How to Trigger Insurance Coverage for an ERISA Claim
Well, how can I not comment on this, given the focus of both this blog and my practice? The Second Circuit was just presented with the question of whether an insurer has to provide a defense to a company and its officer, under the employee benefits liability portion of a policy, for an ERISA claim related to a retaliatory discharge/reclassification claim brought by an employee of the insured. The employee claimed, in essence, that she had been retaliated against for complaining of sexual harassment.
Now, coverage by insurers for complaints alleging sexual harassment or similar claims under standard CGL policies have their own complicated backstory, revolving around the question of whether, no matter what is actually alleged in the complaint by the employee, the acts in question are intentional, dishonest or otherwise harmful in a manner that precludes coverage. Some of this history goes back to at least the 1980s, and, having been involved with a client’s rollout of the coverage, it played a role to some degree in the creation and eventual acceptance of EPLI – or employment practices liability insurance – coverage.
The insurer here took the same tack with regard to the ERISA claim at issue, and, given the history noted above and the nature of the claim, understandably so. The issue, though, as the Second Circuit found, is that the ERISA claim itself did not require any type of intentional misconduct, which is basically true across the board with most types of ERISA claims, and held that the insurer therefore could not deny coverage for the ERISA claim based on an exclusion for dishonest or malicious acts. The Court found that the ERISA claim could, in essence, simply be a claim for negligent conduct – at least as pled in the complaint – and thus the insurer could not deny a defense to the insured based on such an exclusion, which would not reach a claim of negligence.
There are a number of lessons here for both insured companies (and their officers) who are sued in ERISA cases and for their insurers. First, don’t assume that principles related to coverage of employment related claims will transfer to an ERISA claim; they may very well not do so. Second, you have to pay close attention to the true nature of an ERISA claim (including its key legal elements) before deciding whether or not there is coverage, and not simply to the surrounding factual allegations relating to the insured’s conduct (which in most harassment and similar claims are usually pretty egregious, at least as alleged by the plaintiff).
Anyway, here is the decision, which is Euchner-USA, Inc. v. Hartford Casualty Insurance Company, and here is an article providing a nice summary, for those of you who don’t want to read the full decision.
The Attorney-Client Privilege in Insurance Litigation
My in-box, like most of you I assume, is inundated on a day in, day out basis with offers of webinars, seminars, and the like on every topic under the sun that the sponsors think I might even conceivably have any interest in or professional connection to. Most I ignore without even opening, as not even close to being on point with my professional interests and concerns. Even of that remaining subset of ones that have something to do with my work, or my blogging interests, or my professional development, I seldom pass them along in a post because they often appear to simply be lawyers over-complicating and over-analyzing what should be, and normally is, a relatively simple point or area of law (what, lawyers making something more complicated than is necessary? Who’d have thunk it?). My favorite in this regard are the seminars that are routinely touted to me about the complexities of the tripartite relationship in the insurance context, an area of law in which there is, frankly, little complexity and most of the rules of which I summed up right here in this post some time ago.
A different species of educational opportunity, however, consists of those that actually provide a detailed level of analysis on a question that is in fact complicated, and that presents nuances that need to be dealt with in the day to day hurly-burly of practice. This webinar here, on the attorney-client privilege in the context of insurance coverage counseling and litigation, looks on its face to fall into that category. The privilege, in this context, is a lot of fun for a litigator, like me, who enjoys working with the rules of evidence, and exploiting - or conversely defending against - gaps in the protection provided by the privilege. Two issues that quickly jump to the forefront of my mind even as I write this post - both of which appear to be covered by the webinar - are the interrelationship of the privilege with bad faith litigation, including in particular the impact on whether and how to use an advice of counsel defense, and the possible risk of disclosure by means of discovery from an expert witness. There are many more, but they seem to fall within the broad categories listed in the webinar’s agenda, so rather than my reciting them, you may just want to take a listen.
Electronic Discovery and the Federal Rules
Here is an excellent article on electronic discovery under the federal rules, and efforts to reduce the expense of this process by protecting against inadvertent waiver of privilege. As long time readers know, I have frequently criticized the structure and format of the federal rules, and their application by the courts, concerning electronic discovery, for the extraordinary burden and expense they impose on litigants. Moreover, I have focused on the fact that the major problem is that the scope of relevancy is very broad in discovery, which has not been too big a problem in traditional forms of discovery because the very nature of depositions, producing existing documents held in hard copy form, etc., puts some outside limits on the process and thus, on the expense. Electronic discovery, obviously, doesn’t have the benefit of being limited in this way by such simple physical restrictions of time and space; because the quantity of data that can and is stored is immense - and not as easily confined physically as, say, simply pulling all file folders at a client related to a particular transaction - the broad scope of relevancy, when applied to electronically stored information, can expand discovery obligations exponentially in comparison to traditional forms of discovery. For this reason, I have argued in the past that courts need to leave their past rubric for discovery (which basically consisted of the view that discovery is broad, the parties are expected to work most problems out among themselves, and court intervention is only warranted for outlier type issues) where it belongs, in the past, and create new approaches to dealing with electronic discovery, in which the courts - either pro-actively or in response to motion practice by the parties - attempt to focus electronic discovery in a manner that properly balances the importance of the documents in question with both the benefits of that discovery to the requesting party and the costs of that discovery. I am, sadly, still waiting for this to happen. The reason I like this article is its focus on the fact that electronic discovery is far too expensive, and that the latest attempt to target that problem is at best, a finger in the dyke approach, in that it just isn’t a lasting solution to the bigger problem. Moreover, the article rightly focuses on the construct that rests at the heart of the problem; the incompatibility of the historically broad definition of relevance applied in discovery with the amount of data now available in a technological society.
Litigators who read this blog already understand my obsession with this issue; while trying cases is the joy of the work, discovery - and fights over it - is the heavy lifting that takes up much of a litigator’s time and a client’s money. It’s a particular problem in ERISA cases, where any type of a plan with a significant number of participants is going to create a great deal of electronically stored data, almost none of it of relevance to any particular dispute yet still possibly open to discovery as things currently stand.
On Discovery Problems and Solutions
Permalink | Here’s an interesting law review article, passed along in detail by the Workplace Prof, on problems, and potential solutions, in managing discovery. Discovery, to beat what must now be a dead horse, has become infinitely more complicated and expensive - with far more consequences for mistakes - in any type of complex litigation with the adoption of the federal rules governing electronic discovery (and in fact with the rise of computerized data itself). Regular readers know that I have argued before in this space that the courts need to develop a jurisprudence that analyzes the need for and cost of electronic discovery - which can often involve massive amounts of computer generated and/or stored data - in much greater depth than the more superficial analysis of discovery disputes that has historically been the norm: in essence, courts should engage in a more searching inquiry into disputes over electronic discovery, given their costs and how much of such data is likely to be irrelevant in any given case, before granting extensive discovery into electronically stored data. At a minimum, there should be a degree of inquiry that, even if it won’t allow conclusive enough findings to decide to outright not allow such discovery, will still allow an intelligent, reasoned limitation on exactly what the scope of that discovery should be. I would argue that, in cases that warrant it, it would even be appropriate to hold a mini-trial type proceeding, maybe of two or three witnesses, and then to rule on to what extent such discovery is warranted. This approach would be a far cry from how courts have traditionally addressed discovery disputes, but, as the article suggests, it is past time for the courts to begin applying a more systemic and in-depth approach to controlling discovery.
This is particularly important in the areas covered by this blog, ERISA litigation and insurance coverage litigation, where computerized data, communications and information processing, is almost literally the coin of the realm. Electronic discovery is therefore truly a major cost-driver and risk factor in these areas of the law. The development, at the boots on the ground level of magistrate judges (to whom discovery disputes are often assigned), special discovery masters and trial judges, of the law of electronic discovery provides an opening for courts to really address these issues, in the manner suggested by the article and with fresh eyes, and its an opportunity that should be taken advantage of, one that calls for curiosity, innovation and reasoned experimentation. I will give you one example, to make my point. One of my partners was recently handling a massive, multi-party litigation, in which there were numerous interrelated legal and factual issues, some of which may be outcome determinative. Rather than engage in the traditional approach of years of discovery with only minimal court oversight, followed by summary judgment motions, the court instead ordered some discovery, followed by summary judgment motions on the key potentially outcome determinative legal issues, followed by, if any party believed further discovery was needed to resolve those issues, the filing of Rule 56(f) affidavits to justify such discovery; the court would then decide what further discovery would be allowed before it would rule on the legal issues. The end result was order out of what otherwise could have been chaos, and a case that stayed on track towards resolution. It’s a good example of a court proactively using existing procedural tools to narrow the issues, and decide on what issues further and potentially expensive discovery is actually needed. This appears to be exactly the type of use of existing procedural tools and focus on the timing of discovery that the article's author is advocating as the means to improve discovery.
Bad Faith, Sureties, Insurance Coverage, and Punitive Damages: Who Gets the Check When the Misconduct Ends?
Permalink | Here’s a neat little story out of the Massachusetts Lawyers Weekly today on a Massachusetts Appeals Court decision holding that the surety on a construction contract does not cover, under the construction bond it issued, punitive damages awarded for the bad faith conduct of a principal of the construction company covered under the bond. Although turning on the specific language of the bond and what losses it extended to, the ruling parallels the common issue arising under insurance policies of all types as to whether a policy’s coverage extends to punitive damage awards and, in fact, whether public policy even allows parties to insure punitive damages awards, an issue I discussed awhile back in some detail in this post here. The primary issue in those cases is twofold: first, whether the policy language extends coverage to punitive damage awards and then, second, whether allowing a party to insure against such an award provides the wrong marketplace incentives with regard to corporate conduct and should not be allowed as a result.
Those same two issues were in play in this surety bond case, with the Appeals Court first concluding that the language of the bond does not extend to the punitive damages award itself, and second, that expanding the language to cover such awards would risk undermining the entire surety bond system in the state. The court’s conclusion on this issue is summed up in this paragraph from the opinion:
By its terms, then, the bond did not cover punitive damages, payment of which is payment for punishment, not for "labor, materials and equipment" [which is what the bond stated it covered]. See Gasior v. Massachusetts Gen. Hosp., 446 Mass. 645, 653 (2006) ("purpose of punitive damages has been described as punishment and deterrence rather than compensation of an injured party"); Kapp v. Arbella Mut. Ins. Co., 426 Mass. 683, 686 (1998). To conclude that the bond encompassed punitive damages would be to rewrite the agreement Travelers made with Peabody and to risk diluting through punitive awards to a few subcontractors and materialmen the "security to [all] subcontractors and materialmen on public works," LaBonte v. White Constr. Co., 363 Mass. 41, 45 (1973), that the bond is designed to afford. See New Hampshire Ins. Co. v. Gruhn, 99 Nev. 771, 773 (1983).
I can’t say I disagree with the court on either aspect of its reasoning. Standard rules of contract interpretation, properly applied, cannot support a finding that the relevant language of the bond extended coverage to punitive damage awards, and the policy reasons for not extending coverage in general to such awards is frequently compelling in insurance coverage cases, just as it was in this case.
The case itself is C & I Steel v. Travelers Casualty and Surety, and you can find the opinion itself here.
Bad Faith Failure to Settle and the Obligations of Excess Carriers
Permalink | I wanted to return for a moment to a decision from the Massachusetts Supreme Judicial Court from earlier this month, Allmerica Financial Corporation v. Certain Underwriters at Lloyds' London, in which the court held that an excess carrier that had issued a follow form policy to an insured was not bound by or required to follow the settlement decisions of the insured's primary carrier, to whose policy the excess carrier's policy followed form. For those of you who may not be familiar with follow form policies, they are excess policies that incorporate - or borrow or "follow form" to - the same terms and exclusions as are contained in the primary policy issued to the mutual insured of both the excess carrier and the primary carrier. There's nothing very surprising in this holding, and anyone knowledgeable about the practices of the insurance industry since the time of, oh, say the end of the civil war, would know that excess carriers who have issued following form policies do not abdicate to the primary insurer the right to decide whether to spend the excess carrier's money as part of a settlement. So nothing too surprising in the court's opinion, to that extent.
But what might be surprising to some or interesting to others is the fact that, while the law may well be that excess carriers are not bound by the settlement decisions of underlying primary carriers, they may well be exposed to significant bad faith liability, in particular under Massachusetts' unfair trade practices statute, if they refuse to join in on such a settlement. As a general rule in Massachusetts, by statute insurers are obligated to agree to a reasonable settlement of a claim and, by statute, can be hit with multiple damage awards if they fail to do so. Now, think about it, and play out the scenario in which the primary carrier elects to settle, even if the amount will exceed the limits of the primary policy and require some payment by the excess carrier. Presumably, the primary carrier is doing so because settlement on those terms is reasonable. Well then, what about the excess carrier? If it refuses to go along, has it committed a breach of the obligation to reach a reasonable settlement by refusing to participate in the settlement reached by the primary carrier, which was premised on the participation of the excess carrier in the settlement?
There are a lot of ins and outs to this, and I would have to write a full blown law review article here to address them all. But for now, my point is only this. It is one thing for the state's highest court to say that an excess carrier is not obligated by the terms of a follow form policy to join in a settlement reached by the primary carrier, but it is an entirely different question whether other sources of legal obligation, such as the state's unfair trade practices act, impose an obligation to the contrary. I would argue that they don't and shouldn't, but outside of the digital confines of this blog, I certainly don't get the last word on this subject.
It should be noted, however, that the Supreme Judicial Court did nod at this issue in its opinion, and in so doing suggested both that excess carriers have a great deal of leeway in deciding whether to settle a case where the loss will be in excess of the primary policy's limits and that it should not be easy to show that an excess carrier committed bad faith by declining to participate in an arguably reasonable settlement to which the primary carrier was willing to commit. The Court, in a footnote, explained that the question of the excess carrier's bad faith obligations was not at issue, but cited Hartford Casualty Insurance Company v. New Hampshire Insurance Company, a 1994 decision, as reflecting current Massachusetts law on the duty an excess carrier “owes to its insured not to act negligently in refusing to settle a case.” Indeed, the Court then went one step further and, in a different footnote, expressly declared that the Court’s conclusion in Allmerica with regard to the follow form obligations of excess carriers with regard to settlements “should not be construed to limit the settlement responsibilities of insurers articulated in” Hartford Casualty.
The Hartford Casualty case set forth a very high standard for imposing bad faith liability on a carrier that fails to settle a case, finding that there is only a bad faith failure to settle if no reasonable insurer at all would have failed to settle the case on the terms presented to it. That's a pretty high standard. I would argue, given the Supreme Judicial Court's deliberate citation of that case in two footnotes in a case, Allmerica, that didn't require the Court to even address issues of bad faith failure to settle, that the Court was reinforcing that bad faith failure to settle claims can only be maintained against excess carriers - even ones that issued follow form policies and even where the primary carrier wants to settle - if the very high bar set forth in the 1994 Hartford Casualty case is met.
Insurance Bad Faith Litigation in Massachusetts and the Other 49 States
Permalink | Want to learn more about insurance bad faith litigation? Well, you could retain me, but if you want something more off the rack, here is a nice looking seminar, with a well credentialed faculty, on the subject. Of course, for local readers, it is important to note that the seminar looks to provide a general overview, as most seminars do, concerning overall principles related to insurance bad faith litigation. Here in Massachusetts, the issues would be a little different and have their own peculiar twists and turns, because we are one of the few jurisdictions with a unique bad faith statute actually granting a bad faith cause of action to policyholders and injured parties; litigating a bad faith case here requires a deep understanding of years of court rulings applying that statute.
Insurance Bad Faith, Expert Witnesses and Privileged Communications
Permalink | I received a pitch for an interesting seminar on the interrelationship of the federal rules governing expert discovery, the retention of experts in litigation, and the work product doctrine. The issue addressed by the seminar has to do with the fact that expert discovery under the federal rules at this point is very broad, and can result in disclosure to the opposing side of what would otherwise be privileged communications and documents detailing the strategies and thoughts of the attorney retaining the expert. This problem flows from changes to the federal rules governing discovery that make discoverable the documents and information considered by the expert in reaching an opinion in the case.
A significant body of case law, most of it at the federal district court level, now stands for the proposition that all information provided to such an expert is fair game for discovery, even if, absent disclosure to the expert, it would have been protected from discovery as privileged. The majority of the courts that have considered the issue have concluded that the current version of the federal expert discovery rule requires that any material that is reviewed by an expert witness must be disclosed, whether or not it would otherwise be protected from disclosure to an adversary by the work product doctrine or the attorney -client privilege. See Zheng v. Liberty Apparel Co., 2004 U.S. Dist. LEXIS 15026 (S.D.N.Y. Aug. 3, 2004). It has been held that the applicable federal rule requires the “disclosure of all information, whether privileged or not, that a testifying expert generates, reviews, reflects upon, reads, and/or uses in connection with the formulation of his opinions, even if the testifying expert ultimately rejects the information.” Synthes Spine Co., L.P. v. Walden, 232 F.R.D. 460, 464 (E.D. Pa. Dec. 21, 2005). This includes disclosing notes created by an expert witness in the capacity of an expert witness, even if the notes contain information that would have otherwise fallen under the protection of the attorney-client privilege or the work product doctrine. Id. at 464-65 (reasoning that notes authored by expert could contain information that bears on the credibility of the expert, his report, and his trial testimony).
The law in the First Circuit, where this blog has its metaphorical home, is consistent with this rule. In fact, courts in this circuit were out ahead of the curve on this issue. Years before the bulk of authority on this issue was decided, the federal district court for Massachusetts issued its ruling in Suskind v. Home Depot Corp., 2001 U.S. Dist. LEXIS 1349 (D. Mass. January 2, 2001), which holds to this effect and has been repeatedly cited by other courts as an example of the majority rule that requires disclosure of materials considered or created by an expert.
The scope of the obligation to disclose is broad. Information supplied to or reviewed by an expert, in connection with his opinion, is discoverable regardless of whether the expert actually relied upon the information in preparing his expert report. In re Pioneer Hi-Bred Int’l, Inc., 238 F. 3d 1370 (Fed. Cir. 2001). Even more importantly for purposes of the subject of this post, documents considered by a party’s expert are discoverable even if they were supplied to the expert by a party’s attorney. Suskind, 2001 U.S. Dist. LEXIS 1349 (D. Mass. January 2, 2001) (holding that attorney-work product materials considered by an expert are discoverable).
The end result of all of this, and the problem addressed by the seminar, is that it can become difficult to work with an expert, and to inform the expert, without exposing confidential material and information, including quite possibly the entire theory of the case, to discovery. While a relevant problem in all areas of federal litigation, and one that a good lawyer needs to work around in handling experts, this issue is particularly significant in insurance bad faith litigation, one of the topics of this blog. This is because in that area, much more so than others, the theories of the case and the issues to be addressed with an expert are much more amorphous (imaginative rather than fact based, some defense lawyers would say) than they are in other types of cases, making it much harder to discuss an expert’s likely opinion without first disclosing the theory of the case to the expert.
There are ways around this problem, and the simple fact of the matter is that it is the job of a good litigator to know how to do it. Perhaps even more so, it is the job of a good litigator to know how to exploit errors in this regard that an adversary may make, which may open up an otherwise foreclosed area of discovery.
The Tripartite Relationship and the Attorney Client Privilege
Permalink | One of the more unwieldy of legal fictions is the so-called tripartite relationship among the insured, the insurer, and the defense counsel defending the insured against the claim. Duties run every which way in the relationship, and this beast is at its most cantankerous when one gets into the question of how the attorney client privilege fits in. In particular, if the insured and the insurer end up in a coverage dispute, the question of who has access to the communications between the insured and the defense counsel - just the insured, or also the insurer - quickly becomes a bone of contention.
I have talked before about the difficulty presented by this issue, and how it impacts insurance coverage and bad faith litigation. How exactly is an insurer to get at all the evidence of what happened in the underlying case, or at all of the facts that might shed light on whether or not the loss, in truth, is within the scope of coverage, if much of the evidence on that is laid out in the communications of the party who was actually on the scene - the lawyer litigating the case? A quick example highlights the problem. Suppose, for example, the issue presented is whether a settlement entered into by the insured was actually for losses within the scope of the coverage rather than just having been styled in that manner to try to place the loss within the coverage, and was actually paid for uncovered parts of the lawsuit. What more telling evidence could there be than the information communicated, orally and in writing, to the insured from the defense lawyer negotiating the settlement? After all, she is giving the advice on the settlement and structuring its terms - so if there is a question of whether the settlement is actually covered, shouldn’t that evidence both be admissible and discoverable?
Would seem so, but that isn’t necessarily the law. Which leads me to the real point of today’s post, which is to recommend Marc Mayerson’s review of the case law on this question.
Attorney's Fee Awards, and the Duty to Indemnify
Permalink | I have written before about the American Rule - which requires parties to a lawsuit, in the absence of a fee shifting statute or contractual agreement, to pay their own legal fees - and the exception under Massachusetts law that runs in favor of insureds who prevail in coverage cases against their insurers. The Supreme Judicial Court has now established that this exception runs only to disputes over an insurer’s duty to defend, and not to disputes over the duty to indemnify. Thus, while an insured who proves that its insurer breached a duty to defend can recover from the insurer its legal fees in proving this point, the same is not true for an insured who proves that its insurer breached the duty to indemnify. Here’s the story, with a link to the case.
This resolves an unsettled point of Massachusetts law, as to whether the right to recover attorneys fees runs along with a claim over the duty to indemnify, or instead only along with a claim for breach of the duty to defend. It turns out to be the latter only.
In the long run, it’s a better decision than the opposite holding would have been. A decision to deny indemnity without a reasonable basis for doing so is already punishable in Massachusetts under the state’s consumer protection act. When, in contrast, a denial of indemnity is reasonable, an insurer should be able to try to prove that its coverage determination was correct without having to factor in the risk of having to pay the insured’s legal fees if a court finds that the insurer’s interpretation of its coverage obligations, while reasonable, was wrong.
The Attorney-Client Privilege in Insurance Coverage and Bad Faith Lawsuits
Like all of you, I am sure, I receive almost daily pitches in my in-box for seminars, podcasts, books and publications that promise to educate me on various topics that the pitchers have decided I must be interested in. Of course, these may be the same marketing wizards who send me twenty pitches a day for on-line pharmacies, so I may be giving them too much credit when I assume they are actually targeting their offerings to my professional interests in such topics as patent litigation, ERISA and insurance coverage. Nonetheless, sort of like playing horseshoes, they do sometimes come close to the mark with the offerings they email me.
This one caught my eye the other day, for a teleconference on the attorney-client privilege, with the hook that the privilege is supposedly under assault in the context of insurance coverage litigation. The short version pitch that was sent to me goes like this:
The sanctity of attorney-client privilege has been shaken by court decisions allowing discovery of attorney-client communication in the context of certain insurance lawsuits. Attorneys and clients must always be conscious of preserving the privilege, but insurance disputes gives rise to unique areas of concern.
In insurance cases, counsel often become involved prior to litigation, during the claims process - for coverage advice or to assist with investigations. These pre-litigation communications often end up subject to discovery.
Some courts have found the privilege waived in bad-faith suits where the insurer relies on an advice-of-counsel defense - sometimes even without that defense being raised. Insured's counsel also argue that attorneys who participate in insurance investigations are not providing legal advice but are acting as adjusters whose communications with the insurer are not privileged.
Now, I have litigated these issues a number of times. While I have sometimes won these disputes outright, more often than not, the court finds a way to split the baby and give some limited and controlled discovery while at the same time imposing some restrictions intended to protect the primary communications at the heart of the attorney-client relationship, namely those in which actual legal advice itself is transmitted.
There are a couple of points that jump out at me about this whole issue that I wanted to mention. The first is that there is some truth to the argument that it is hard to investigate the facts at issue in both insurance coverage and bad faith litigation because of the attorney-client privilege and work product doctrine, and it is often necessary to carve out some exceptions to those protections against discovery to allow discovery in those kinds of cases to proceed. This often holds true for both insurers trying to learn the underlying facts of the claim over which coverage is being disputed and for insureds trying to learn the facts of what the insurer did with regard to coverage, or the denial of coverage, for such claims. The simple fact is that lawyers for the insured, in defending and settling the underlying claim, and lawyers for the insurer, in providing coverage analysis and recommendations, are participating in activities that are at the heart of insurance coverage and bad faith litigation, but do so while engaging in what would normally be privileged communications. Effective prosecution and defense of these types of lawsuits therefore often raises the question of the extent to which discovery is proper in light of, or instead precluded by, the attorney-client privilege.
The second point that jumped out at me is that this is another one of those issues that is, much like what I talked about in my post yesterday, deja vu all over again. It seems like every several years - maybe it works out to be once every generation of seminar presenters - the books and the articles and the seminars appear declaring the attorney-client privilege to be under assault as a result of discovery rulings issued in the context of insurance coverage and bad faith litigation. I don't know for sure, but it sure seems to me that, despite these periodic "the sky is falling" pronouncements, the attorney-client privilege is still alive and well, and being raised in response to all sorts of discovery requests.
Bad Faith Litigation: Do the Numbers Add Up?
I am a little bit of a skeptic - I don't think it has devolved yet to cynicism - when it comes to insurance bad faith litigation. Done right, a state law system of bad faith rules and rights can establish appropriate boundaries for all three sides of the insurance triangle - the insurer, the insured and the claimant. Done wrong, however, it tends to be little more than a system for imposing additional obligations and expenses on insurers beyond any that were bargained for or paid for by insureds.
Beyond that, the whole subject of bad faith litigation, including whether it is appropriate and the rules that should govern it, tends to become one of public relations and political posturing, rather than of rational legal and economic thought. This article demonstrates that exact dynamic in the context of a dispute in West Virginia over the elimination of third party bad faith claims against insurers, after years in which such claims were actionable. What jumps out at me is the assertion that a particular amount - 77 million dollars in premium reductions - of savings to the public can be attributed to the elimination of the bad faith cause of action.
Now it is beyond my skills as an amateur economist, but it seems to be that there must be enough data pre and post the ban on such claims to actually measure, at least roughly, the economic effect of banning, as opposed to allowing, such bad faith claims against insurers. It would make an interesting test case as to the economic impact, pro or con, of insurance bad faith litigation, and might be a good starting point for more empirically based and rational discussions as to whether other states should allow, or instead ban, such causes of action. This would be a nice substitute for the current state of the debate in most states over whether bad faith litigation should be allowed, which tends to consist of little more than entirely predictable and unverifiable public posturing of the type reflected in the article on the effect in West Virginia of banning such causes of action.
Discovery of Reserves and Other Repetitive Events
Here is a nice post on whether claim reserves are discoverable in insurance coverage or bad faith litigation, with some case law on the topic as well. The discovery of claim reserve information is one of those issues that is a consistent point of dispute from one coverage or bad faith action to the next. In fact, given how much it comes up, it is kind of amazing the amount of time and money spent - some would say wasted - in insurance coverage and bad faith litigation over discovery issues such as this one. Some of that, it is fair to say, is driven by the fact that insureds and claimants in such lawsuits are often convinced there is some document somewhere in the insurer's files that is the key that will unlock the entire case, and are determined as a result to obtain every single piece of paper possessed by the insurer that they can grab hold of. In truth, there almost never is such a key stone document, and even when there is, you can be pretty certain it isn't going to be found in the claim reserves or in similar information, such as reinsurance documents, that are likewise routinely the source of a tug of war over production and discovery in coverage and bad faith litigation.
But the other part of the problem is that what we may really need is some sort of federal rules of evidence, insurance coverage and bad faith subsection (hopefully then adopted by the states as well as part of their own evidence codes, in states like Massachusetts that don't automatically follow the federal rules of evidence), that synthesizes all the case law on these types of issues that arise repetitively in coverage or bad faith litigation, and sets down a rule once and for all on them. In this tidy little daydream for a Friday morning, we could then all stop relitigating the same discovery points over and over again, frequently with little more than a change of judge and forum from the last time we argued over them.
Bad Faith Failure to Settle? Maybe, Maybe Not.
Well, this is an interesting report, and though I am not quite sure exactly what to make of it, it falls within the general rubric of this blog. As Robert Ambrogi sums the reporting and blogging on this story up here, a law firm has been hit with an eighteen million dollar malpractice verdict based on the failure of a health plan; the amount of the verdict is premised on the amount of unpaid claims outstanding under the plan. Of interest to me is the side carnival, which is the defendant law firm apparently claiming that its professional liability insurer committed bad faith by failing to settle the claim within the one million dollar limits of the firm's professional liability insurance. Anytime anyone suffers a verdict in excess of their insurance coverage, it is reasonable to look first to whether the insurer should have seen that coming and settled the case before a verdict could be taken on the case that would expose the insured to the possibility of having to pay damages greater than the amount of the existent insurance coverage. But though the law on whether an insurer can be liable for bad faith failure to settle within the policy limits under such a scenario varies from jurisdiction to jurisdiction, there are some questions that always have to be answered to consider whether the insurer should have settled the case and avoided the risk of such an excess judgment. These include whether the insurer should have seen that the case was worth the policy limits in settlement, or should have foreseen the risk of a judgment exceeding the policy limits if the case was tried to a verdict.
Beyond that, in a case such as this one where presumably the hard numbers of the loss were always obvious and so you could always know that there was a risk a verdict would exceed the insurance coverage, is that enough to require the insurer to settle the action? Probably not, since in deciding whether to settle the action or instead risk an excess verdict in that situation, one normally still has to consider how likely the case is to end up with such a large verdict. For instance, should the law really require an insurer to settle, rather than allow a trial, just because the claimed damages are sky high, if the likelihood of those damages being recovered is minimal? The likelihood of losing or winning at trial obviously always factors into the settlement negotiations of any experienced lawyer or other negotiator.
And for that matter, there is the question of why the case did not settle before a verdict came in. Was it because the plaintiff's demands were too high, or was it instead because the insurer wouldn't respond to an appropriate demand? And what role did the insured play in the matter? Did the insured always press for settlement within the limits of the coverage, and work towards it, or was a settlement within the policy limits just something the insured requested in a token manner prior to the verdict, so as to place itself in a position to sue the insurer if things went south at trial?
There are more questions in these types of cases than one can shake a stick at, and the fun of such cases is sorting out the answers.
New York Bad Faith Law
Sometimes it is fun to see what other states do. Here in Massachusetts, insurer bad faith claims are for all intents and purposes a product of statute, and the statute authorizes multiple damages and awards of attorney's fees to a prevailing plaintiff. Hence, there is a significant amount of bad faith litigation in this jurisdiction.
As part of an upcoming Defense Research Institute publication on insurance bad faith law, I contributed a review and overview of New York law on insurance bad faith. New York does not grant such a broad right of action, and in fact does not even allow a private statutory right of action. This and more is in the New York section of the materials.
A Reasonable But Erroneous Coverage Determination is Not Bad Faith
The Massachusetts Supreme Judicial Court reinvigorated, yet at the same time may have narrowed, a key rule governing insurer bad faith claims in this state in its decision this month in City Fuel Corp. vs. National Fire Insurance Company of Hartford, SJC-09623 (May 10, 2006), available here http://www.masslawyersweekly.com/signup/opinion.cfm?page=ma/opin/sup/1007806.htm.
In the Commonwealth, bad faith claims are premised on General Laws Chapter 93A, which bans unfair and deceptive trade practices; in the context of insurance, it grants both claimants and insureds the right to sue insurers for any of a variety of actions by the insurer. One key carve out, an area where an insurer is understood to be left with some discretion to act without fear of being liable for bad faith under the statute, has traditionally been the insurer's freedom to make coverage determinations, even erroneous ones. So long as the determination was at least reasonable, the insurer cannot be liable for bad faith simply for making an incorrect coverage determination. The Supreme Judicial Court, in City Fuel Corp., reiterated that this rule still applies, and that insurers still have both discretion in this area and the freedom to err. The court stated:
We do, however, affirm the judge's decision granting summary judgment on the G. L. c. 93A claim to National Fire. That claim fails because the interpretation of the policy's language is an issue of first impression, and we find that National Fire's position was reasonable. See Polaroid Corp. v. Travelers Indem. Co., 414 Mass. 747, 763 (1993) (even if coverage found to exist, insurer not liable under G. L. c. 93A if its position was reasonable, particularly where little or no legal precedent exists on the issue).
City Fuel Corp. does raise an interesting question on this point, however. By its focus on the absence of legal precedent that would guide the insurer's determination, is the court in the process of narrowing that carve out? Is it no longer enough to simply be reasonable to preclude bad faith liability from attaching to an insurer's erroneous coverage decision? Is the court moving towards imposing additional requirements, such as the absence of legal guidance? Are we moving towards the word reasonable in this context being defined, and having specific elements - such as the absence of legal precedent?
Case law has moved far in the direction of imposing bad faith liability on insurers in this jurisdiction for acts that traditionally have been a normal part of the business of insurance, or at least opening up those acts to microscopic investigation before deciding whether or not the insurer should be free to engage in them without the risk of bad faith exposure. Is this another example?