Corporate policyholders/insureds who have been sued share a common interest with their liability insurers—successfully defending those lawsuits.  Yet insureds and insurers often disagree on the choice of defense counsel and how much the insurer must pay toward legal bills.  These disputes are costly and, in most instances, can be avoided.

Many primary commercial liability policies purchased by corporate policyholders not only impose a “duty to defend,” but also afford insurers the “right to defend.” This express “right” allows the insurer, rather than the insured, to select defense counsel.  Upon seeking a defense under that policy, the insured has relinquished its right to select defense counsel.  

There are two schools of thought regarding whether the assigned defense counsel owes duties only to one client (insured) or to two clients (insured and insurer). Many courts have adopted the two-client or “tripartite relationship” theory, under which insurer-selected counsel (commonly “insurance defense counsel”) has an attorney-client relationship with both insured and insurer.  Where the insurer has agreed to provide a defense to the insured under a reservation of rights, and that reservation raises a conflict of interest such that defense counsel in theory could face divided loyalties, courts have held that the insured is entitled to a defense through counsel of its choice (“independent counsel”).  Most courts hold that not every reservation of rights creates a conflict of interest.  Rather, a conflict of interest has been found where coverage turns on facts or issues to be determined in the underlying action such that the insurer-assigned defense attorney would face a conflict in deciding how to conduct the defense given the duty of loyalty owed to both clients.  

Other courts follow the one-client theory, under which insurance defense counsel represents only the policyholder, not the insurer.  Therefore, the attorney owes no duties to the insurer. Accordingly, in the states following the one-client rule, a reservation of rights cannot give rise to the insured’s right to select its own counsel.

Policyholders often take the position they can select their own counsel, who normally charge higher hourly rates than insurance defense counsel.  The typical arguments include:  (1) the two-client/tripartite relationship model applies, and the insurer’s reservation of rights creates a conflict allowing the insured to select counsel; (2) the insurer’s litigation management guidelines constrain insurance defense counsel from exercising independent professional judgment in the insured’s best interests; and (3) the litigation is particularly important to the insured.  Even when the insurer might acquiesce in the insured’s choice of counsel, disputes arise as to the difference between the insured-selected firm’s proposed rates and the rates the insurer typically pays for that type of case.  Some states have addressed this issue by statute (e.g., California Civil Code Section 2860, limiting hourly rates to those the insurer ordinarily pays) or by case law.  Often, the dispute is left to negotiation and either a compromise (typically by which fees are shared between insurer and insured) or an agreement to disagree, coupled with litigation or arbitration.

There are several solutions to this recurring problem that can eliminate or substantially minimize disputes.  First, the issue can be addressed at the policy negotiation stage.  An insured may insist on controlling the right to select counsel, which often is achieved through a policy endorsement allowing the insured to select counsel or even identifying specific lawyers who will defend lawsuits.  An insurer may protect against a dispute over its future defense cost exposure by including policy language specifying the maximum rates it will pay to defend lawsuits or that it will pay no more than the hourly rates it ordinarily pays in the jurisdiction where a case pends.

Second, insureds should better appreciate that leading property and casualty insurers afford their insureds a full, high quality, and professionally independent defense (regardless of whether of a reservation of rights is asserted).  This is expected of all counsel engaged by insurers.  Significantly, the Defense Research Institute (DRI) Recommended Guidelines for Insurers and Law Firms, which are followed in whole or in substantial part by many insurers, provide: “Nothing contained herein is intended to nor shall restrict Counsel’s independent exercise of professional judgment in rendering legal services for the Insured or otherwise interfere with any ethical directive governing the conduct of counsel.”  Elsewhere the guidelines provide that “in the event of disagreement [over litigation strategy], the final decision will remain the independent professional judgment of defense counsel.”  Whether expressed in an insurer’s guidelines, an engagement letter, or as a matter of practice and expectation, all carriers expect assigned counsel to uphold the ethical obligations they owe their client, the insured.  Further, an insurer may consider emphasizing this reality by agreeing it has no attorney-client relationship with assigned counsel.  See  Michael M. Marick and Karen M. Dixon, “The Insurer’s Contract ‘Right’ To Defend–The ‘Tripartite’ Relationship Reconsidered,” 39 Tort Trial & Ins. Prac. L. J. 1119 (2004) (absence of an agreement in fact to an attorney-client relationship obviates the two-client model, and thus an insured’s ability to select counsel in reservation of rights situations).

Third, insureds and insurers should have an open-minded and transparent discussion on counsel selection immediately after a lawsuit has been filed.  Insurers may consider offering the insured several qualified firms from which to choose.  A “beauty contest” among potential law firms is often highly instructive.  Insurance defense firms often are selected by insureds, even in high exposure cases, both because of their capabilities and they will be paid fully by the insurer.  

Fourth, at the same time counsel is selected, insured and insurer should agree upon litigation management guidelines (including anticipated staffing and budgeting).  It is in the interest of all parties—insured, insurer, and attorneys—to reach a meeting of the minds at the outset of a lawsuit, which facilitates a cooperative and focused defense. Insureds approaching the discussion by taking the position that guidelines are not “binding” on their counsel miss the point.  Both by their language and implementation, leading insurers do not apply guidelines to constrain a lawyer’s ability to fully defend the insured.  Ongoing three-way communication throughout the life of a litigated matter will solve most billing and case management issues.

In sum, insureds and insurers can and should find common ground on how to properly defend high exposure lawsuits. There is no legitimate reason for insureds to be skeptical of an insurer’s counsel selection and litigation management protocols. An honest and open-minded dialogue from the beginning of a lawsuit, and throughout the litigation, should resolve most issues.  


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The V-8 Moment with Regard to Insurance

Posted on August 5, 2014 04:36 by Steve Crislip

Wow, I should have had professional liability coverage.  I remain amazed at how many lawyers forego such coverage. I do not understand that rationale since they would never risk their assets with an uninsured car or house.  Yet, they think this cost of doing business is too high or it somehow is not needed.

Even a totally bogus claim costs real money to defend.  It takes time and work to get these dismissed, with no return of the costs. Lawyers always seem surprised at the legal costs for such work when they send out similar bills each day.  Then if there is a meritorious claim or even a colorable claim, coverage is very much needed.

When I last looked only one state required legal malpractice coverage as a condition of licensing.  Many states annually require you to disclose whether or not you have such coverage for consumer knowledge. I wonder how many clients ever really check that, or if they even care.  If you err in their case, they will sue you regardless. Do not think they will not, just because you have no insurance.  You certainly do not want to explain to family members that they now need to take the bus, since your cars were attached to pay a malpractice judgment.  Just treat this like a business expense and get coverage, and get the right coverage.

You should shop for coverage with brokers and agents as well as Bar groups.  Be totally forthcoming in any applications so there is no reason for any carrier to later deny coverage. Price varies with the amount of risk you are willing to take by way of the deductible.  Sometimes that is just cost pricing with lower annual premiums for higher retention levels by you. Sometimes in order to get big policy limits for some specialty work, you are required to have a big deductible.  Bigger firms are used to that, but smaller firms must always be mindful of the amount of risk they can absorb and how much they can promptly pay for a defense.  Usually the deductibles are for both losses and for the defense of the claim.

At one time, professional liability policies were like your auto policy — occurrence based.  Were you insured when you had the wreck or act of malpractice, or not?  By the 1970’s, that type of coverage disappeared and all are usually claims-made, eliminating the open-ended coverage concerns.  So, now a lawyer needs to be covered when a claim is made and must therefore avoid any gaps in coverage.

Since claims can arise well after the act or occurrence, prior acts coverage was needed to cover such matters forward when changing carriers or policies.  A tail (extended reporting endorsement) or an endorsement for prior acts must be considered carefully when charging firms.  Someone either closing a firm or making a lateral move needs to consider this carefully.  See, “A Primer on Prior Acts Coverage,” Mark Bassingthwrighte, ALPS 411, May 27, 2014.

For example, working in a mid-size regional firm, it made no sense to take in a lateral lawyer and provide them with prior acts coverage under the firm’s policy.  There had been no quality control by the firm and there were totally unknown risks involved with the lateral’s prior work.  With a large deductible, it was just bad business to assume that liability.  Accordingly, all laterals were told to look to their prior carriers or firms for coverage up to the day that they just started at our new firm.  Going forward they were covered, even when they left, as long as our firm was viable and still covered.  A tail may be needed by them from their prior work, but if they were likewise leaving a viable ongoing firm with good coverage, maybe nothing was needed.

Complicated to some degree, but it is just a part of doing business as a lawyer.  You need certain things to practice and this certainly is one of them.  Just like paying the rent on the office, paying for the coverage in a timely manner, and getting the right coverage is kind of important.  Don’t be the person who thinks they will not be sued by their clients. 

Be advised that most are loss and claim deductibles for any expended fees and costs, as well as claims payouts.  Also, it is customary for you to have to pay your full deductible before any carrier pays anything.  So pick a deductible you can afford and then escrow the funds for it as soon as a claim surfaces.  By the way, give notice of claims promptly, again to avoid coverage issues.  See ALPS 411, Claims-Made Reporting Requirement, February 15, 2012.

This blog was originally posted on the Lawyering for Lawyers blog on August 5. Click here to read the original entry. 


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A New York trial judge’s recent decision in Zurich American Insurance v. Sony Corporation of America has set the legal blogosphere aflutter with arguments and counter-arguments as to whether cyber liability and data breach claims fall within the “Personal and Advertising Injury Liability” coverage section (Coverage B) afforded by most commercial general liability (CGL) policies. A new set of data breach exclusionary endorsements, however, filed in many jurisdictions by Insurance Services Office, Inc. (ISO) and set to take effect this month, May 2014, appear poised to end the debate over CGL coverage for these types of claims. But will they?

The issue in Sony was whether the underlying consumer class action claims brought in connection with the 2011 data breach of Sony’s Playstation network sought damages because of “personal and advertising injury” under Coverage B. Zurich’s CGL policy in that case featured the typical definition of “personal and advertising injury”, which included “injury… arising out of… [o]ral or written publication, in any manner, of material that violates a person’s right of privacy.” The New York trial judge held that this definition requires “some kind of act or conduct by the policyholder in order for coverage to be present”. Because “there was no act or conduct perpetuated by Sony”, but rather third party “hackers breaking into that security system”, the court held that Zurich’s CGL policy did not afford coverage for the claims against Sony. 

Courts in other jurisdictions have arrived at the opposite conclusion regarding coverage for cyber liability and data breach claims under Coverage B. See e.g. Netscape Communications Corp. v. Federal Ins. Co., 343 Fed.Appx. 271 (9th Cir. 2009); Tamm v. Hartford Fire Ins. Co., 16 Mass.L.Rptr. 535, 2003 WL 21960374 (Mass. Super. Ct. 2003).

As a result, ISO initially responded by including in its April 2013 revisions to its CGL forms an optional endorsement labeled “Amendment Of Personal And Advertising Injury Definition” (CG 24 13 04 13). This endorsement removes “injury… arising out of… [o]ral or written publication, in any manner, of material that violates a person’s right of privacy” from the definition of “personal and advertising injury” all together. This removal effectively defeats coverage in most cases for cyber liability and data breach claims under Coverage B. The problem is that eliminating this language from the “personal and advertising injury” definition also defeats coverage for the more traditional type of privacy claims typically covered by a CGL policy.

In contrast, ISO’s new exclusionary endorsements set to take effect in May 2014 are more narrowly tailored to the cyber liability or data breach context. For example, one of the new mandatory endorsements labeled “Exclusion-- Access or Disclosure of Confidential or Personal Information and Data-Related Liability-- With Limited Bodily Injury Exception” (CG 21 06 05 14) applies specifically to Coverage B:

This insurance does not apply to:

Access Or Disclosure Of Confidential Or Personal Information

“Personal and advertising injury” arising out of any access to or disclosure of any person's or organization's confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.

This exclusion applies even if damages are claimed for notification costs, credit monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense incurred by you or others arising out of any access to or disclosure of any person's or organization's confidential or personal information.

This endorsement features a similar exclusion for coverage provided by the “Bodily Injury And Property Damage” section of the standard CGL form (Coverage A). By removing coverage for claims “arising out of any access to or disclosure of any person's or organization's confidential or personal information”, the new endorsement certainly seems to target coverage for cyber liability and data breach claims. 

Policyholders likely will argue that ISO’s inclusion of these new exclusionary endorsements demonstrate that the standard CGL form, without these exclusions, necessarily provide coverage for cyber liability and data breach claims. Otherwise, the argument will go, there is no need for these new exclusions. That type of argument has had mixed success in other contexts. For example, insureds have argued that the presence of the “your work” exclusion in CGL policies serves as a concession that defective construction work claims necessarily meet the “occurrence” and “property damage” requirements of Coverage A. Insurers that issue or have issued policies without these new “Access or Disclosure of Confidential or Personal Information and Data-Related Liability” endorsements may face this argument. 

Insurers that do issue policies with these new exclusionary endorsements will have to show that they apply to cyber liability and data breach claims. Although the exclusionary provisions are new, carriers can expect policyholders to raise familiar arguments to try to defeat them. 

For example, many liability policies contain exclusions for bodily injury claims arising out of sexual acts, conduct or abuse. Those exclusions certainly eliminate coverage for the direct perpetrator of the act or abuse. Some jurisdictions, however, have held that those exclusions may not apply to claims against indirect tortfeasors, such as employers or parents of the direct perpetrator, under various negligent hiring, retention or supervision theories. The policyholder argument for coverage lies in the theory that the plaintiff’s claim against the employer or parent was one for injury caused not by sexual abuse or conduct, but by negligent hiring, retention or supervision. Whether courts will apply that same reasoning to these new data breach exclusions, and whether it even makes sense to do so, remains to be seen.

ISO’s new exclusionary endorsements appear designed to end the debate over whether CGL policies cover cyber liability and data breach claims. Whether those endorsements have ended the debate, or simply sent it in a new direction, will be decided by the courts in the upcoming years.


Michael L. Young is a partner in the St. Louis, Missouri, office of HeplerBroom LLC. His practice focuses on insurance coverage and civil appellate matters. This post does not necessarily represent the views of HeplerBroom or its clients and is not intended to serve as legal advice or to establish an attorney-client relationship. 

 

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California Court of Appeals for the Fourth District Rules Insurance Broker Had No Duty To Investigate Insured’s Coverage Needs

On October 4, 2013, the California Court of Appeals for the Fourth District reaffirmed prior rulings regarding the duties of an insurance broker in procuring coverage in San Diego Assemblers, Inc. v. Work Comp for Less Insurance Services, Inc. Assemblers, a remodeling contractor, contacted its broker, Work Comp for Less, to procure a liability policy. It requested only the lowest priced policy available and desired limits, but did not request any specific coverage. Work Comp responded with several plans and Assemblers chose one, without asking any questions concerning the coverage. Assemblers never at any time indicated that it did not want a policy with a manifestation endorsement, or with a prior work completed exclusion. In 2004, Assemblers performed work on a restaurant; in 2008 an explosion and fire caused substantial property damage. The restaurant’s insurer, Golden Eagle Insurance, pursued Assemblers for the damage. Assemblers tendered the claim to its insurer in 2004, Lincoln General Insurance Company, and its insurer in 2008, Preferred Contractors Insurance Company.

Thereafter, Lincoln General denied Assembler’s claim asserting a manifestation endorsement limiting coverage to injury or damage first manifested during the policy period. Preferred Contractors denied coverage asserting the period completed work exclusion. Assemblers informed Golden Eagle that it did not have coverage and stated that it could sue Assemblers. Assemblers thereafter filed bankruptcy and any and all claims in relation to the matter were assigned to Golden Eagle.

Golden Eagle responded by filing suit in Assembler’s name, naming Work Comp as defendant and alleging the broker negligently failed to procure insurance for Assemblers that would cover the fire. Work Comp responded by filing a motion for summary judgment, asserting it had no duty to provide Assemblers with different or additional coverages, as well as asserting the defenses of the superior equities doctrine and statute of limitations. The trial court granted the motion, stating it had no duty to provide different coverage. The court did not consider the issues of the superior equities doctrine or statute of limitations. The plaintiff appealed.

On review, the California Court of Appeals for the 4th District considered the superior equities doctrine, as well as the broker’s duty to procure a different policy.

On the issue of the superior equities doctrine, the Court noted that, though Golden Eagle brought suit as Assembler’s assignee, the analysis of any claimant in subrogation was the same and such a claimant must first demonstrate a right in equity to be entitled to subrogation. An insurer can show this by establishing a position superior to the party to be charged. This cannot be established where the party to be charged is not the wrongdoer whose act or omission caused the underlying loss. Here, there was no evidence Work Comp caused the restaurant fire, nor that it agreed to indemnify Assemblers. Therefore, pursuant to the superior equities doctrine, Golden Eagle’s claim must fail.

The Court next considered whether Work Comp had a duty to procure prior completed work coverage. The Court stated the law is well-settled that insurance brokers owe a limited duty to their clients only to use reasonable care, diligence, and judgment in procuring insurance. This duty is not breached unless the broker misrepresents the nature, extent, or scope of the coverage being offered, there is a request by the insured for a particular type of coverage, or the broker assumes an additional duty by express agreement or by holding itself out as have a certain level of expertise. Golden Eagle argued that Work Comp had an implied duty to investigate Assembler’s coverage needs and procure an appropriate policy. The Court, however, declined to follow this reasoning citing public policy reasons and stating that to create an implied duty in insurance brokers to investigate coverage needs would result in the overselling of insurance to avoid professional liability.

The trial court’s ruling was affirmed.

This case serves to remind brokers of their duties in procuring insurance coverage, as well as the possibility of creating additional duties. While a broker’s duty may be limited, it is important to recognize that a broker can breach the duty by misrepresenting the coverage offered, or by assuming additional duties either by agreement or holding itself out as an expert in specific fields.

This blog was originally posted on November 19, 2013 by Jampol Zimet LLC. Click here to read the original entry. 

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INTRODUCTION

On June 18, 2013, the West Virginia Supreme Court of Appeals issued its opinion in Cherrington v. Erie Insurance Property and Casualty Co., 745 S.E.2d 508 (W. Va. June 18, 2013).  The opinion expressly reversed previous West Virginia jurisprudence through the Court’s holding that defective workmanship causing bodily injury or property damage is an “occurrence” under a commercial general liability (CGL) insurance policy.  

FACTUAL HISTORY

The case originated in 2004 when the underlying plaintiff entered into a “cost plus” contract with a general contractor (“contractor”) for the construction of a home, which included landscaping and interior furnishing.  Several subcontractors were also involved in construction, and their work formed the basis of plaintiff’s damages.  During the construction process, disputes arose between plaintiff and the contractor concerning whether landscaping was included within the contract between the parties.  Plaintiff also felt that she was overcharged for the interior furnishings for the house.  Most importantly, plaintiff alleged that she observed defects in the house following its completion, including an uneven concrete floor, water infiltration, a sagging support beam and cracks in drywall.  

Plaintiff brought suit against the contractor and subcontractors in 2006.  Plaintiff’s complaint and amended complaint alleged that the contractor was negligent through the construction of her home through the following: (1) altering the design; (2) negligently pouring and finishing the concrete floor; (3) finishing and painting the house; (4) placing and securing the foundation.  Plaintiff also alleged that the contractor breached a fiduciary duty through its failure to secure materials and furnishings for the project within the completed contract price.  Plaintiff alleged damages through the contractor’s misrepresentations and negligent acts, which resulted in a reduction in her home’s fair market value.  Plaintiff also alleged emotional distress as a result of the issues with her home.  

Following the filing of plaintiff’s lawsuit, the contractor requested its carrier to provide coverage and a defense through a CGL policy. The carrier denied coverage and a duty to defend.  The contractor subsequently filed a third-party complaint against the carrier seeking a declaration of its rights under the CGL policy. The carrier subsequently filed a motion for summary judgment, contending that the subject policy did not provide coverage for the claims asserted by plaintiff and that a defense was not owed to the contractor.  The trial court granted the carrier’s motion for summary judgment, finding that contractor’s CGL policy did provide coverage for “bodily injury” or “property damage” but plaintiff’s claims of emotional distress without physical manifestation did not constitute a “bodily injury” under the policy’s definition of that term.  The trial court also found that plaintiff failed to establish covered property damage due to the fact that the damages she alleged in her complaint were for economic losses for diminution in value or home or excess charges she was required to pay.  

Importantly, the trial court further found that plaintiff had not established that an “occurrence” or “accident” had caused damages she had sustained because faulty workmanship, standing alone, is not sufficient to give rise to an “occurrence.”  See, Cherrington, at 514.  This finding was premised on the previous holding of West Virginia Court of Appeals in Corder v. William W. Smith Excavating Co., 210 W. Va. 110, 556 S.E.2d 77 (2001); See also, State v. Bancorp, Inc. v. United States Fid. & Guar. Ins. Co., 199 W. Va. 99, 483 S.E.2d 228 (1997). The trial court held that even if plaintiff had sustained covered losses, there was not an “occurrence” pursuant to the contractor’s CGL policy, which would trigger coverage.  Finally, the trial court found that even if it was assumed that coverage existed under CGL policy, coverage would be barred pursuant to the policy’s exclusions.  Citing North American Precast, Inc. v. General Cas. Co. of Wisconsin, 413 Fed. Appx. 574 (4th Cir. 2011) (per curiam) and Groves v. Doe, 333 F.Supp.2d 568 (N.D. W. Va. 2004), the trial court also found that exclusion “M” (“Damage to Impaired Property or Property Not Physically Injured”) would bar coverage because it applies “irrespective of the existence of subcontractors.”  Cherringer, supra., at 515. 

On appeal, the West Virginia Supreme Court of Appeals considered the following assignments of error by the trial court: (1) there was no property damage caused by an “occurrence” under the contractor’s CGL policy; and (2) the CGL policy’s exclusions for “your work” and “impaired property or property not physically injured” precluded coverage.  On appeal, petitioners also advanced the argument that the trial court had refused to interpret the policies consistent with the reasonable expectations of the insured.  

ANALYSIS

The Court’s analysis started by recognizing that it had previously addressed the issue presented on appeal: is defective workmanship a covered “occurrence” under the provisions of a CGL policy of insurance?  Citing Syl. Pt. 2, Erie Insurance Property and Casualty Co. v. Pioneer Home Improvement, Inc., 206 W. Va. 506, 526 S.E.2d 28 (1999), the Court recited its previous holding: 

A lawsuit commenced by a building owner against a building contractor alleging damages caused by faulty workmanship is not within the coverage provided by the contractor's general liability policy of insurance unless such coverage is specifically included in the insurance policy. A commercial general liability policy insurer has no duty to defend a contractor in a lawsuit nor to indemnify a contractor for sums paid to settle the lawsuit or to satisfy a judgment unless the insurance policy specifically requires the insurer to do so.

In its decision of Corder, supra., the Court further found: 

Commercial general liability policies are not designed to cover poor workmanship. Poor workmanship, standing alone, does not constitute an "occurrence" under the standard policy definition of this term as an "accident including continuous or repeated exposure to substantially the same general harmful conditions."

Id., at Syl. Pt. 2.   The final decision by the West Virginia Supreme Court of Appeals within its trilogy of cases addressing coverage for defective workmanship claims was Webster County Solid Waste Authority v. Brackenrich and Associates, Inc. 217 W. Va. 304, 617 S.E.2d 851 (2005). 

The Court then noted that it was “acutely” aware that after rendering the above referenced decisions, many courts considered the same issues.  The Court noted that a majority of other states reached the contrary conclusion through legislative action or judicial decision.  Cherringer, at 517.  Recognizing a “definite trend” in the law that had arisen since its decisions in the late 1990’s and early-to-mid-2000’s, the Court cited to a multitude of decisions from other jurisdictions.  Ultimately, after citing to the holdings throughout the United States that have addressed this issue, the Court held that a defective workmanship claim constitutes an “occurrence” under a CGL policy of insurance.  Id., at 520.  

The Court formally held that “[i]n order for a claim to be covered by the subject CGL policy, it must evidence bodily injury or property damage that has been caused by an ‘occurrence.’”  Id. Citing the definition of “occurrence” to mean “an accident” the Court noted that the policy did not provide a definition for “accident.”  Through a previous holding, the Court defined accident to exclude damages or injuries that were “deliberate, intentional, expected, desired or foreseen” by the insured.  Id., citing Syl. Pt. 1, Casualty Co. v. Westfield Insurance Co., 217 W. Va. 250, 617 S.E.2d 797 (2005). 

Evidence produced in discovery indicated that the damage to plaintiff’s residence was caused by subcontractors of the primary contractor.  The Court found that the policy’s express language provided coverage for the acts of subcontractors, contained within policy’s Exclusion “L”, by excepting it from the “your work” exclusion: 

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor. 

The Court’s treatment of the exclusions in the policy deserves special attention because it could significantly mitigate the impact of the Court’s finding concerning what constitutes an “occurrence.”  Examining Exclusion “L” (“Property damage” to “your work”), the Court noted that Exclusion “L” excludes coverage for the work of the contractor but does not operate to preclude coverage under the facts of the case for work performed by the subcontractors.  Id., at 524. Consequently, if the contractor was alleged to have completed the defective work, coverage would have likely been excluded irrespective of whether the defective work constituted an occurrence under the policy. 

Under Exclusion “M” (excluding coverage for (1) a shortcoming in “your product” or “your work” and (2) an issue arising from the insured’s or insured’s agent’s failure to perform contractual obligations), the Court again relied on the fact that the subcontractor performed a significant amount of the work which was defective.  The Court found that Exclusion “M” would act to preclude coverage for the contractor based on the damages caused by the subcontractors.  However, the Court further found that Exclusions “L” and “M” were in conflict and applying Exclusion “M” to preclude coverage for the subcontractor’s work would negate the coverage afforded for subcontractor work in Exclusion “L.”  Id., at 525-526.  The Court found that it was not reasonable to construe two policy exclusions according to their plain language when the operative effect of this exercise results in such an incongruous result.  Id., citing Syl. Pt. 2, D’Annunzio v. Security –Connecticut Life Ins. Co., 186 W. Va. 39, 410 S.E.2d 275 (1991).   The Court disregarded the exclusion contained in Exclusion “M”.  The Court briefly noted that the exclusion for “breach of contract” related actions in Exclusion “M” was also not applicable.   Finally, the Court briefly analyzed the trial court’s conclusory finding that Exclusion N (recall of products) also operated to exclude coverage.  The Court found no support for this finding by the trial court.  

The Court’s opinion also addressed the trial court’s grant of summary judgment in favor of the same carrier in a claim for coverage and defense by a subcontractor/agent (subcontractor) of the contractor pursuant to the subcontractor’s homeowners and umbrella policies of insurance.  Cherrington, supra, at 528. The Supreme Court of Appeals upheld the award of summary judgment in favor the carrier in this instance.  However, the Court did find, consistent with its handling of the CGL policy that the claims against the subcontractor were “occurrences” under the homeowner’s and umbrella policies.  The Court based its affirmation of the denial of coverage based on the business pursuit’s exclusion to the policies.

The effects of the Cherrington decision will likely continue to be felt for the foreseeable future in relation to the interpretation of CGL policies in West Virginia and in other jurisdictions.  Several critical issues will likely need to be addressed in future cases, including the issue of how the West Virginia Supreme Court of Appeals handles the situation when the allegations of defective workmanship are only directed towards work completed by the general contractor.  

Members of DRI’s Insurance Law Committee recognize that they must always be aware of new changes involving insurance coverage.  The recent West Virginia Supreme Court of Appeals decision discussed above demonstrates the importance of membership with DRI and the value that DRI’s seminars provide.  For more information about how the Cherrington decision could affect future coverage decisions in other jurisdictions, please consider attending the DRI’s Insurance Coverage and Practice Symposium on December 12th and 13th, 2013 in New York City.  The program will offer an outstanding opportunity for practitioners to learn about the latest decisions in coverage litigation and how they will shape insurance practice for the foreseeable future.  The Insurance Coverage and Practice Symposium will also present an outstanding opportunity to network with colleagues.  

For more information, please click here. See you in New York!

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In United Ins. Co. of Am. v. Boron in the Circuit Court of Cook County, Illinois, three life insurers have filed an action seeking declaratory and injunctive relief from the Illinois Department of Insurance Regulations that impose an obligation on life insurers to utilize the Social Security Death Master File to ascertain whether its insureds are deceased and benefits owed to their beneficiaries under policies issued in the State of Illinois.

The insurers claim that under the Insurance Code an insurer is required to settle and pay claims only after receipt of due proof of death and upon receipt of a claim by the insured’s estate or beneficiary. The policies issued by the insurers also contain language consistent with the Insurance Code in this respect. Therefore, the insurers argue that the new obligations put in place by the Regulations are unfounded in law and contradict the Insurance Code and the express terms of the policies.

The insurers argue that if no death claim is filed, the insurers have no affirmative obligation to search for proof of death or to take steps to pay benefits under the terms of the policies until the insured has reached the “mortality limiting age.” According to the NAIC approved mortality table incorporated into the insurer’s policy forms, that age is 99. Currently, if no claim is filed, benefits under the policy will be paid when the insured reaches the age of 99.

The state of Illinois has taken the lead in the mufti-state market conduct examination in this area joined by five other states (California, Florida, Pennsylvania, New Hampshire, and North Dakota). Recently, these investigations have resulted in multi-million dollar settlements for life insurers who have been found to affirmatively use the Death Master File for their benefit in terminating annuity payments, but also did not utilize the Death Master File to search for deceased policyholders whose beneficiaries were owed life insurance proceeds. The insurer’s in this action claim that they do not use the Death Master File for any purpose.

This blog was posted on September 11 on Goldberg Segalla LLP’s Insurance and Reinsurance Report Blog. Click here to view the original post. 
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CA Court of Appeals Rules Insured Must Accept Insurer’s Counsel Where No Conflict of Interest Exists That Could Be Influenced by Retained Counsel

On August 26th, the California Court of Appeals ruled in Federal Insurance Company v. MBL, Inc. (2013) — Cal.App.3d– that an insured must accept its insurer’s defense counsel where no conflict of interest exists that could be influenced by defense counsel in litigation. The issue arose when MBL, a supplier of dry cleaning products, was sued by one of its customers seeking indemnity and contribution after the customer was found responsible by the federal government for contamination of land on which its dry cleaning business operated.

MBL tendered the defense to its several insurers, who accepted the tender of defense subject to reservations of rights, and retained counsel to represent MBL. However, MBL refused to accept the insurers’ counsel on the grounds that the insurers’ reservations of rights created a conflict of interest. MBL instead demanded the insurers pay for independent counsel of MBL’s choosing. The insurers denied the existence of a conflict of interest and filed action seeking declaratory relief from the trial court that no conflict existed. The trial court granted summary judgment in favor of the insurers and MBL appealed.

On review, the Court of Appeals revisited the issue of when independent, or “Cumis,” counsel must be provided to an insured. In San Diego Federal Credit Union v. Cumis Ins. Society, Inc., the court held that where a conflict exists between an insured and insurer based on potential non-coverage under the insurance policy, the insured is entitled to independent counsel at the insurer’s expense. This rule was later codified by California Civil Code section 2860, which further provides: “[f]or purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist. No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.”

As explained by the Court, it is clear from the language of section 2860 that not every situation in which a conflict exists between an insurer and insured gives rise to the right to Cumis counsel. The reasoning for this is that the basis for Cumis counsel is not in insurance law, but rather in the professional duties of an attorney to avoid conflicts of interest in representation. It has previously been held that where a reservation of rights is based on coverage issues that have nothing to do with the underlying litigation, no conflict exists.

In the instant case, the insurers’ various reservations of rights were based upon acts not occurring within the policy periods, qualified exclusions, as well as a general reservation of rights. The Court first held that a general reservation of rights does not give rise to the right to Cumis counsel. Furthermore, the Court stated that all reservations of rights by the insurers were not issues that could have been influenced by MBL’s retained counsel in litigation. Therefore, because the reservation of rights did not require retained counsel to represent conflicting interests between the insured and insurer, the insurers were not required to provide independent counsel.

It is important for insureds to understand and be aware of the circumstances under which they may have the right to independent counsel. Furthermore, it is equally important for insurers to identify the situations that create a conflict between the insurance company and insurer such that independent counsel should be provided. A comprehensive understanding of both parties on this issue can aid in settling representation issues before litigation on the subject becomes necessary.

This blog was originally posted on September 3. Click here to read the original entry. 

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Not Every Reservation of Rights Raises a Conflict

Posted on September 11, 2013 03:11 by Barry Zalma

An insurer that reserves its rights under a policy of insurance will usually raise a request by the insured for independent counsel. However, unless the reservation actually raises the need for the application of the ethical duty of an attorney to avoid representing conflicting interests. If that duty exists independent counsel is required. If not, the insurer may assert its right to control the defense of the insured with counsel of its choice.

In Federal Insurance Company v. MBL, Inc., H036296, H036578 (Cal.App. Dist.6 08/26/2013) the California Court of Appeal explained the purpose of independent counsel as first stated in San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 as modified by California statutes.

FACTUAL BACKGROUND

After soil and groundwater contamination in the City of Modesto was traced back to a dry cleaning facility known as Halford’s Cleaner’s (Halford’s), the federal government brought a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) action against the owners of the property on which Halford’s was located, as well as the lessees who owned and/or operated the facility, to recover the costs of monitoring and remediating the contamination. The defendants in the Lyon action subsequently filed third-party actions against, among others, appellant MBL, Inc. (MBL), a supplier of dry cleaning products including perchloroethylene (PCE), seeking indemnity, contribution and declaratory relief.

MBL tendered the defense of these third-party actions to its insurers, Federal Insurance Company (Federal), Centennial Insurance Company (Centennial), Atlantic Mutual Insurance Company (Atlantic), Nationwide Indemnity Company (Nationwide), Utica Mutual Insurance Company (Utica) and Great American Insurance Company (Great American) (hereafter collectively referred to as Insurers). The Insurers accepted the tender of defense, subject to reservations of various rights, and retained counsel to provide MBL with a defense. MBL refused to accept retained counsel, arguing the Insurers’ reservations of rights created a conflict of interest and demanding the Insurers instead pay for counsel of MBL’s choosing. The Insurers denied there was any such conflict of interest and filed declaratory relief actions. The trial court granted summary judgment in favor of the Insurers, finding there was no actual conflict of interest.

In a related appeal, Great American sought to preserve its right to equitable contribution from the other Insurers in the event MBL’s appeal is successful. Alone among the Insurers, Great American paid MBL’s independent counsel for the costs of defending the third-party actions, subject to a reservation of the right to reimbursement from MBL if it succeeded in its declaratory relief action.

MBL supplies PCE, and other dry cleaning products, to dry cleaning facilities, and has done so for a number of years. In 2007, MBL was named as a defendant in a number of third-party complaints and cross-complaints filed in the Lyon action. According to the allegations of the Lyon action, wastewater containing PCE was discharged into the sewer system as part of Halford’s dry cleaning operations until the mid-1980s. PCE was also leaking from an old dry cleaning machine through the floor of the facility into the soil and groundwater. In 1989, the site was placed on the National Priorities List of hazardous waste sites.

MBL retained defense counsel, who tendered the defense of the Lyon action to the Insurers, requesting they appoint Cumis counsel. The Insurers accepted the tender of defense subject to various reservations of rights, detailed below, and appointed counsel to defend MBL. MBL refused to allow the Insurers’ appointed counsel to associate as defense counsel, asserting it was entitled to independent counsel of its own choosing pursuant to Civil Code section 2860. The Insurers advised MBL it was only entitled to Cumis counsel if their reservations of rights created a conflict of interest and, with the exception of Great American, refused to pay the defense costs incurred by MBL’s counsel.

INSURERS’ COMPLAINTS FOR DECLARATORY RELIEF

The Insurers moved for summary adjudication of the causes of action for declaratory relief regarding their duty to provide independent counsel to represent MBL. The Insurers argued that the limited reservations of rights asserted by these insurers did not create a conflict of interest under California Civil Code section 2860 which modified the Cumis decision.

In June 2009, after the matter was briefed and argued, the trial court granted the Insurers’ motions. In its order, the court noted that the specific reservations of rights by [the] insurers did not present a conflict which would require the appointment of independent counsel. The court further found the general reservation of rights to deny coverage does not present a conflict which would require the appointment of independent counsel.

After amending its complaint to add a cause of action for reimbursement against MBL, Great American filed a motion for summary adjudication and summary judgment against MBL. The motion further sought summary judgment on MBL’s cross-complaint against Great American. The trial court granted Great American’s motion in its entirety and entered a declaratory and money judgment on October 27, 2010, in favor of Great American and against MBL.

DISCUSSION

Entitlement to Independent Counsel – Statutory and Case Law

In San Diego Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d 358, the court held that if a conflict of interest exists between an insurer and its insured, based on possible noncoverage under the insurance policy, the insured is entitled to retain its own independent counsel at the insurer’s expense.

The Cumis opinion was codified in 1987 by the enactment of section 2860, which clarifies and limits the rights and responsibilities of insurer and insured as set forth in Cumis.

As statutory and case laws make clear, not every conflict of interest triggers an obligation on the part of the insurer to provide the insured with independent counsel at the insurer’s expense. For example, the mere fact the insurer disputes coverage does not entitle the insured to Cumis counsel; nor does the fact the complaint seeks punitive damages or damages in excess of policy limits. The insurer owes no duty to provide independent counsel in these situations because the Cumis rule is not based on insurance law but on the ethical duty of an attorney to avoid representing conflicting interests. For independent counsel to be required, the conflict of interest must be significant, not merely theoretical, actual, and not merely potential. The insured’s right to independent counsel depends upon the nature of the coverage issue, as it relates to the issues in the underlying case.

An insurer that reserves its rights under a policy of insurance will usually raise a request by the insured for independent counsel. However, unless the reservation actually raises the need for the application of the ethical duty of an attorney to avoid representing conflicting interests. If that duty exists independent counsel is required. If not, the insurer may assert its right to control the defense of the insured with counsel of its choice.

In Federal Insurance Company v. MBL, Inc., H036296, H036578 (Cal.App. Dist.6 08/26/2013) the California Court of Appeal explained the purpose of independent counsel as first stated in San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 as modified by California statutes.

FACTUAL BACKGROUND

After soil and groundwater contamination in the City of Modesto was traced back to a dry cleaning facility known as Halford’s Cleaner’s (Halford’s), the federal government brought a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) action against the owners of the property on which Halford’s was located, as well as the lessees who owned and/or operated the facility, to recover the costs of monitoring and remediating the contamination. The defendants in the Lyon action subsequently filed third-party actions against, among others, appellant MBL, Inc. (MBL), a supplier of dry cleaning products including perchloroethylene (PCE), seeking indemnity, contribution and declaratory relief.

MBL tendered the defense of these third-party actions to its insurers, Federal Insurance Company (Federal), Centennial Insurance Company (Centennial), Atlantic Mutual Insurance Company (Atlantic), Nationwide Indemnity Company (Nationwide), Utica Mutual Insurance Company (Utica) and Great American Insurance Company (Great American) (hereafter collectively referred to as Insurers). The Insurers accepted the tender of defense, subject to reservations of various rights, and retained counsel to provide MBL with a defense. MBL refused to accept retained counsel, arguing the Insurers’ reservations of rights created a conflict of interest and demanding the Insurers instead pay for counsel of MBL’s choosing. The Insurers denied there was any such conflict of interest and filed declaratory relief actions. The trial court granted summary judgment in favor of the Insurers, finding there was no actual conflict of interest.

In a related appeal, Great American sought to preserve its right to equitable contribution from the other Insurers in the event MBL’s appeal is successful. Alone among the Insurers, Great American paid MBL’s independent counsel for the costs of defending the third-party actions, subject to a reservation of the right to reimbursement from MBL if it succeeded in its declaratory relief action.

MBL supplies PCE, and other dry cleaning products, to dry cleaning facilities, and has done so for a number of years. In 2007, MBL was named as a defendant in a number of third-party complaints and cross-complaints filed in the Lyon action. According to the allegations of the Lyon action, wastewater containing PCE was discharged into the sewer system as part of Halford’s dry cleaning operations until the mid-1980s. PCE was also leaking from an old dry cleaning machine through the floor of the facility into the soil and groundwater. In 1989, the site was placed on the National Priorities List of hazardous waste sites.

MBL retained defense counsel, who tendered the defense of the Lyon action to the Insurers, requesting they appoint Cumis counsel. The Insurers accepted the tender of defense subject to various reservations of rights, detailed below, and appointed counsel to defend MBL. MBL refused to allow the Insurers’ appointed counsel to associate as defense counsel, asserting it was entitled to independent counsel of its own choosing pursuant to Civil Code section 2860. The Insurers advised MBL it was only entitled to Cumis counsel if their reservations of rights created a conflict of interest and, with the exception of Great American, refused to pay the defense costs incurred by MBL’s counsel.

INSURERS’ COMPLAINTS FOR DECLARATORY RELIEF
The Insurers moved for summary adjudication of the causes of action for declaratory relief regarding their duty to provide independent counsel to represent MBL. The Insurers argued that the limited reservations of rights asserted by these insurers did not create a conflict of interest under California Civil Code section 2860 which modified the Cumis decision.
In June 2009, after the matter was briefed and argued, the trial court granted the Insurers’ motions. In its order, the court noted that the specific reservations of rights by [the] insurers did not present a conflict which would require the appointment of independent counsel. The court further found the general reservation of rights to deny coverage does not present a conflict which would require the appointment of independent counsel.

After amending its complaint to add a cause of action for reimbursement against MBL, Great American filed a motion for summary adjudication and summary judgment against MBL. The motion further sought summary judgment on MBL’s cross-complaint against Great American. The trial court granted Great American’s motion in its entirety and entered a declaratory and money judgment on October 27, 2010, in favor of Great American and against MBL.

DISCUSSION

Entitlement to Independent Counsel – Statutory and Case Law

In San Diego Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d 358, the court held that if a conflict of interest exists between an insurer and its insured, based on possible noncoverage under the insurance policy, the insured is entitled to retain its own independent counsel at the insurer’s expense.

The Cumis opinion was codified in 1987 by the enactment of section 2860, which clarifies and limits the rights and responsibilities of insurer and insured as set forth in Cumis.

As statutory and case laws make clear, not every conflict of interest triggers an obligation on the part of the insurer to provide the insured with independent counsel at the insurer’s expense. For example, the mere fact the insurer disputes coverage does not entitle the insured to Cumis counsel; nor does the fact the complaint seeks punitive damages or damages in excess of policy limits. The insurer owes no duty to provide independent counsel in these situations because the Cumis rule is not based on insurance law but on the ethical duty of an attorney to avoid representing conflicting interests. For independent counsel to be required, the conflict of interest must be significant, not merely theoretical, actual, and not merely potential. The insured’s right to independent counsel depends upon the nature of the coverage issue, as it relates to the issues in the underlying case.

Not every reservation of rights entitles an insured to select Cumis counsel. There is no such entitlement, for example, where the coverage issue is independent of, or extrinsic to, the issues in the underlying action or where the damages are only partially covered by the policy. Independent counsel is required where there is a reservation of rights and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.

The court of appeal agreed with the Insurers. There was no evidence to show that the Insurers’ representation of other parties in the Lyon action gave rise to a “significant, not merely theoretical, actual, not merely potential” conflict of interest. General reservations of rights do not raise a conflict because they are just that: general reservations. At most, they create a theoretical, potential conflict of interest – nothing more.

Because it decided that judgment was properly entered in favor of the other Insurers, the trial court also properly entered judgment in favor of the other Insurers on Great American’s declaratory relief action.  At the heart of this dispute is the question whether MBL was entitled to independent counsel; since it was not, the other Insurers were not obligated to contribute to payment of MBL’s counsel and Great American is not entitled to equitable contribution from the other Insurers.

Equitable contribution is a loss-sharing mechanism intended to accomplish ultimate justice among coinsurers of the same insured.  The fundamental prerequisite to equitable contribution is shared responsibility for the loss.

None of the Insurers disputed their duty to defend MBL. They all acknowledged that duty and agreed to defend MBL, subject to their reservations of various rights. MBL, however, insisted on retaining independent counsel, rather than allowing counsel appointed by the Insurers to conduct its defense. As discussed above, MBL was not entitled to independent counsel, thus none of the Insurers (including Great American) were ever obligated to reimburse MBL for the fees generated by that counsel. Great American, as it happens, did reimburse MBL for those fees, but because there was no obligation to pay, Great American can only seek reimbursement for those fees from MBL, not the other Insurers.

ZALMA OPINION

The Cumis decision – regardless of the opinion of counsel and the public – is not an insurance decision. It is, rather, a decision regarding the ethical duty of an attorney to avoid representing conflicting interests. If there is a real conflict of interest between the lawyer retained by the insurer and the insured the lawyer was retained to defend the insured has the right to seek independent counsel. If, however, in a case like this one, the reservation of rights do not raise an inference that counsel is representing conflicting interests there is no obligation to provide the insured with independent counsel.

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Courts across the nation give lip-service to the fact that insurance contracts are contracts that must be interpreted like every other contract. However, like the creatures in George Orwell’s Animal Farm some litigants are more equal than others and some contracts are read as written while insurance contracts are modified by court opinion to change the wording of the policy. Reference to precedent and public policy make agreed to language in a contract of insurance contain words neither party agreed to when the contract was purchased.

The Supreme Court of Texas was asked to resolve an insurance coverage dispute arising from the fact that homes built with an exterior insulation and finish system (“EIFS”) suffer serious water damage that worsens over time in Lennar Corp. v. Markel American Insurance Co., 11-0394 (Tex. 08/23/2013). Lennar Corp., a homebuilder, facing potentially hundreds of expensive suits, undertook to remove the product from all the homes it had built and replace it with conventional stucco. The homebuilder’s insurers refused to pay for the remediation program, because there was no claim and no evidence of actual property damage. The insurers preferred to rely on the policy language and do nothing until homeowners claimed damages or sued which is what it agreed to do by the wording of the policy. As a result the insurers denied coverage of the costs.

The Issues

The litigation lasted more than twelve years between the builder and its insurers. The case before the Supreme Court of Texas, after twelve years, left only one insurer and the issues were winnowed to two:
Not having consented to the homebuilder’s remediation program, is the insurer nevertheless responsible for the costs if it suffered no prejudice as a result?
Is the insurer responsible for (i) costs incurred to determine property damage as well as to repair it, and (ii) costs to remediate damage that began before and continued after the policy period?

EIFS 
Long used in commercial construction, EIFS was marketed in the early 1990s as an attractive alternative to conventional stucco in home construction. But installed on wood-frame walls typical of single-family homes, EIFS traps water inside, causing rot and structural damage, mildew and mold, and termite infestations. After the problems with EIFS were exposed on the NBC television show Dateline in 1999, homeowner complaints poured in.

Self Help
Lennar decided not merely to address complaints as it received them but to contact all its homeowners and offer to remove the EIFS and replace it with conventional stucco. Lennar began its remediation program in 1999 and finished in 2003. Almost all the homeowners accepted Lennar’s offer of remediation. A few were paid cash. Only three ever sued. All settled.

Early in the process, Lennar notified its insurers that it would seek indemnification for the costs. The insurers refused to participate in Lennar’s proactive, comprehensive efforts, preferring instead to wait and respond to homeowners’ claims one by one.

Lennar arguably made a good business decision to remove and replace all the EIFS to prevent further damage. Lennar and Markel also disputed whether coverage was precluded by Lennar’s failure to comply with Condition E of the policy, which states in part: “it is a requirement of this policy that . . . no insured, except at their own cost, voluntarily make any payment, assume any obligation, or incur any expense . . . without [Markel's] consent.” Markel had not consented to Lennar’s remediation settlements.
After hearing evidence for eight days, the jury found that Lennar’s defective use of EIFS in home construction “create[d] an imminent threat to the health or safety of the inhabitants of the homes”, and that Lennar took “reasonable steps to cure the construction defect as soon as practicable and within a reasonable time.” The jury failed to find that Markel was prejudiced by Lennar’s “failure to obtain Markel’s consent (a) to enter into any compromise settlement agreement, or (b) to voluntarily make any payment, assume any obligation, or incur any expense.” The trial court rendered judgment awarding Lennar $2,965,114.16, the damages found by the jury less a $425,000 credit for settlements with other insurers, $2,421,825.89, the attorney fees found by the jury, and $1,227,476.03 in prejudgment interest.

The court of appeals reversed and rendered judgment for Markel on two grounds.

Analysis

Condition E of Markel’s policy forbade Lennar, “except at [its] own cost, [from] voluntarily mak[ing] any payment, assum[ing] any obligation, or incur[ring] any expense . . . without [Markel's] consent.” Though Markel did not consent to Lennar’s settlements with homeowners, it conceded, as Lennar I held, that Texas precedent required that the provision does not excuse its liability under the policy unless it was prejudiced by the settlements, words that do not exist in the policy.

At trial, Markel vigorously contended that Lennar’s settlements were prejudicial, largely because Lennar offered remediation to homeowners with damaged houses who would never have sought redress had Lennar left them alone.  Markel argued: “When an insurer is not asked to adjust a claim, provide a defense, or be involved in negotiating a settlement, but is simply told it has to pay for a voluntary payment, the insurer has suffered prejudice as a matter of law. That prejudice is even starker in this case, in which the insured actively solicited claims which might otherwise never have been brought and made payments which were not covered under the Policy.”

Assuming Markel is right, that an insurer need not show prejudice from an insured’s failure to comply with a policy requirement that is “considered essential to coverage,” the Supreme Court found that the Loss Establishment Provision does not qualify, certainly not for the reasons Markel argues. The Loss Establishment Provision is no more central to the policy than Condition E, and the requirement that Markel show prejudice from Lennar’s non-compliance with either operates identically. Markel failed to prove that it was prejudiced in any way by Lennar’s settlements.
The jury’s failure to find prejudice leaves but one conclusion: that Lennar’s loss as shown by the settlements is the amount Markel is obligated to pay under the policy. Absent prejudice to Markel, Lennar’s settlements with homeowners establish both its legal liability for the property damages and the basis for determining the amount of loss.

The policy obligated Markel to pay “the total amount” of Lennar’s loss “because of” property damage that “occurred during the policy period,” including “continuous or repeated exposure to the same general harmful condition.” Focusing on “because of,” the court of appeals held that the policy covers only the cost of repairing home damage, not the cost of locating it, and because Lennar’s evidence did not segregate the two, it was entitled to recover nothing. Additionally, Markel argued that Lennar’s evidence improperly included the cost of repairing home damage that occurred outside the policy period. The court of appeals did not reach this argument.

For damage that occurs during the policy period, coverage extends to the “total amount” of loss suffered as a result, not just the loss incurred during the policy period. No question remains that all 465 houses at issue suffered property damage during the policy period, which began before or during the policy period and continued until it was repaired, all because of water trapped in home walls by EIFS applied to wood-frame construction. Thus, the policy covered Lennar’s total remediation costs.

The Supreme Court concluded that Markel’s policy covered Lennar’s entire remediation costs for damaged homes. Lennar’s responsible efforts to correct defects in its home construction did not absolve Markel of responsibility for the costs under its liability policy.

Justice Boyd wrote separately and explained that the policy does not cover Lennar’s liabilities because Lennar incurred those liabilities through settlements to which Markel had not “previously agreed in writing.” However, because Texas precedent compels the court to disregard the policy’s consent requirement and impose a prejudice requirement into the policy’s wording, the jury’s finding that Lennar’s failure to obtain Markel’s prior agreement to the settlements did not harm or prejudice Markel, he concurred in the Court’s judgment.

ZALMA OPINION
Markel was the victim of the public policy of the state of Texas that rewrote the policy wording requiring prejudice to the insurer before the consent to settlement provision could be enforced. The insured, Lennar, and Markel, entered into a written contract that clearly and unambiguously stated that Markel would owe nothing if the insured entered into a settlement without the consent of Markel. There is no question that Markel did not agree to the various settlements reached by Lennar. Regardless of the clear and unambiguous language of the policy the Texas Supreme Court required Markel to pay multi-millions of dollars it did not agree to pay.

Insurance is a contract that should be given meaning. If the parties wanted a prejudice requirement in the policy they could have negotiated such a requirement. They did not and the Supreme Court put it in and changed the agreed to wording of the contract.

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Obamacare & the Insurance Broker

Posted on August 7, 2013 03:22 by Marc Zimet

The Patient Protection and Affordable Care Act, otherwise known as “Obamacare,” is scheduled to go into effect on January 1, 2014. Once in effect, it will drastically alter the manner in which health insurance is purchased and brokered in California. To comply with the Act, California is required to establish a health insurance exchange, allowing individuals and small businesses to purchase health insurance at competitive rates. This exchange is set to begin operation January 1, 2014. In order for brokers to participate in the exchange, they must first prove compliance with new federal and state rules and regulations.

California has been actively working towards creating new rules and regulations which will govern how brokers operate in the state. However, it appears that while federal law has its own set of regulations, California may be on its way towards creating stricter and more rigid regulations, placing a higher burden on the broker.

Obamacare has created different roles for brokers by which they may participate in the exchange: they may enroll as a “Navigator” or “Assister.” To enroll, it is most likely that brokers will be required to complete a short training and pass a certification test. Navigators will assist consumers in applying for health insurance and will receive compensation directly from the exchange for individuals they enroll. They do not have to be licensed agents or brokers. According to the National Association of Health Underwriters, this designation is not without its problems. It claims the distinction between advising clients regarding qualified health plans and simply aiding clients through the enrollment and eligibility process is unclear and, furthermore, it is not known how this distinction will be overseen and enforced. Additionally, there are no guidelines in place requiring Navigators to inform clients of non-exchange insurance plans, and the likelihood of fraud in this area is high.

Assisters are more akin to the traditional insurance broker and must, in fact, be licensed. An Assister will receive payment from third party health insurance carriers for enrolling individuals in the exchange. While a broker may choose to enroll as either a Navigator or Assister, if one chooses to enroll as a Navigator, one will be subject to compensation constraints and may only receive compensation directly from the exchange.

In addition to the new roles for brokers, the Act will only permit “qualified health plans” to be sold on the exchange, which must comply with federal and state rules. For example, federal law requires that such policies cover ten “essential health benefits” such a hospital stays, maternity care, pediatric care, and dental and vision. Federal law, in attempt to create more flexibility, excepts state exchanges from including dental coverage for children so long as it offers at least one pediatric dental plan. However, California has chosen to deny insurers the ability to combine medical and dental policies, requiring them to be offered separately; only one plan combining medical and pediatric dental has been approved. Any broker who chooses to participate in the exchange may sell policies outside of the exchange, on the condition that all policies be qualified health plans.

The date the new laws take effect is fast approaching. Brokers should utilize the remaining months to familiarize themselves with the minimum requirements for qualified health plans, as well as the compensation limits for Navigators and Assisters. The health insurance industry is changing quickly with brokers at the heart of the change. It is imperative for brokers to understand the changes about to occur so that they can not only stay abreast of the changes in their practice, but ensure compliance with the new rules and regulations.

This blog was originally posted on August 6 on Jampol Zimet's Insurance Defense Blog. Click here to read Marc Zimet's original post. 


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