The Connecticut Supreme Court is presently considering whether claims for breach of contract against a contractor for failing to properly construct a building may constitute an “occurrence” under a commercial general liability policy.  At issue in Capstone Development Corp. v. American Motorists Ins. Co., No. SC 18886 are various questions certified from a federal district court in Alabama concerning the availability of insurance coverage for defects in the construction of buildings an the University of Connecticut.

Meanwhile, the U.S. Court of Appeals for the Second Circuit has issued a new ruling calling into question an earlier precedent that insurers have relied on in disputing such claims.  In Scottsdale Ins. Co. v. R.I. Pools, Inc., No. 11-3529 (2d Cir. March 21, 2013), the Second Circuit reversed a Connecticut District Court’s declaration that a liability insurer did not owe coverage for claims brought against its insured by purchasers of swimming pools for damage the purchasers sustained when cracks developed in their pools.  

The District Court had ruled in Scottsdale Ins. Co. v. R.I. Pools, Inc., No. 09-1319 (D. Conn. August 15, 2011) that the insurer had no duty either to indemnify or defend the insured, and was furthermore entitled to the return of funds it had previously expended in the defense of the insured.  On appeal, however, the Court of Appeals recently ruled that the District Court had erroneously relied on a distinguishable Second Circuit precedent and therefore remanded the matter for further proceedings in the District Court.

The District Court had relied on Jakobson Shipyard, Inc. v. Aetna Cas. & Sur. Co., 961 9 F.2d 387 (2d Cir. 1992) in finding that the cracking of the concrete resulting from defects in the insured’s work could not constitute an “accident” or “occurrence.”  The Second Circuit found, however, that there was a crucial difference between the CGL policy that Scottsdale had issued to R.I. Pools and the Aetna policy as issue in Jakobson.  In this case, the Scottsdale “your work” exclusion contained an “exclusion [from coverage] does not apply if the damaged work . . . was performed on [the insured’s] behalf by a sub-contractor.”  The court noted:

Whereas Jakobson held that the insured's faulty workmanship could not be a covered occurrence under the policy, the present policies expressly provide that in some circumstances the insured's own work is covered. As coverage is limited by the policy to “occurrences” and defects in the insured's own work in some circumstances are covered, these policies, unlike the Jakobson policy, unmistakably include defects in the insured's own work within the category of an “occurrence.” 

While therefore remanding the case for further findings as to whether the underlying claims fell within the sub-contractor exception, the Second Circuit held that there was a duty to defend up until the point at which it is legally determined that there is no possibility for coverage under the policies and that Scottsdale therefore had no right to recoup the defense costs up until then.

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Categories: Construction Law | State Law

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Class Actions and The Supreme Court

Posted on September 4, 2012 02:09 by Michael Aylward

As the rest of us return from the last long weekend of summer, the U.S. Supreme Court send us scurrying back to our computers this morning with news that it has accepted Travelers' cert petition in Standard Fire Ins. Co. v. Knowles, 11-1450.  At issue is a ruling by an Arkansas District Court declaring that Travelers could not remove a homeowner's class action against to federal court because the underlying claimants had stipulated that they were seeking damages under $5 million, the jurisdictional limit for removal under CAFA.  

In its cert petition, Travelers observed that last year, the Supreme Court ruled in Smith v. Bayer Corp,  131 S. Ct. 2368, 2382 (2011) that in a putative class action "the mere proposal of a class ... could not bind persons who were not parties."  In this case, it asks:  

When a named plaintiff attempts to defeat a defendant's right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a "stipulation" that attempts to limit the damages he "seeks" for the absent putative class members to less than the $5 million threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the "stipulation," exceeds $5 million, is the "stipulation" binding on absent class members so as to destroy federal jurisdiction?   

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For all of its diminutive stature, Rhode Island has proven over the years that it can punch outside of its weight class when it comes to generating large environmental liability disputes and the insurance coverage controversies that invariably attend them.

Rhode Island also has the unique distinction of being one of the few states (perhaps the only one) that still recognizes “manifestation” as the appropriate trigger of coverage in long-tail disputes such as those involving pollution liabilities.  Further, Rhode Island’s view of “manifestation” is not just the date of discovery.  Rather, as the Rhode Island Supreme Court explained in CPC Int., Inc. v. Northbrook Excess & Surplus Ins. Co., 668 A.2d 647 (R.I. 1995) coverage should arise in the policy year in which property damage was discovered, became manifest or, in the exercise of reasonable diligence, could have been discovered.

Traditionally, “manifestation” was viewed as a coverage theory that assigned the insured’s entire claim to a single policy year, that being the year in which the loss was actually discovered.  In Rhode Island, it seems that courts are not only broadening the idea of “discoverability” but are implicitly treating “manifestation” as potentially involving different years of coverage that correspond to the different events identified in CPC, that is to say when the pollution was actually discovered or became manifest (ie. discovery) and the earlier year when it could have been discovered in the exercise of reasonable diligence.  

Although no Rhode Island court has explicitly declared that “manifestation” may trigger multiple policies, several recent cases have acknowledged the right of an insurer in one year to sue another for contribution, thus implicitly suggesting that multiple policy years may be required to respond to a single “occurrence.”      

Last year, for instance, a federal district court in Rhode Island ruled that a liability insurer that had insured an industrial polluter in 1969-70 was entitled to recover from an earlier insurer nearly all of the defense costs that it had been ordered to pay to its insured following a lengthy and contentious coverage law suit. Judge Smith ruled in Century Ind. Co. v. Liberty Mut. Ins. Co., No. 09-285 (DRI, September 6, 2011) that even though Liberty Mutual had bought back its 1971-79 policies early on for a settlement of $250,000, it must reimburse Century Indemnity for nearly $6 million in defense costs that it had been forced to pay since the tiny amount paid had all but guaranteed that the insured would be forced to litigate its claims against the other insurers to the better end.  The court declared that, “To reward Liberty Mutual for its settlement with Emhart would do nothing to serve Rhode Island’s public policy of encouraging settlements and that ‘far from being a litigation killer, Liberty Mutual’s settlement essentially ensured that this litigation would not die.’”  Having found that Liberty Mutual owed contribution to Century Indemnity, Judge Smith concluded that defense costs should be apportioned on a “time on the risk” basis, comparing Century Indemnity’s 11 months of coverage to the eight years insured by Liberty Mutual.  As a result, the Court ruled Liberty Mutual was obliged to reimburse Century Indemnity for 86.87% of the defense costs that it had paid to Emhart for a total payment of $5.27 million less the $250,000 settlement that Liberty Mutual had already paid.  The case subsequently settled.

Now the First Circuit has issued a new opinion sustaining a liability insurer’s equitable contribution claim against another insurer for claims arising out of the same Centredale Manor Superfund site as engendered the dispute between Century Indemnity and Liberty Mutual. In Travelers Property & Cas. Co. v. Providence Washington Ins. Co., No. 11-2193 (1st Cir. July 11, 2012), Travelers sought contribution from Providence Washington for costs that it had incurred in defending a mutual insured against claims that it had contributed to pollution at the site.  New England Container (NEC) had conducted various business operations at the site between 1952 and 1969, including the incineration of the chemical contents of drums and other containers.  

After being named as a PRP by the U.S. EPA, New England Container tendered its defense to Travelers, which had issued CGL policies to it between 1969 and 1982, and Providence Washington, which insured it after 1982.  Travelers, which had agreed to defend under a reservation of rights, sued Providence Washington for contribution.  However, a federal district court in Rhode Island ruled in 2011 that Providence Washington had rightly refused to defend as the property damage in question had all occurred before its 1982-85 coverage.  The court observed that by 1982, NEC was no longer doing business at the site and had no on-going connection to it.  Remarking that it had found no Rhode Island court decision holding that the coverage trigger "was satisfied when the policy period did not correspond at all to the period during which the insured conducted its allegedly harmful activities," the district judge underscored that, here, "there is not even a small speck of an overlap between the policy period and the period of the insured's allegedly damaging activities."  Travelers appealed.

In reversing the lower court’s finding of no coverage, the First Circuit emphasized Rhode Island’s liberal view of the scope of the duty to defend as well as the principle that coverage is triggered by when property damage is reasonably discoverable and not merely by reference to the date of the insured’s involvement at a site.  In this case, the First Circuit ruled the government’s claims against New England Container left open the possibility that pollution could have been discovered in the exercise of reasonable diligence within one of the prongs of the CPC “manifestation” rule. The court ruled that “discoverable in the exercise of reasonable diligence” does not require a temporal overlap between the policy period and the insured’s active business operations during which the allegedly damaging polluting activity took place.”  As the underlying facts alleged that pollution had migrated over a period of decades leading up to its discovery in 1999, the court found that the absence of specific allegations with respect to when property damage became detectable did not preclude the potential of a manifestation trigger during the Providence Washington coverage period.  

Fairly read, these allegations give rise to the potential that NE Container's polluting activities may have spanned two decades and that the pollution migrated from NE Container's property and eventually caused damage to surrounding land and waterways, which damage was discovered in 1999. While the complaint does not include specific allegations showing when property damage became detectable, the potential magnitude of NE Container's alleged polluting activities supports a reasonable inference that property damage was discoverable in the exercise of reasonable diligence some time before its actual discovery, including during the policy period

The First Circuit acknowledged that an insured might face a heavier burden in establishing a claim for indemnity in such a case as this but declared that there was, nonetheless, a duty to defend:

It may be difficult to unearth evidence and prove for indemnity purposes that property damage occurred in accord with the reasonable diligence coverage trigger during a time frame when the insured has long ceased its business operations that coincided with the pollution activity. Still, there is a vast array of factual circumstances in the progressive environmental damage context, and we must take our cue from the Rhode Island court's demarcation of an "occurrence" coverage trigger for delayed manifestation scenarios. Cf. Emhart Indus., 559 F.3d at 69 (concluding that the state court's silence on the duty to defend issue does not sufficiently support [the insurer-appellant's] claim that the Rhode Island Supreme court would not apply the pleadings test in the CERCLA context).

Finally, the First Circuit rejected Providence Washington’s suggestion that this construction of the manifestation trigger transformed it into a continuous injury trigger.  The court observed that under a continuous injury trigger, injury is presumed to have occurred in all years from the date of initial exposure through manifestation, whereas under Rhode Island’s pleadings test, a duty to defend only arises where allegations in the charging document “show the potential that property damage occurred during the policy period.”  More candidly, the First Circuit also commented that “it is not necessarily certain that the Rhode Island Supreme Court has put to rest the continuous trigger test in the environmental context,” pointing to dicta in Textron in which the Supreme Court had stated that “because we conclude that liability under the policy may be established by one of the recognized CPC tests, we need not address the continuous trigger-of-coverage standard."

There is some irony in this holding, as Providence Washington’s Rhode Island counsel—Adler Pollock & Sheehan--is also the law firm that prevailed on behalf of policyholders in cases such as Textron. In the wake of this latest ruling, one must wonder what distinction remains between “manifestation” and “continuous injury” triggers in the context of environmental claims.

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Several weeks ago, DRI published an article in which I discussed recent case law trends in the wake of Qualcomm analyzing requirements in excess policies requiring that underlying insurers actually pay their limits in order for the excess insurers’ obligations to be triggered.  One of the cases cited in that article was affirmed last week by the Appellate Division of the New York Supreme Court.

In J.P. Morgan Chase & Co. v. Indian Harbor Ins. Co., 2012 N.Y. slip op. 04702 (App. Div. June 12, 2012), the insured sought coverage for several large settlements pursuant to a tower of “claims made” professional liability policies.   After settling with several lower layer carriers, J.P. Morgan sued to compel coverage from its remaining insurers, who moved for summary judgment on the grounds that the insured had failed to satisfy their policy requirements that the underlying insurers have actually paid their limits.

In affirming the trial court’s ruling in favor of the insurers, the First Department gave effect to language in the excess policies that variously required that the underlying insurers “shall have paid the full amount of their respective liability” (Twin City) or that  "shall apply only after all applicable Underlying Insurance with respect to an Insurance Product has been exhausted by actual payment under such Underlying Insurance . . ." (Lumbermens) or “after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance as covered loss thereunder” (St. Paul)

The court ruled that the settlements that the underlying insurers had entered into not only did not involve any admission of coverage but were for less than the actual policy limits.  The court followed the approach pioneered by the California Court of Appeal in Qualcomm and, more recently, the U.S. Court of Appeals for the Fifth Circuit in Citigroup, Inc. v. Federal Ins. Co., 649 F.3d 367 (5th Cir. 2011) in which courts had ruled that such clauses are a valid condition precedent to excess coverage and are not satisfied merely because the insured accepts responsibility for the gap between the full limit and the amount actually paid by the insurer. 

Further, the court refused to find ambiguity based upon a claimed conflict between this exhaustion requirement and the separate requirement in the excess policy requiring maintenance of underlying limits.  The court distinguished the Second Circuit’s opinion in Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2nd Cir. 1923), which has historically been the foundation of policyholder efforts to compel coverage in such cases, declaring that Zeig was clearly distinguishable as involving different policy provisions and, indeed, as recognizing that actual payment of limits might be required where the policies so clearly state.  

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The issue of whether CGL policies cover junk fax liabilities under the federal Telephone Consumer Protection Act (TCPA) has largely faded from view.  During the 2004-2010 period, insurers won several key victories in federal courts only to lose much of this ground through adverse state supreme court rulings on the key issue of whether a consumer's receipt of a fax constituted a covered "personal injury" as involving the publication of material that invaded a person's right of privacy.  At the same time, however, the widespread use of TCPA exclusions after 2007 and the growing awareness of most business concerning TCPA exposures substantially reduced the number of coverage disputes.

Although the junk fax wars are no longer on page 1 of the coverage news, a number of recent decisions make clear that the wars continue and, indeed, are being fought on several different fronts.  In particular, insurers have recently argued with success that the $500 statutory damages allowed under the Act are a type of penalty or punitive damages for which coverage is unavailable as a matter of public policy.

In Illinois, where the state supreme court ruled in Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 860 N.E.2d 307 (Ill. 2006) that TCPA claims trigger "personal injury" coverage, the intermediate appellate court ruled last month that there is no duty to indemnify such claims because the $500 statutory penalty for sending unauthorized telefaxes is a form of punitive damages and thus uninsurable under Illinois law.  

In Standard Mut. Ins. Co. v. Lay, No. 4-11-0527 (Ill. App. April 20, 2012), the insurer agreed to defend TCPA claims under a reservation of rights.  The insured insisted on Peppers counsel, however, who negotiated a settlement with class action claim representative for the full amount demanded ($1,739,000) in consideration of an agreement to only pursue recovery from Standard Mutual's policy proceeds.  In affirming a lower court's ruling in favor of Standard Mutual, the Appellate Court noted that actual cost in loss of paper, toner and ink caused by receiving a fax is far less than $500, the purpose of this award must be one of deterrence and not compensation.  It ruled, therefore, that these damages were in the nature of a penalty that, as with punitive damages, is uninsurable as a matter of public policy in Illinois.

More recently, a divided panel of the Missouri Court of Appeals (Eastern District) took a slightly different approach in reaching the same result.  In Olsen v. Siddiqi, No. ED 97455 (Mo. App. May 9, 2012), a class of TCPA claims pursued a garnishment demand for $4.9 million against a telemarketer's liability insurer (American Family) that the plaintiffs had obtained by way of a consent judgment that could only be satisfied through the policy proceeds without risk to the insured.  Although a trial court found coverage, American Family appealed on the grounds that the claims were not for "property damage."

In reversing and finding no coverage, the Missouri appellate court ruled 2-1 that the claims were not "damages" on account of "property damage."  The court distinguished the Eighth Circuit's Missouri ruling in Universal Underwriters Ins. Co. v. Lou Fusz Automotive Network, 401 F.3d 876 (8th Cir. 2005), noting that the policy at issue in that case had expressly defined damages as including punitive damages (where insurable by law).  The Missouri Supreme Court has ruled that fines and penalties are not insurable "damages" unless the policy expressly provides to the contrary.  In this case, the majority declared that the option of recovering statutory damages under the TCPA had a penal purpose and that $500 damages are therefore not insurable.  (The court also rejected the insured's claim for "personal injury" coverage, noting that he had expressly given up this coverage by endorsement).  A minority opinion argued that the loss of toner and fax paper is clearly "property damage."  Justice Mooney also claimed that a $500 award is, in fact, remedial and that it only the provision for trebled damages in the event of intentional TCPA violations that has a penal purpose.

TCPA claims also remain a source of tension between state and federal courts.

In Illinois, state and federal courts have reached conflicting conclusions as to whether the "personal injury" requirement that a "person's right of privacy be invaded precludes CGL coverage for business interests that receive junk faxes.  In Maxum Ind. Co. v. Eclipse Mfg. Co., No. 06 C 4946 (N.D. Ill. June 13, 2011) Judge Lefkow ruled that businesses have no right of privacy and therefore cannot claim coverage, Swiderski notwithstanding.  By contrast, the First Division of the Appellate Court ruled a few months later in Pekin Ins. Co. v. Xdata Solutions, Inc., 958 N.E.2d 397 (Ill. App. Ct. 2011) that a corporation can be a "person" whether the issue is presented under Illinois or Indiana law.

In Massachusetts, where the Supreme Judicial Court followed the Swiderski court's lead in finding CGL coverage for TCPA claims presented under ISO forms in Terra Nova Ins. Co. v. Evan Fray-Witzer, 869 N.E.2d 565 (Mass. 2007), the First Circuit took a different view under different language in the St. Paul general liability policies which required that the insured "make known" material that invades privacy interests.  In Cynosure, Inc. v. St. Paul Fire & Marine Ins. Co., 645 F.3d 1 (1st Cir. 2011), the First the reference to "makes known" clearly requires that the privacy interest be invaded by the content of the communicated materials, not the means of communication consistent with the holdings of the U.S. Courts of Appeal for the Third and Fourth Circuits construing similar wordings.  Writing for the court, former U.S. Supreme Court Justice David Souter declared that "what logic and definition require, syntax confirms."

Finally, disputes persist with respect to the scope of TCPA exclusions that have been a mandatory endorsement to CGL forms since 2007.  This exclusion was upheld by a federal district in a recent Houston case.

A federal judge in Houston ruled in Rick's Cabaret International, Inc. v. Indemnity Ins. Co., No. H-11-3716 (S.D. Tex. January 24, 2012)(insurer was relieved of any duty to defend TCPA claims against its insured by reason of an exclusion in its policy for claims arising out of or relating to "actual or alleged violation of United States Federal Communications Commission rules, regulations, interpretations, policies, statutes, laws or codes").  Even so, insureds and garnishment claimants are succeeding to avoid these exclusions by claiming recovery on common law grounds.

Additionally, the ubiquity of TCPA exclusions in CGL policies is forcing claimants to broaden the scope of their coverage search, exploring claims under E&O or D&O policy that may lack such exclusions.  For instance, in Landmark American  Ins. Co. v. NIP Group, Inc., No. 1-10-1155 (Ill. App. December 5, 2011), the Illinois Appellate Court ruled that that an insurance agency's use of junk faxes to market its services potentially involve the rendering of or failure to render "professional services" so as to trigger its E&O policy.  The First Division noted that as the Landmark policy provided coverage for "advertising liability," the insurer could not argue that advertising could never involve a professional service.

Apart from these coverage issues, the key factor driving insurer exposures to TCPA claims is the risk of class certification.  It remains to be seen how much the U.S. Supreme Court's 2011 Walmart opinion and other opinions addressing Rule 26 certification will create larger roadblocks to class certification of these claims.  In the interim, the Georgia Supreme Court is now considering an appeal that present the novel issue of how such damages should be calculated.

In A Fast Sign v. American Home Services Co., a Georgia trial court determined that the insured had intentionally violated the TCPA by issuing 306,000 junk faxes.  Accordingly, the court awarded damages to the certified class totaling $459 million.  The Georgia Court of Appeals ruled on May 29, 2011 that TCPA liability hinged on a consumer's receipt of a fax and that it was therefore error to award damages based on the number of faxes issued.   The plaintiff's appeal was argued before the Georgia Supreme Court on May 21, 2012.

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Categories: Personal Injury | Privacy

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Although unexpectedly large jury verdicts have prompted disputes between excess and primary insurers for years, the phenomenon of excess carriers suing defense counsel hired by the primary insurer relatively new.  The issue presented in such cases is whether, in the absence of a direct attorney/client relationship, the excess carrier has any right to sue counsel or, in the alternative, pursue a claim for equitable subrogation based upon counsel's client relationship with the insured.

For the most part, courts have declined to acknowledge a direct client relationship between the excess insurer and defense counsel.  As a result, some states have ruled that excess counsel has no right of action at all.  Indeed, in many states, courts have refused to acknowledge a client relationship between defense counsel and the primary insurer that hires counsel to defend its insured.  Whether a lawyer has an attorney-client relationship with an insurer that has hired it to represent a policyholder has been considered in several cases where insurers have sought to sue defense counsel for malpractice.  In several of these cases, courts have ruled that  the insurer is not a client of defense counsel. See First American Carriers v. Kroger Co., 787 S.W.2d 669, 671 (Ark. 1990)("when a liability insurer retains a lawyer to defend an insured, the insured is the lawyer's client");  Atlanta Int. Ins. Co. v. Bell, 475 N.W.2d 294, 297 (Mich. 1991)(declaring that "the relationship between the insurer and the retained defense counsel [is] less than a client-attorney relationship");  Continental Cas. v. Pullman, Comley, 929 F.2d 103, 108 (2d Cir. 1991)("[i]t is clear beyond cavil that in the insurance context the attorney owes his allegiance, not to the insurance company that retained him but to the insured defendant"); Point Pleasant Canoe Rental v. Tinicum Tp., 110 F.R.D. 166, 170 (E.D. Pa. 1986) ("[w]hen a liability insurer retains a lawyer to defend an insured, the insured is considered the lawyer's client") and In Re Petition of Youngblood, 895 S.W.2d 322, 328 (Tenn. 1995)(counsel's sole client is insured).

A few jurisdictions have also acknowledged that, even if the excess insurer is not a client, it is at least a third-party beneficiary of these legal services and thus entitled to bring suit.  Thus, in Paradigm Insurance Company v. The Langerman Law Offices, 24 P.2d 593 (Ariz.  2001), the Arizona Supreme Court found that although an insurer's retention of defense counsel does not necessarily give rise to an inherent conflict of interest in every case, neither does an insurer always enjoy "client" status. The Supreme Court agreed with defense counsel that "the potential for conflict between insurer and insured exists in every case; but we note the interests of insurer and insured frequently coincide."  Accordingly, the court found that it was possible, absent a conflict of interest, for defense counsel to represent both insurer and insured "but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith."  In any event, even if the insurer is not the lawyer's client but merely an agent of the insured, it is entitled to the same protection as the insured enjoys with respect to the confidentiality of client communications.  The court concluded that, "when an insurer assigns an attorney to represent an insured, the lawyer has a duty to the insurer arising from the understanding that the lawyer's services are ordinarily intended to benefit both insurer and insured when their interests coincide.  This duty exists even if the insurer is a non-client."

Others have likewise found that no client relationship exists but have permitted such claims to go forward on a theory of equitable subrogation.  However, a right to pursue claims for equitable subrogation may be of little value to an insurer in cases where the insured itself is already pursuing a malpractice action of its own, however.  In Pine Island Farmers Cooperative v. Erstad & Riemer, P.A., 649 N.W.2d 444 (Minn. 2002), for instance, the Minnesota Supreme Court refused to find that defense counsel had a client relationship with the insurer and, furthermore, refused to permit the insurer to pursue an action for equitable subrogation to pursue rights accrued from the insured as, in this case, the insured itself had already sued defense counsel for malpractice.  

In a recent Mississippi case, however, the state Court of Appeals has suggested the possibility that an actual attorney/client relationship may be established as the result of contacts between defense counsel and the excess carrier.  In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, No. 2009-CA-01063, a nursing home in Mississippi was sued for failing to provide proper care to a resident.  The primary insurer (Royal) engaged local counsel to defend the case.  A year later, Royal hired the law firm of Quintairos, Prieto, Wood & Boyer to take over the defense.  The Quintairos firm is a large national law firm with offices throughout the South and Southwest but is not itself a Mississippi law firm.  This fact was pointed out to Royal by the nursing home in expressing concern that none of Quintairos' partners or trial attorneys were licensed to practice law in Mississippi.  Although Royal insisted on continuing to use the Quintairos law firm despite its insured's concerns, these concerns were magnified when, a few weeks later, the trial court struck down counsel's belated designation of a physician as an expert witness.  Thereafter, the law firm issued an updated evaluation of the case.  Whereas prior reports had given a settlement value of $500,000 or less, the March 19, 2004 report concluded that the case had a value of $3 million to $4 million, the first indication that Great American's excess policy might be implicated.  Thereafter, Royal tendered its limits and Great American ultimately settled the lawsuit for an undisclosed amount.

In the ensuing malpractice action against Quintairos, Great American sought recovery on theories of equitable subrogation and negligence, including claims for negligent misrepresentation based upon the trial report submitted to Great American by the law firm.  In 2009, the trial court granted the defendants' motion to dismiss, holding that Great American lacked standing to file suit because it had no attorney/client relationship with the law firm. 

In 2011, the Court of Appeal affirmed the trial court's dismissal of Great American's negligence claims but declared that it should be permitted to go forward on a theory of equitable subrogation.  In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 2009-CA-01603 (Miss. App. January 18, 2011), the Mississippi Court of Appeals has ruled that an excess insurer may sue defense counsel hired by the primary insurer for any alleged negligence that resulted in the underlying nursing home suits settling for sums greater than the primary limits of coverage.  The court held that Great American could not sue for malpractice, since it lacked an attorney-client relationship with the firm.  The court declined to allow a direct claim based upon the excess insurer's reliance on alleged misrepresentations with respect to case valuation.  Nevertheless, as have other courts, the Court of Appeals held that even in the absence of an attorney-client relationship, an insurer may bring a claim for equitable subrogation. 

It is logical that an excess-insurance carrier should be allowed to pursue a claim in the insured's place. Shady Lawn had no incentive to pursue a legal-malpractice claim against Quintairos even if it believed Quintairos to be negligent because it had insurance in place to pay the settlement. Also, Royal had no incentive to pursue a claim if it believed the settlement value to be at or near the policy limits of the primary coverage regardless of the alleged malpractice. "The only winner produced by an analysis precluding liability would be the malpracticing attorney." Atlanta Intern. Ins. Co. v. Bell, 475 N.W.2d 294, 298 (Mich. 1991). ¶18. We recognize that a possibility exists that this may result in frivolous claims by excess-insurance carriers; but, for this Court to prohibit legitimate claims would leave the attorney who allegedly committed malpractice free from consequences if the primary insurer declined to pursue a claim. Also, we find that a conflict is not created by allowing Great American to seek equitable subrogation against Quintairos for legal malpractice. Great American and Shady Lawn have the same interest in this litigation -- Shady Lawn's competent representation. Further, Quintairos has already shared attorney-client communications and work product with Great American in the underlying cases. 

Last month, however, the full Court of Appeals withdrew the 2011 panel opinion and substituted a new decision declaring that Great American could pursue claims for negligence and equitable subrogation against the Quintairos firm.  Although the court "denied" Great American's motion for rehearing, its new decision effectively grants the relief that the excess insurer was seeking.  Whereas the Court's earlier opinion had only allowed the case to go forward on a theory of equitable subrogation, the court has now ruled 7-2 in Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 212 WL 266858 (Miss. App. January 31, 2012) that Great American had direct rights of action against the firm based upon misrepresentations that it made in reports from Quintairos to Great American.  Even though Great American had not hired the Quintairos firm, the court ruled that Great American was not a "stranger" to the attorney/client relationship.  The court found a relationship was implicit in the communications that defense counsel had been providing to the excess carrier, belying counsel's claims that permitting such a cause of action would interfere with the privilege attached to communications between defense counsel and its client.  

Under the circumstances, the Mississippi court ruled that any misrepresentations in the report that Quintairos had provided to Great American  would support a claim for malpractice and that the trial court had therefore erred in granting counsel's motion to dismiss.  Further, as before, the court recognized a right on the part of an umbrella carrier to bring a claim for equitable subrogation,

Writing in dissent, Justices Carleton and Russell argued that Great American lacked standing to raise these claims and that, "Creating a cause of action for legal malpractice wherein no privity of contract, nor attorney-client relationship exists, jeopardizes the sanctity of the attorney-client relationship."

It remains to be seen whether this Mississippi opinion will provide a template for other courts to imply a client relationship between excess insurers and defense counsel in cases where there were privileged communications between the parties and other trappings of an attorney-client relationship.  What does seem apparent is that courts are becoming less concerned about the formal relationships and are increasingly looking to the actual inter-relationships among defense counsel, primary insurers and excess carriers in determining whether the purposes and indiciae underlying the attorney-client relationship should extend to excess insurers.  It is less clear, however, that Quintairos would support the finding of a client relationship between an excess insurer and defense counsel where, as is more commonly the case, the excess carrier merely receives information from the primary insurer and has little or no direct dealings with defense counsel.

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Massachusetts is one of a handful of states that allow third party claimants to sue liability insurers for failing to promptly settle their claims.  It is unique in allowing tort claimants to recover punitive damages in such cases.   In the wake of the Supreme Judicial Court's ruling this week in Rhodes v. AIG Domestic Claims it is evident that the price of failing to settle claims in which liability is reasonably clear can be high indeed.


In 1989, the Massachusetts legislature amended two sections of the state Consumer Protection Act (G.L. c. 93A) to read: "For the purposes of this chapter, the amount of actual damages to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction or occurrence, regardless of the existence or nonexistence of insurance coverage available in payment of the claim."

As these amendments were prompted by a series of case in which 93A awards against first party insurers were based on the insured's lost interest on the amount owed, it has been unclear ever since whether this language was also meant to apply to claims against liability insurers, who may be subject to 93A liability in Massachusetts if they fail to make a reasonable offer of settlement in a case in which their insured's liability is reasonably clear.  In such cases, should the doubled or trebled award be based on the damage caused by the insurer's delay in effectuating a settlement or did these statutory amendments mandate that the insurer's liability reflect the injuries suffered by the tort claimant as the result of the insured's actions?

Marcia Rhodes had become a paraplegic after her vehicle was rear-ended by an 18 wheel truck.  The truck was owned by Penske and leased to GAF, which had a $2 million primary policy with Zurich and a $50 million excess policy with National Union.  Nearly two years after the accident, a representative of Zurich asked for permission to offer its full policy limit.  Even so, settlement discussions dragged on, due in part to the positions adopted by National Union.

After efforts at mediation collapsed, the case went to trial and resulted in a $7.4 million verdict against GAF.  A few months later, the carriers $9.4 million to settle, leaving open their claimed 93A exposure for not settling once the liability of GAF had become reasonably clear.

In the ensuing bench trial, the Superior Court found Zurich blameless but concluded that National Union had failed to make a timely offer of settlement.  Nevertheless, the Superior Court declined to award damages as the plaintiff had testified that he never would accepted anything less than $8 million, more than what the court had deemed to be a reasonable offer.

This finding was reversed by the Appeals Court of Massachusetts in 2010.  Although the trial judge had declined to find c. 176D liability on the part of the insurer for its failure to make a reasonable offer of settlement until the very eve of trial, given testimony by the plaintiff that he never would have accepted anything less than $8 million anyway, the Appeals Court found that this testimony was not dispositive, declaring that, "The causal link between AIGDC's unfair settlement practices and injury to the plaintiffs was sufficiently established by showing that the insurer failed to initiate the settlement process once the merits of the plaintiffs' claims were clear, thus depriving the plaintiffs of the opportunity to engage in a timely settlement process, and thereby forcing them to pursue recovery through the courts."
 
The Appeals Court also awarded double damages based on AIGDC's initial failure to make a reasonable offer of settlement after the jury awarded $9.4 million to the plaintiff, rejecting the insurer's argument that the issues in the case and its grounds for appealing the verdict were so complex that the plaintiff should have been required to present expert testimony to support its extra-contractual argument. However, the court declined to base this doubled award on the $9 million settlement and limited the award to 1% for each of the five months in which AIGDC had delayed in settling post-verdict.
 
AIGDC appealed from these findings.  The plaintiffs cross-appealed from the holding that they could only recover lost interest on the value of the settlement.  Although the Supreme Judicial Court accepts very few requests for further appellate review, it took this case, setting the stage for a final clarification of the rules governing how damages should be awarded in such cases.
  
In its February 10, 2012 opinion, the SJC agreed that National Union had acted in bad faith in failing to settle the case before trial.  The court refused to find that the insurer's failure to make a reasonable offer of settlement was excused by the apparent futility of such an offer, declaring that:
 
the plaintiffs need only prove that they suffered a loss, or an adverse consequence, due to the insurer's failure to make a timely, reasonable offer; the plaintiffs need not speculate about what they would have done with a hypothetical offer that the insurers might have, but in fact did not, make on a timely basis

Further, the SJC ruled that the Appeals Court had erred in refusing to give literal effect to the 1989 amendments to 93A, ruling that the double damages owed by AIGDC should be based on the multi-million dollar award rendered by the jury against GAF, not based on the loss of use of these settlement funds for a few months.  The court rejected AIGDC's distinction between first and third party cases, declaring that 93A "does not require a causal relationship between the unfair practice and the underlying judgment itself; rather, the statutory causation requirement focuses on the relationship between the unfair practice and injury to the plaintiff."  Similarly, the court rejected AIGDC's argument that the accident caused by its insured involved a different transaction or occurrence than that resulting in its 93A liability for failing to settle.
    
The court also declined to find that an award of damages in this manner exceed the due process standards for punitive damages awards enunciated by the U.S. Supreme Court in State Farm v. Campbell and other recent cases.  The SJC questioned whether Campbell even applied to cases where judges issued awards (runaway judges are presumed not to be a concern) and declared that, in any event, the award in this case was two times the actual damages and therefore well within the Supreme Court's dicta concerning ratios.  (This particular issue was highlighted in the amicus brief that our law firm filed on behalf of the American Insurance Association in support of AIGDC's position).

Although 93A claims have been a ubiquitous feature of insurance litigation in the Commonwealth of Massachusetts since the 1980s, cases such as Rhodes illustrate the extent to which the liabilities that insurers may face in such cases are not limited to coverage disputes with policyholders.
  
The SJC declined to impose liability on Zurich, however, declaring that it had acted properly in tendering its limits to the excess insurer once liability became clear.  This holding was of interest since at least one judge had suggested at oral argument that Zurich had an independent duty to offer its limits directly to the plaintiffs and could not merely tender to the excess insurer.  In this case, however, the SJC took note of the grievous injuries suffered by Rhodes and opined that Zurich's primary limit was clearly not enough to effect a complete settlement.
   
In the wake of Rhodes, liability insurers face heightened risk if they dare to take severe injury cases to trial.  While the SJC has doubtless acted with the best of intentions in creating such severe penalties for failing to settle, it is unclear whether the Court has thought through the long-term consequences of its ruling on the insurance marketplace or the cost of such rulings to policyholders, both in terms of increased costs of insurance and sums that insureds may now be forced to pay through self-insured retentions, deductibles and retro-rated premiums. 
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Categories: Damages

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The fate of climate change litigation now rests in the hands of the United States Supreme Court. Electric utilities, having suffered a surprising defeat at the hands of the Second Circuit last year in American Electric Power Co. Inc. et al. vs. State of Connecticut, 582 F.3d 309 (2d Cir. 2009), rehearing denied (2d Cir. March 5, 2010) filed a petition for certiorari (.pdf) with the nation’s highest court on August 2, 2010 seeking reversal of the Second Circuit’s opinion reinstating the plaintiffs' federal common law nuisance claims against the utilities for allegedly contributing to global warming. In their cert petition, American Electric, Duke Power, Xcel Energy and Southern Company argue that such a cause of action should not be implied under the common law and that these are political issues that are best left to the Congress to decide.

The utilities' arguments found support from a surprising quarter last week when the Obama Administration weighed in on the side of the Petitioners. In an amicus brief (.pdf) filed on behalf of the Tennessee Valley Authority on August 24, U.S. Solicitor General Neal Katyal argued that the issue should not be resolved through the court system and asks that the matter be remanded to the Second Circuit so that the court can consider the Administration’s recent proposals that greenhouse gases be regulated under the federal Clean Air Act.

The Supreme Court will decide during the coming term whether to accept the case. Notwithstanding the Solicitor General's support and the generally pro-business attitude of the court, the Court's willingness to wade back into the climate change debate is far from certain, particularly given the sharp divide that was evident in the Court's seminal Massachusetts v. EPA opinion. One factor that might potentially influence the court’s attitude is that Justice Sotomayor sat on the Second Circuit panel that heard the American Electric case (but was appointed to the Supreme Court before it was decided).

Climate change litigation has enjoyed a roller coaster ride in the year since American Electric was decided by the Second Circuit last September. A few weeks later, the Fifth Circuit ruled in Comer v. Murphy Oil that federal district court had erred in dismissing claims by Gulf property owners who claimed that the defendants' emissions had increased the ferocity of Hurricane Katrina. Although the full Fifth Circuit subsequently agreed to hear en banc rehearing of Comer, so many of the justices recused themselves due to conflicts of interest that the court was left without a quorum. As the order granting rehearing had the effect of vacating the panel opinion, the dismissal of the appeal reinstated the District Court’s original opinion.
 
The Ninth Circuit is also now considering these issues in Native Village of Kivalina v. Exxon Mobil Oil Corp., a case in which a federal district court in San Francisco dismissed a climate change suit brought by Eskimo villagers who claim that emissions from oil, energy and utility companies have caused Arctic sea ice to recede, threatening their village. In contrast to the opinions of the Second and Fifth Circuits, the California District Court adopted the view that it should not entertain jurisdiction as the public nuisance claims present a non-justiciable political question that should be decided by Congress, not the courts.

Meanwhile, the issue of insurance coverage for climate change claims is moving to the fore. On August 2, 2010, the Virginia Supreme Court announced  that it would agree to hear the insured’s appeal of a state trial court’s ruling AES was not entitled to coverage for the Kivalina plaintiff’s claims on the basis that they failed to seek recovery on account of an "occurrence" as the allegations of climate change were the foreseeable result of the insured's routine discharge of millions of tons of carbon dioxide over the years. Waiting in the wings is the all important issue of whether such claims also involve the discharge of a "pollutant".

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Categories: Environmental Law | Supreme Court

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The Young Lawyers Committee (“YLC”) is now on Facebook!  To find our page, log onto Facebook.com and then search for “DRI Young Lawyers”.  I encourage you to take a look at our page and become a “fan” of DRI Young Lawyers.

Have you ever been to a DRI Seminar and discussed a potential case with someone and then forgot the person's name by the time you got back to your office?  Have you ever needed to find an IP lawyer in California?  Have you ever wanted to go to lunch with a colleague after a deposition in Alabama?  The YLC's Facebook page can provide these types of networking opportunities and connect you to young defense lawyers from all over the country.

Fans of the site can network, post information or questions, stay in touch with lawyers they meet at YLC Seminars, and offer practice tips of interest to other young lawyers.  The YLC's Facebook page also has great pictures of YLC members participating in YLC Seminars, public service projects and young lawyer breakout sessions at various DRI Seminars.  Our page also includes announcements, information about YLC publications and information about the YLC Seminar scheduled for June 4-5, 2009 at Caesars Palace in Las Vegas, which you don't want to miss.

The YLC is the first DRI Committee to have a Facebook page.  Special thanks to YLC Webpage/Technology Subcommittee Chair Mike Huff and Vice-Chair David Campbell who set up our profile and who are serving as administrators of our page, the DRI staff, and Cynthia Arends and Laurie Miller, who helped make our Facebook page possible.

The YLC's Facebook page can be a powerful and dynamic networking tool, but only if you use it.  So, join us and then spread the word.

Melissa Roberts Tannery
Troutman Sanders
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Categories: DRI Committees | Young Lawyers

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When is a policyholder not an insured?

Posted on November 12, 2008 05:27 by Michael Aylward

When is a policyholder not an insured? That was the issue considered by the Seventh Circuit last week in Iowa Physicians’ Clinical Medical Foundation v. Physicians’ Ins. Co. of Wisconsin, No. 08-1297 (7th Cir. October 31, 2008), an Illinois case in which the court declared that an insurer’s obligation to act in good faith in responding to offers to settle within policy limits only extends to insured entities.

The Estate of Dennis Goetz sued Dr. Randall Mullen and Iowa Health Physicians (IHP) for failing to properly vaccinate Goetz against malaria before he took a trip to Africa and, upon his return, for failing to properly diagnose or treat the malarial condition that ultimately killed Goetz. At the time, Goetz was insured under a medical malpractice policy issued by Physicians’ Insurance Company of Wisconsin with limits of $1 million. The policy was issued in the name of Iowa Health Physicians, Mullen’s employer, which also paid the premiums on behalf of Dr. Mullen as part of a financial package to entice him into working at the clinic. Although IHP was listed as the policyholder, the policy itself made clear that it was not an insured and, indeed, IHP declined to pay the additional premium that would have entitled it to coverage under its policy. Rather, IHP was covered through a combination of self-insurance and a separate commercial insurance policy.

Full Article

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Categories: Insurance Law

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