In the 1990s, plaintiffs started filing asbestos actions against Travelers in various state courts. As relevant, many of these claims alleged that Travelers conspired with other insurers and asbestos manufacturers to hide the dangers of asbestos and to raise fraudulent defenses to personal injury claims or that Travelers had violated common law duties by failing to warn the public about the dangers of asbestos. Such claims sought to recover from Travelers, not derivatively for Manville’s wrongdoing, but for Travelers’ own alleged misconduct.

In 2002, Travelers relied on the 1986 Order in moving the Bankruptcy Court to enjoin the pending state court actions. The Bankruptcy Court eventually entered an order dated August 17, 2004 (the “Clarifying Order”) finding that the 1986 Order barred the pending actions and “[t]he commencement or prosecution of all actions and proceedings against Travelers that directly or indirectly are based upon, arise out of or relate to Travelers[’] insurance relationship with Manville or Travelers[’] knowledge or alleged knowledge concerning the hazards of asbestos,” including claims for contribution or indemnification.

Some individual claimants and Chubb Indemnity Insurance Company (“Chubb”) objected to the Clarifying Order and subsequently appealed. They argued that the state court actions fell outside the 1986 Order and that the Clarifying Order improperly expanded the 1986 Order to bar actions beyond the Bankruptcy Court’s jurisdiction (because the Clarifying Order purported to bar actions premised on Travelers’ own alleged misconduct, not just its derivative liability for Manville’s wrongdoing). The District Court affirmed, but the Court of Appeals for the Second Circuit reversed. Travelers appealed the Second Circuit’s decision to the United States Supreme Court.

The Supreme Court, in an opinion delivered by Justice Souter, initially found that the time to appeal from the 1986 Order had expired almost two decades ago. Thus, the Court could not reach the argument of whether that 1986 Order exceeded the Bankruptcy Court’s jurisdiction. The 1986 Order was final and not subject to attack. Therefore, the Supreme Court determined that the only issue properly before it was whether the 1986 Order barred the state court actions.

The Supreme Court held that the state court actions fell within the scope of and were barred by the 1986 Order. In so ruling, the Court found that even though the subject actions were premised on Travelers’ own alleged misconduct (as opposed to Travelers’ derivative liability for Manville’s wrongdoing), they still fell within the broad language used by the 1986 order, e.g., arising out of or relating to. The Court refused to consider extrinsic evidence of what the parties understood about the scope of the 1986 Order concluding that “it is black-letter law that the terms of an unambiguous private contract must be enforced irrespective of the parties’ subjective intent.” The Court went on to find that the Bankruptcy Court had subject matter jurisdiction to issue the Clarifying Order which, in it view, embodied a correct reading of the 1986 Order.

Significantly, the Supreme Court did “not resolve whether a bankruptcy court, in 1986 or today, could properly enjoin claims against nondebtor insurers that are not derivative of the [insured] debtor’s wrongdoing.” Rather, its holding was based solely on the face of the 1986 Order, which could not be challenged almost twenty years later.

Justice Stevens, joined by Justice Ginsburg, issued a dissenting opinion which concluded that the 1986 Order only barred claims against Manville’s insurers seeking to recover from the bankruptcy estate for Manville’s own misconduct, not claims seeking to recover from insurers for their own misconduct. In support of this view, the dissenting opinion cited to the record in the prior bankruptcy action which contained evidence that even the parties to the 1986 Order did not believe it would bar claims premised on the insurers’ alleged misconduct. According to the record, the settling parties did not believe that the Bankruptcy Court had the power to enjoin third-party claims against nondebtors that did not affect the debtor’s estate. Additionally, the dissenting opinion disagreed that the current appeal was seeking to rewrite the 1986 Order. Rather, the current appeal was objecting to the Clarifying Order. As such, the dissenting opinion found that the appeal was timely and that the 1986 Order did not bar the claims pending against Travelers.

Were you at the bad faith seminar in Boston last week? Wasn’t it great? Historically, the Insurance Law Committee has done this program every other year. People who do “bad faith” litigation, or handle that kind of claim, really look forward to it. In my opinion, there was no disappointment this year. Congratulations to the program chair and vice chair, Tony Zelle and Bill Kobokovich.

There were many high points of the seminar. One of the best was a panel discussion on litigating “institutional bad faith.” The panel consisted of the aforementioned Bill Kobokovich (Travelers), Chris Martin (Martin Disiere, et al) and Richard Fabian (RiverStone). A lot of people told me how much they learned from the panel. The really cool part was that Chris had just gotten a defense verdict, in an institutional bad faith case against Bill’s company, the week before. And, get this, the senior partner of the plaintiff law firm that lost the case was in the audience there in Boston. I don’t believe he submitted any questions to the panel. : )

In any event, I felt the whole program had an outstanding “vibe.” The education, networking and collegiality were synergistic, creating a dynamic atmosphere. Did you feel the same way? To me, the atmosphere in a seminar can make all the difference in the world.

I don’t see how anyone who handles bad faith matters can miss the Insurance Law Committee’s semi-annual seminar.

It is a well-established principle of insurance law that state law claims relating to employee benefits plans covered by ERISA are preempted. An equally-well recognized legal principle, though not often encountered in the area of insurance defense, is the Younger abstention doctrine, which provides that, in certain circumstances, a federal court should abstain from exercising jurisdiction over a matter if there are related, ongoing state proceedings. Younger v. Harris, 401 U.S. 37 (1971). These two principles are pitted against each other in the case of Colonial Life & Accident Ins. Co. v. Massachusetts Comm’n Against Discrimination (MCAD), 584 F.Supp.2d 368 (D. Mass. 2008).

In Colonial Life v. MCAD, the District Court of Massachusetts was faced with the question of whether the Younger doctrine should apply where the ongoing state proceedings involve a state agency investigating whether short-term disability coverage, offered as part of an ERISA employee-benefits plan, failed to comply with state anti-discrimination laws. The facts were as follows: Colonial Life issued a short-term disability policy to Carolyn Calderon, an employee of UMass Memorial Health Care. The policy was offered to and acquired by Ms. Calderon as part of UMass Memorial’s employee benefits package. Ms. Calderon submitted a claim for disability benefits based on a mental disability, which claim was denied on the basis of an express exclusion in the policy for disabilities caused by psychological or psychiatric conditions. Ms. Calderon filed a Charge of Discrimination with the Massachusetts Commission Against Discrimination (MCAD), alleging that Colonial Life and UMass Memorial had violated state disability discrimination laws by virtue of this express exclusion in the policy.

Colonial Life and UMass Memorial filed suit in Federal District Court, seeking to enjoin the MCAD from pursuing its investigation on the grounds that Calderon’s claims were preempted by ERISA. The MCAD responded with a motion to dismiss the case, on grounds of Younger abstention. And so the District Court set to work to determine which of two competing core legal principles – ERISA preemption or Younger abstention – would prevail in this case.

Younger abstention is a judge-made doctrine that arises from the case of Younger v. Harris, decided three years before the enactment of ERISA. In Younger, the defendant was charged with violation of California’s Criminal Syndicalism Act, based upon conduct that allegedly promoted socialism. The defendant had successfully obtained an injunction in the District Court, halting the pending state criminal proceedings on the grounds that his prosecution violated his Constitutional rights under the First and Fourteenth Amendments. The Supreme Court reversed, holding that because the defendant could have raised his Constitutional defense in the state proceedings, he had an adequate remedy and no injunction was necessary. The Supreme Court further held that comity dictated that the federal court permit the state to continue with its prosecution. Summarizing the holding, Younger abstention applies where there are ongoing state proceedings: (1) that are judicial in nature; (2) that implicate important state interests; and (3) that provide an adequate opportunity to raise federal constitutional challenges.

Numerous cases following Younger have attempted to interpret the applicability of the abstention doctrine. In New Orleans Public Service, Inc. v. New Orleans, 491 U.S. 350 (1989) (NOPSI), the Supreme Court identified a limitation on the scope of abstention. NOPSI involved an energy company’s efforts to prevent a local agency from countermanding a requirement of the Federal Energy Regulatory Commission by denying its rate request that would permit it to comply with those requirements. The lower federal courts held that abstention was proper and the case was appealed to the United States Supreme Court. The Supreme Court reversed, holding that the District Court should not have abstained in this matter. Although its ultimate holding was based upon a determination that the proceeding was not judicial in nature, the Court addressed the reach of the abstention doctrine, discussing an exception to abstention where preemption is “facially conclusive.”

In Colonial Life v. MCAD, Colonial Life and UMass Memorial relied upon the facially conclusive preemption exception to the abstention doctrine, which the First Circuit embraced in Chaulk Services, Inc. v. Mass. Comm’n Against Discrimination, 70 F.3d 1361, 1368 (1st Cir. 1995). The court in Chaulk adopted the language of NOPSI, holding that abstention is inappropriate where the claim of preemption is “facially conclusive” or “readily apparent.” The court reasoned, “no significant state interests are served when it is clear that the state tribunal is acting beyond the lawful limits of its authority.”

In light of this exception, the pivotal issue in the case became whether ERISA preemption was “facially conclusive” or “readily apparent.” Answering this question involved not only an analysis of the benefit plan at issue in this case, but also required consideration of whether the Americans with Disabilities Act (ADA) prohibits insurance companies from differentiating between physical and psychological conditions. This is so because, pursuant to its own terms, ERISA does not preempt state laws that are consistent with the mandates of federal law. As such, although Calderon’s claim before the MCAD was that Colonial Life and UMass Memorial had violated state anti-discrimination laws, the Court had to determine whether federal law, specifically in this case the ADA, would prohibit a benefit plan from making such distinctions. The First Circuit, however, had not ruled on this issue. The MCAD argued that because there was no definitive statement from the First Circuit, this was a novel legal question, and therefore preemption could not be “facially conclusive.” The MCAD’s position was that the Younger abstention doctrine prohibited the district court from even reaching the question of whether the ADA prohibits such a provision in an insurance policy, because to do so would be exercising jurisdiction over the matter.

The court declined to adopt the MCAD’s position with respect to facially conclusive preemption, noting that it “must not shirk its responsibility” to decide legal questions “simply because the law is complicated or novel.” The court found that the ADA does not bar entities from offering different benefits for mental disabilities than for physical ones, and therefore found it was facially conclusive that the claims asserted by Ms. Calderon were preempted by ERISA. As such, the court denied the MCAD’s motion to dismiss, and granted Colonial Life and UMass Memorial’s motion for injunctive relief.

This case is presently on appeal to the First Circuit.

Jessica H. Munyon
Mirick O’Connell
Worcester, Massachusetts
jmunyon@mirickoconnell.com

The California Court of Appeal, Second Appellate District, affirmed the trial court’s finding that water damage caused by third party negligence was subject to the policy’s water damage and third party negligence exclusions.

In Freedman, contractor remodeling the Freedmans’ bathroom drove a nail through a pipe in the bathroom wall. Five years later, extensive water damage and mold were discovered.

The Freedmans were insured under a homeowners insurance policy. The policy provided “all-risk” coverage for the dwelling subject to exclusions for losses resulting from “deterioration, . . . corrosion . . . or rust,” and water damage, defined as “continuous or repeated . . . leakage of water . . . from a . . . plumbing system . . . .” The exclusions applied regardless of whether the loss or event “occurs suddenly or gradually, . . . arises from natural or external forces,” or is caused or aggravated by negligence or defective workmanship, among others. The policy also contained a mold endorsement which provided coverage for losses caused by mold, if the mold was caused by a specified peril or not otherwise excluded.

State Farm denied the Freedmans’ claim contending that the water damage and corrosion exclusions barred coverage. The Freedmans sued, arguing the exclusions did not bar coverage because the contractor’s negligence in puncturing the pipe was the efficient proximate cause of the ensuing damage, not the excluded water leakage or corrosion. State Farm countered that the identity of the efficient proximate cause did not matter because all of the possible causes were excluded. On cross motions for summary judgment, the trial court found for State Farm and entered judgment in its favor. The Freedmans appealed.

The Court of Appeal affirmed. It rejected the Freedmans’ efficient proximate cause analysis as having been superseded by the Supreme Court’s opinion in Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747. The efficient proximate cause doctrine states that, where a loss is caused by a combination of covered and uncovered risks, the loss is covered under the policy if the covered risk was the predominate or most important cause of the loss.

In Julian, the Supreme Court ruled that (1) “an insurer is not absolutely prohibited from drafting and enforcing policy provisions that provide or leave intact coverage for some, but not all, manifestations of a particular peril[,]” and (2) a manifestation of a particular peril can be defined “in terms of a relationship between two otherwise distinct perils.” (Id. at p. 759.)

The Freedmans’ policy excluded third parties’ negligence and defective workmanship when they interacted with an excluded risk. Corrosion and continuous or repeated water leakage were excluded risks under the policy. Thus, the policy excluded any losses caused by corrosion or water leakage that was induced by the contractor’s negligence. Moreover, the Freedmans had not presented any evidence that contractor negligence caused their loss in any way other than from the nail’s role in triggering corrosion and a water leak. Therefore, the Court held the loss was not covered.

The Court also ruled that the third-party negligence provisions in the policy were not “insufficiently clear” as defined in De Bruyn v. Superior Court (2008) 158 Cal.App.4th 1213. The language of the provisions clearly excluded the perils of contractor-negligence-induced corrosion and water leaks, such that “‘[a] reasonable insured would readily understand from the policy language which perils are covered and which are not.’” (De Bruyn, supra, 158 Cal.App.4th at 1223, quoting Julian, supra, 35 Cal.4th at 759.)

The Court similarly rejected the Freedmans’ contention that the water leakage exclusion was ambiguous. The Freedmans argued the exclusion was ambiguous because the policy did not specify how long a leak had to exist to be deemed “continuous,” or how many times it had to start and stop to be considered “repeated.” The Court ruled that, as applied in this case, the terms were not ambiguous. Given the small size of the hole in the pipe and the extent of water damage, the leak had lasted long enough to be deemed “continuous,” or had stopped and started enough times to count as “repeated” under any reasonable construction of those terms.

The Court also rejected the Freedmans’ argument that the exclusion only applied to “normal deterioration of the plumbing system,” and not leaks caused by anything other than normal deterioration. The Court found the Freedmans’ interpretation at odds with the policy language because the exclusion barred coverage for losses arising from “natural or external forces.” (Emphasis added.)

Finally, the Court held that the loss was not covered under the Freedmans’ mold endorsement. The endorsement provided coverage for mold damage where the mold was caused by a covered risk, or a risk that was not otherwise excluded. As with the water damage, the damage from mold was similarly excluded because the mold in the Freedmans’ bathroom was caused by third party negligence in connection with corrosion and continuous water leakage, all of which were excluded risks.

Therefore, the Court affirmed the trial court’s judgment, and awarded appeal costs to State Farm.

Freedman v. State Farm.pdf (27.62 kb)

DRI's Technology Committee just released its biannual newsletter, which can be downloaded from the DRI website. The newsletter contains alot of useful information for practitioners trying to streamline their practices and incorporate today's ever changing technological advancements into their practice. This most recent issue contains informative articles about using technology to maximize productivity and reduce overhead expenditures, innovative ways to improve the efficiency of your legal research, and increasing the effectiveness of your opening statement and closing argument through the use of Microsoft PowerPoint or Corel Presentations. These articles will educate you on new software that is available to capture billable time out of the office and minimize expenses by utilizing free or inexpensive online collaboration services; teach you about Firefox, CiteGenie and Zotero as research tools; and give you a new perspective on tools you may already use when it comes to visual presentations.

We are also pleased to announce that the Technology Committee will be presenting Using Technology To Your Advantage At Trial: A Case Study In A Hurricane Katrina Insurance Case at this year's Annual Meeting in Chicago. Our newsletter has an inside look at that presentation as well. This is a can't miss presentation that you will find both informative and entertaining!

If you find the information in our newsletter useful, we encourage you to join our committee and stay informed of the cutting edge in legal technology.

Sign up now for DRI Climate Change Webcast June 18 1:00-2:30 EDT 

What's the Obama Administration doing about Climate Change?  More in four months than the prior administration did in in eight years.

How will this affect you and your clients? Take 90 minutes to hear Roger Martella, former General Counsel of the United States Environmental Protection Agency, who will share his insights into the strategy and agenda of the new administration. 

The DRI Climate Change Task Force will be hosting its second webinar on June 18th from 1:00 - 2:30 pm EDT, "Climate Change in the Obama Administration: The Status of Proposed Global Warming Policies and Legislation."  You will receive the latest updates on the EPA's "Greenhouse Gas Emissions Reporting Rule" and "Endangerment Finding"; the draft of the American Clean Energy and Security Act of 2009, introduced by Reps. Henry A. Waxman and Edward J. Markey; state and regional greenhouse gas regulatory programs; and the American Recovery and Reinvestment Act provisions on clean energy and carbon capture and storage.

Please take the time to pass on the attached invitation to your colleagues, clients and other contacts and encourage them to join us for this informative session.

Thank you for your continued support of this popular series.

Download Invitation (561.75 kb)

Parties and third parties alike should pay careful attention to the terms of a discovery stipulation. Courts are likely to strictly uphold the terms of a stipulation, even if doing so would result in a party or third party having to go to great expense in order to comply with a discovery request. Parties and third parties should also strive toward timely compliance with case management orders, as well as comprehensive identification of sources of potentially relevant ESI, keeping in mind that even a good faith failure to comply could result in sanctions.

In re Fannie Mae Sec. Litig., 552 F.3d 814 (D.C. Cir. 2009):

D.C. Cir. affirmed district court’s decision in this case, where defendants sought production of documents from a third party (“OFHEO”). After OFHEO produced what it represented were “all” of its responsive documents, defendants learned that OFHEO did not search its off-site backup tapes. OFHEO voluntarily agreed to search the backup tapes, and entered into a stipulation by which defendants would set the search terms. Upon finding that the search terms resulted in 660,000 documents, OFHEO objected, but the court ordered the production of all the documents finding that the stipulation clearly granted defendants sole discretion over the terms. OFHEO took steps to comply, and went to great expense (9% of its total budget), but repeatedly requested last minute extensions of time. Court noted OFHEO’s good faith, but late attempts to comply, and ordered immediate production of all documents withheld on the sole basis of pending privilege review, although such production would not constitute a waiver of privilege. Moreover, the D.C. Cir. upheld the district court’s holding OFHEO in contempt for its delay and conduct during discovery.

A detailed summary of this case is available here.

The Diversity for Success Seminar is one week away!  Come join some of the nation’s best attorneys as we discuss key issues surrounding Diversity and Inclusion.  The conference kicks off Wednesday, June 10, 2009, with a Networking Reception sponsored by Hiltgen & Brewer PC.   Thursday, June 11, will include a full day of panel discussions and seminars with topics ranging from “Fueling the Diversity Pipeline” to “Making the Pitch – Interview/Sales Pitch Skills Workshop” – how to land that corporate client!  Thursday night ends with “Dine-Arounds.” It’s the perfect opportunity to join friends, colleagues and potential clients for dinner around Chicago.
 
Learn how successful women and minorities are achieving economic equality by obtaining business from insurance companies and corporations.  Put the new ideas you learn to good use at the Diversity Expo on Friday, June 12, 2009.  The Diversity Expo is an excellent opportunity to interview with insurance companies and corporations for possible retention as outside counsel.    As of today’s date, the following companies have committed to interview at the Expo:
 
Altria Corporate Services
American Airlines
American Family Mutual Insurance Company
Coca Cola
Cummins Inc.
DuPont Company
Eli Lilly and Company
GlaxoSmithKline
The Hartford Financial Services Group, Inc.
H.J. Russell & Company
Home Depot, U.S.A., Inc.
International Paper
Key Corp/Key Bank N.A.
Kraft
Liberty Mutual Group
McDonald’s Corporation
Monitor Liability Managers, Inc.
Monsanto Company
Steelcase Inc.
Yum! Brands, Inc.
 
For more information on the Diversity for Success Seminar, please visit www.dri.org.  We hope to see you there!

One or both parties might have to bear the costs associated with ediscovery, depending on the court’s assessment of the parties’ agreements, the conduct of the parties, and the overall circumstances. Even though a party has failed to specify the format for production of ESI, or even if ESI has already been produced in a reasonably useful format, the requesting party might still be able to obtain production in its desired format, so long as it is willing to pay.

Proctor & Gamble Co. v. S.C. Johnson & Son, Inc., 2009 WL 440543 (E.D.Tex. 2009):

Parties agreed to produce ESI in TIFF format, and sought case management order determining which party should run OCR on the TIFFs, and who should bear the costs. Defendant argued that plaintiff should bear the costs associated with the OCR process, estimated to be $200,000, but the court determined that cost-shifting was not warranted. Court’s analysis focused on the arguments defendant failed to make, namely, that the information requested is not relevant; that the OCR process would not make documents easier to examine and thus significantly reduce time-related costs.

A detailed summary of this case is available here.

In re Classicstar Mare Lease Litig., 2009 WL 260954 (E.D. Ky. 2009):

Defendant responded to plaintiff’s request for production of financial documents “as they are kept in the usual course of business” by producing the information in .pdf and Excel format, and then again in searchable .tif format. Despite this production, plaintiffs obtained an order compelling a native format production, which defendant objected to on grounds that it had already produced information in a reasonably usable format that did not significantly degrade its searchability. Noting that the parties at one point had agreed the information would be in native format, and that plaintiff felt the information was degraded without the native format metadata, the court ordered defendant to produce in native format. However, the court ordered plaintiff to bear the costs associated with the native format production.

A detailed summary of this case is available here.