Through the Magnifying Glass: What an Insured May Recover Beyond Damages against its Insurer under Washington Law

By and on May 15, 2015
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Earlier this year, the United States District Court for the Western District of Washington provided a detailed analysis of the categories of damages available to a prevailing insured in a breach of contract action against an insurer, including prejudgment interest, costs and attorneys’ fees. MKB Constructors v. Am. Zurich Ins. Co., 2015 U.S. Dist. LEXIS 9325 (W.D. Wash. Jan. 27, 2015). In MKB, the insured was awarded more than $2.35 million in damages, comprised of (1) $1,083,424.24 for breach of contract, (2) $274,482.47 for violation of Washington’s Insurance Fair Conduct Act (“IFCA”), (3) $862,000 in enhanced damages under IFCA, and (4) $138,000 for failure to act in good faith (later overturned as duplicative of the IFCA damages). Following the verdict, the insured moved for prejudgment interest, nontaxable costs, and attorneys’ fees.

Prejudgment Interest

The parties did not dispute that the insured was entitled to prejudgment interest on the liquidated portions of its award. Rather, the issues were which rate to apply and when the interest began to accrue. Under Washington law, a twelve percent prejudgment interest rate is applied to contract disputes, but a lower rate of two percentage points above prime is applied to tort claims. RCW 4.56.110. The parties agreed that only one rate should apply, but disagreed as to whether the judgment was primarily based in tort or in contract. The insured asserted that the judgment was based primarily in contract because the majority of the liquidated portion of the award was for breach of contract. The insurer argued that the Court must consider the judgment as a whole and not just its liquidated components. The Court agreed with the insurer, citing Unigard Ins. Co.v. Mutual of Enumclaw Ins. Co., 160 Wn.App. 912 (Wash. Ct. App. 2011). The Court then compared the amount awarded for breach of contract to the greater total amount awarded for the tort claims based on bad faith and IFCA and concluded that the judgment was primarily based in tort. Accordingly, the Court applied the lower pre-judgment interest rate.

For the prejudgment interest accrual date, the parties agreed that under Washington law prejudgment interest should run from the date each particular invoice was paid. The insured argued, however, that the volume of invoices would make such a calculation an unreasonable burden. The Court agreed to two dates proposed by the insured for the commencement of prejudgment interest, one with respect to the invoices related to the breach of contract and another for its attorney’s invoices, based on the insured’s confirmation that these dates would not prejudice the insurer, and in fact would result in a net benefit to the insurer.

Attorney’s Fees

The insured sought a 33% increase of the total award to account for the contingent fee paid to its counsel. The Court rejected this request as unprecedented. Rather, Washington law presumes that a properly calculated lodestar figure represents reasonable compensation for counsel. A “lodestar” fee is determined by multiplying a reasonable hourly rate by the number of hours reasonably expended in the lawsuit.

The insurer disputed the reasonableness of the attorneys’ hours based on improper block-billing, unnecessary participation by a third attorney added just before trial, and for time spent on unsuccessful claims. Based on its review of the invoices, the Court reduced the block-billed entries by 20%. The Court did not deduct time for the third attorney added just before trial, because the addition of the attorney for trial was neither unusual nor excessive. The Court found that certain work related to discovery and dispositive motions were unnecessary and insufficiently related to the overall success of the litigation to warrant an award of fees. Rather than undertake an hour-by-hour analysis of the attorneys’ fees in order to excise the precise number of hours attributable to these items, the Court estimated, based on its experience with the case that an overall 20% reduction in the claimed fees would sufficiently account for the hours spent on these items.

Litigation Costs

Lastly, the insured sought reimbursement of litigation costs, totaling $160,580.50, which consisted of (1) expert witness fees; (2) travel expenses; (3) the insured’s labor costs; and (4) litigation costs advanced by counsel. The expert fees and travel expenses were uncontested.  In dispute were the labor costs and litigation costs advanced by counsel.

The Court held that the insured’s recovery of wages for employees who testified or otherwise participated in the lawsuit would be an unprecedented stretch of both IFCA and case authority permitting an award of costs. On the same basis, the Court denied recovery for fees paid to secure the attendance at trial of its former employees that were in excess of the statutory amount for fact witnesses provided by RCW 2.40.010. The Court rejected the insured’s argument that the payment of these witnesses was “akin” to an expert witness fee, since Washington courts have expressly disallowed such fees to fact or occurrence witnesses.

The Court also trimmed the insured’s request for over $52,000 in costs advanced by counsel.  “Actual and statutory litigation costs, including expert witness fees” may be awarded under IFCA.  Additionally, Washington case authority permits the court to award “all of the expenses necessary to establish coverage” in order to make the insured “whole.” Panorama Village Condo. Owners Ass’n Bd. Of Dirs. v. Allstate Ins. Co., 26 P.3d 910, 917 (Wash. 2001) (bolding in original). The Court ruled that the following costs should be reimbursed: (1) costs associated with electronic legal research; (2) photocopying; (3) messenger and Federal Express fees; (4) court reporter and videographer fees; (5) travel to depositions; (6) telephone conference fees; (7) PACER fees; and (8) hotel rooms near the courthouse for witnesses.

However, the Court declined to award certain costs that were not “litigation costs” such as a mediation fee; costs that were part of routine daily life and would have been incurred without trial such as costs for local attorneys’ commuting, lodging and meals during trial; and costs that were excessive, such as daily trial transcriptions.

The MKB decision should serve as a useful guide in future fee award cases and as a warning that courts in Washington should not “rubber stamp” an award in favor of the insured but should carefully scrutinize all components of the insured’s demand.

Filed under Attorneys’ Fees, Breach of Contract

Intellectual Property Exclusion Bars Coverage for Right of Publicity Claims

By and on April 3, 2015
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In Alterra Excess and Surplus Insurance Company v. Jaime Snyder (2015) 234 Cal.App.4th 1390, Gordon & Rees Partner Arthur Schwartz and Senior Counsel Randall Berdan obtained affirmance of a trial court judgment in the California Court of Appeal, First Appellate District. The court held an exclusion for “Infringement of Copyright, Patent, Trademark or Trade Secret” applied to preclude coverage for claims based on the right of publicity. While the court’s ruling absolved Alterra of its alleged duty to defend or indemnify, the procedural wrangling behind the scenes provides a cautionary tale for insurers.

In 2009, Maxfield & Oberton Holdings, LLC began manufacturing and distributing a desk toy, “Buckyballs”, and similar products. They all incorporated the name “Bucky” which was based on the architectural engineer and inventor, R. Buckminster Fuller. Fuller died in 1983 and, in 1985, Fuller’s Estate registered its claim as Fuller’s successor with the California Secretary of State. The Estate licensed the right to use Fuller’s name and likeness on numerous occasions, including to Apple Computer which used Fuller’s image, and others, in its “Think Different” advertising campaign. In 2004, the U.S. Postal Service licensed the rights to Fuller’s image for a postage stamp.

The Estate sued Maxfield in federal district court in Northern California alleging Maxfield had been using the Bucky name without the Estate’s consent or paying royalties to the Estate. The Estate alleged claims for (1) Unfair Competition, (2) Invasion of Privacy (Misappropriation of Name and Likeness), (3) Unauthorized Use of Name and Likeness in Violation of § 3344.1, and (4) Violation of various Business and Professions Code statutes.

Alterra’s predecessor issued a CGL insurance policy to Maxfield in 2010. Alterra provided a defense to Maxfield in the federal action under a reservation of rights and filed a declaratory relief action in San Francisco Superior Court seeking a declaration of non-coverage. Alterra named the Estate in the coverage action but later stipulated to dismiss it in return for the Estate’s agreement to be bound by the outcome.

While the federal action was pending, Maxfield dissolved. This was precipitated by the United States Consumer Product Safety Commission’s filing of an administrative complaint due to safety concerns over Buckyballs. The dissolution created several issues.

First, as a dissolved entity, Maxfield could no longer defend itself in the federal infringement action and its retained defense counsel filed a motion to withdraw. Second, following the appointment of a Trustee to administer pending and future claims against Maxfield, the Fuller Estate entered into an agreement with the Trustee that released Maxfield from liability in the federal action. But, it also purported to allow the Estate to continue to pursue the infringement action so that the Estate could obtain a judgment against Maxfield for collection from Alterra. The Estate also obtained an assignment from the Trustee to allow the Estate to pursue Maxfield’s rights against Alterra.

So the stage was set. The Estate had made it clear that, despite its release of Maxfield in the federal action, it would pursue a judgment against Maxfield, an unrepresented party that could not defend itself, for eventual collection against Alterra. Although Alterra continued to believe no coverage existed, the stakes had now increased substantially by the possible exposure to Maxfield on an uncontested judgment.

To protect itself, Alterra intervened in the federal action and asserted defenses on the merits, including the very real defense the Estate had settled and released all claims against Maxfield and the infringement action had become a sham proceeding.

The Estate then sought to re-insert itself into the San Francisco coverage action despite its prior agreement to be dismissed. The court allowed the Estate to join after which the Estate attempted to prove Alterra owed coverage to Maxfield for the federal action. In the meantime, the federal action was stayed to allow the coverage issues to be resolved. Of course, if Alterra were to prevail on coverage, the Estate’s plan would collapse.

Alterra moved for judgment on the pleadings in the coverage action on three grounds: the policy’s Intellectual Property and First Publication Exclusions, and the Estate’s settlement with the Trustee. As to the latter, Alterra contended the Estate’s deal with Maxfield’s trustee, made without Alterra’s consent, violated the policy’s “no action clause” barring any coverage obligation. Alterra cited the fundamental principle, recognized by the California Supreme Court, that a claimant may not manufacture a payday by entering into an agreement with an insured to the defending insurer’s detriment or without its consent.

The trial court granted Alterra’s motion for judgment finding the Intellectual Property Exclusion barred all coverage as a matter of law. It did not reach Alterra’s other issues. The Court of Appeal subsequently affirmed on this ground.

On appeal, the Estate contended the exclusion could not reasonably be understood to apply to “intellectual property rights” because it is not conspicuous, plain and clear. Coverage exclusions and limitations must meet two separate tests, (1) “the limitation must be ‘conspicuous’ with regard to placement and visibility,” and (2) the language must be “plain and clear.” The court explained the Intellectual Property Exclusion is on an Insurance Services Office (ISO) industry form, appears under a bold-faced heading “Exclusions,” with each exclusion’s title also bold-faced. The court found these factors satisfy the first test.

The court also concluded the Intellectual Property Exclusion plainly and clearly applies to bar coverage. The Estate argued the exclusion entitled “Infringement of Copyright, Patent, Trademark or Trade Secret” shouldn’t even be called the Intellectual Property Exclusion. But the court noted that, not only have prior courts uniformly referred to this exclusion as the “Intellectual Property Exclusion,” the Estate repeatedly referred to it in just this manner in trial court filings.

Alterra’s exclusion encompasses not only copyright, patent, trademark and trade secrets but also “other intellectual property rights,” sufficient to extend to invasion of privacy and right of publicity claims. A similar exclusion was addressed by a 2011 California appellate ruling, Aroa Marketing, Inc. v. Hartford Ins. Co. of the Midwest (2011) 198 Cal.App.4th 781. In Aroa, the court held the exclusion there barred claims based on the unauthorized use of a model’s image and likeness.

The Alterra court found the “other intellectual property rights” language in Alterra’s policy is effectively identical to the Hartford policy’s “any intellectual property rights” in Aroa. These nonexclusive listings are broad enough to encompass invasion of privacy or right of publicity claims. Even if Aroa were not on the books, the Alterra court added, it would apply the exclusion to the Estate’s claims.

The tale is not yet over. The federal action must now be dismissed. Also, the Court of Appeal’s opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. But, as things stand, Alterra’s rights have been vindicated and the Estate’s plan to collect an uncontested judgment thwarted.

Filed under Appellate, Duty to Defend, Intellectual Property Exclusion, Reservation of Rights, Right of Publicity

Medical Insurer Waived Its Right To Rescind Policy By Electing To Cancel And Retaining Premiums

By on March 25, 2015
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In DuBeck v. California Physicians’ Service, 2015 Cal. App. LEXIS 203 (March 5, 2015), California’s Second Appellate District held that California Physicians’ Service dba Blue Shield of California (“Blue Shield”) waived its right to rescind a health insurance policy by taking actions wholly inconsistent with rescission.

In October 2004, Bonnie DuBeck (“DuBeck”) was involved in an accident and developed a lump in her left breast. On February 11, 2005, DuBeck visited the UCLA Breast Center for tests in the affected area.  Later that month, additional tests revealed the lump was malignant.

On February 16, 2005, DuBeck applied for health insurance with Blue Shield. DuBeck failed to disclose her recent medical issues and treatment. On April 1, 2005, Blue Shield issued a health insurance policy to DuBeck that covered pre-existing conditions only after six months of continuous coverage. DuBeck underwent breast cancer surgery on April 6, 2005, less than a week after the policy was issued, and her medical providers submitted bills for her treatment to Blue Shield. In its June 2005 explanation of benefits, Blue Shield stated the breast cancer “may have existed prior to [DuBeck’s] enrollment” and that processing of the claim was suspended “pending receipt of additional information requested.”

On September 8, 2006, seventeen months into coverage, Blue Shield wrote to DuBeck cancelling the policy based on her earlier misrepresentations. The letter stated: “[A]t this time[,] Blue Shield has determined that, rather than rescind the coverage completely, your coverage was terminated prospectively and ended effective today, September 8, 2006.” It advised Dubeck that “[a]ny claims for covered services incurred before this date will be covered,” and that “at this time Blue Shield will not seek refund of any claims payments made on your behalf.” Blue Shield had not reimbursed DuBeck for her breast cancer surgeries but had made payment for other health care costs.

Two years later, DuBeck filed a complaint against Blue Shield challenging the cancellation of the policy and asserting claims for breach of contract, violation of the covenant of good faith and fair dealing and intentional infliction of emotional distress. DuBeck alleged that Blue Shield had previously denied her claims for medical treatment in April and May 2005 under the pre-existing condition exclusion in the policy. Therefore, Blue Shield knew or should have known that she had received treatment for her malignancy in February 2005. By delaying the cancellation, Blue Shield was able to collect more in premiums than it paid in benefits. In December 2008, Blue Shield answered the complaint and asserted rescission of the policy as a defense. Blue Shield moved for summary judgment on rescission which the trial court granted. The Court of Appeal reversed.

The Court of Appeal held Blue Shield had waived its right to rescind the policy. First, the Court found Blue Shield was aware of all pertinent information which would have allowed it to rescind when it elected to cancel DuBeck’s coverage two years prior in September 2006. However, instead of rescinding the policy, Blue Shield “cancelled” the policy which allowed it to keep the policy premiums.

Second, Blue Shield was aware of Dubeck’s medical condition as early as five days into coverage when she underwent breast surgery. In fact, Blue Shield refused to pay for the surgery because the breast cancer may have existed prior to the policy. The Court concluded that Blue Shield’s delay in investigating the misrepresentation resulted in DuBeck incurring substantial medical expenses and impeded her ability to timely investigate the availability of government assistance for her medical needs. These actions were entirely inconsistent with rescission. Accordingly, Blue Shield waived its right to rescind the policy.

As this decision shows, there is no middle-ground between acknowledging coverage and rescission. Blue Shield may have had several reasons for cancelling rather than rescinding. Blue Shield was able to keep policy premiums and its cancellation allowed DuBeck to keep benefits for treatment received prior to the cancellation. However, Blue Shield’s approach was fatal to its rescission claim.

Filed under Rescission

Contamination Products Insurance Does Not Cover Recall of Ingredients Supplied to Insured Manufacturer

By and on March 25, 2015
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In Windsor Food Quality Company, Ltd v. The Underwriters of Lloyds of London, et al. (2015) 2015 Cal.App. LEXIS 195, the California Court of Appeal for the Fourth Appellate District held that a contamination products policy does not cover contaminated ingredients obtained from a supplier and incorporated into the insured manufacturer’s product.

The insured, Windsor Food Quality Company, Ltd. (“Windsor”) manufactured Jose Ole frozen food products using ground beef supplied by Westland/Hallmark Meat Company (“Westland”).  The United States Department of Agriculture announced a voluntary recall of all products containing Westland’s ground beef because Westland had used “downer cattle” (non-ambulatory disabled cattle, the use of which is prohibited in human food) that may have been contaminated.  Windsor recalled its products which had incorporated Westland ground beef and incurred an approximate $3 million loss.

Windsor tendered the loss to its contamination products insurer, The Underwriters of Lloyds of London (“Lloyds”).  Lloyds denied the tender on the grounds that its policy did not cover recalled products.  Windsor then sued Lloyds for breach of contract and breach of the implied covenant of good faith and fair dealing.  The trial court granted Lloyd’s motion for summary judgment and Windsor appealed.

The policy’s insuring agreement covered “Malicious Product Tampering” to an “Insured Product.”  “Insured Products” was defined as “all products including their ingredients and components once incorporated therein of the Insured that are in production or have been manufactured, packaged or distributed by or to the order of the Insured… .”  Windsor argued that the frozen food products containing the contaminated beef qualified as an “Insured Product” because the beef was incorporated into Windsor’s final product.  The court disagreed, finding no ambiguity and that the plain meaning of the policy required Windsor to prove “there was contamination or tampering with its product during or after manufacture, not before Windsor began the process.”

The decision highlights the distinction between contamination products insurance and recall insurance.  The former provides coverage for loss arising out of products contaminated during the insured’s manufacturing process and the latter provides coverage for loss resulting from recalled products regardless of when the alleged contamination to the products occurred.

Filed under Contaminated Products Insurance, Product Recall Insurance, Property Damage

New Jersey Federal Court Permits Reformation Over Additional Insured’s Objection

By on March 4, 2015
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The United States District Court for the District of New Jersey recently granted summary judgment to an insurer seeking to reform an aircraft fleet insurance policy based on mutual mistake of the parties to the contract.  Illinois National Insurance Company v. Wyndham Worldwide Operations, Inc., 2015 U.S. Dist. LEXIS 9468 (D.N.J. Jan. 28, 2015).

Illinois National issued a series of policies to an aircraft management company, Jet Aviation International, Inc., from 2004 to 2008.  Jet managed and operated Wyndham’s aircraft fleet and provided flight planning, staffing, and maintenance.  Under its agreement with Wyndham, Jet would arrange for a substitute airplane from its own fleet if necessary for a particular flight.  Jet also promised to maintain insurance covering Wyndham’s aircraft.

INS BLOG_jet aviationThe Illinois National policies afforded blanket coverage for aircraft operated by or used at the direction of Jet.  From 2004 to 2007, the policies included a “non-owned” aircraft exclusion which meant that Wyndham could not seek coverage for damages in connection with an aircraft it did not own, and where Jet had no involvement.  In 2008, Jet requested a small modification to the policy which had the unintended effect of expanding coverage to apply to Wyndham’s “non-owned” aircraft, even without a connection to Jet.

Two Wyndham employees were killed in a 2008 accident involving a rented airplane, neither owned by Wyndham nor operated by Jet under the management agreement.  Wyndham maintained separate insurance covering its use of non-owned aircraft without Jet’s involvement, and that insurer defended and settled the claims arising from the accident.  Nevertheless, Wyndham contended that the 2008 Illinois National policy also applied based on its terms.  Illinois National filed this coverage action seeking a declaration of no coverage or, in the alternative, equitable reformation based on mutual mistake.

The court initially granted a motion to dismiss Illinois National’s complaint, but the Third Circuit reversed.  On remand (and before a different judge), the court considered the issues through cross-motions for summary judgment.  To justify reformation, Illinois National had to demonstrate: (1) at the time of the 2008 modification, Jet did not intend to grant Wyndham coverage for non-owned aircraft unrelated to Jet; (2) Illinois National shared this intent; and (3) the 2008 policy did not reflect their agreement.

The court weighed various factors to determine whether a shared intent existed.  These factors included evidence of the reason for the change, prior policy terms, Wyndham’s reasonable expectations, the substance of the Jet/Wyndham agreement, the amount of premium, and the alleged absurdity of Wyndham’s interpretation.  The court noted that Wyndham’s interpretation of the exclusion would render it meaningless.  Thus, on balance, the factors reflected a shared intent which the 2008 policy did not express.  The court rejected Wyndham’s attempt, as an interloper, to dictate the contracting parties’ intent.

Finally, the court concluded negligence, even gross negligence, of Illinois National or Jet did not bar reformation where there was a meeting of the minds not expressed in the policy.  Nor did the fact that the accident had already occurred preclude post-loss reformation absent a showing of any prejudice.

Filed under Commercial General Liability, Non-Owned Aircraft Exclusion, Reformation

Policy Exhaustion Can Limit the Duty to Defend Under Connecticut Law

By and on February 26, 2015
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Assessing whether the duty to defend terminates on policy exhaustion can become a complex analysis when a claim involves multiple plaintiffs and exposure unquestionably exceeds the policy limits, yet the insured desires a continuing defense.

A common policy provision provides that an insurer has a duty to “settle or defend” a covered claim but that upon payment of the policy limits for “judgment or settlement” the insurer no longer has an obligation to provide a defense. Connecticut appellate courts have not squarely addressed in what circumstances exhaustion of policy limits will terminate the duty to defend, but at least one Connecticut Superior Court has recognized that exhaustion of policy limits would terminate the duty to defend based on the following policy language in a commercial policy: In Aetna Life & Cas. Co. v. Gentile, No. 0122259, 1995 Conn. Super. LEXIS 3444, 5 (Dec. 12, 1995), the insurer sought a declaratory judgment that it did not have a duty to defend following payment of the policy limits in response to seven separate claims. Id. at 4, 6. The court ultimately concluded that the payment was not the result of a “settlement” because the insurer failed to obtain a full release of the insured for one of the seven claims. Id. at 6-7. Despite its conclusion, the court plainly recognized that “if [the payment was a “settlement”] the policy limits are exhausted and there is no further duty to defend.” Id. at 7. The court concluded that the failure to obtain a release as to one of the claims precluded a finding that the payment was the result of a “settlement.” Id. at 9, 11. Thus, even though the insurer had made a payment in the amount of policy limits, the duty to defend was not terminated. Id.

Though the Gentile court initially acknowledged the potential enforceability of the exhaustion provision to terminate the duty to defend, the fact that the insurer left the insured to face excess exposure resulted in a finding that it had a continuing duty to defend and indemnify. Id. at 13. Notably, the court denied declaratory relief to the insured and awarded attorneys’ fees to the insured for both the underlying action and the declaratory judgment action. Id. at 13, 17.

Another instructive case is Chicago Title Insurance Company v. Kent School Corporation, 361 F. Supp. 2d 4, 7 (D. Conn. 2005). In that case, the United States District Court for the District of Connecticut addressed whether a policy of title insurance permitted the insurer to tender its policy limits to its insured and thereby terminate its duty to defend. The policy provided that the insurer “may terminate its liability hereunder by paying or tendering the full amount of this policy.” Id. at 8. Despite this clause, because the policy provided that “the costs and expenses of defending the title” were in addition to the policy limits and the policy was ambiguous in its failure to define the term “liability,” the court found that the insurer had a continuing duty to defend. Id. at 9-10. In so concluding, however, the court did not rule out a different conclusion based on clearer policy language.

While it does not appear that any Connecticut court has actually applied the rule permitting an insurer to terminate its duty to defend by making full payment of policy limits to enforce such a result, both the Gentile court and Chicago Title court clearly recognize this rule and the enforceability of exhaustion clauses. Gentile, 1995 Conn. Super. LEXIS 3444, 7; Chicago Title, 361 F. Supp. 2d 4, 9. Such recognition is found in other jurisdictions, as well. Further, though such decisions are presently absent from Connecticut jurisprudence, courts in other jurisdictions have allowed an insurer to exhaust limits and terminate its duty to defend.  Seem e.g. In Re: East 51st Street Crane Collapse Litigation, No. 769000/08, 2010 N.Y. Misc. LEXIS 6310 (N.Y. Sup. Ct. Feb. 18, 2010).

For an expanded analysis, click here.

Filed under Commercial General Liability, Duty to Defend, Exhaustion

Getting Schooled by Sandy and Irene: What Insurance Lessons Can We Learn?

By and on February 20, 2015
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It is a simple premise, but many insurance coverage disputes, perhaps even a majority of them, could be completely avoided if policyholders would take the time to read their insurance policies.  With winter storms upon us, now might be a good time.

No matter how complex the legal issues or controlling authorities are in any coverage case, the analysis almost always starts and ends with the express language of the insurance policy at issue.   As the Connecticut District Court often tells us, insurance policies are interpreted “in accordance with the parties’ intent, as derived from the plain and ordinary meaning of the policy’s terms.”  It nonetheless appears that many of the coverage disputes popping up on Connecticut’s federal docket arise from a failure to follow the most basic commandment applicable to every insurance policy, or any other contract for that matter:  Thou shalt read the policy, and read it in its entirety.

IP BLOG_hurricane sandyTwo cases recently decided by the Connecticut District Court in the wake of Hurricane Irene and Super Storm Sandy shine a spotlight on the importance of reading the entire insurance policy and reviewing your coverage with your agent or broker.  These cases show that understanding the express language of the policy is not only crucial for the policyholder to anticipate which claims will be covered and which will not in order to ensure appropriate coverage, but also so that the policyholder knows exactly what must be done in order to properly present a claim for coverage after the damage has been done.  In each case, the District Court granted summary judgment in the insurer’s favor based on the plain language of the disputed policy.

Azoulay v. Allstate Insurance Company, No. 3:12-cv-1693(JBA), 2014 U.S. Dist. LEXIS 159177 (D. Conn. Nov. 12, 2014)(Arterton, J.) arose from a coverage dispute between the plaintiff, Moshe Azoulay, and his insurer, Allstate, regarding his claim for flood damage to his property caused by Hurricane Irene.  Mr. Azoulay’s policy was a Standard Flood Insurance Policy, which was promulgated by the Federal Emergency Management Agency and which Allstate was not permitted to alter in any way.  Every Standard Flood Insurance Policy requires an insured seeking compensation for a loss to send the insurer a “proof of loss,” which is the insured’s statement of the amount that he is claiming under the policy, within 60 days of the loss.  This proof of loss must be “signed and sworn to by the insured.”  Mr. Azoulay’s property was damaged by Hurricane Irene in August of 2011, and within two months he provided Allstate’s assigned adjuster with receipts for cleanup costs totaling $5,000 and an itemized list of damages to the property totaling an additional $35,983.  Allstate’s adjuster provided Mr. Azoulay with a Proof of Loss concluding that the total cost of repairing his property was $2,044.61, leaving him with a covered claim of $44.61 after factoring out his $2,000 deductible.  Mr. Azoulay signed, notarized, and faxed Allstate this Proof of Loss, adding the notation “undisputed damages only.”  He also sent Allstate copies of receipts, a list of itemized damages, and pictures of the damaged property, none of which were signed or notarized.  Mr. Azoulay then filed suit after Allstate failed to respond to him regarding his claims in excess of $44.61.

Allstate moved for summary judgment, arguing that Mr. Azoulay did not comply with his flood insurance policy’s proof of loss requirement with respect to his additional claims because the only signed and sworn proof of loss that he submitted was for $44.61. The District Court accepted Allstate’s argument, holding that Mr. Azoulay’s attachment of itemized damages did not suffice as a supplemental proof of loss, because this document was neither signed nor notarized as required by the Standard Flood Insurance Policy.  The court relied on the Second Circuit’s legal standard that “[b]ecause the federal government is liable for claims brought under [Standard Flood Insurance Policies] issued by private insurers, the Constitution mandates strict compliance with the [Standard Flood Insurance Policy],” and granted summary judgment in Allstate’s favor.  The world will never know how much Mr. Azoulay might have recovered if he had only signed and notarized his itemized list of additional damages.

Despite the heightened standard applicable to Standard Flood Insurance Policies, the lesson is broadly applicable.  The District of Connecticut’s holding in Great Lakes International Trading, Inc. v. Travelers Property Casualty Company of America is literally the case in point.  No. 3:13-cv-01522(JAM), 2014 U.S. Dist. LEXIS 165378 (D. Conn. Nov. 26, 2014) (Meyer, J.).

The Great Lakes case arose from the plaintiff’s disputed claim for over $1.5 million in damages to the insured’s inventory of seeds, dried fruit, and edible nuts caused by Super Storm Sandy.  The plaintiff, a food importer, had several insurance policies with Travelers, including a Marine Open Cargo Policy that contained a Warehouse Coverage endorsement providing up to $5 million in coverage for damage to goods stored in the Plaintiff’s warehouse.  Unfortunately for the insured, however, the Warehouse Coverage endorsement provided that “the peril of Flood is excluded” from coverage.  After Sandy hit the plaintiff’s New Jersey warehouse, Travelers paid nearly $900,000 for damages caused by rainwater entering the warehouse through openings in the roof, but Travelers refused to pay an additional $650,000 claimed by the plaintiff, stating that these damages were attributable to rising flood-waters from a nearby river, and were therefore excluded from coverage.  The plaintiff filed suit, and Travelers moved for summary judgment, arguing that the plain language of the policy precluded coverage.

While claimants often attack policy exclusions as being ambiguous, the language of the exclusion at issue, which stated, “It is further understood and agreed that the peril of Flood is excluded for the following location,” then listed the name and address of the plaintiff’s New Jersey warehouse, was too clear for the plaintiff to even attempt to argue that any ambiguity existed.  Facing Travelers’ motion for summary judgment, the plaintiff mustered the best argument at its disposal; that the flood exclusion did not apply because it was tacked on at the very end of the Warehouse Coverage Endorsement, and did not have its own sub-heading.  The exclusion appeared as the final paragraph under the sub-heading “Earth Movement Sublimit & Deductible,” following several paragraphs referring to coverage sub-limits and deductibles for losses stemming from “earth movements.”  The plaintiff argued that the placement of the flood exclusion indicated that it only applied if the flood was caused by an earthquake or other earth-movement.

While noting that “[a]n insurance company should know better” than to place the flood exclusion in the policy so “awkwardly”, the court nonetheless enforced the exclusion.  First, the court observed that the wording of the exclusion itself was clear.  Next, the court held that the opening words of the exclusion, stating “It is further understood . . .,” made it sufficiently clear that the flood exclusion stood apart from the remainder of the preceding paragraph regarding earth-movement related sub-limits and deductibles.  Lastly, the court succinctly rejected the argument that the flood itself arose from a covered cause, a storm, holding that damages caused by the flood nevertheless fell within the scope of the flood exclusion.  The court granted summary judgment in the insurer’s favor, and Great Lakes International Trading was left holding a bag of soggy nuts.

Neither Mr. Azoulay nor Great Lakes International Trading appear to have been lazy, unsophisticated, or dilatory – in fact, both demonstrated some acumen when it came to dealing with insurance.  Mr. Azoulay actually took the time to save and organize all of his receipts, to take photographs documenting his property damage, and to create an itemized list of all of the damage that Hurricane Irene caused.  These tasks were all probably more time consuming than simply reading through his entire insurance policy, word for word.  If Mr. Azoulay had only signed and notarized his own itemized list of damages at the same time that he signed and notarized Allstate’s proof of loss, he would likely have been able to recover additional insurance proceeds and avoid litigation entirely.

Great Lakes International Trading, for its part, appears to have been a sophisticated consumer of insurance.  The court observed that Great Lakes had more than one policy with Travelers as well as the fact that Great Lakes had procured a separate Warehouse Coverage endorsement to insure the goods stored in its facilities that would not have been covered by its Marine Open Cargo Policy.  It stands to reason that a business like Great Lakes may have worked with a broker to procure its insurance and that it should have been made aware of the flood exclusion in the first instance.  Nonetheless, if Great Lakes had simply read its own insurance policy, it would have seen the exclusionary language and presumably procured additional insurance to guard against the risk of a flood.  Great Lakes learned an important lesson to be sure, but unfortunately that lesson came at the cost of over a half million dollars in damaged fruit.  Yet, we can all learn from it now.

The words in an insurance policy have a legally binding effect, and they are therefore chosen very carefully.  It behooves policy-holders to read every single one of those words, no matter how tedious, lest they be caught unaware at the worst possible time like Mr. Azoulay or Great Lakes International Trading.  So the next time a nor’easter arrives to give us a snow day, we should all turn off the Netflix for a minute and take the time to read through our insurance policies from cover to cover.  Maybe after just one more episode . . . .

 

This article was originally published in the Connecticut Law Tribune and can be accessed here.

Image courtesy of Flickr by NOAA’s National Ocean Service

Filed under First Party Policy, Flood insurance

Denial of Summary Judgment Does Not Automatically Establish Duty To Defend

By and on February 10, 2015
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In McMillin Companies, LLC v. American Safety Indemnity Company, a California appeals court found a trial court erred in finding the denial of an insurer’s motion for summary judgment on the duty to defend meant the insurer’s duty to defend was established as a matter of law.

McMillin Companies, LLC was the general contractor for a series of residential construction projects in Temecula, California.  After the projects were completed, McMillin was named in a construction defect lawsuit that arose out of the projects.  McMillin tendered its defense to the insurers of allegedly implicated subcontractors, including American Safety Indemnity Company (“ASIC”), contending it was an additional insured.  None of the insurers accepted McMillin’s tender.

McMillin sued ASIC and other insurers for breach of contract and bad faith based on their alleged failure to defend.  After numerous settlements, ASIC was left as the sole remaining defendant.  ASIC submitted a motion for summary judgment, arguing, inter alia, that it did not owe any duty to defend because its policy only covered  liability arising out of its named insured’s “ongoing operations” which had ceased prior to the occurrences alleged in the litigation.  This motion was denied on the basis ASIC had not met its initial burden of proof to show no triable issue of material fact.

At trial, McMillin moved in limine to exclude argument disputing ASIC’s duty to defend, and ASIC moved in limine to preclude McMillin from arguing the amounts it had received from the other insurers in settlement were not offsets to McMillin’s alleged damages against ASIC.  The trial court granted McMillin’s motion, finding the prior denial of ASIC’s motion for summary judgment demonstrated the existence of a disputed issue of material fact which necessitated a finding of a duty to defend.  The trial court also granted, without explanation, ASIC’s motion as to the settlement offsets.

The California court of appeal reversed, holding the trial court erred in granting the motions in limine.  Disagreeing with the trial court’s conclusion, the appeals court reasoned that the denial of an insurer’s motion for summary judgment because it failed to meet its initial burden of proof was not the same as denying the motion based on an unresolved factual dispute.  The appeals court also concluded McMillin’s settlements with the other insurers were not potential offsets to damages but rather would only affect McMillin’s right to recover any damages awarded at trial.

Filed under Bad Faith, Duty to Defend

Cedell v. Farmers – Where Are We Now?

By , and on January 27, 2015
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In Cedell v. Farmers Insurance Company of Washington, 176 Wn.2d 686 (2013), the Washington Supreme Court significantly restricted an insurer’s ability to assert the attorney-client privilege over communications with counsel by ruling that there is a presumption of no attorney-client privilege in first-party bad faith claims handling lawsuits.  The insurer may, however, overcome the presumption by showing that its attorney was “not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.”

As one Washington federal district court noted, while it is difficult to assess when a particular communication involves an attorney performing quasi-fiduciary duties, “as a general matter, there will likely be no privilege for a lawyer investigating facts to reach a coverage decision, but there likely will be a privilege for a lawyer giving an insurer strictly legal advice about potential liability that could result from a coverage decision or some other course of action.”  Anderson v. Country Mut. Ins. Co., 2014 U.S. Dist. LEXIS 112360 (W.D. Wash. August 13, 2014).  However, the attorney-client privilege can still be overcome if the insured asserts that the insurer engaged “in an act of bad faith tantamount to civil fraud” and makes a showing that “a reasonable person would have a reasonable belief that an act of bad faith has occurred” or that an insurer engaged in a “bad faith attempt to defeat a meritorious claim.”  Such analysis would, however, require something more than an honest disagreement between the insured and the insurer about coverage under the policy. For a prior G&R Insurance Bulletin on Cedell, click here.

Unfortunately, the Cedell Court caused some confusion regarding the process through which an insurer can overcome the presumption.  In short, it is unclear if there is a two-step process which requires the insurer to show that its attorney was not performing quasi-fiduciary (investigating and evaluating or processing the claim), followed by an in camera review of the allegedly privileged documents, or if the in camera review is part of the initial showing.  As one federal district court noted, “the opinion creates rather than alleviates confusion about what must be produced, and under what circumstances.”  Phil. Indem. Ins. Co. v. Olympia Early Learning Center, 2013 U.S. Dist. LEXIS 93067, at *3 (W.D. Wash. July 2, 2013).  There has been no Washington state court decision that explains the process identified in Cedell, but recent Washington federal district court decisions applying Cedell may shed some light on this confusion, at least in federal court practice. MKB Constructors v. Am. Zurich Ins. Co., 2014 U.S. Dist. LEXIS 78883 (W.D. Wash. May 27, 2014)

In MKB Constructors, Judge James L. Robart held that because state substantive law applies to the attorney-client privilege, an insurer must demonstrate that the attorney was not engaged in the “quasi-fiduciary tasks of investigating and evaluating or processing” a claim under Cedell.  However, federal law applies to the manner in which the court determines the existence of the privilege because the process through which an insurer can overcome the presumption is procedural in nature.  As a result, the court may use its discretion and utilize mechanisms other than an in camera review, i.e. privilege log, affidavit, declaration, to determine the applicability of Cedell in the specific context of the case.  Even so, most of the federal court decisions since MKB Constructors utilized in camera review to assess whether the insurer’s counsel engaged in quasi-fiduciary tasks.  See MKB Constructors v. Am. Zurich Ins. Co., 2014 U.S. Dist. LEXIS 102759 (W.D. Wash. July 28, 2014); Anderson v. Country Mut. Ins. Co., 2014 U.S. Dist. LEXIS 112360 (W.D. Wash. August 13, 2014); Johnson v. Allstate Prop. & Cas. Ins. Co., 2014 U.S. Dist. LEXIS 121342 (W.D. Wash. August 29, 2014); Collazo v. Balboa Ins. Co., 2014 U.S. Dist. LEXIS 109336 (W.D. Wash. August 7, 2014); Palmer v. Sentinel Ins. Co., 2013 U.S. Dist. LEXIS 103079 (W.D. Wash. July 23, 2013).

Another important aspect of the MKB Constructors decision is the holding by Judge Robart that Cedell is inapplicable in federal court when the work-product doctrine is invoked.  The work product doctrine is governed by Federal Rules of Civil Procedure Rule 26(b)(3); thus, Cedell is inapplicable when an insurer withholds documents under the work product doctrine in federal court.  It is important to keep in mind, however, that in the Ninth Circuit, a document is eligible for work product protection only if the document was prepared or obtained because of the prospect of litigation.  In re Grand Jury Subpoena (Mark Torf), 357 F.3d 900, 907 (9th Cir. 2004).  If a document would have been created in substantially similar form in the normal course of business, however, the fact that litigation is afoot will not protect it from discovery.  Id. at 908.  Under this analysis, Washington federal courts have held that draft denial letters prepared by the insurer’s coverage counsel are discoverable.  See Anderson v. Country Mut. Ins. Co., 2014 U.S. Dist. LEXIS 118400 (W.D. Wash. August 25, 2014); Tilden-Coil Constructors, Inc. v. Landmark Am. Ins. Co., 2010 U.S. Dist. LEXIS 106369 (W.D. Wash. September 23, 2010).

Finally, as predicted, the federal district court in Carolina Cas. Ins. Co. v. Omeros Corp., 2013 U.S. Dist. LEXIS 53225 (W.D. Wash. April 12, 2013), rejected the insurer’s argument that Cedell only applies to first-party claims, not to third-party liability claims.  The federal district court reasoned that the Cedell court based its ruling on the quasi-fiduciary duty of an insurer to its insured, which exists in both first-party and third-party claims.  Id. at *6-7.

Cedell is still very much alive and well in Washington and insurers should continue to pay close attention to how it impacts reliance on the attorney-client privilege in discovery in both first and third-party bad faith litigation.

Filed under Attorney-Client Privilege, Bad Faith

Washington’s Insurance Fair Conduct Act Only Applies to First-Party Claims

By , and on January 20, 2015
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Ever since the Washington Insurance Fair Conduct Act (“IFCA”) took effect on December 6, 2007, insureds have asserted a claim for IFCA violation in lawsuits against an insurance company.  While IFCA specifies that “[a]ny first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action,” insureds under both first-party policies and third-party liability policies have asserted IFCA claims in light of Washington courts’ very pro-policyholder attitude.  An IFCA claim is very attractive to the insureds because if a court finds that an insurer acted unreasonably in denying a claim for coverage or payment of benefits, an insured is entitled to actual damages (not limited to the benefits that were unreasonably denied), treble of those damages, and attorneys’ fees and costs.

Earlier this year, however, Judge Marsha Pechman dismissed plaintiffs’ IFCA claim against Continental Casualty Company (Continental), ruling that IFCA does not apply to third-party liability claims.  Cox v. Cont’l Cas. Co., 2014 U.S. Dist. LEXIS 68081 (W.D. Wash. May 15, 2014). Judge Pechman explained that only a “first party claimant to a policy of insurance” has a right of action under IFCA.

Cox arises out of a malpractice action against retired dentist, Dr. Henri Duyzend.  In the malpractice action, a group of Dr. Duyzend’s former patients secured a judgment totaling $35,212,000 against Dr. Duyzend for their malpractice claims.  Thereafter, on an assignment of claims from Dr. Duyzend, the dental patients sued Continental, alleging in part that Continental acted in bad faith and violated the IFCA by not pursing a global settlement with them and risking an excess judgment against Dr. Duyzend.  Continental had issued a professional liability policy to Dr. Duyzend.

With regard to the plaintiffs’ IFCA claim, Judge Pechman explained that “[a]n IFCA claim arises when ‘any first party claimant’ to a policy of insurance … is unreasonably denied a claim for coverage or payment of benefits by an insurer.”  Judge Pechman noted that a third-party insurance policy “indemnif[ies] an insured for covered claims which others [third-party claimants] file against him.”  The professional liability policy at issue in Cox was a third-party liability policy, not a first-party insurance policy.  As a result, Dr. Duyzend was never a first-party claimant under the IFCA and could not assign an IFCA claim to the plaintiffs.  Therefore, Judge Pechman dismissed the plaintiffs’ IFCA claim.

In one subsequent case, Judge Pechman held consistently with her decision in Cox.  Judge Pechman denied a plaintiff’s motion to amend the complaint to assert an IFCA violation against an insurer under a third-party liability policy, holding that such claims are not permitted under the rule.  Judge Pechman refused to certify to the Washington Supreme Court the question of whether an insured under a third-party liability policy may have an IFCA claim.  In so holding, the court affirmed that under Washington law, coverage which “indemnif[ies] an insured for covered claims which others [third-party claimants] file against him is third-party coverage.  As discussed in Cox, the IFCA defines ‘first party claimant’ in a narrow way that applies only to first-party insurance.”

Filed under Bad Faith, Commercial General Liability, First Party Policy, Unfair Insurance Practices

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