SCOTUS Holds That Unaccepted Rule 68 Settlement Offer Doesn’t Moot Consumer Class Action Lawsuit

By and on January 20, 2016
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The U.S. Supreme Court ruled today (January 20, 2016) in Campbell-Ewald Co. v. Gomez (No. 14-857) that an unaccepted Rule 68 offer of judgment for full relief does not moot a consumer lawsuit. Gomez will undoubtedly have far reaching implications for future class action cases, especially those filed under the Telephone Consumer Protection Act (“TCPA”), where damages per violation are set by statute, and are generally easy to quantify. While the decision seems to favor class action plaintiffs by precluding defendants from “picking off” named class representatives, it leaves open the question of whether the result would be different where a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.

The facts of the case are straightforward. The U.S. Navy hired Campbell-Ewald Company (“Campbell”) to assist it with a recruiting campaign. As part of that campaign, Campbell hired a third party to sent text messages to the cell phones of over 100,000 recipients who had supposedly consented to receiving such solicitations. Jose Gomez filed a nationwide class action in the District Court for the Central District of California, alleging that Campbell violated the TCPA by sending him a text message without his consent.

A successful plaintiff in a TCPA action may recover her actual monetary loss or $500 for each violation, whichever is greater, and the penalty can be trebled for a knowing or willful violation. Gomez sought treble damages, costs, attorney’s fees, and an injunction against Campbell.

Prior to the agreed-upon deadline for a class certification motion to be filed, and before Gomez moved for class certification, Campbell made an offer of judgment to Gomez under Rule 68. Specifically, Campbell offered to pay Gomez his costs, excluding attorneys’ fees, and $1,503 per message—thereby satisfying any claim for potential treble damages. Campbell also proposed a stipulated injunction, whereby Campbell would agree to be barred from sending texts in violation of TCPA. However, the proposed injunction denied liability and disclaimed the existence of grounds for such an imposition. Campbell did not offer attorney’s fees as such fees are not available under the TCPA. Gomez did not accept the offer, and it lapsed by operation of time under Rule 68.

Thereafter, Campbell moved to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction. Campbell argued that no Article III case or controversy remained, since its offer mooted Gomez’s individual claim by providing him with complete relief. The District Court denied the motion. The Ninth Circuit agreed, finding that an unaccepted offer of judgment can not moot a class action. The Supreme Court granted certiorari to resolve a split among the Courts of Appeals over whether an unaccepted offer can moot a claim, thereby depriving federal courts of Article III jurisdiction.

On review, opinion author Justice Ginsberg relied heavily on Justice Kagan’s dissenting opinion in Genesis HealthCare. In that case, Justice Kagan wrote that “[a]n unaccepted settlement offer—like any unaccepted contract offer—is a legal nullity, with no operative effect. As every first-year law student learns, the recipient’s rejection of an offer leaves the matter as if no offer had ever been made.” Reasoning that nothing in Rule 68 changed that result, the Court expressly adopted Justice Kagan’s analysis and held that Campbell’s unaccepted offer did nothing to alter the course of his claim. Thus, the Court held that “in accord with Rule 68 of the Federal Rules of Civil Procedure, [] an unaccepted settlement offer has no force. Like other unaccepted contract offers, it creates no lasting right or obligation. With the offer off the table, and the defendant’s continuing denial of liability, adversity between the parties persists.”

The Court distinguished several cases that seemed to go the other way. In each of those cases, the defendants’ payments had fully satisfied the asserted claims. In contrast, even though the offer of judgment appeared to resolve Gomez’s claims, the Court reasoned that his individual claim was not made moot by the expiration of a settlement offer that was never accepted. Once the offer of judgment to Gomez expired, he was left with nothing; his TCPA claim was “wholly unsatisfied.”

The Court seemed to hint at a potentially different result had Campbell admitted liability. Over the course of the relatively short opinion, the court mentioned at least five times that Campbell continued to deny liability despite the offer of judgment. The Court also left open the question of “whether the result would be different if a defendant deposits the full amount of the plaintiff ’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.”

The decision also discussed whether Campbell should be entitled to derivative sovereign immunity, having performed its actions at the direction of the Navy. The Court found that Campbell was not entitled to share such immunity.

Notably, Justice Thomas concurred in the judgment, but rejected the majority’s reliance on modern contract principles and Justice Kagan’s dissent in Genesis HealthCare concerning Rule 68. Instead, Justice Thomas stated that he would rely on the common law history of tenders (that led to Rule 68), which demonstrates that a mere offer of the sum owed is insufficient to eliminate a court’s jurisdiction to decide the case to which the offer related.

Chief Justice Roberts, joined by Justices Scalia and Alito (Justice Alito also wrote separately), sharply dissented. The dissenting Justices found that Campbell offered to pay Gomez the maximum he could recover under the TCPA (e.g., $1500 per text message, plus the costs of filings suit), but that Campbell wanted more – “He wants a federal court to say he is right.” The dissenting Justices stated that the real problem for Gomez is that federal courts exist to resolve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking. They agreed with the majority that Gomez’s rejection of the offer was a legal nullity as a matter of contract law, but that the question is not whether there is a contract, but rather whether there is a case or controversy under Article III. Thus, they argued that because the District Court found that Campbell agreed to fully satisfy Gomez’s claims by giving him everything he asked for, there is no case or controversy to adjudicate and the case is moot.

Filed under Class Action, TCPA

Policyholders on the Hook for Insolvent Insurers’ Allocated Share in New Jersey

By on January 19, 2016
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On January 12, 2016, the New Jersey Superior Court, Appellate Division, issued a non-precedential opinion in Ward Sand & Materials Co. v. Transamerica Ins. Co., et al. The long–anticipated ruling found that, in long-tail claims, insureds are responsible for the share of liability allocated to insurers that became insolvent prior to December 22, 2004.

In Ward Sand, the insured – which accepted a township’s municipal waste in the 1970s and was later sued for contribution towards site cleanup – sought to have a prior allocation ruling revised based on the New Jersey Supreme Court’s decision in Farmers Mutual, which held that the 2004 amendment to the New Jersey Property-Liability Insurance Guaranty Association Act (“PLIGA Act”), N.J.S.A. 17:30A-1 et. seq. required solvent insurers to pay within their policy limits for the share of any long-tail claim otherwise covered by an insolvent insurer. Farmers Mut. v. N.J. Prop.-Liab. Ins. Guar. Ass’n., 215 N.J. 522, 544 (2013) (previously discussed here). Five of Ward Sand’s insurers on the risk had, by then, become insolvent. It was undisputed that these insurers were declared insolvent prior to the effective date of the 2004 amendment to the PLIGA Act. The insured argued that (1) the 2004 amendment to the PLIGA Act, understood in light of Farmers Mutual, was intended to be corrective and curative and, therefore, had retroactive effect and (2) even if the 2004 amendment was not retroactive, the reasoning of the Farmers Mutual Court clarified principles that predate the amendment such that all coverage available from a solvent carrier must be exhausted prior to the policyholders’ obligation to pay the insolvent insurer’s share.

The trial court disagreed, and the Appellate Division affirmed, finding that the 2004 amendment to the PLIGA Act could only be given prospective effect, and did not control allocation issues for insurers that became insolvent prior to its enactment. Relying on Farmers Mutual, the Appellate Division held that for the years in which PLIGA is standing in the place of an insolvent carrier in a long-tail environmental contamination case, the insured – not the solvent insurer – is compelled to make payments under the Owens-Illinois allocation scheme before accessing statutory benefits under the PLIGA Act.

The decision is non-precedential and Ward Sand will almost certainly seek review by the Supreme Court of New Jersey. Nevertheless, Ward Sand represents an important victory for solvent insurers, which never contracted to cover the insolvent policy periods or layers.

Filed under Allocation, Insolvencies

Cost-Shifting in Federal Court Discovery: Where We Are and Where We’ve Been

By and on January 14, 2016
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We all know the long-standing general rule that a party must ordinarily pay its own costs to respond to discovery. Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358 (1978). However, effective December 1, 2015, Rule 26 of the Federal Rules of Civil Procedure was amended to expressly address cost-shifting in discovery, a practice that has already been employed in many federal districts. Specifically, sub-section 26(c)(1)(B) was added to state that, when entering a protective order, a court may specify terms “including time and place or the allocation of expenses, for the disclosure or discovery[.]”  (Emphasis added.)

One might infer that the express acknowledgement of cost-shifting in the Federal Rules is meant to signal a trend toward a general increase in cost-shifting orders. The Advisory Committee Notes, however, are quick to throw cold water on this idea, explaining that the amendment was designed only to recognize courts’ authority to order cost-shifting, and not to make cost-shifting the “new normal”:

Rule 26(c)(1)(B) is amended to include an express recognition of protective orders that allocate expenses for disclosure or discovery. Authority to enter such orders is included in the present rule, and courts already exercise this authority. Explicit recognition will forestall the temptation some parties may feel to contest this authority. Recognizing the authority does not imply that cost-shifting should become a common practice. Courts and parties should continue to assume that a responding party ordinarily bears the costs of responding.

Although the Notes say that the new amendment “does not imply that cost-shifting should become a common practice,” this does not necessarily mean that cost-shifting should not become more common than it is right now.

Before Rule 26(c)(1)(B), federal courts typically relied on two other provisions of the Federal Rules for authority to order cost-shifting. First, Rule 26(b)(2)(B), which provides that “[a] party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost.” This sub-section is limited to electronically stored information, and is further limited to information identified as “not reasonably accessible,” and neither of these limitations are contained in the new sub-section 26(c)(1)(B). Courts also used to rely on Rule 26(b)(2)(C)(iii), which was interpreted to permit cost-sharing if the court determined that “the burden or expense of the proposed discovery outweigh[ed] its likely benefit[.]” That sub-section has, however, been removed and replaced by the December 1, 2015 amendments.

Going forward, we anticipate that the addition of Section 26(c)(1)(B), which is worded less restrictively than either of its “predecessors” in Rule 26, will encourage more attorneys to seek cost-shifting in discovery, notwithstanding the Advisory Committee Notes explaining that the amendment is not meant to make cost-shifting “a common practice.” Currently, the keystone decision on cost-shifting in federal discovery is the Southern District of New York’s opinion in Zubulake v. UBS Warburg LLC,  217 F.R.D. 309 (S.D.N.Y. 2003). Under Zubulake, cost-shifting is only permitted if the requested documents are deemed “inaccessible”. This analysis is largely controlled by the manner in which the information at issue is stored, and whether it is available in a readable format. If the information is found to be inaccessible, then cost-shifting may be permitted under Zubulake, subject to an eight-factor balancing test, which considers:

(1) the specificity of the discovery requests; (2) the likelihood of discovering critical information; (3) the availability of such information from other sources; (4) the purposes for which the responding party maintains the requested data; (5) the relative benefits to the parties of obtaining the information; (6) the total cost associated with production; (7) the relative ability of each party to control costs and its incentive to do so; and (8) the resources available to each party.

This test is based, in part, on the language of Rule 26(b)(2)(C)(iii), quoted above, that has since been removed and replaced by a reference to Rule 26(b)(1), which, after the December 1, 2015 amendments, emphasizes the importance of proportionality in defining the scope of discovery:

Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resource, the importance of discovery in resolving the issues, and whether the burden or expense of the proposed information outweighs its likely benefit.

(Emphasis added.) When the Zubulake decision was issued in 2003, the court essentially proceeded on the premise that cost-shifting would only be appropriate where the discovery requests at issue presented an “undue” burden or expense, which would only exist if the information at issue was “inaccessible,” and would then be subject to the eight-factor balancing test articulated above.

If Zubulake was decided again today, under the Federal Rules as amended on December 1, 2015, it is not clear that the Court would choose to impose the pre-requisite that cost-shifting can only be permitted where the information at issue is “inaccessible.” Further, the multi-factor test articulated by the court (assuming the court would still choose a multi-factor test, a trend that never seems to go out of style), would likely resemble the proportionality factors now articulated in Rule 26(b)(1). These changes to the analytical framework could point to the conclusion that cost-shifting is merited in a greater number of cases than previously ordered. This is especially significant in jurisdictions that have not yet adopted the Zubulake approach to cost-shifting or articulated a standard of their own.

In sum, while the authors do not expect the recent addition of Rule 26(c)(1)(B) to usher in a sea-change where the requesting party will typically be expected to shoulder some percentage of the responding party’s discovery costs, it is expected to increase the number of motions filed seeking cost-shifting, which should, in turn, increase the raw number of cost-shifting orders in federal discovery. Further, the recent amendments’ overall focus on proportionality could lead some courts to soften the analysis that they use to determine when cost-shifting is merited. The key takeaway for attorneys and defendants is that the practice of cost-shifting is now expressly acknowledged in the Federal Rules, and, while it may not become commonplace, it is certainly not going to become any less common.

Filed under Cost-Shifting, Discovery

Liquor Liability Exclusion Bars Coverage for the Four Loko Bodily Injury Lawsuits

By and on December 29, 2015
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In Phusion Projects, Inc. v. Selective Ins. Co., No. 1-15-0172, 2015 Ill. App. LEXIS 942 (Ill. App. Dec. 18, 2015), the manufacturers of the alcoholic beverage “Four Loko” (collectively “Phusion”) filed a declaratory judgment action seeking a declaration that their commercial liability insurer was required to defend and indemnify Phusion in six underlying bodily injury claims. Selective claimed it was not required to defend Phusion because of the policy’s liquor liability exclusion. The trial court agreed and dismissed Phusion’s complaint. Phusion appealed, and the Appellate Court affirmed the underlying decision.

Four Loko is a fruit-flavored malt beverage which contains 12% alcohol by volume, as well as taurine and guarana. During the relevant time period, Four Loko also contained 135 milligrams of caffeine. The underlying suits alleged that the plaintiffs’ injuries were caused by either their own or another individual’s consumption of Four Loko and subsequent intoxication, mainly due to the inclusion of the stimulants in the Four Loko product.

The CGL policy excluded coverage for “bodily injury…for which any insured may be held liable by reason of (1) causing or contributing to the intoxication of any person.” The exclusion applied only where the insured was “in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.”

In its initial motion to dismiss the declaratory judgment action, Selective relied on the policy’s liquor liability exclusion. Selective cited to a Federal District Court opinion excluding coverage for Phusion based on an identical liquor liability exclusion. Netherlands Insurance Co. v. Phusion Projects, Inc., 2012 WL 123921 (N.D. Ill. Jan 17, 2012). Phusion argued the underlying lawsuits were not based on liquor liability, but were based on “stimulant liability,” pointing to the allegations that Phusion was liable for adulterating its Four Loko products with caffeine, guarana, and taurine. Phusion pointed to the underlying plaintiffs’ claims that the addition of these stimulants desensitized consumers of Four Loko to the symptoms of intoxication, and caused them to act recklessly. In its reply, Selective relied on the Seventh Circuit’s holding in Netherlands, which recognized that “the presence of energy stimulants in a [sic] alcoholic drink has no legal effect on the applicability of a liquor liability exclusion.” The trial court held the terms of the insurance policy and liquor liability exclusion made it “clear that coverage is excluded when there are claim[s] that an individual sustained bodily injury caused by intoxication,” and therefore Selective had no duty to defend or indemnify Phusion for the lawsuits.

On appeal, Phusion argued that the exclusion did not apply to manufacturers, but rather only to “those in the liquor business to preserve host liquor liability coverage.” Phusion relied on cases establishing that the voluntary consumption of alcohol is the proximate cause of an injury rather than the manufacture of the beverages. The Appellate Court rejected this argument as relevant only to Phusion’s liability in the underlying suits, and not Selective’s duty to defend or indemnify Phusion in those suits. The court instead followed the Seventh Circuit’s interpretation of the exclusion in Netherlands, finding the plain and ordinary meaning of the exclusion applied to “claims of bodily injury…where Phusion may be held liable because it either caused or contributed to the intoxication of any person,” an exclusion which applied specifically to those in the business of manufacturing alcoholic beverages.

Phusion also argued that intoxication was not the “sole and proximate cause” of the injuries asserted in the underlying lawsuits, but that some allegations such as the addition of stimulants to the product fell outside the liquor liability exclusion and were therefore potentially covered by the policy. The court disagreed, finding that Illinois law actually requires an allegation of a proximate cause “wholly independent” from the excluded coverage. The court found that “in order for the underlying lawsuits at issue here to fall within the insurance policy and, thus, outside the liquor liability exclusion, each of the complaints must allege facts that are independent from the event that led to the injury,” requiring that the underlying complaints allege facts “that are independent of ‘causing or contributing to the intoxication of any person.’” Here, it was impossible for anyone to suffer injuries due to the inclusion of stimulants in the product absent consumption of and subsequent intoxication due to Four Loko. It was “[t]he supply of alcohol, regardless of what it is mixed with,” that was “the relevant factor to determine whether an insured caused or contributed to the intoxication of any person.” Quoting the Seventh Circuit, the Court found Phusion’s decision to mix energy stimulants and alcohol “might not have been a very good one,” but did “not amount to tortious conduct that is divorced from the serving of alcohol.” Therefore, the allegations of the underlying complaint fell within the liquor liability exclusion, and Selective had no duty to defend Phusion in the underlying actions.

Courts often struggle with whether to apply policy exclusions in the face of alternative theories of liability in the underlying case, especially when one of those theories arguably falls outside the scope of the exclusion. Here, however, the court appropriately relied on the broad scope of the exclusion and rejected the insured’s efforts to circumvent the exclusion by parsing the allegations of the underlying complaint.

Filed under Appellate, Commercial General Liability, Exclusion

Ninth Circuit Zaps Insured’s Suit Seeking Coverage for Zip Code Claims

By on December 10, 2015
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In Big 5 Sporting Goods Corp. v. Zurich American Ins. Co., et al., Case No. 13-56249 (9th Cir. Dec. 7, 2015), the Ninth Circuit, interpreting California law, held that underlying putative class action lawsuits asserting Song-Beverly Act claims alongside causes of action for invasion of privacy and negligence were not covered and did not trigger a duty to defend under CGL policies issued by Zurich and Hartford. The Ninth Circuit affirmed the decision of the Central District Court Judge Dolly Gee.

The Song-Beverly Act prohibits retailers from requesting and recording personal identification information (e.g., Zip codes) in conjunction with point-of-sale credit card transactions. Big 5 was sued in a series of underlying class action lawsuits asserting causes of action based on alleged violations of the Song-Beverly Act. Some of those complaints also asserted common law and constitutional invasion of privacy claims as well as negligence causes of action.

The policies included “Distribution of Material” exclusions which eliminated coverage for personal and advertising injury arising directly or indirectly out of any act or omission that violates or is alleged to violate any statute that prohibits or limits the sending, transmitting, communicating, distribution, etc., of material or information. Additionally, the Hartford policy included a “Right of Privacy Created by Statute” exclusion which eliminated coverage for personal and advertising injury arising out of the violation of a person’s right of privacy created by statute.

The Ninth Circuit affirmed District Court, holding that these exclusions eliminated coverage and any duty to defend the underlying suits based on the alleged violations of the Song-Beverly Act. The Court determined that the Act was undeniably a statute and that the alleged violations of the Act amounted to acts or omissions that were excluded from coverage.

Significantly, the Ninth Circuit rejected Big 5’s argument that the underlying common law and California constitutional invasion of privacy claims independently triggered a duty to defend. In doing so, the Court determined that in the context of the at-issue garden variety Song-Beverly Act complaints, such invasion of privacy claims “simply do not exist.” The Court further stated:

California does not recognize any common law or constitutional privacy right causes of action for requesting, sending, transmitting, communicating, distributing, or commercially using ZIP Codes. The only possible claim is for statutory penalties, not damages.

As support for this conclusion, the Ninth Circuit recognized that the Song-Beverly Act created a new right to protection in a consumer’s personal identification information that that did not previously exist and that the remedy for violations of the Act were specified statutory penalties. It also relied on the decision in Fogelstrom v. Lamps Plus, Inc. (2011) 195 Cal. App. 4th 986, which concluded that in the context of Song-Beverly class actions, there was no actionable invasion of privacy cause of action as the required element of a serious invasion of privacy or egregious breach of social norms was not present.

The Ninth Circuit further held that the underlying negligence causes of action did not trigger a duty to defend, stating that “[j]ust as a rose by any other name is still a rose, so a ZIP Code case under any other label remains a ZIP Code case.” The Court recognized that under California law, artful drafting and the assertion of superfluous negligence claims does not create a duty to defend where such a duty does not otherwise exist under the facts alleged.

With its decision in Big 5, the Ninth Circuit joins a growing number of Courts from across the country that have held that statutory class action lawsuits do not trigger a duty to defend under CGL policies.

The Ninth Circuit’s decision in Big 5 is not published and its citation is governed by 9th Cir. R. 36-3.

Filed under Commercial General Liability, Electronic Data, Exclusion, Personal and Advertising Injury

DRI Publishes 4th Edition of Insurance Bad Faith: A Compendium of State Law

By on December 8, 2015
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The Defense Research Institute recently published Insurance Bad Faith: A Compendium of State Law with Gordon & Rees partner Asim Desai and senior counsel Randall Berdan serving as co-editors in chief. Partner Leon Silver and senior counsel Andy Jacob authored the Compendium’s Arizona chapter, and senior counsel Laura Ryan authored the Nevada chapter.
This is the fourth edition of the Compendium, which addresses the state of the law in all areas of Insurance Bad Faith including theories of liability, damages, defenses and direct actions, among others in each of the 50 states as well as the District of Columbia, Puerto Rico, the Virgin Islands, and Canada. State level authors, and regional editors were selected based upon their breadth and depth of experience and knowledge in defending against bad faith actions.
To obtain copies of DRI’s Compendium, please click here.

Filed under Bad Faith

The Oregon Supreme Court Overrules the Stubblefield Rule Regarding an Insured’s Ability to Assign Insurance Rights

By and on December 8, 2015
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Oregon has long had a very interesting rule called the Stubblefield Rule, derived from the case of Stubblefield v. St. Paul Fire & Marine Ins. Co., 267 Or. 397 (1973). In Stubblefield, the Oregon Supreme Court held that when an insured enters into a stipulated judgment with a covenant not to execute, the insured is no longer “legally obligated to pay” for purposes of triggering coverage under a CGL policy. Under Stubblefield, a stipulated judgment with a covenant not to execute terminates the insurer’s obligations under the policy to the insured, and, in turn, to the assignor/claimant. The Stubblefield Rule has caused parties to a stipulated judgment to be extremely careful to make sure that the insured’s liability was not eliminated.

Earlier this year, in A&T Siding v. Capitol Specialty Ins. Corp., ___ Or. ___ (Oct. 8, 2015), the Oregon Supreme Court also held that parties to a stipulated settlement with an agreement not to execute could not amend the settlement agreement to revive the insured’s liability for purposes of seeking insurance coverage. Our Capitol Specialty discussion can be found here. As we indicated in our A&T Siding blog post, the Stubblefield Rule was alive and well in Oregon, and we recommended that insurers facing a settlement agreement and covenant judgment should examine the settlement documents carefully to determine whether the agreement released the insured from all liability.

Now, however, the Stubblefield Rule is no longer the law in Oregon. In Brownstone Homes Condo. Assoc. v. Brownstone Forest Heights, LLC, et al., the Oregon Supreme Court acknowledged that Stubblefield “was wrongly decided.” The Court noted that its reasoning in Stubblefield was sparse, the decision was “unsupported by any explanation or analysis,” and the Court neglected to examine the policy language. The Court observed that the majority of jurisdictions have held that “when a covenant not to execute is given in the context of a settlement agreement for valuable consideration (specifically, an assignment of claims), it is a contractual promise not to sue the defendant on the judgment, not a release or extinguishment of the defendant’s legal obligation to pay it.” The Oregon Supreme Court concluded that Stubblefield “erred when it concluded that a covenant not to execute obtained in exchange for an assignment of rights, by itself, effects a complete release that extinguishes an insured’s liability and, by extension, the insurer’s liability as well.”

Nevertheless, insurers should remain mindful of ORS 31.825, which sets forth precise timing requirements to effect a proper assignment of rights against an insurer. Under ORS 31.825, the underlying parties must first reach a settlement, then facilitate entry of judgment, and only then can a valid assignment take place. Insurers should take care to confirm the insured’s compliance with the statute when evaluating an assignment of rights to insurance proceeds.

Filed under Consent to Assignment, Covenant Judgments

Food Fight: Chicken Producer Awarded Coverage Under Accidental Contamination and Government Recall Coverage Parts

By and on November 19, 2015
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In Foster Poultry Farms, Inc. v. Certain Underwriters at Lloyd’s, London, Civil Action No. 1:14-953, 2015 U.S. Dist. LEXIS 138609 (E.D. Cal. Oct. 9, 2015), the Eastern District of California, applying New York law, granted plaintiff-chicken producer Foster Poultry Farms’ (“Foster”) motion for partial summary judgment on its declaratory relief action, and denied the defendant-insurers (“Lloyd’s”) motion for summary judgment on both of Foster’s claims.

11-19During the relevant policy period, the United States Department of Agriculture Food Safety and Inspection Service (“FSIS”) issued a Notice of Intended Enforcement (“NOIE”) to withhold marks of inspection for products produced at Foster’s facility, making the chicken products ineligible for sale. As a result, Foster destroyed 1.3 million pounds of chicken. Foster then submitted a claim to Lloyd’s seeking coverage under its product contamination policy for over $12 million in expenses associated with the destruction of the chicken. The policy provided coverage for all “loss” arising out of “insured events,” the two of which at issue in this case were “accidental contamination” and “government recall.” Lloyd’s denied coverage under both provisions of the policy, leading Foster to file an action for declaratory relief and breach of the insurance contract.

On cross-motions for summary judgment, the Court first found that coverage existed under the Accidental Contamination provision of the policy, which provided coverage where Foster could demonstrate “(1) an error in the production of its chicken product, (2) the consumption of which ‘would lead to’ bodily injury.” The first step was established by Foster’s failure to comply with federal sanitation regulations, which resulted in a high frequency of salmonella in the finished chicken products and an outbreak of salmonella illness in the community. The court found compliance with the federal regulations was “vital to controlling food safety hazards during [food] production,” and a failure to do so therefore constituted an “error” in the production of the chicken product.

The second element required showing that the “‘erroneously produced’ chicken product ‘would lead to bodily injury, sickness, disease or death.’” Lloyd’s denied coverage on the basis that Foster had to prove actual contamination of the chicken in order to establish that consumption would be harmful. While Lloyd’s cited heavily to cases that validated denials of coverage due to an insured’s inability to prove actual contamination, the Court determined these cases were distinguishable from Foster’s because coverage under Foster’s policy was triggered by an error in production, not actual contamination. The Court noted, however, that even if Foster’s policy did require actual contamination, that requirement would have been met, because it was undisputed that Foster’s chicken product consistently tested positive for salmonella in the six months prior to its destroying the product for which it sought coverage.

Lloyd’s also argued that the presence of salmonella did not by itself render the product harmful because normal cooking practices would destroy the salmonella organism. The Court rejected this argument, as FSIS identified the Foster facility as the likely source of a salmonella illness outbreak in over two hundred people from fifteen states across the country. Finally, Lloyd’s argued that the policy language required Foster to demonstrate a causal link between its “error” and injury that would have resulted from consuming the product. The court rejected this argument, finding Foster only needed to prove that an error occurred and that the product would have caused harm if consumed, as the provision did not use any causation language. The Court therefore granted Foster partial summary judgment on the accidental contamination policy.

The Court also granted Foster’s motion for partial summary judgment on the government recall provision. The Policy provided coverage for “a voluntary or compulsory recall of Insured Products arising directly from a Regulatory Body’s determination that there is a reasonable probability that Insured Products will cause ‘serious adverse health consequences or death.’” Lloyd’s denied coverage because Foster’s destruction of its product did not constitute a “recall” given that the chicken never left Foster’s control and was never introduced into the stream of commerce. Foster argued that the destroyed chicken had been recalled because the policy’s definition of pre-recall expenses included ascertaining whether the product was contaminated and the potential effects of such contamination, and recall expenses included destroying contaminated products without mention of who was in possession of the product. The Court found both interpretations of the term were reasonable, but because the term was subject to more than one interpretation it was deemed ambiguous, and the contract was thus interpreted in favor of Foster as the insured.

As the body of case law interpreting the newer wave of specialty policies in the food and beverage industry continues to grow, it is extremely important for insurers to analyze the specific policy language and recall/contamination scenarios at issue in those cases when evaluating coverage under their own policies. This particular case has some interesting takeaways on issues such as causation and ambiguity that should guide us going forward.

Filed under Food Contamination

Insurance Coverage for Social Engineering Losses

By on November 16, 2015
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11-4Cyber criminals employ a variety of tactics—such as hacking, phishing or baiting schemes—to steal a business’s money, property or proprietary information. The term “social engineering” is applied to schemes that use technology, not to steal directly from the business, but to manipulate employees unwittingly to perform acts, transfer assets or divulge confidential information. A common social engineering loss scenario involves a trusted employee who is induced, by a spoof email or forged written instructions from someone impersonating a customer, a vendor or a senior officer of the company, to instruct the employer’s bank to wire funds to the imposter’s account.

Many businesses mistakenly believe that traditional commercial crime policies cover all such cyber-related losses. Although commercial crime policies have traditionally included computer fraud and funds transfer fraud insuring agreements, courts interpreting the scope of such coverages have generally distinguished between: (1) Losses where a thief hacks the insured’s computer systems and uses the computer to steal the insured’s property or to induce the insured’s bank to transfer the insured’s funds; and (2) Losses where the insured voluntarily transfers funds. Courts have generally allowed coverage for the first category of loss, but the latter losses—which include “social engineering” claims—usually are not covered.

Standard computer fraud insurance usually applies to hacking losses, i.e., direct loss resulting from “theft” through the use of a computer system. Social engineering losses are outside the scope of coverage because they do not arise “directly” from the use of any computer to fraudulently cause a transfer of property; they arise from an authorized transfer of funds.

The Funds Transfer Fraud insuring agreement applies when an imposter induces a financial institution to allow funds to be withdrawn from the insured’s account by posing as the insured and submitting fraudulent instructions. Social engineering claims are outside the scope of the insuring agreement, where an authorized employee is induced to authorize a withdrawal.

Social engineering loss is difficult to prevent; it cannot be defended against through hardware or software. Insurance coverage against social engineering risks, however, is available, usually by endorsement to commercial crime policy forms.  Such coverage typically covers direct loss resulting from the intentional misleading of an employee through electronic or written instruction sent by a person who purports to be a vendor, client or employee, that directs the Employee to transfer, pay or deliver money or property, and contains a misrepresentation of material fact which is relied upon by the employee.

Filed under Cyberinsurance, Electronic Data

Illinois Supreme Court Slams Door on Long-Tail Toxic Tort Claims Against Employers

By on November 12, 2015
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We previously wrote about the potential new risks facing employers’ liability insurers in light of recent case law from Pennsylvania and Illinois permitting employees to maintain long-tail occupational disease claims against former employers in the tort system, outside of the traditionally exclusive workers compensation regimes. For now, employers and their insurers can breathe a sigh of relief, at least in Illinois.

On November 4, 2015, the Illinois Supreme Court reversed an Illinois intermediate appellate court which had permitted an employee’s estate to sue his former employer in the tort system. Folta v. Ferro Eng’g, 2015 IL 118070 (Ill. Nov. 4, 2015). That employee, James Folta, worked for Ferro Engineering from 1966 to 1970 as a shipping clerk and product tester, and allegedly developed mesothelioma in part as a result of his exposure to asbestos-containing products at Ferro. The intermediate appellate court held that the identical exclusivity provisions in the Illinois Workers’ Occupational Disease Act and the Workers’ Compensation Act (collectively, the “Act”) did not bar Folta’s tort claim against Ferro because he first discovered his asbestos-related injury outside of the Act’s statute of repose. Folta v. Ferro Engineering, 14 N.E.3d 717 (Ill. App. Ct. 1st Dist. 2014).

In reversing the appellate court, the Illinois Supreme Court held that Folta’s tort claim against Ferro was barred by the exclusive remedy provisions of the Act even though Folta had no rights under the Act because his injuries manifested after the 25-year statutory time limits to file claims. Under Illinois law, “an employee can escape the exclusivity provisions of the Act if the employee establishes that the injury (1) was not accidental; (2) did not arise from his employment; (3) was not received during the course of employment; or (4) was not compensable under the Act.”  Id. at *14. In Folta, the plaintiff argued – and the intermediate appellate court accepted – that his claim was “not compensable” because his disease manifested outside of the Act’s statutory time limits to file a claim. In other words, plaintiff argued that “he never had an opportunity to recover any benefits under the Act. That is, through no fault of his own, the claim was time-barred before his disease manifested.” Id. at *16. On the other hand, the employer argued that an injury was “compensable” if the type of injury fell within the scope of the Act, regardless of whether an employee could recover thereunder.

The Folta court agreed with the employer, explaining that the legislatively-enacted time limit acts as a “statute of repose, and creates an absolute bar on the right to bring a claim.” Id. at *33. Further, the Folta court explained that such a statute of repose was not manifestly unfair because the time limitation did “not prevent an employee from seeking a remedy against other third parties for an injury or disease.” In dissent, however, Justice Freeman heralded Pennsylvania’s “persuasive” Tooey decision, which permitted employees to sue their former employers in tort for long-tail occupational disease injuries.

It remains to be seen whether other jurisdictions will follow the Pennsylvania or Illinois approach but, for now, employers and their employers’ liability insurers should continue to be prepared to address these potential newfound liabilities.

Filed under Employer’s Liability

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