Insurer Bound by Renewal Endorsement in Expiring Policy to Offer “Substantially Similar” Coverage Despite Known Losses

By on November 5, 2015
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In a somewhat unusual insurance coverage case, the Third Circuit gave teeth to a “renewal” clause contained within a ten-year pollution and remediation policy and prohibited the insurer from materially changing the policy terms for the renewal period. Indian Harbor Insurance Co. v. F&M Equipment, Ltd., No. 14-1897 (3d Cir. 2015). Indian Harbor issued a ten-year pollution policy with a $10 million dollar limit (later upped to $14 million) to F&M Equipment’s predecessor in 2001 that covered twelve specific sites (the “Policy”). The Policy contained an endorsement (the “Renewal Endorsement”) requiring Indian Harbor to offer F&M a renewal unless one of five specific enumerated conditions was met.

Indian Harbor, however, offered a materially different “renewal” policy: a one-year policy with a $5 million dollar limit that excluded coverage for one of the twelve sites (the only site where claims had been made). F&M rejected Indian Harbor’s offer and asserted that the Renewal Endorsement required Indian Harbor to provide a renewal policy with terms and conditions that are identical to the original Policy. After the insured sent Indian Harbor a premium check for a renewal policy, Indian Harbor filed a declaratory judgment action. Indian Harbor succeeded in obtaining a declaratory judgment from the district court, which reasoned that Pennsylvania law permits a “renewal” of a policy with different terms and conditions, provided that the insured is given notice of the different terms.

The Third Circuit reversed and remanded to determine the remedy for Indian Harbor’s breach of the Policy. Though it noted that there was scant authoritative Pennsylvania law on point the court was persuaded by the Eighth Circuit’s decision in McCuen v. Am. Cas. Co., 946 F.2d 1401, 1403 (8th Cir. 1991), and held that Indian Harbor’s “renewal” obligation required it to offer F&M a policy with substantially similar terms and conditions. The court specifically rejected Indian Harbor’s argument that its “renewal” obligation was met as long as the policy was not commercially unreasonable: “the relevant provision of the contract is a promise to offer a renewal, not a reasonable insurance contract.”

The Indian Harbor court, however, declined to fully answer the relevant question presented by the case: “how similar the new contract must be” to constitute a “renewal.” Instead, the particular facts of the case lead to the court’s holding that “regardless of the particular degree of similarity required, Indian Harbor’s position cannot be what the parties intended.” In short, the court explained, a renewal policy requires greater similarity to the original policy than just the same parties and “general subject matter.”

The Indian Harbor decision leaves a number of unanswered questions. First, while a “renewal need not be identical to the original,” the court declined to provide any guidance as to how similar a “renewal” must be.  Second, while the court suggested that an insurer could demand a “reasonable change in price” for a renewal, it did not define “reasonable.” Although the court did not allow the insured to exclude coverage for a site with known losses, it left open the question as to how the insurer may price the risk and what constitutes a reasonable change. Finally, the court punted on the question of whether the renewal provision itself is a substantially similar term which must be included in any renewal policy, leaving open the possibility that an insurer issuing a policy with a “renewal” term is obligated to cover an insured along the same terms and conditions in perpetuity. This is certainly a unique case but it deserves attention to the extent that the district court on remand holds the insurer to a potentially absurd result that was not intended by the parties at the time of contracting.

Filed under Policy Renewal

California Appeals Court Rejects Insurer’s “Escape” Clause And Confirms Tolling Of Statute Of Limitations For Equitable Contribution Claims

By on November 4, 2015
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In Underwriters of Interest v Probuilders Specialty Ins. Co. (Case No. D066615, filed 10/23/15), the California Court of Appeal for the Fourth District, Division One, rejected an insurer’s “escape” clause, ruled that a Contractors Special Conditions endorsement was inapplicable, and confirmed that the statute of limitation for an insurer’s claim for equitable contribution against a co-carrier is tolled until it makes its last defense payment.

Construction siteUnderwriters insured Pacific Trades Construction & Development (“PTCD”) from 2001 to 2003. Probuilders insured PTCD from 2002 to 2004. Pursuant to its policies, Underwriters agreed to defend PTCD in a construction defect action arising out of the construction of single family homes. In contrast, Probuilders denied PTCD’s tender arguing that its policies only provided a duty to defend when “no other insurance affording a defense against such a suit is available to [the insured].” In addition, Probuilders argued its policy included a Contractors Special Conditions (“CSC”) endorsement which provided that as a “condition precedent to this policy applying to any claim in whole or in part based upon work performed by independent contractors,” PTCD must have: (1) written indemnity agreements with each subcontractor hired; (2) certificates of insurance from each subcontractor’s insurer showing PTCD as an additional insured; and (3) maintained records evidencing PTCD’s compliance with these obligations.

Turning first to Probuilders’ defense obligation, the Appellate Court, citing Edmondson Property Management v. Kwock (2007) 156 Cal.App.4th 197, 203-204, held that Probuilders’ other insurance clause was an “escape” clause disfavored under the law.

[C]ourts have considered this type of “other insurance” clause as an “escape” clause, a clause which attempts to have coverage, paid for with the insured’s premiums, evaporate in the presence of other insurance….Escape clauses are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.

Reasoning the policies issued by Underwriters and Probuilders were not completely overlapping and provided coverage for at least different periods of time, the Appellate Court refused to enforce Probuilders’ other insurance clause.

The appeals court also rejected Probuilders’ argument that its CSC endorsement obviated a duty to defend because PTCD had failed to secure indemnity and/or additional insured coverage from all of its subcontractors. Noting Probuilders had not conclusively established that all of the claims against PTCD were limited to work performed by subcontractors and that while there was evidence of incomplete compliance with the CSC endorsement at least one subcontract had complied, the court found there was a question of fact precluding summary judgment in Probuilders’ favor.

Next, the appeals court found Underwriter’s equitable contribution claim was timely because while the claim first accrued at the time Probuilders first refused to participate in PTCD’s defense, the statute of limitations was “tolled until all of the defense obligations in the underlying action are terminated by final judgment.”

While not a departure from current case law, the case confirms California’s rejection of “escape” type clauses in contribution disputes between carriers and that under the right set of facts, endorsements requiring insureds to secure additional insured coverage from subcontractors may serve as a means to limit or possibly obviate the duty to defend and/or indemnify.

Filed under Construction Defect, Contribution Actions, Other Insurance, Statute of Limitations

Oregon Supreme Court Bars Plaintiff From Executing on Covenant Judgment Against the Defendant’s Insurer

By on October 26, 2015
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The Oregon Supreme Court recently answered a question certified to it by the Ninth Circuit Court of Appeals, which asked whether a settlement agreement that released an insured from liability could be amended to revive the liability of the insured so that the plaintiff could seek recovery from the insurer. The Oregon Supreme Court concluded that, based upon the theory presented by the plaintiff, the settlement agreement could not be amended. A&T Siding v. Capitol Specialty Insurance Corp., ___ Or. ___ (Oct. 8, 2015)

The case arose out of a lawsuit by the Brownstone Homes Condominium Association related to construction defects in the condominium complex, which Brownstone alleged were caused in part by A&T Siding. Capitol Specialty and Zurich insured A&T for the relevant time period. Capitol initially defended A&T, but withdrew its defense when it concluded that the damage alleged by Brownstone was not covered.

Brownstone later settled with A&T via a “covenant judgment.” Under the agreement, judgment would be entered against A&T for $2 million and Zurich would pay $900,000 of that judgment. A&T agreed to assign its rights against Capitol to Brownstone, and Brownstone covenanted not to execute the judgment against A&T or its assets. Instead they agreed that Brownstone would be entitled to seek recovery of the unexecuted portion of the judgment from Capitol. The parties also agreed to release each other from “all past, present and future claims” arising out of the dispute.

Brownstone then began garnishment proceedings against Capitol for the unpaid portion of the judgment. Capitol moved for summary judgment, arguing that because the settlement agreement released A&T from all liability, Capitol was likewise released from liability. The trial court agreed and entered judgment in Capitol’s favor. The court relied in part upon its decision in Stubblefield v. St. Paul Fire & Marine, 517 P.2d 262 (1973), which also involved a covenant judgment. The settlement agreement in Stubblefield excused the insured from any obligation to pay the judgment, and the insurance policy limited the insured’s coverage to sums the insured was “legally obligated” to pay. The court therefore held the underlying plaintiff had acquired no enforceable claims or rights against the insurer under the assignment.

Following the entry of judgment, Brownstone and A&T executed an “addendum” to their settlement agreement. Among other things, the addendum eliminated the original assignment to Brownstone of A&T’s claims and required A&T to pursue those claims itself under Brownstone’s direction and at Brownstone’s expense. The addendum also replaced the original unconditional release of all parties with a release only of Zurich.

A&T then sued Capitol and the case eventually found its way to the Ninth Circuit, which certified the following question to the Oregon Supreme Court:

The parties’ original settlement agreement, under which [Brownstone] released A&T from liability and signed a covenant not to execute the stipulated judgment against A&T, was construed pursuant to Stubblefield * * * to also release A&T’s insurer, [Capitol] from liability. The parties to the agreement assert that such a construction is contrary to the parties’ intent. Under Oregon law, may the parties amend their settlement agreement to reflect their original intent, and thereby restore the insurer’s duty to provide coverage for A&T’s resulting liability to the extent its policy provides coverage for the loss alleged by Brownstone?

The Oregon Supreme Court accepted the certified question. Capitol argued that Brownstone originally released A&T from any liability and that the addendum they created could not undo that release in the absence of the trial court rescinding or reforming the settlement agreement. A&T argued that it and Brownstone did not intend for the language in the original settlement agreement to have the legal effect the trial court gave it. It further argued that the parties reformed the original settlement agreement when they created the addendum, even though they did not call on the equitable authority of a court to reform the agreement. A&T therefore argued that the addendum should relate back to the original settlement agreement.

The Oregon Supreme Court rejected A&T’s argument. It did not reach the question of whether A&T and Brownstone could privately reform the contract without court approval. Instead it concluded among other things that A&T and Brownstone were not entitled to the equitable remedy of reformation based on A&T’s “mistake of law” argument that the language in the original agreement had unintended consequences. Accordingly, the insured and plaintiff could not reform the original settlement agreement.

The court left open the possibility that other legal or equitable theories not argued by the parties might justify treating the addendum as relating back to the original settlement agreement, though it did not explain what those theories might be. It is clear, however, that Stubblefield remains the law in Oregon. Insurers faced with a settlement agreement and covenant judgment in Oregon should always examine the settlement documents carefully to determine whether the agreement releases the insured from all liability. In such a case the insurer may have a strong argument that it is not obligated to fund the settlement.

Filed under Commercial General Liability, Consent to Settle, Covenant Judgments, Garnishment Proceeding, Reformation

Cumis Counsel Rule Adopted by Nevada Supreme Court

By on October 6, 2015
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In response to certified questions from the U.S. District Court for the District of Nevada, the Nevada Supreme Court has adopted the Cumis independent counsel rule established by California courts requiring an insurer to provide independent counsel for its insured when a conflict of interest arises between the insurer and insured. State Farm Mut. Auto Ins. Co. v. Hansen, 131 Nev. Adv. Op. 74 (Sept. 24, 2015). The court also rejected application of a standard that creates a per se conflict of interest to every case in which there is a reservation of rights. Instead, Nevada courts must ask, on a case-by-case basis, whether an actual conflict exists.

In the underlying litigation, State Farm’s insured was sued for negligence and various intentional torts following an altercation at a house party and subsequent auto collision. State Farm agreed to defend under a reservation of rights, but did not agree to provide independent counsel to its insured. In subsequent coverage litigation, the federal district court initially found that State Farm breached its contractual duty to defend because it had not provided independent counsel to its insured.  The court then reconsidered and asked the Nevada Supreme Court to resolve questions concerning the state’s conflict of interest rules in insurance litigation.

Recognizing that Nevada, like California, is a dual-representation state – meaning that insurer appointed counsel represents both the insurer and insured – the Nevada Supreme court held that “counsel may not represent both the insurer and the insured when their interests conflict and no special exception applies.” This justified application of the Cumis rule in Nevada.

The Court then considered what circumstances created a conflict of interest and, in particular, whether a reservation of rights created a per se right to independent counsel. The Court concluded that even when there is a reservation of rights and insurer-appointed counsel has control over an issue in the case that will also decide the coverage issue, courts must still determine whether there is an actual conflict of interest. Relying on Nevada’s Rule of Professional Conduct 1.7, the Court explained, “[t]his means that there is no conflict if the reservation of rights is based on coverage issues that are only extrinsic or ancillary to the issues actually litigated in the underlying action.”

The decision provides useful guidance to Nevada litigants and trial courts for resolving conflict of interests in insurance litigation. However, the opinion leaves unaddressed other Cumis-type issues such as the reasonable amount of fees for independent defense counsel. As such, more litigation and possible legislation to clarify the rule should be expected.

Filed under Attorneys’ Fees, Duty to Defend, Independent Counsel, Reservation of Rights

Oregon’s Safe-Harbor Provision in the Insurance Fee-Shifting Statute Not as Safe as it Seems

By and on September 30, 2015
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The Oregon insurance fee-shifting statute, ORS 742.061, continues to be a popular topic in the Oregon courts. Our last entry on this subject discussed whether the statute’s reference to “any court of this state” included federal court actions. More recently, the Oregon Court of Appeals strictly construed the safe-harbor provision of ORS 742.061 in holding that an insured could recover attorney’s fees in a UIM arbitration because the insurer had pled – although it did not pursue – other policy-based defenses. Kiryuta v. Country Preferred Insurance Company, 273 Or. App. 469 (2015)

Subsection (3) of the statute states that an insured is not entitled to attorney’s fees under subsection (1) in actions to recover uninsured or underinsured motorist benefits “if, in writing, not later than six months from the date proof of loss is filed with the insurer:

(a) The insurer has accepted coverage and the only issues are the liability of the uninsured or underinsured motorist and the damages due the insured; and

(b) The insurer has consented to submit the case to binding arbitration.”

A letter issued by an insurance company under ORS 742.061(3) is referred to as a “safe-harbor” letter. In Kiryuta, the Court of Appeals addressed whether a safe-harbor letter is effective when an insurance company’s responsive pleading sets forth affirmative defenses that are not litigated but raise issues other than the liability of the uninsured or underinsured driver and the damages to which the insured is entitled. After an injured motorist made a claim for underinsured motorist benefits to Country Preferred, the insurer denied the claim and issued a safe-harbor letter that complied with the requirements of ORS 742.061(3). The insured filed a civil action and the matter was arbitrated. Despite the safe-harbor letter, the arbitrator awarded attorney’s fees to the insured. On review, the trial court reversed the award of attorney’s fees based on the safe-harbor letter.

In its subsequent appeal, the insured argued that Country Preferred’s affirmative defenses of “Contractual Compliance” and “Offset” raised issues other than liability of the driver and the damages due to him, rendering the safe harbor-letter ineffective. Country Preferred argued that because it only litigated the issue of damages owed in the arbitration, the safe-harbor letter was effective. The Court of Appeals agreed with the insured.

In Oregon, a party’s pleadings “declare and control the issues to be determined and the relations that the parties bear to each other.” The Court of Appeals noted that because Country Preferred’s pleading provided a foundation to litigate issues other than the amount of plaintiff’s damages or liability of the underinsured driver, Country Preferred’s litigation strategy was potentially broader than that contemplated by the legislature in ORS 742.061(3). Consequently, the insured had to be prepared at the arbitration to meet any proof that Country Preferred might offer consistent with its pleadings. Therefore, Country Preferred’s conduct was inconsistent with the safe-harbor provision; it was immaterial that Country Preferred did not follow through with its potential litigation strategy. The Court of Appeals reversed the trial court and held that the insured is entitled to reasonable attorney’s fees under ORS 742.061.

In its opinion, the Court of Appeals noted that Country Preferred was in control of its pleading and could have conformed its pleading to the limitations the safe-harbor provision. However, in a footnote, the Court of Appeals sent mixed messages by hinting that insurer could retain the protection of the safe-harbor provision by timely amending its pleading to conform to the requirements of ORS 742.061(3). Accordingly, in uninsured or underinsured claims involving safe-harbor letters in Oregon, insurance companies should consider amending responsive pleadings to reflect only those affirmative defenses that pertain to the liability of the uninsured or underinsured driver and the damages to which the insured is entitled.

Filed under Attorneys’ Fees, Auto

California Appeals Court Rules that Defending Insurer Is Not Bound by Stipulated Judgment to Which It Did Not Consent

By and on September 18, 2015
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In 21st Century Insurance Company v. Superior Court (Tapia), a California appeals court held that an insurance company that is defending its insured cannot be bound by a stipulated judgment entered into by its insured without a trial and judgment after verdict.

The insured, Cy Tapia, was a teenager living with his aunt and grandmother. Tapia was driving with Cory Driscoll in a vehicle owned by Tapia’s grandfather when he was involved in an accident that left Driscoll severely injured. Tapia had $100,000 in liability coverage under an automobile insurance policy issued by defendant 21st Century Insurance Company.

Driscoll and his mother sued Tapia. 21st Century agreed to provide a defense to this suit. Plaintiffs rejected 21st Century’s settlement offer of the $100,000 policy limit as they believed that Tapia might be covered under 21st Century policies issued to Tapia’s aunt and grandmother, each providing $25,000 in coverage.

21st Century offered $150,000 to settle the case against Tapia which plaintiffs declined as they demanded $3 million for Driscoll and $1.15 million for his mother. 21st Century warned Tapia that it would not agree to be bound if Tapia accepted the offer. Tapia ignored this warning, agreed to the entry of a stipulated judgment and assigned any rights he had against 21st Century. Plaintiffs filed a bad faith action against 21st Century, and 21st Century moved for summary judgment which was denied. This denial was reversed on appeal.

The Court of Appeal cited Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 730 for the rule that “a defending insurer cannot be bound be a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment.” The crucial element in the Hamilton ruling was the lack of a judgment rendered after an adversarial trial given the potential for collusion. The Court stated that if the situation involved an insurer that refused to defend, then the insured was free to enter into a stipulated judgment at any time.

The Court of Appeal rejected plaintiffs’ arguments that 21st Century breached its duty to defend because it did not acknowledge coverage or a duty to defend under the policies issued to Tapia’s aunt and grandmother.  The Court also found that the undisputed evidence demonstrated that 21st Century did not have a duty to defend Tapia under either of the policies issued to his aunt or grandmother.

Filed under Bad Faith, Duty to Defend

California Supreme Court Overrules Henkel and Holds Insurer Consent Is Not Required For Policy Assignment After Coverage-Triggering Event Has Occurred

By and on August 25, 2015
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The California Supreme Court held that, regardless of a policy’s consent-to-assignment provision, an insurer’s consent is not required for a valid assignment of a liability insurance policy after a loss has happened. Its holding is based on rarely-cited Insurance Code section 520 (“Section 520”) which states: “[a]n agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.” Further, the Court concluded a loss “happens” when an event giving rise to potentially covered liability takes place, not when a claim is reduced to a fixed sum due. In so holding, the Court overruled Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, which reached a contrary conclusion but did not consider the effect of Section 520.

Hartford issued a series of liability policies to Fluor Corporation, an engineering and construction company. The policies, in effect from 1971 to 1986, contained a consent-to-assignment clause that stated an “[a]ssignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” Beginning in the mid-1980s, various Fluor entities were sued in numerous lawsuits alleging injuries caused by exposure to asbestos. Hartford defended and settled lawsuits against Fluor over a 25-year period.

In the 1980s, Fluor acquired a mining business, A.T. Massey. But in 2000, Fluor chose to refocus on its core businesses and underwent a corporate restructuring known as a “reverse spinoff.” Fluor created a new subsidiary (“Fluor-2”), with the original Fluor becoming Massey Energy. Under a Distribution Agreement, Fluor transferred its rights and obligations to Fluor-2. Those “rights” encompassed all of Fluor’s assets, including the Hartford policies. Fluor-2 notified Hartford of the restructuring. Hartford did not object and continued to defend Fluor-2 against asbestos lawsuits for another seven years.

In 2006, Fluor-2 filed a coverage action against Hartford regarding issues unrelated to Fluor’s assignment. In a 2009 cross-complaint, Hartford for the first time alleged the purported assignment of its policies to Fluor-2 was invalid without Hartford’s consent. Hartford sought reimbursement of defense and indemnity paid on Fluor-2’s behalf.

Fluor-2 moved for summary adjudication that Section 520 bars enforcement of Hartford’s consent-to-assignment clause “after a loss has happened.” Fluor-2 asserted the underlying asbestos suits alleged exposure while Hartford’s policies were in effect. Thus, the “loss” triggering its duty to defend and indemnify already happened, so claims under the policy were assignable without Hartford’s consent. Hartford argued the Court was duty-bound to follow Henkel, which held an assignment is valid only after a loss has been reduced to a “chose in action” – that is, a fixed sum of money due or to become due.

The trial court agreed with Hartford. Fluor-2 filed a writ which the Court of Appeal denied, concluding Henkel controls. The Court of Appeal also concluded Section 520 only applies to first-party insurance policies, since liability insurance “did not even exist” when the predecessor to Section 520 was enacted in 1872. The Supreme Court granted review to consider the effect of Section 520 on the purported assignment.

The Supreme Court first recounted the history of Section 520 in detail. In 1935, when the Insurance Code was created, third-party liability policies were becoming more common, and Section 520 was included in a “General Rules” section of the Code with other sections defining and applying to liability insurance. Section 520 was modified in 1947 to exclude two specific classes of insurance (life and disability, not liability). The Supreme Court disagreed with the Court of Appeal and concluded Section 520 applies to both first-party and third-party insurance policies.

The Court then considered how Section 520 applies in the liability insurance context. The issue turns on the meaning of the phrase “after a loss has happened,” which the Court concluded is ambiguous. Fluor-2 asserted a loss “happened” when a claimant was exposed to asbestos while the Hartford policies were in effect, so Fluor’s assignment of its rights under the policies to Fluor-2 in 2000 was valid. In contrast, Hartford asserted a loss happens when the insured incurs a direct loss by judgment or settlement fixing a sum of money due. The Court concluded that both interpretations are reasonable.

However, the Court reasoned that the legislative history of Section 520, as well as early cases addressing assignment of policies, favor Fluor-2’s view. Early cases distinguish an insured’s inability to assign a policy as to future events (substituting another insured for the risk the insurer evaluated) from an insured’s right to assign a claim after a loss. Regarding the timing of loss, the Court concluded an insurer’s contingent liability to its insured becomes “fixed” when an accident or event takes place for which the insured may be responsible. A claim need not be reduced to a discrete sum for a loss to have occurred.

The Court stated this is the majority view across the country and was expressed in case law decided before the 1947 amendment of Section 520, so the rule was part of the “legal landscape” at that time. The Court also reasoned the notion that loss “happens” at the time of the injury during the policy period is consistent with its holdings in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 and State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, in which the Court equated “loss” with bodily injury and property damage, rather than a money judgment or settlement.

The Court rejected various arguments by Hartford, including that the Court is bound to follow Henkel and that its reliance on a relatively obscure statute is misplaced. The Court overruled Henkel to the extent it is inconsistent.

Click here for the opinion.

This opinion is not final. It may be modified on rehearing or review may be granted by the United States Supreme Court. These events would render the opinion unavailable for use as legal authority.

Filed under Consent to Assignment, General Liability

Insurer May Seek Reimbursement from Independent Counsel of Excessive Defense Expenses Given Trial Court’s Duty to Defend Order

By and on August 20, 2015
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Hartford Cas. Ins. Co. v. J.R. Marketing, L.L.C. (2015) ___ Cal. ___.

The California Supreme Court held an insurer can recover allegedly excessive and unnecessary defense expenses directly from its insureds’ independent counsel. The Court reversed a Court of Appeal decision affirming the trial court’s grant of a demurrer. The trial court had concluded the insurer’s right to reimbursement, if any, was from its insureds, not their independent counsel. The Supreme Court disagreed. The insurer was obligated under an enforcement order to pay the insureds’ defense expenses subject to a right to seek reimbursement for “unreasonable and unnecessary” charges after the fact. On the particular facts, and based on principles of restitution and unjust enrichment, the Court concluded the insurer could pursue reimbursement from the law firm.

Hartford Casualty Insurance Company provided liability insurance to J.R. Marketing, L.L.C. and Noble Locks Enterprises, Inc. covering business-related defamation and disparagement claims, among other risks. In 2005, the insureds were named as defendants in lawsuits in California and elsewhere based on alleged defamation and interference with business relationships. The insureds tendered the California action to Hartford, which refused to defend.

After the insureds (through their counsel, Squire Sanders) filed a coverage action against Hartford, Hartford agreed to defend the California action subject to a reservation of rights. Hartford declined to pay already-incurred defense expenses or provide independent counsel under San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (codified at Civil Code section 2860). But the trial court in the coverage action granted the insureds summary adjudication that Hartford owed a duty to defend from the date of tender. The court also concluded Hartford was obligated to provide independent counsel, and the insureds retained Squire Sanders.

The trial court in the coverage action subsequently issued an enforcement order (which Squire Sanders drafted) stating Hartford had breached its duty to defend by failing to pay defense invoices in a timely fashion. The enforcement order precluded Hartford from invoking the rate limitations in Civil Code section 2860, and required Hartford to pay submitted expenses subject to a right to seek reimbursement at the end of the California action of any “unreasonable or unnecessary” expenses.

The California action was resolved in 2009, and Hartford filed a cross-complaint in the coverage action. On a theory of unjust enrichment, Hartford asserted a right to recoup a significant portion of roughly $13.5 million paid to Squire Sanders under the enforcement order. The trial court sustained Squire Sanders’ demurrer to Hartford’s cross-complaint, concluding Hartford only could seek reimbursement from its insureds, not their independent counsel. The Court of Appeal affirmed.

The California Supreme Court granted review to address the narrow question whether an insurer can seek reimbursement of defense expenses directly from independent counsel where the insurer has paid expenses under a court order expressly preserving the insurer’s post-litigation right to recoup “unreasonable and unnecessary” amounts charged.

The Court began with an analysis of its holding in Buss v. Superior Court (1997) 16 Cal.4th 35, which requires an insurer to provide a complete defense to a lawsuit alleging both covered and non-covered claims, subject to the insurer’s right to seek reimbursement of expenses solely allocable to non-covered claims. In such a case, the insured would be unjustly enriched if the insurer had no reimbursement right. But Buss did not consider who is unjustly enriched if independent counsel is allowed to retain payments that were unreasonable or unnecessary to the insureds’ defense.

The Court concluded that, in light of the trial court’s enforcement order, Hartford could pursue Squire Sanders for reimbursement. Assuming Hartford’s position has merit, the firm is the unjust beneficiary of the disputed sums. Nevertheless, the Court emphasized that its conclusion is limited to the unusual facts at issue.

Squire Sanders asserted various objections based on contract law principles, public policy and procedure, all of which the Court rejected. The Court concluded Squire Sanders is not an incidental beneficiary of Hartford’s duty to defend its insureds, with no duty to make restitution. Hartford’s obligation under the enforcement order Squire Sanders prepared was to pay reasonable expenses, subject to an express right to seek reimbursement of unreasonable expenses later. Hartford never agreed to pay whatever Squire Sanders billed, no matter how excessive.

The Court concluded Hartford’s unjust enrichment claim did not interfere with the attorney-client privilege between the insureds and its independent counsel, or with counsel’s right to control the defense. Civil Code section 2860 contemplates that independent counsel will be called upon to justify their fees, and privileged information can be redacted. The Court also rejected the notion that, rather than seeking reimbursement from independent counsel, Hartford should pursue its unsophisticated insureds for allegedly failing to monitor and control their counsel’s fees.

Nor would an unjust enrichment claim against independent counsel violate California’s prohibition against assignment of legal malpractice claims. Hartford seeks to recover overpayments for allegedly excessive and unnecessary work by Squire Sanders, not damages due to the firm’s alleged breach of any duty owed to the insureds.

Click here for the opinion.

This opinion is not final. It may be modified on rehearing or review may be granted by the United States Supreme Court. These events would render the opinion unavailable for use as legal authority.

Filed under Duty to Defend, Independent Counsel

Oregon State and Federal District Courts Interpret Insurance Fee Shifting Statute Broadly

By and on August 6, 2015
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In Oregon, ORS 742.061 authorizes an award of attorney fees to an insured that prevails in “an action…in any court of this state upon any policy of insurance of any kind or nature…” The Oregon Supreme Court, in Morgan v. Amex Assurance Co., 352 Or. 363, 287 P.3d 1038 (2012), addressed whether this fee shifting statute applies to insurance policies issued outside of Oregon, as a later enacted statute, ORS 742.001, provides that ORS Chapter 742 “appl[ies] to all insurance policies delivered or issued for delivery in this state…” In Morgan, the Oregon Supreme Court concluded, after considering the text, context and the legislative history, that the legislature did not intend for ORS 742.001 to limit the scope of ORS 742.061. The Court held, therefore, that ORS 742.001 permits an award of attorney fees to an insured that prevails in an action in an Oregon court on “any policy of insurance of any kind or nature,” even if the policy was delivered or issued for delivery in another state. The Oregon Supreme Court noted that to hold otherwise would be “to turn an expansion of the state’s authority to impose substantive regulations on insurers transacting business in Oregon into a limitation on the remedial and procedural rules that affect insurers appearing in its courts.”

Now, insureds and insurers in Oregon are looking to the Ninth Circuit Court of Appeals for an answer to whether ORS 742.061 applies only to Oregon state courts, as the statute specifically states that it applies “in an action…in any court of this state…” (emphasis added). Schnitzer Steel Industries, Inc. v. Continental Casualty Corp., 2014 U.S. Dist. LEXIS 160031 (D. Or. November 12, 2014). In Schnitzer Steel, the insured, as the prevailing party in a coverage action, moved for attorneys’ fees in the amount of $3,483,878.00. Continental opposed, arguing that the plain language of ORS § 742.061 does not apply because the statute plainly states that it is limited to an action “brought in any court of this state upon any policy of insurance…” Continental argued that because Schnitzer did not bring its claim in a court of Oregon, but rather a court in Oregon, the statute does not apply. Continental based its argument on Simonoff v. Expedia, Inc., 653 F.3d 1202 (9th Cir. 2011), a decision from the Ninth Circuit Court of Appeals that interpreted the phrase “the courts of” in the context of a forum selection clause. In Simonoff, the Ninth Circuit held:

We conclude[] that the choice of the preposition “of” in the phrase “the courts of Virginia” was determinative — “of” is a term “denoting that from which anything proceeds; indicating origin, source, descent, and the like.”  Thus, the phrase “the courts of” a state refers to courts that derive their power from the state — i.e. only state court — and the forum selection clause, which vested exclusive jurisdiction in the courts “of” Virginia, limited jurisdiction to the Virginia state courts.

Simonoff at 1205-06.

While Judge Mosman found Continental’s argument “very interesting” and rejected all but one of Schnitzer’s arguments in the reply as “very weak,” Judge Mosman adopted Schnitzer’s one argument based on Erie principles and ruled that ORS 742.061 applies to cases commenced in Oregon federal courts. Judge Mosman held that the Erie doctrine together with good public policy dictate that ORS § 742.061 should apply in this case as its holding – that ORS 742.061 applies to both federal and state courts of Oregon – will “avoid the intrastate forum shopping that Erie is intended to prevent and it would support the stated purpose of this statute by not creating an easy backdoor to thwart any impact it might have on encouraging settlements or discouraging unreasonable rejections of insurance claims.”  Id. *11-12.

Continental has appealed to the Ninth Circuit Court of Appeals. It will be interesting to see how the Ninth Circuit will address the issue pertaining to ORS 742.061 in light of its decision in Simonoff. It is possible that because the issue pertains to the construction of an Oregon statute, the Ninth Circuit Court of Appeals may certify the question at issue to the Oregon Supreme Court.

Filed under Attorneys’ Fees, Declaratory Judgment Actions

East Versus West: Washington Federal District Courts Offer Differing Views on IFCA Claims

By and on August 3, 2015
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The Washington Insurance Fair Conduct Act (“IFCA”) is generating some interesting divisions in the Washington Federal District Courts. As previously reported, Judge Marsha J. Pechman recently ruled in May, 2015 that an IFCA cause of action is only available to insureds under first party insurance policies, but not third party liability policies. This post discusses how cases brought under the IFCA are being examined differently between the Eastern and Western Federal District Courts of Washington.

As a brief background, IFCA (RCW 48.30.015) states, in part, as follows:

(1) Any 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 in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys’ fees and litigation costs, as set forth in subsection (3) of this section.

(2) The superior court may, after finding that an insurer has acted unreasonably in denying a claim for coverage or payment of benefits or has violated a rule in subsection (5) of this section, increase the total award of damages to an amount not to exceed three times the actual damages.

(3) The superior court shall, after a finding of unreasonable denial of a claim for coverage or payment of benefits, or after a finding of a violation of a rule in subsection (5) of this section, award reasonable attorneys’ fees and actual and statutory litigation costs, including expert witness fees, to the first party claimant of an insurance contract who is the prevailing party in such an action.

…

(5) A violation of any of the following is a violation for the purposes of subsections (2) and (3) of this section:

(a) WAC 284-30-330, captioned “specific unfair claims settlement practices defined”;

(b) WAC 284-30-350, captioned “misrepresentation of policy provisions”;

(c) WAC 284-30-360, captioned “failure to acknowledge pertinent communications”;

(d) WAC 284-30-370, captioned “standards for prompt investigation of claims”;

(e) WAC 284-30-380, captioned “standards for prompt, fair and equitable settlements applicable to all insurers”; or

(f) An unfair claims settlement practice rule adopted under RCW 48.30.010 by the insurance commissioner intending to implement this section. The rule must be codified in chapter 284-30 of the Washington Administrative Code.

The Western Federal District Courts have held that an IFCA cause of action is only available if the insured shows that the insurer unreasonably denied a claim for coverage or that the insurer unreasonably denied payment of benefits, but not if the insurer only violated the Washington Administrative Code (“WAC”) provisions. Lease Crutcher Lewis WA, LLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2010 U.S. Dist. LEXIS 110866 (W.D. Wash. October 15, 2010); Weinstein & Riley, P.S. v. Westport Ins. Corp., 2011 U.S. Dist. LEXIS 26369 (W.D. Wash. March 14, 2011); Phinney v. American Family Mut. Ins. Co., 2012 U.S. Dist. LEXIS 22328 (W.D. Wash. February 22, 2012); Cardenas v. Navigators Ins. Co., 2011 U.S. Dist. LEXIS 145194 (W.D. Wash. December 16, 2011).

However, the Eastern Federal District Courts have rejected the precedent set by the Western Federal District Courts and have held that a violation of the enumerated WAC provisions is an independent basis for a cause of action, regardless of coverage or benefits. Merrill v. Crown Life Ins. Co., 22 F. Supp.3d 1137 (E.D. Wash. 2014); Hell Yeah Cycles v. Ohio Sec. Ins. Co., 16 F. Supp.3d 1224 (E.D. Wash. 2014); Hover v. State Farm Mut. Auto. Ins. Co., 2014 U.S. Dist. LEXIS 119162 (E.D. Wash. September 12, 2014).

In Langley v. GEICO Gen. Ins. Co., 2015 U.S. Dist. LEXIS 26079 (E.D. Wash. February 24, 2015), the Court noted that it is “not persuaded that an IFCA cause of action requires a denial of coverage or benefit… The opinions [from the Western District] do not provide any analysis of the statutory construction they utilized to reach their conclusions, and appear to only be looking for express causes of action without determining whether the IFCA creates an implied cause of action for violation of an enumerated WAC.” The Court in Langley then continued by reviewing the elements for an implied cause of action, i.e. whether the plaintiff is “within the class for whose ‘especial’ benefit the statute was enacted”; whether “legislative intent, explicitly or implicitly, supports creating or denying a remedy”; and “whether implying a remedy is consistent with the underlying purpose of the legislation.” The Court determined that the plaintiff, as first party claimant under an insurance policy, was within the class of those that the legislature sought to protect; that the legislative intent was to create a claim for violating the enumerated WACs in both the language in the statute and the explanation of that language provided to the voters; and that implying a remedy is consistent with the IFCA’s purpose. As a result, the Court concluded that “at a minimum, an independent implied cause of action exists under the IFCA for a first party claimant to bring a suit for a violation of the enumerated WAC provisions.” The Court rejected “the progeny of cases from the Western District of Washington which reached a different conclusion.”

In light of the inconsistencies in the Washington Federal District Courts, it is important for insurers to understand the jurisdictional differences when evaluating an IFCA claim. In addition, insurers should be particularly sensitive to efforts by policyholders to establish jurisdiction in the more favorable Eastern Federal District Courts.

Filed under Bad Faith, Commercial General Liability, Unfair Insurance Practices

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