National Insurance Law Forum

National Insurance Law Forum

Published By The Attorneys of the National Insurance Law Forum

Perspectives on the ALI Restatement: The Plain Meaning Presumption

Posted in Liability Coverage, News

The American Law Institute (ALI) voted to approve the Restatement of the Law of Liability Insurance (Restatement) at its annual meeting on Tuesday, May 22, 2018, with sections of the Restatement being debated until the final vote.[1] The debate had resulted in many different drafts of the Restatement, with the Council of Advisors to the Restatement Reporters approving Proposed Final Draft No. 2 on April 13, 2018.[2] This was the version ultimately approved by the ALI Members during the annual meeting.[3]

One of the more controversial issues regarding policy language interpretation had been the proposed use of a “plain meaning presumption,” rather than the majority “plain meaning” rule. Though the Restatement ultimately adopts the plain meaning rule, the Comment to Section 3 continues to advocate a contextual approach utilizing custom, practice, or usage, implicating the plain meaning presumption.

The Comment to Section 3 begins with a discussion of two opposing approaches to the interpretation of insurance policy language found in the common law of insurance: the “contextual approach,” and the “plain meaning rule.” Under the contextual approach, courts interpret insurance policy terms in light of all the circumstances surrounding the drafting, negotiation, and performance of the insurance policy.[4] This approach was adopted in the Restatement Second of Contracts. Under the plain meaning rule, if a term is unambiguous when applied to the claim in question and in the context of the entire policy, the term is interpreted according to that meaning.[5] This approach has been adopted by a substantial majority of courts in insurance cases.[6] In adopting the plain meaning rule, the Restatement recognizes there is value in the rule’s incentivizing the use of policy terms having a plain meaning, and its promotion of the consistent interpretation of similar terms, which leads to more uniform enforcement of standardized policies.[7]

Comment b to Section 3 addresses “sources of plain meaning,” including dictionaries, court decisions, statutes and regulations, and secondary legal authority such as treatises and law review articles.[8] Noting such sources of meaning “are not ‘extrinsic evidence’ under any definition of that term,” the Restatement presents them as “legal authorities” consulted by the courts when determining the plain meaning of an insurance policy term.”[9]

Likening them to the sources of plain meaning, Comment c asserts “custom, practice, and usage” can inform the court’s determination of the objective meaning of insurance policy terms “in the relevant market.”[10] Distinguishing them from other sources of meaning, such as drafting history, course of dealing, or pre-contractual negotiations (characterized as evidence of the “specific” or “subjective” intent of a particular party), Comment c concludes the use of custom, practice, and usage would not “open the door to extrinsic evidence.”[11] Comment c asserts the use of these sources would be limited to when a party can reasonably be charged with knowledge of the particular custom, practice, or usage.[12] Expecting each party to be knowledgeable in its own trade and business, Comment c anticipates that the costs to consider custom, practice, and usage will be low.[13] Thus, Comment c concludes that when custom, practice, and usage can be discerned from public sources and with limited discovery, it is the better approach.[14]

Comment d permits courts applying the plain meaning rule to utilize the sources of plain meaning described in Comment b, as well as custom, practice, and usage sources of Comment c, to determine whether a term is ambiguous.[15] Similarly, Comment e permits the court to determine the term’s purpose based upon its context in the policy, in conjunction with the sources of meaning set forth in Comments b and c, to assist in determining whether a term is ambiguous.[16] Only after a term is determined to be ambiguous may the court consider extrinsic evidence of meaning such as pre-contractual negotiations or course of dealing.[17]

Comment h asserts the plain meaning rule adopted by Section 3 is “broadly consistent with the principle that insurance policy terms are to be interpreted according to the reasonable expectations of the insured, provided that the understanding of what makes an expectation ‘reasonable’ incorporates the concept of plain meaning.”[18] Though Comment h does not detail how it would work, incorporating the plain meaning rule into a contextual analysis echoes the plain meaning presumption abandoned by earlier drafts of the Restatement.

The “plain meaning presumption” was a hybrid approach to policy interpretation that relied upon the plain meaning of the provision unless extrinsic evidence established the policyholder’s interpretation was more reasonable, as follows:

An insurance policy is interpreted according to its plain meaning, if any, unless extrinsic evidence shows that a reasonable person in the policyholder’s position would give the term a different meaning. That different meaning must be more reasonable than the plain meaning in light of the extrinsic evidence, and it must be a meaning to which the language of the term is reasonably susceptible.[19]

The presumption did not give rise to a factual question. Rather, it was the framework for the court’s interpretation of the policy language at issue:

In other words, for the plain meaning to be displaced, the court must conclude that the plain meaning is a less reasonable meaning. If, after considering the extrinsic evidence, the court cannot determine which interpretation is more reasonable in the circumstances, the plain meaning of the term prevails. This presumption in favor of the plain meaning is not a factual presumption, because interpretation of the term is a question of law. The presumption therefore does not refer to a burden of proof, which pertains only to factual issues. Rather, the presumption in favor of the plain meaning is a rule of decision that defines the deference that courts should give the plain meaning of insurance policy terms.[20]

The presumption in favor of plain meaning represented a clear departure from the current state of the law governing policy interpretation. Indeed, an earlier draft of the Restatement acknowledged that the presumption did not follow the plain meaning rule or the contextual approach.[21] Instead, as indicated by Comment h, the presumption reflects an expansion of the “reasonable expectations” doctrine. Under this doctrine, the insured’s expectation as to the scope of coverage is upheld provided that such expectations are objectively reasonable.[22] The analysis of the insured’s expectations, according to both the presumption and Comment h, would incorporate the concept of plain meaning.

How much influence is ultimately exerted by the contextual approach advocated by the Comment to Section 3 will depend in large part upon where it is asserted, and the state of the law governing policy interpretation in that jurisdiction. For instance, a court applying Florida law may reject the application of the contextual approach based upon the Florida Supreme Court’s rejection of the reasonable expectations doctrine in Deni Associates of Florida, Inc. v. State Farm Fire & Cas. Ins. Co.[23]

In Deni, the Court declined to adopt the doctrine, finding “[t]here is no need for it if the policy provisions are ambiguous because in Florida ambiguities are construed against the insurer. To apply the doctrine to an unambiguous provision would be to rewrite the contract and the basis upon which the premiums are charged.”[24] The Court also noted:

The Florida Department of Insurance categorically opposes the adoption of the doctrine of reasonable expectations. According to its answer brief: “Adopting the reasonable expectations doctrine will negate the traditional construction guidelines and create greater uncertainty. This Court should not resort to the reasonable expectations doctrine because it will only spawn more litigation to determine the parties’ expectations.”[25]

Ultimately, the Court rejected the doctrine, concluding that an interpretation of an insurance policy based upon a determination as to whether the insured’s subjective expectations are reasonable, can only lead to uncertainty and unnecessary litigation.[26]

[1] David L. Brown and David G. Harris II, “The ALI Votes to Approve the ‘Restatement of the Law of Liability Insurance,’ ” The Insurance & Reinsurance Report, May 23, 2018.

[2] Colleen A. Beverly, “What’s Next Now That The Restatement Of Liability Insurance Was Approved?” Clausen Miller PC, May 22, 2018.

[3] Id.

[4] Restatement of the Law of Liability Insurance, Proposed Final Draft No. 2, Section 3 at Comment a (April 13, 2018).

[5] Id.

[6] Id.

[7] Id.

[8] Id. at Comment b.

[9] Id.

[10] Id. at Comment c.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id. at Comment d.

[16] Id. at Comment e.

[17] Id. at Comment d.

[18] Id. at Comment h.

[19] Tom Baker and Kyle D. Logue, Comment Insurance Law and Policy: Cases and Materials, Section 3 Comment d (4th ed. 2017).

[20] Id. at Section 3 Comment c.

[21] Id. at, Section 3 Comment a.

[22] Max True Plastering Co. v. United States Fidelity & Guar. Co., 912 P.2d 861 (Okla.1996).

[23] 711 So. 2d 1135, 1140 (Fla. 1998). Under this doctrine, the insured’s expectations as to the scope of coverage is upheld provided that such expectations are objectively reasonable. Id., citing Max True Plastering Co. v. United States Fidelity & Guar. Co., 912 P.2d 861 (Okla.1996).

[24] Deni, 711 So. 2d at 1140, citing Sterling Merchandise Co. v. Hartford Ins. Co., 30 Ohio App.3d 131, 506 N.E.2d 1192, 1197 (1986) (“[T]he reasonable expectation doctrine requires a court to rewrite an insurance contract which does not meet popular expectations. Such rewriting is done regardless of the bargain entered into by the parties to the contract.”).

[25] Deni, 711 So. 2d at FN4.

[26] Id.

American Law Institute Votes to Approve Restatement of Law, Liability Insurance

Posted in Liability Coverage, News

Following a vigorous two hour debate, the American Law Institute voted on May 22 to give final approval to the Restatement of Law, Liability Insurance.  Eight years in the making, this Restatement is the first one devoted to a specific industry.  It was expected to have received final approval at the 2017 ALI Annual Meeting but a final vote was postponed by the ALI leadership after a last minute controversy arose with respect to whether certain provisions of Proposed Final Draft No. 1 truly mirrored the common law.

Tuesday’s debate focused on Sections 3, 8, 12, 25, 27 and 46.

Several significant changes have been made to this draft since May 2017, most notably in the rules of insurance policy interpretation in Section 3.   The Reporters belatedly abandoned their experimental “presumption of plain meaning” and have now largely retreated to conventional “plain meaning” rules.   Controversy remains with respect to several sections of this Restatement, however, and a vigorous floor debate is expected on Tuesday.

Based upon the Motions that have been filed with the ALI as of this weekend, Tuesday’s debate will likely focus on the following proposed Sections:

–Rules of Contract Interpretation:   While Proposed Final Draft No. 2 modified Section 3 to abandon the previously-stated “presumption of plain meaning,” the “plain meaning rule” proposed by the Reporters had a twist, as Comment c. allows courts to consider evidence of “custom, practice and usage” (of both the insured’s industry and the insurer) in determining plain meaning.  Motions to delete Comment c. that I filed and that was submitted Vanita Banks of Allstate were voted down.  The Reporters did prove amenable to a suggestion by John Buchanan of Covington & Burling that the legal authority that they had deleted after abandoning the “presumption of plain meaning” approach earlier this year be restored to the Reporters’ Notes for Section 3 as reflecting the “spectrum” of views in this area.

–Misrepresentation:  A Motion filed by Vanita Banks to amend Section 8’s black letter rule to eliminate language that presently only permits insurers to rescind policy if an insured’s misrepresentation caused them to underwrite a policy with “substantially different terms” than they would have had the truth been known was defeated from the floor. The Reporters responded that this was needed to avoid insurers from rescinding a policy based on a trivial misstatement

–Liability for Defense Counsel—While Section 12’s earlier imposition of vicarious liability for the acts of defense counsel has disappeared in the face of fierce opposition from DRI and other defense bar advocates, it retains an unfortunate and face statement in Subsection (1) that insurers may still be liable if they are negligent in their selection of counsel, especially if the firm does not have “adequate” malpractice insurance.  Concerns were also expressed that the illustrations used by the Reporters, many of which involved an insurer’s knowledge of substance abuse or other personal problems, were problematic or would place insurers in the position of intruding into the privacy of defense counsel.  A motion to delete Subsection (1) by Brackett Denniston of Goodwin LLP and Harold Kim on the Chamber of Commerce was defeated.  Reporters did state that they were open to revising the illustrations, particularly with respect to privacy concerns, and might clarify the Comments to cite the lack of case support for this proposition.

–Duty to Make Reasonable Settlement Decisions:  Prior to the meeting, the Reporters accepted a proposal by Malcolm Wheeler of Wheeler Trigger to amend Sections 25(3) and 27 to require that insureds give full notice and information to insurers before being permitted to enter into settlements over the insurer’s objection in cases where the insurer is defending under a reservation  prevent insureds from entering into settlements unless their insurers are given full information and an opportunity to participate in the settlement. The Reporters have said that they will likely accept these proposed changes.

–Consequences of Failing to Settle—Section 27 declares that an insurer is liable for all damages resulting from a failure to make a reasonable settlement decision, including punitive damages that may be awarded against its insured even if punitive damages are otherwise uninsurable.  Despite the fact that the only legal support for this contention are a few dissenting opinions in cases where the majority had refused to require coverage, a motion by Victor Schwartz of Shook Hardy & Bacon to strike this aspect of the Comment was defeated.

–Known Liabilities:   The only Motion that prevailed today also the only motion filed by a  policyholder lawyer.   David Goodwin of Covington & Burling sought to delete Section 46(a)(2), which extends the “known loss” doctrine to defense costs.  The Motion argued that there was no legal support for applying the known loss doctrine to defense costs and that doing so would be contracted to Section 13 of this Restatement, which sets forth four narrow circumstances in which courts may look outside of a Complaint to justify denying a duty to defend.   I had argued in earlier-filed Comment that there were citing numerous state and federal decisions that have declined to distinguished between indemnity and defense costs in applying the “known loss” doctrine and that there was no logical research for distinguish between defense costs and indemnity where a law suit or demand for damages had been received by the insured before the policy in question was issued.   Despite the lack of authority supporting David’s motion, the Reporters quailed and decided to accept Goodwin’s argument a a “friendly” motion.

Shortly before Noon, the ALI voted to approve the full Restatement.  For the next few months, the Reporters will continue to fine tune the wording of various provisions and various areas where Comments and Reporters’ Notes need to be revised to reflect the debate.  It is therefore unlikely that the Reporter will finally be published by the ALI before the Fall of 2018.

ALI Insurance Restatement: May 22 Showdown in Foggy Bottom?

Posted in Liability Coverage, News

Eight years after work on it began, the American Law Institute’s Restatement of Law, Liability Insurance is likely to win final approval when it is debated at the ALI’s Annual Meeting in Washington, D.C. on May 22.   This will be the fourth successive annual meeting where this proposed Restatement has been debated by the membership.  It was expected to have received final approval at the 2017 ALI Annual Meeting but a final vote was postponed by the ALI leadership after a last minute controversy arose with respect to whether certain provisions of Proposed Final Draft No. 1 truly mirrored the common law.

Several significant changes have been made to this draft since May 2017, most notably in the rules of insurance policy interpretation in Section 3.   The Reporters belatedly abandoned their experimental “presumption of plain meaning” and have now largely retreated to conventional “plain meaning” rules.   Controversy remains with respect to several sections of this Restatement, however, and a vigorous floor debate is expected on Tuesday.

Based upon the Motions that have been filed with the ALI as of this weekend, Tuesday’s debate will likely focuson the following proposed Sections:

–Rules of Contract Interpretation:   While Proposed Final Draft No. 2 modified Section 3 to abandon the previously-stated “presumption of plain meaning,” the “plain meaning rule” proposed by the Reporters had a twist, as Comment c. allows courts to consider evidence of “custom, practice and usage” (of both the insured’s industry and the insurer) in determining plain meaning.  Vanita Banks of Allstate and I have separately filed Motions to delete Comment c.

–Misrepresentation:  Vanita Banks has also filed a Motion to amend Section 8’s black letter rule to eliminate language that presently only permits insurers to rescind policy if an insured’s misrepresentation caused them to underwrite a policy with “substantially different terms” than they would have had the truth been known.

–Liability for Defense Counsel—While Section 12’s earlier imposition of vicarious liability for the acts of defense counsel has disappeared in the face of fierce opposition from DRI and other defense bar advocates, it retains an unfortunate and face statement in Subsection (1) that insurers may still be liable if they are negligent in their selection of counsel, especially if the firm does not have “adequate” malpractice insurance.   Malcolm Wheeler of Wheeler Trigger & O’Connell and Harold Kim of the U.S. Chamber of Commerce have both filed motions to strike Subsection (1) so that insurers would only be liable under Section 12(2) if they instructed defense counsel to act improperly.

–Duty to Make Reasonable Settlement Decisions:  Malcolm Wheeler has separately moved to amend Sections 25(3) and 27 to prevent insureds from entering into settlements unless their insurers are given full information and an opportunity to participate in the settlement. The Reporters have said that they will likely accept these proposed changes.

–Consequences of Failing to Settle—Section 27 declares that an insurer is liable for all damages resulting from a failure to make a reasonable settlement decision, including punitive damages that may be awarded against its insured even if punitive damages are otherwise uninsurable.  Victor Schwartz of Shook Hardy & Bacon has filed a motion to strike the Comment to this effect, noting that the only legal support for this contention is a dissenting opinion to the California Supreme Court’s PPG opinion.

–Known Liabilities:   The sole policyholder motion is a Motion that Covington & Burling’s David Goodwin has filed, seeking to eliminate any application of the “known loss” doctrine in Section 46 to indemnity payments.   David contends in his motion that there is no legal support for applying the known loss doctrine to defense costs and that doing so would be contracted to Section 13 of this Restatement, which sets forth four narrow circumstances in which courts may look outside of a Complaint to justify denying a duty to defend.   I have filed a Comment disputing these contentions and citing numerous state and federal decisions that have declined to distinguished between indemnity and defense costs in applying the “known loss” doctrine.

Allocating Responsibility for Defense and Indemnity Costs Among Multiple Insurers

Posted in Declaratory Judgment Strategy, Duty to Defend, Duty to Indemnify, Excess and Umbrella Insurance, Recent Cases

Analysis of Zurich Am. Ins. Co. v. S.-Owners Ins. Co., 248 F. Supp. 3d 1268, 1276 (M.D. Fla. 2017)

In a dispute between two insurers arising from an underlying premises liability action, a federal district court applied Florida law in its analysis of claims for declaratory relief, equitable subrogation, and contribution.

In the underlying action, McMillan asserted negligence claims against Catamount Constructors, Inc. (Catamount) and Duval Concrete Contracting, Inc. (Duval). McMillan alleged he “slipped and fell due to an accumulation of debris as he walked … towards a port-o-let where Defendant Catamount had begun construction work and established a construction site,” and where “Duval had previously begun concrete cutting.”[1]

Catamount was the general contractor for a construction project to furnish and install a complete gravel/sand sub-base package.[2] Catamount and Duval executed a subcontract, whereby Duval agreed to “furnish[ ] all labor, materials, tools, equipment and insurance necessary to” complete the project.[3] The terms of the subcontract required Duval to maintain liability insurance naming Catamount as an additional insured, and providing primary coverage, for any liability arising from Duval’s work.[4]

Per the subcontract, Duval purchased a commercial general liability policy from Southern–Owners Insurance Company (SOIC).[5] Zurich American Insurance Company (ZAIC) issued a commercial insurance policy to Catamount.[6]

ZAIC initially assumed Catamount’s defense because it “was not aware at that time that Catamount was a primary insured under the SOIC Policy.”[7] Pursuant to the subcontract, ZAIC tendered the defense and indemnity of Catamount to Duval and requested that Duval notify its insurer. After ZAIC learned that SOIC had issued a commercial general liability policy to Duval, ZAIC made a second tender to Duval, and a first tender to SOIC. SOIC denied the request.

Shortly after receiving the SOIC denial, ZAIC filed a complaint for Declaratory Judgment.[8] After ZAIC “resolved the underlying action on behalf of Catamount” for a confidential amount, it sought leave to drop McMillan as a defendant and file a second amended complaint.[9] The motion was granted, and ZAIC filed a three-count Second Amended Complaint.

With Count I, ZAIC sought the court’s declaration[10] that SOIC, as Catamount’s primary insurer, had a duty to defend and indemnify Catamount in the underlying action. In Count II, ZAIC sought reimbursement from SOIC for all defense costs and indemnity payments made in resolving the underlying action on a theory of equitable subrogation. With Count III, ZAIC sought full reimbursement on the alternative theory of common law contribution. The court’s analysis of these theories of recovery was prompted by SOIC’s motion to dismiss all three counts under Rule 12(b)(6) of the Federal Rules of Civil Procedure.

Count I: Declaratory Relief

The party seeking a declaratory judgment bears the burden “of establishing the existence of an actual case or controversy.”[11] This means that:

[a]t an irreducible minimum, the party who invokes the court’s authority under Article III must show: (1) that they personally have suffered some actual or threatened injury as a result of the alleged conduct of the defendant; (2) that the injury fairly can be traced to the challenged action; and (3) that it is likely to be redressed by a favorable decision.[12]

“In addition, the controversy must be ‘live’ throughout the case; federal jurisdiction is not created by a previously existing dispute.”[13] Therefore, because the “actual controversy” requirement is jurisdictional, “a threshold question in an action for declaratory relief must be whether a justiciable controversy exists.”[14]

In the instant matter, the court determined that ZAIC failed to satisfy its burden of establishing its claim for declaratory relief against SOIC constituted an actual case or controversy, appropriate for judicial resolution. Specifically, the court concluded that ZAIC failed to plead the existence of a legal relationship between the parties as well as an ongoing live controversy with respect to its request for declaratory relief.[15]

Referencing the Eleventh Circuit’s decision in Provident Life & Accident Ins. Co., the court concluded an insurer does not have a legal relationship with another insurer by virtue of sharing a common insured.[16] Therefore, although courts have Article III case or controversy jurisdiction to consider claims between insurers and their insureds, absent some legal basis for an assertion of rights between two insurers, courts lack jurisdiction to adjudicate claims solely between the insurers.[17]

The court also determined ZAIC’s declaratory judgment claim was deficient because ZAIC failed to assert a live controversy.[18] “In the insurance context, once an insurer tenders coverage, any future claims that insurer brings regarding another insurer’s obligations pertain to a past injury.”[19] As an example, the court referenced Interstate Fire & Cas. Co. v. Kluger, Peretz, Kaplan & Berlin, P.L.,[20] where, after paying its policy limits, an excess insurer sought a declaration that two other insurers should have tendered coverage. That court held that it lacked jurisdiction over the declaratory judgment claim because the plaintiff sought to redress a past injury, which “does not support a finding of an Article III case or controversy when the only relief sought is a declaratory judgment.”[21] As such, the court found Count I was subject to dismissal for lack of subject matter jurisdiction.[22]

Count II: Equitable Subrogation

As an initial matter, the court noted an insurer can only recover the amount it paid on behalf of a judgment rendered against its insured, and cannot recover its payments for attorney’s fees and costs.[23] The court therefore concluded ZAIC’s claim of equitable subrogation was subject to dismissal, to the extent it sought recovery of attorney’s fees and costs incurred in the defense of Catamount.[24]

The court then considered ZAIC’s claim of subrogation for recovery of indemnity payments made on behalf of Catamount and its principals. Under Florida law, equitable subrogation entails “the substitution of one person in the place of another with reference to a lawful claim or right.”[25] In the insurance context, the insurer is “put in the position of the insured in order to pursue recovery from third parties legally responsible to the insured for a loss paid by the insurer.”[26] More specifically, “[t]hrough equitable subrogation, ‘the excess insurer ‘stands in the shoes’ of the insured and succeeds to the rights and responsibilities that the insured would normally have against the primary insurer.’ ”[27]

“Equitable subrogation is generally appropriate where: (1) the subrogee made the payment to protect his or her own interest, (2) the subrogee did not act as a volunteer, (3) the subrogee was not primarily liable for the debt, (4) the subrogee paid off the entire debt, and (5) subrogation would not work any injustice to the rights of a third party.”[28] The Court rejected ZAIC’s attempt to distinguish a decision requiring application of all five elements, noting that several courts have required the plaintiff to plead facts sufficient to give rise to these elements.[29] Additionally, the court found decisions applying these elements in cases arising specifically in the insurance context.[30] Therefore, the Court found ZAIC was required to have pled facts supporting these five elements in order to bring an equitable subrogation claim.[31]

In weighing the sufficiency of ZAIC’s pleadings, however, the court noted its duty to draw all reasonable inferences in favor of the plaintiff on a motion to dismiss.[32] The court found this duty to be particularly important in light of the Supreme Court of Florida’s substantive “commitment to a liberal application of the rule of equitable subrogation.”[33] Indeed, because the purpose of equitable subrogation “is ‘to do complete and perfect justice between the parties without regard to form or technicality, the remedy will be applied in all cases where demanded by the dictates of equity, good conscience, and public policy.’ ”[34] Thus, inferring elements not expressly pled, the court found the interests of justice required it to allow ZAIC to proceed with the indemnity payment portion of its equitable subrogation claim.[35] Accordingly, the court denied the motion with respect to that portion of Count II.[36]

Count III: Equitable Contribution

In support of its motion to dismiss Count III, SOIC asserted that ZAIC’s claim for “common law contribution” is not recognized under Florida law, and that contribution is exclusively a statutory remedy that is only available “when two or more persons become jointly or severally liable in tort for the same injury to person or property, or for the same wrongful death ….”[37] Rejecting SOIC’s arguments as inapposite,[38] the court then considered whether ZAIC sufficiently asserted a claim for equitable contribution.

In order for an insurer to bring this claim, courts in some states require a plaintiff to allege that the insurers “share (1) the same level of obligation (2) on the same risk (3) to the same insured.”[39] Under Florida law, however, the court observed a plaintiff is not required “to explicitly demonstrate the existence of these three elements to pursue its contribution claim.”[40] Rather, “Florida courts have used much more general language, holding that equitable contribution is available where the parties share a ‘common burden,’ or ‘common liability.’ ”[41] In order to find that two insurers share a common obligation:

It is not necessary that the policies provide identical coverage in all respects in order for … each insurer [to be] entitled to contribution from the other; as long as the particular risk actually involved in the case is covered by both policies, the coverage is duplicate, and contribution will be allowed.[42]

As an example, the court referenced U.S. Fid. & Guar. Co. v. Liberty Surplus Ins. Corp. In that case, the court allowed Liberty Surplus Insurance Corporation (Liberty) to proceed with its equitable contribution claim against St. Paul Fire & Marine Insurance Company (St. Paul) in a situation much like the instant action.[43] There, Liberty “issued two commercial general liability policies … to John T. Callahan & Sons, Inc. (Callahan), which served as the general contractor for a construction project.[44] St. Paul issued commercial liability policies to one of Callahan’s subcontractors, and covered Callahan as an additional insured for damages arising out of that subcontractor’s work.[45] The court found that because “both the St. Paul Policies and the Liberty Policies provide[d] coverage to Callahan for liability arising out of the work of [the subcontractor],” the insurers “share[d] a common obligation, and Liberty’s contingent equitable contribution claim [wa]s legally proper.”[46] The court distinguished this scenario from cases in which a primary insurer brought a contribution claim against an excess insurer,[47] and in which a subcontractor’s insurer brought a contribution claim against a different subcontractor’s insurer, both of whom covered the general contractor as an additional insured, but only for damages arising out of their respective insured’s work.[48]

Here, as in U.S. Fid. & Guar. Co., ZAIC issued a commercial general liability policy to Catamount.[49] SOIC issued a commercial general liability policy to Duval, Catamount’s subcontractor, and covered Catamount as an additional insured for damages arising out of Duval’s work.[50] Thus, ZAIC alleged that SOIC had a duty to provide primary coverage to Catamount for all damages arising out of Duval’s work, and ZAIC had a duty to provide excess coverage to Catamount for these damages.[51] Accordingly, the court determined “it appears that both the [SOIC] and [ZAIC] policies [may] provide coverage to [Catamount] for liability arising out of the work of Duval.”[52] The court therefore concluded that ZAIC’s allegations suggested a common obligation sufficient to permit ZAIC’s contingent equitable contribution claim to proceed, and denied the Motion to Dismiss with respect to Count III.

Conclusion

Where an insurer seeks the allocation of indemnity and defense costs among multiple insurers, the lack of an ongoing live controversy and legal relationship between the insurers can preclude declaratory relief. However, equitable subrogation may provide a limited remedy. Under this theory, an insurer can recover the amount it paid on behalf of a judgment rendered against its insured, but cannot recover its payment for attorney’s fees and costs. Notwithstanding the limitation on recovery, the Florida Supreme Court mandates that equitable subrogation will be available in all cases where demanded by the dictates of equity, good conscience, and public policy.

Under the theory of equitable contribution, an insurer can recover indemnity and defense costs. Florida courts have held that equitable contribution is available where the parties share a ‘common burden,’ or ‘common liability.’ ” To meet this requirement, it has not been necessary that the policies provide identical coverage in all respects; as long as the particular risk actually involved in the case is covered by both policies, and the coverage is duplicate, then contribution will be allowed. However, because the policies do not cover the same risk, a primary insurer is not permitted to bring a claim for contribution against an excess insurer.

[1] Zurich Am. Ins. Co. v. S.-Owners Ins. Co., 248 F. Supp. 3d 1268, 1276 (M.D. Fla. 2017).

[2] Id. at 1274.

[3] Id. at 1275.

[4] Id.

[5] Id.

[6] Id.

[7] Id. at 1276.

[8] Id.

[9] Id. at 1277.

[10] Pursuant to 28 U.S.C. § 2201.

[11] Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83, 95, 113 S.Ct. 1967, 1974, 124 L.Ed.2d 1 (1993).

[12] U.S. Fire Ins. Co. v. Caulkins Indiantown Citrus Co., 931 F.2d 744, 747 (11th Cir. 1991) (citing Valley Forge Christian Coll. v. Ams. United for Separation of Church & State, 454 U.S. 464, 472, 102 S.Ct. 752, 758, 70 L.Ed.2d 700 (1982)); see also GTE Directories Publ’g Corp. v. Trimen Am., Inc., 67 F.3d 1563, 1567 (11th Cir. 1995).

[13] Caulkins Indiantown Citrus Co., 931 F.2d at 747.

[14] Id.

[15] S.-Owners Ins. Co., 248 F. Supp. 3d at 1281.

[16] Provident Life & Acc. Ins. Co. v. Transamerica-Occidental Life Ins. Co., 850 F.2d 1489, 1491 (11th Cir. 1988)

[17] See also Progressive Express Ins. Co. v. Overdrive Specialized, Inc., No. 3:14-cv-138-MCR/EMT, 2014 WL 11512202, at *3 (N.D. Fla. Dec. 24, 2014) (finding a definite and substantial controversy in a declaratory judgment action filed by one insurer against another insurer because their common insured had been joined).

[18] “Injury in the past… does not support a finding of an Article III case or controversy when the only relief sought is declaratory judgment.” Malowney v. Fed. Collection Deposit Grp., 193 F.3d 1342, 1346 (11th Cir. 1999) (citing City of L.A. v. Lyons, 461 U.S. 95, 102, 103 S.Ct. 1660, 1665, 75 L.Ed.2d 675 (1983)).

[19] S.-Owners Ins. Co., 248 F. Supp. 3d at 1283–84.

[20] 855 F.Supp.2d 1376, 1379 (S.D. Fla. 2012).

[21] Id. (citing Nat’l Union Fire Ins. Co. of Pittsburgh, Pa v. Int’l Wire Grp., No. 02 Civ. 10338(SAS), 2003 WL 21277114, at *5 (S.D.N.Y. Jun. 2, 2003) (dismissing an excess insurer’s claim for declaratory judgment against a primary insurer because it did “not seek a prospective determination of its rights and responsibilities under the insurance contract (so that it can avoid future damages), but rather a finding that it is not liable for damages alleged to have already accrued.’ ”)).

[22] S.-Owners Ins. Co., 248 F. Supp. 3d at 1283.

[23] See Amerisure Mut. Ins. Co. v. Crum & Forster Specialty Ins. Co., No. 2:12–cv–443–FtM–29CM, 2014 WL 3809113, **3–4 (M.D. Fla. Aug. 1, 2014) (dismissing an insurer’s equitable contribution claim through which it sought to recover defense costs); Am. Cas. Co. of Reading Pa. v. Health Care Indem., 613 F.Supp.2d 1310, 1322–23 (M.D. Fla. 2009) (denying an insurer’s request for contribution and subrogation for fees and costs); Pa. Lumbermens Mut. Ins. Co. v. Ind. Lumbermens Mut. Ins. Co., 43 So.3d 182, 186–87 (Fla. 4th DCA 2010) (collecting Florida cases showing that “ ‘traditional principles of subrogation will not support a reimbursement of defense costs in favor of someone who has the independent contractual duty to pay all such expenses,’ ” such as an insurer) (citation omitted).

[24] S.-Owners Ins. Co., 248 F. Supp. 3d at 1286.

[25] W. Am. Ins. Co. v. Yellow Cab Co. of Orlando, 495 So.2d 204, 207 (Fla. 5th DCA 1986) (quoting Boley v. Daniel, 72 Fla. 121, 72 So. 644, 645 (1916)).

[26] Monte de Oca v. State Farm Fire & Cas. Co., 897 So.2d 471, 472 n.2 (Fla. 3d DCA 2004) (quotation and citation omitted).

[27] Mount Vernon Fire Ins. Co. v. Transcontinental Ins. Co., No. 8:07-cv-1593-T-24-EAJ, 2008 WL 2074427, at *2 (M.D. Fla. May 15, 2008) (citations omitted); see also Galen Health Care, Inc. v. Am. Cas. Co. of Reading, 913 F.Supp. 1525, 1531 (M.D. Fla. 1996) (“Florida law recognizes a cause of action for equitable subrogation between primary and excess insurers arising from the payment of a claim by the excess insurers.”); U.S. Fire Ins. Co. v. Morrison Assurance Co., 600 So.2d 1147, 1151 (Fla. 1st DCA 1992) (noting “that the primary insurer should be held responsible to the excess insurer for improper failure to settle, since the position of the latter is analogous to that of the insured when only one insurer is involved.”).

[28] Dade Cnty. Sch. Bd. v. Radio Station WQBA, 731 So.2d 638, 646 (Fla. 1999).

[29] See Amerisure Ins. Co. v. S. Waterproofing, No. 3:14-cv-154-J-34JRK, 2014 WL 4682898, at *4 (M.D. Fla. Sept. 19, 2014) (“A plaintiff must allege [the enumerated] five elements in order to maintain a claim for equitable subrogation.”); Columbia Bank v. Turbeville, 143 So.3d 964, 968 (Fla. 1st DCA 2014) (resolving a motion to dismiss by applying these elements).

[30] See Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. KPMG Peat Marwick, 742 So. 2d 328, 332 (Fla. 3d DCA 1999), approved, 765 So. 2d 36 (Fla. 2000); DaimlerChrysler Ins. Co. v. Arrigo Enters., Inc., 63 So.3d 68, 72 (Fla. 4th DCA 2011).

[31] S.-Owners Ins. Co., 248 F. Supp. 3d at 1287-88.

[32] See Omar ex rel. Cannon v. Lindsey, 334 F.3d 1246, 1247 (11th Cir. 2003)

[33] Dantzler Lumber & Export Co. v. Columbia Cas. Co.,115 Fla. 541, 551, 156 So. 116 (Fla. 1934). In determining whether or not to allow an equitable subrogation claim to proceed, the Supreme Court of Florida has emphasized that equitable concerns outweigh “technical rules of law.” Id. at 550–51, 156 So. 116. According to the court:

 

[t]he doctrine of subrogation will be applied or not according to the dictates of equity and good conscience, and consideration of public policy, and will be allowed in all cases where the equities of the case demand. It rests upon the maxim that no one shall be enriched by another’s loss, and may be invoked wherever justice demands its application, in opposition to the technical rules of law … The right to it depends upon the facts and circumstances of each particular case, and to which must be applied the principles of justice. Id.

 

[34] Compania Anonima Venezolana De Navegacion v. A. J. Perez Export Co., 303 F.2d 692, 697 (5th Cir. 1962).

[35] S.-Owners Ins. Co., 248 F. Supp. 3d at 1288.

[36] Id. at 1289.

[37] Id., quoting Fla. Stat. § 768.31(2)(a).

[38] S.-Owners Ins. Co., 248 F. Supp. 3d at 1290-1291.

[39] U.S. Fid. & Guar. Co. v. Liberty Surplus Ins. Corp., No. 6:06–cv–1180–Orl–31UAM, 2007 WL 3275307, *3 (M.D. Fla. Oct. 31, 2007) (citing Lexington Ins. Co. v. Allianz Ins. Co., 177 Fed.Appx. 572, 573 (9th Cir. 2006)); see also Hartford Cas. Ins. Co. v. Trinity Universal Ins. Co. of KS., 158 F.Supp.3d 1183, 1201–02 (D. N.M. 2015) (applying the three elements); Flintkote Co. v. Gen. Accident Assurance Co. of Can., 480 F.Supp.2d 1167, 1181 (N.D. Cal. 2007) (recognizing the three elements).

[40] U.S. Fid. & Guar. Co., 2007 WL 3275307 at *3.

[41] Id. (citation omitted).

[42] 15 Couch on Ins. § 218:6 (Dec. 2016).

[43] 2007 WL 3275307 at **3–4.

[44] Id. at *1.

[45] Id. at **1, 3–4.

[46] Id. at *4.

[47] See Transcontinental Ins. Co. v. Ins. Co. of the State of Pa., 148 Cal.App.4th 1296, 56 Cal.Rptr.3d 491 (Cal. App. 2007).

[48] See Home Ins. Co. v. Cincinnati Ins. Co., 213 Ill.2d 307, 290 Ill.Dec. 218, 821 N.E.2d 269 (Ill. 2004) and Schal Bovis, Inc. v. Cas. Ins. Co., 315 Ill.App.3d 353, 247 Ill.Dec. 847, 732 N.E.2d 1179 (Ill. App. 2000).

[49] S.-Owners Ins. Co., 248 F. Supp. 3d at 1292.

[50] Id.

[51] Id.

[52] Id. quoting U.S. Fid. & Guar. Co., 2007 WL 3275307 at * 4.

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.