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.
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.