartford eventually sent a reservation of rights letter after the neighbors issued a settlement demand.

 

The claimants made a timed settlement demand of $55,000 on the Ardens.  Cushman demanded Forsberg accept the demand and Hartford pay it.  Hartford declined because it needed documentation from pending discovery responses regarding claimed damages and information about case value.  Forsberg explained to Cushman it wanted to wait until it had received claimants’ discovery responses, and requested and received an extension from the claimants.  Cushman did not object to the extension at the time.

 

After receiving the claimants’ discovery responses, Forsberg prepared a detailed litigation report and case evaluation and shared it with Cushman before sending it to Hartford.  It included a number, $35,000, Forsberg believed the case could be settled for.  It told Cushman it would allow the timed $55,000 demand to expire, then offer $18,000 with the goal of ultimately getting to $35,000.  Neither Cushman nor the Ardens objected.  The claimants then made another timed settlement demand, this time for $40,000.  Hartford told Cushman it would allow this demand to expire then counter at $25,000.  Cushman did not object to this offer at the time but later argued Hartford acted in bad faith by not accepting the $40,000 demand.  The claimants rejected the $25,000 offer.

 

The Ardens then filed suit against Hartford asserting bad faith and other claims, and the Ardens later added Forsberg as a defendant.  Hartford, the Ardens, and the neighbors ultimately globally settled their claims at mediation a few months later.  The only claims reserved were the Ardens’ claims for breach of fiduciary duty and legal negligence against Forsberg.  The trial court granted Forsberg’s summary judgment motion, dismissing the Ardens’ claims against it.  The Ardens appealed.

 

The Supreme Court first determined that the requirements of Tank—which outline the duties of insurance defense counsel when the insurer defends under a reservation of rights—may not apply because the “inherent conflict of interest concern in Tank did not fully materialize.”  The Court explained that Tank may not apply because (1) the insurer did not initially defend under a reservation of rights and (2) the insurer still made settlement offers notwithstanding its reservation to deny coverage and the insured was never asked to contribute toward settlement.  Even if Tank were to apply, the Court reasoned, there was no evidence that Forsberg failed to comply with Tank’s requirements of good faith.  Forsberg fully investigated the incident, informed the Ardens that it represented only the Ardens, and fully informed the Ardens of all settlement activity.

 

The Court then assessed Forsberg’s alleged duty to disclose its relationship with Hartford.  The Court recognized that Forsberg could be liable if its work for Hartford constituted a “significant risk” of a material limitation on its representation of the Ardens under RPC 1.7, because it did not disclose the relationship and obtain the Ardens’ informed consent.  The Court noted the competing expert opinions about whether Forsberg should have disclosed the relationship and obtained informed consent, and explained that the competing opinions would generally give rise to a genuine issue of fact precluding summary judgment.

 

The Court held that, even assuming that a breach of duty existed, the Ardens had not established any damages as a result of the alleged breach of duty.  The Court therefore affirmed summary judgment in favor of Forsberg because there was no evidence of recoverable damages.  The concurring justices agreed that lack of evidence of damages supported affirming dismissal of the Ardens’ claims, but they did not join in the dicta suggesting a limited application of Tank or the discussion of Forsberg’s potential breach of duties.

 

The Court left several questions remaining to be resolved by future decisions, including when the “inherent conflict of interest” in Tank may “fully materialize,” and the type and nature of relationships between law firms and insurers that may require disclosure when defending that insurer’s policyholder.

ALI Reinsurance Restatement Takes Another Step Towards Approval

Posted in Liability Coverage, News

Following last May’s tumultuous decision by the American Law Institute to defer a final vote on its proposed Restatement of Law, Liability Insurance, the Restatement reporters have been busy drafting new text to meet the concerns that were expressed by defense lawyers, state regulators and other groups in the weeks leading up to last May’s meeting.  On August 4, the Reporters released Preliminary Draft No. 4, which was debated yesterday at a meeting in Philadelphia between the project’s Reporters and a hundred lawyers, judges and law professors from the Advisers Group and Members Consultative Group for this project.

Here is a summary of the key changes in this latest draft:

–Principles of Policy Interpretation (Section 3)

The Reporters have made a concerted effort in this new Preliminary Draft to rationalize their novel “presumption of plain meaning” approach to contract interpretation and to minimize the extent to which it diverges from the traditional “plain meaning” view.   They explain that their proposed approach is a compromise between “strict plain meaning” and the “contextual” approach favored by the Restatement of Contracts that construes terms in accordance with the circumstances and context of the contract that because a determination of ambiguity is to be made without regard to extrinsic evidence, this section did not recognize the concept of “ambiguity in context.”  Notably, the Reporters assert that extrinsic evidence may not be used to “manufacture” an alternative meaning.  Rather, a plausible basis must exist for arguing that an alternative meaning exists before courts should allow discovery of extrinsic evidence to determine the relative reasonableness of the proposed latent meaning.

–Liability of Insurer for Conduct of Defense (Section 12)

As revised, Section 12 imposes vicariously liability if counsel is an employee of the insurer (ie. staff counsel) and direct liability if the insurer “has undertaken a duty to select defense counsel and the insurer breaches that duty, including by retaining counsel with inadequate professional liability insurance” or where “the insurer has undertaken a duty to supervise defense counsel and the insurer breaches that duty.”  Confusion persists, however, with respect to what constitutes “supervision.”   The Reporters explained at the September 7 meeting that they are focusing on cases where the insurer somehow controls the conduct of defense counsel and that a mere engagement letter of the issuance of Billing Guidelines would not give rise to liability.   There was also widespread criticism at the September 7 meeting of the vague statement that insurers may be liable if defense counsel does not have adequate malpractice coverage.  While insurers nowadays typically require panel counsel to produce a dec page or other proof of E&O coverage, how much coverage is enough?

–Conditions Under Which Insurers Must Defend (Section 13)

Section 12 requires insurers to defend any cases where facts are alleged that, if proven, would be covered or if there are “facts not alleged in the complaint…that a reasonable insurer would regard as a basis for adding an allegation to the action.”    Insurer advocates at the September 7 meeting argued for an elimination of the “reasonable insurer” language in favor of limiting an insurer’s duty to consider extrinsic facts to those actually known by the insurer.  The Reporters responded that they are worried about insurers that stay “willfully ignorant” by conducting little or no investigation.   Controversy also remains with respect to what it means for an “allegation” to be added to an action.  Are the Reporters referring to new facts concerning existing causes of action or an amendment to the pleadings that adds new theories of liability altogether. The Reporters have clarified Section 13 to make clear that, while “factual uncertainty” gives rise to a duty to defend, “legal uncertainty” that may exist when a jurisdiction does not have settled coverage law does not.  This drew criticism from policyholder advocates at the September 7 meeting, who argued that it would encourage delay and obfuscation by insurers.

–Duty to Make Reasonable Settlement Decisions (Section 24)

The Reporters have added language to Comment d. to Section 24 to state that their conception of a “reasonable insurer” includes not only an average ordinary insurer but also “a more aspirational concept that protects against circumstances at which average conduct is objectively unreasonable.”  They have clarified, however, that the duty to make reasonable settlement decisions only extends to excess judgments that are otherwise covered by the policy, language that was lacking in earlier drafts.

The Reporters continue to equivocate with respect to whether insurers must make an offer of settlement in the absence of a demand from the plaintiff.  Comment f. states that they are adopting a “reasonableness” standard, not a “hard and fast rule” and that whether an insurer owes the duty to make an offer depends on the particular circumstances as where the facts known to the insurer make clear that the policy limits are significantly less than the reasonable settlement value of the underlying case given the severity of the claimant’s damages and the likelihood of liability being found.  They acknowledge, however, that there may be strategic value in not making an offer early on.

Allocation in Long-Tail Losses (Section 42)

Despite policyholder efforts to return Section 42 to an “all sums” approach, the reporters have retained a “pro rata by years” allocation methodology for long tail losses.   Recently, the insureds shifted their emphasis from arguing for “all sums” to arguing instead that equity required that insureds not be required to assume responsibility for “pro rata” shares allocable to years when insurance was “unavailable,” as was largely the case for asbestos losses and, to a lesser extent, pollution claims after 1986.  The Reporters did include a discussion of “unavailability” in a new Comment h. but do not expressly endorse it.

–Known Losses (Section 47)

The Reporters have amended both the black letter rule and Comments for Section 47 to make clear that conventional CGL insurers do not have a duty to defend claims that are already in suit before their policies are issued.  This is in contrast to the text that was in last Spring’s Proposed Final Draft, which found that the liability of insurers whose obligations were subject to large self-insured retentions might still be uncertain in such circumstances.  In this latest draft, the Reporters declare that “the touchstone from whether the doctrine applies is substantially certain is whether, absent the application of the doctrine, the insurer will be required to pay some amount of money on behalf of an insured under the policy that is about to be issued.”

–Fee Shifting (Sections 48-49)

Sections 48 and 49 set forth the remedies available to policyholders and, in particular, the circumstances in which policyholders can recover their fees for litigating coverage disputes.  Section 48 states that insurers that substantial prevail in coverage suits commenced by insurers seeking to terminate a defense obligation may recover their fees, whereas Section 49 allows fees if the insurer has declined to defend and the insured obtains a ruling finding a duty to defend.  At the September 7 meeting, insurer advocates protested that Section 48, while consistent with the Mighty Midgets rule in New York, unfairly penalized insurers for bringing DJs to clarify their obligations, especially in states like Illinois where the failure to bring a DJ may estop the insurer from contesting its indemnity obligations.

It is likely that the Reporters will make a few adjustments to this latest drafting, especially as regards Section 12 but that major changes are unlikely before the draft Restatement is submitted to the ALI Council in January.   While there may be efforts to lobby the Council between now and January, there is danger in such efforts as the ALI is sensitive to efforts by outside interests to influence its deliberations.

Assuming that the ALI Council approves the revised draft, a second Proposed Final Draft will be presented to the ALI membership next Spring for a final vote in May 2018.  This time around, nearly eight years after this project began in 2010, final approval seems likely.