In an interesting opinion in an intriguing case, California's Fourth District Court of Appeal summarized the law and applied it to its summary of the facts in American Modern Home Insurance Co. v. Fahmian, Super. Ct. No. 05CC12158, 2011 WL 1334959 (Cal. Ct. App. Apr. 8, 2011).  The result was an award to American Home of "reimbursement from Fahmian of (i) the $300,000 paid to settle the [underlying] action, and (ii) the fees and expenses that the trial court determines are reimbursable under the terms of the policy, and that were incurred by American Modern in connection with the defense of the [underlying] action, as well as prejudgment interest," among other relief.  Id. at *10.

The Court concisely summarized the applicable, settled law at the beginning of its opinion.  "Under binding California Supreme Court authority, an insurance company may obtain reimbursement from its insured for a policy limits settlement, when it is determined the underlying claim was not covered by the policy," the Court held, "if the insurance company":

(1) made a timely and express reservation of rights [the Court pointed out separately that "it is a timely and express reservation of rights letter that is determinative."  Id. at *1.],

(2) provided express notification to the insured of the insurer's intent to accept the proposed settlement offer ["We hasten to add that our holding is premised on the insurer's timely provision of a settlement advisement letter to the insured, after receiving the plaintiff's settlement demand."  Id. at *8.], and

(3) made an express offer that the insured could assume its own defense.

"In this case," the appellate court held, "American Modern did all of the foregoing."  Id. at *1.  However, in reaching this holding, the appellate court had to reverse a contrary judgment entered by the trial court against American Modern's recovery, based upon a jury verdict.

The jury in this case was provided a special verdict form with 13 interrogatories.  The jury determined as facts, among other things, that in this case:

• American Modern affirmatively made a timely and express reservation of rights.
• American Modern gave its policyholder whom it was defending in the underlying case, Mr. Sohail Fahmian, reasonably sufficient information to make a reasoned decision, in its settlement advisement letter that it, American Modern, had received a settlement demand for policy limits and that it was about to pay the demand and that Mr. Fahmian could choose between one of several options in that regard.
• Under all the circumstances, American Modern did not provide "sufficient time" for Mr. Fahmian "to make a reasoned reply."

Id. at *3.

The jury's answers to other interrogatories on the special verdict also established that Mr. Fahmian never had any coverage for the underlying action under the American Modern liability insurance policy.  See id.

However, the trial court entered judgment denying any reimbursement to American Modern in this case for the indemnity payment and defense expenses it incurred on Mr. Fahmian's behalf.  In the eyes of the trial judge in this case, the jury's finding that American Modern did not provide "sufficient time" for Mr. Fahmian "to make a reasoned reply" to American Modern's settlement advisement letter barred any chance of reimbursement to American Modern.  As the trial judge said, when giving that notice “the insurer must give the insured a reasonable amount of time to select an option.”  Id. at *5.  Since the jury found that American Modern did not do so, the trial court held that "Fahmian is not liable to American Modern Home."  Id.

This is the time sequence relevant to American Modern giving Mr. Fahmian time to select an option in response to the underlying plaintiff's settlement demand:

1. "Montoya's [the underlying plaintiff's] attorney presented a settlement demand to American Modern for the policy limits -- $300,000."

2. July 1, 2005: American Modern sends a letter by Federal Express to Mr. Fahmian, which is delivered on July 2, 2005, advising Mr. Fahmian that American Modern had received a policy limits demand which would expire "by its terms on July 8, 2005".  American Modern further wrote that it intended to pay the policy limits demand "unless Fahmian either agreed to undertake his own defense in the Montoya action, or waive any potential claims based on the failure to settle the Montoya action within the policy limits."

3. July 5, 2005: Mr. Fahmian telephones American Modern's lawyer and requests a copy of the July 1 letter and its attachments [unspecified by the Court in this case] to be sent to him by e-mail attachment so that he can send them to a lawyer.  "The requested documents were transmitted electronically the same day."  During the telephone conversation, American Modern's lawyer tells Mr. Fahmian that he could call "until the morning of July 8 with his decision."

4. "American Modern did not receive any communication from Fahmian or any attorney purporting to represent him after July 5.  Because American Modern did not hear from Fahmian by July 8, 2005, it accepted the policy limits settlement demand in the Montoya action."

Id. at *2.

It will be recalled that the appellate court "hastened to add" that its holding was based "on the insurer's timely provision of a settlement advisement letter to the insured, after receiving the plaintiff's settlement demand."  Id. at *8.  It is all the more worthy of note, then, that the only date not highlighted by the appellate court in the above summary is the date that American Modern received the underlying plaintiff's settlement demand.  Clearly, that was a thing already decided.

The California appellate court was resolute that its legal holding in this case would be applied to future cases and that, in all future cases, the legal standard would be whether the insurer seeking reimbursement from its insured provided a settlement advisement letter to its insured in a "timely" fashion "after receiving the plaintiff's settlement demand."  There will not be a comparison in any future case with the  date that American Modern received a policy limits demand in this case, because the Court, quite deliberately it appears, did not say what date that was.

Further, and in connection with "timely" providing information to insureds from whom or which liability insurance companies seek reimbursement, the appellate court explicitly wrote that it was concerned with only one "fact" in this case.  It had already happened long before American Modern received a policy limits demand and before American Modern sent its settlement advisement letter to Mr. Fahmian.  As the jury found in this case as a fact, which the trial court itself acknowledged, American Modern made a timely and express reservation of rights including its claimed right of reimbursement in the event of non-coverage.

In sum, in the eyes of the California appellate court in this interesting case, American Modern complied with the list of legal requirements with which its opinion, and this post, began.  "In this case, American Modern did all of the foregoing.  We decline to add any additional requirements."  Id. at *1.

About the Author:  Dennis Wall is the principal in Dennis J. Wall, Attorney at Law, A Professional Association in Winter Springs and Orlando, Florida, and is a member of DRI.  He also is the Author of LITIGATION AND PREVENTION OF INSURER BAD FAITH (Shepard's/McGraw-Hill Second Edition; West Publishing Company 2010 Supplement and Third Edition 2011 in process).  Reimbursement causes of action by insurers from insureds are discussed in §3:4 of the Second Edition and 2010 Supplement, and in the Third Edition in §3:6, "Informing the Insured:  Insurer Assertion of Rights to Reimbursement From the Insured of Clearly Noncovered Indemnity and Defense Expense." 

This post focuses on one of eight motions in limine ruled on in the April 14, 2011 Order in Altheim v. GEICO General Insurance Co., No. 8:10-cv-156-T-24 TBM, 2011 WL 1429735 (M.D. Fla. Apr. 14, 2011).

Specifically, this post focuses on Plaintiff's Motion in Limine Regarding Testimony From Defendant’s Expert Witness and Others, and the court’s disposition of that motion.  See id. at **2-3.

The Defendant’s expert witness is Kathy Maus, Esquire of Tallahassee, Florida.  Her expertise caused her to be retained by a Pensacola, Florida attorney to be an expert witness in an uninsured/underinsured motorist “bad faith lawsuit” pending in federal court in Tampa, Florida.  Id. at *1.  To quote from the federal court's Order, she is “an attorney who was hired as a defense expert regarding claims handling.”  Id. at *2.  She will testify to opinions in that lawsuit “based on her extensive experience in claims handling.”  Id.

Although not stated by the United States District Court in its opinion in this case, Ms. Maus’s law firm also enjoys a statewide reputation for its expertise.  (Many of its partners, including Ms. Maus, are also tireless volunteers in support of the activities of the Defense Research Institute.)

The Plaintiff's subject motion in limine was expressly addressed to three (3) matters as to which, the Plaintiff argued, Ms. Maus should not be permitted to testify at trial in this case.  First, the motion in limine requested that she not be allowed to offer any “medical opinions.”  The court granted this motion to the extent that Ms. Maus, an attorney (and one of the Plaintiff's own experts, also an attorney) was not a doctor and therefore could not testify to medical opinions.  Id.

However, as to this first issue, the federal court made an effort to be very clear in its ruling.  “However, [Ms. Maus] can interpret the medical records based on her expertise in claims handling practices and procedures.”  Id. (Emphasis added).

The Plaintiff also conjectured that Ms. Maus may testify concerning the Plaintiff's doctor’s “state of mind” and argued that Ms. Maus should not be allowed to do so.  The federal court did not accept this argument and denied the motion in this regard.  The court held that Attorney Maus could testify at trial in this regard to the extent that her trial testimony (1) describes her own past experiences with the Plaintiff's doctor and (2) identifies any similarity between that doctor’s medical reports on the Plaintiff, and that doctor’s medical reports on other people.  Id.

Finally, the Plaintiff argued that any defense witness who was “biased” against any “profession” should not be allowed to offer “biased” testimony, and in particular charged that Ms. Maus should not be allowed to testify to the following excerpt apparently taken from the transcript of her deposition (as quoted by the court in this opinion): “As we all know, chiropractors oftentimes will treat you until your insurance runs out.  They will say you need treatment until your insurance runs out.”  Id.  According to the federal court, “Defendant did not directly respond to this argument.”  Id.

Under the circumstances, the court granted this motion in limine in this regard, to the extent “that Maus cannot testify that ‘chiropractors oftentimes will treat you until your insurance runs out.  They will say you need treatment until your insurance runs out.’”  Id. at *10.

Over all, three interesting rulings on one uniquely presented motion in limine.

The Second Circuit Court of Appeals has affirmed a series of rulings made by a district judge in approving a Settlement Agreement and Mutual Release of Claims in the case of In re September 11 Property Damage Litigation, 2011 WL 1331847 (2d Cir. Apr. 8, 2011).

The settlement was made by a group of Plaintiffs in that case, the “World Trade Center Properties Plaintiffs,” with what the Second Circuit called the “Aviation Defendants” for the Defendants’ asserted liabilities under the Air Transportation Safety and System Stabilization Act of 2001 or “ATSSSA.”  The Defendants were allegedly liable for negligence and other statutory fault in connection with the destructive events of September 11, 2001 insofar as the terrorists who committed well-known atrocities on that date were able to use airplanes under the Defendants’ alleged control to commit their atrocities including destruction and damage at the World Trade Center in New York City.

In approving the Settlement Agreement and Mutual Release of Claims between the WTCP Plaintiffs and the Aviation Defendants, the trial court applied New York state law in connection with various issues under the Federal ATSSSA, and without discussing those specific issues further, the Second Circuit affirmed those rulings:

In sum, we agree with the district court that the settling parties entered into their settlement agreement in good faith.  We therefore conclude that the district court did not abuse its discretion in approving the settlement agreement.

Id. at *7.

The issue of broader potential interest, however, concerned the Second Circuit’s affirmance of the district court’s ruling that the proposed settlement payments would be credited towards the Aviation Defendants’ limits of liability to pay damages under the ATSSSA.  The Second Circuit affirmed that ruling by beginning with the observation “that ‘liability’ refers to a ‘financial or pecuniary obligation’ that can arise through the settlement of claims.”  In addition, this interpretation of the term, “liability,” as used in the federal statute would have a similar meaning as “the common understanding of ‘liability insurance,’ which commonly provides for an insured’s claim to arise ‘once the insured’s [legal obligation] to a third party has been asserted.’”  Id. at *8.

By appealing to the general and common understanding of what constitutes “liability insurance,” the Second Circuit added weight to its process of interpreting a specific statutory one-word term, “liability,” and affirmed the trial court’s ruling that payments toward the settlement agreement at bar would have the effect of reducing dollar-for-dollar the paying Defendants’ statutory “liability” under ATSSSA.

In the case of Nationwide Insurance Co. of Florida v. Demmo, No. 2D10-4104, 2011 WL 1197538 (Fla. Dist. Ct. App. Apr. 1, 2011), a Florida state circuit judge ordered Nationwide to produce “Nationwide’s claims notes, activity logs, property loss notice information, and property loss notice forms in Demmo’s first-party breach of contract action against Nationwide.”  Id. at *1.  On certiorari review, the Florida appellate court quashed the trial court’s order.

The reason for reversal in this case was a simple one.  According to the appellate court, the trial court erred by focusing on the date that Nationwide denied coverage under the homeowner’s policy it issued to Ms. Demmo.  The trial court then ordered production of everything prepared before Nationwide denied coverage, on the ground that none of it could have been work product prepared in anticipation of litigation, in the eyes of the trial judge.

Instead, the appellate court concentrated on the nature of the action which Ms. Demmo filed against Nationwide.  “Rather, the issue turns on what type of action Demmo has brought.  Here she is not pursuing a bad faith claim, but rather seeks relief for breach of contract.”  Id.  In this particular case, the materials requested by Ms. Demmo were simply not discoverable where coverage was disputed and not yet resolved, and where, in addition, the homeowner’s insurance company faced prejudice if it were compelled to produce its claim file materials during the insurance coverage litigation.

In an appropriate case, the appellate court indicated that it might be inclined to hold that certain documents contained in a first-party claims file might be discoverable, see id. at *2 n.2, but in effect, the appellate court held that this was not an appropriate case.

In the case of Malaker v. Cincinnati Insurance Co., 2011 WL 1337095 (N.D. Ill. April 7, 2011), a federal judge decided the entire case on a motion to dismiss one count of the complaint. 

Mr. John Helfrich was an insured under a CGL (or Commercial or Comprehensive General Liability Insurance) policy issued by Cincinnati Insurance Company.  An incident took place in which Mr. Helfrich’s hand came into contact with a shirt and jacket worn at the time by Mr. Eric Malaker.  Mr. Helfrich admitted that, and Mr. Helfrich also admitted that he pushed Mr. Malaker.

Mr. Helfrich informed Cincinnati of this incident.   (It is not clear from the opinion how he informed Cincinnati, i.e., whether verbally or in writing, but it did not seem to matter to the judge in reaching her decision).  Cincinnati denied coverage in response to this pre-suit notice and in its “denial-of-coverage letter” asked Mr. Helfrich, should he be sued, to provide Cincinnati with notice “of the suit immediately” so that Cincinnati “may review the wording of the suit” for possible coverage.  Malaker, 2011 WL 1337095 at *1.

Thereafter, Malaker sued Helfrich.  Some two years later, Mr. Helfrich’s attorneys may have notified Cincinnati of the underlying lawsuit by Malaker against Helfrich, a fact which was in dispute.  Six years after the underlying lawsuit was filed, Mr. Malaker and Mr. Helfrich reached a settlement for $5.1 million.  The Circuit Court of Illinois entered what appears to be a consent judgment in the underlying case accordingly.  Mr. Helfrich paid $100,000.00 to Mr. Malaker and assigned all of his rights against Cincinnati to Malaker.

Malaker then filed a complaint against Cincinnati in which he alleged three claims in three counts:  Count One for alleged breach of contract, Count Two for alleged breach of fiduciary duty owed by Cincinnati to Helfrich, and Count Three for alleged bad faith under Section 115 of the Illinois Insurance Code.  In the decision in question, the federal court expressly considered Cincinnati’s motion to dismiss the claim for its alleged breach of fiduciary duty.  However, the Court also noted that the parties had filed motions for summary judgment by the time of this decision.  Id. at *2, *2 n.1.  The federal court’s disposition of the motion to dismiss also disposed of the motions for summary judgment in this case.

As the federal judge threaded her way through to a determination in considering a motion to dismiss that no fiduciary relationship existed on the face of the complaint, the Court made a series of interesting and potentially instructive rulings for duty-to-defend cases.

First, the Federal District Court held that a “breach-of-fiduciary-duty claim” is subject to the notice-pleading standards of Federal Rule of Civil Procedure 8, and not the requirements of pleading with particularity which are required for fraud claims under Rule 9(b).  Id. at *3.

Second, the Court agreed with Cincinnati that the mere existence of an “insurer-insured relationship does not in itself give rise to a fiduciary relationship under Illinois law.”  Id.  Under Illinois law there could be a fiduciary relationship triggered by a duty to defend, but in this particular case whether a duty to defend were triggered involved fact questions of timely vs. late notice which could not be determined at the pleading state, the federal judge wrote.  Id. at *5, *6-*7.  Therefore, the federal court determined, in effect, that it would not determine that factual issue but would instead determine the legal issue of whether, even assuming timely notice, there was a duty to defend Mr. Helfrich against the underlying complaint under Cincinnati's CGL policy.  See id. at *6.

The federal court held that there was never a legally enforceable fiduciary duty between Helfrich and Cincinnati in this matter, because under Illinois law Cincinnati never had a duty to defend him against Malaker’s underlying complaint.  In order to reach this legal conclusion, the federal court had to look behind the complaint at bar, which did not contain allegations which revealed what were the claims and allegations made by Mr. Malaker against Mr. Helfrich in the underlying lawsuit.  Therefore the federal court employed Federal Rule of Evidence 201(b) to examine the underlying state court complaint for the fact of those underlying claims and allegations and not to determine whether they were true or false.  Id. at *6-*7.  It is not clear from the federal court’s opinion in this case whether the underlying complaint was attached as an exhibit to the complaint at bar, or whether there was a request for judicial notice of the underlying complaint under Evidence Rule 201(b) in this case.  It would be a good practice to do both in an appropriate case, and to invite the court in any future case to determine the duty to defend based upon documents which are easily referenced in the record at bar.

There was a possibility that Illinois State Courts considering the question of whether there was a duty to defend the underlying case, would look to other pleadings in the underlying case in addition to looking at the underlying complaint.  The federal judge wrote that she also considered the complaint and other pleadings in the underlying case, although the opinion does not provide a list of all the other pleadings that she considered.  In any event, the result would be the same: the court held that there still would have been no duty by Cincinnati to defend Mr. Helfrich in the underlying Malaker lawsuit.  Id. at *8.  Defense practitioners may thus wish also to consider attaching all relevant underlying pleadings to the complaint, or to consider attaching them to a notice of filing with a request for judicial notice of them, in any appropriate duty-to-defend insurance coverage case.

The federal court was not done in this case, however.  The federal judge went on to consider the legal sufficiency of the counts for alleged breach of contract and for alleged bad faith under the Illinois Insurance Code.  There could be no breach of contract since Cincinnati did not have a duty to defend the underlying Malaker case, and there could not be any bad faith or “vexatious and unreasonable” conduct under the Illinois Insurance Code by Cincinnati denying a duty to defend where, the Court ruled, it did not have a duty to defend.

Since amendment of any count would be futile, dismissal of all claims in all counts in the federal court complaint was warranted.  Accordingly, all counts were held dismissed with prejudice, and the pending motions for summary judgment were held moot as a result.  Id. at *10.

The holdings of the Federal Court in this case came down to this concise summary:

In the present case, the operative Complaint fails to state a claim because its constituent allegations, coupled with relevant pleadings of which the Court takes judicial notice, reveal that Defendant properly denied coverage.