Sanders v. The Phoenix Insurance Company Is a Comprehensive Insurance Coverage Decision, But Have Bad Facts Again Made Bad Law?

Posted By Stephen D. Rosenberg In Coverage Litigation , Coverage for Professional Services , Defense Costs , Duty to Defend , Duty to Indemnify , Homeowners Insurance
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So this is interesting, from a couple of perspectives. The First Circuit Court of Appeals has issued a fairly comprehensive opinion addressing a number of issues in insurance coverage law in Massachusetts. The facts are a little salacious, and read more like a John Grisham plot than real life, but unfortunately, odd facts often underlie key decisions in insurance law. I say unfortunately because it means that many decisions concerning insurance coverage are often so unique to their unusual facts that they can easily be distinguished away by litigants in other cases, leaving parties with less guidance for future conduct than one would expect to glean from the case law. This case is a perfect example: I will bet this fact pattern will never, ever repeat itself in an insurance coverage dispute.

Nonetheless, this case has some discussions that apply broadly enough that the ruling can easily be expanded to other cases. For instance, the Court answers the question of whether Chapter 93A demand letters – which Massachusetts law requires a party to send to a business before suing it for unfair trade practices – can trigger a duty to defend. The Court held that it cannot, and distinguished away a key, longstanding Massachusetts decision that many lawyers have used for years to argue to the contrary. Still, I have to say that even on this point, I am not totally convinced that the issue is settled after this decision; I think there will be room to argue to the contrary in other cases that involve other fact patterns and, more importantly, somewhat different policy language. Personally, I am skeptical that, although the decision suggests that it should be or is the rule, no Chapter 93A demand letter, no matter what relief it seeks or the details of the claim, can ever trigger coverage under any policy language.

I would also highlight the Court’s analysis of the issue of whether an assignment of rights to the claimant from the insured gave rise to a viable claim for recovery against the insurer. The Court found that policy language governing when the insurer agreed to be sued precluded such a claim. It would be beyond the scope of a relatively short blog post to explain why that ruling has some wobbly legs underneath it, but suffice it to say, as I do in this article in Massachusetts Lawyers Weekly on the case, that, after this ruling, lawyers who are considering assigning insurance rights as part of a settlement need to carefully consider whether there is any value to doing so in Massachusetts.

The decision is Sanders v. The Phoenix Insurance Company, which you can find here.

How to Trigger Insurance Coverage for an ERISA Claim

Posted By Stephen D. Rosenberg In 401(k) Plans , Coverage Litigation , Defense Costs , Directors and Officers , Duty to Defend , Employment Practices Liability Insurance , Exclusions , New York Insurance Bad Faith Law
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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.

Other People's Money, Cumis Counsel and the Tripartite Relationship

Posted By Stephen D. Rosenberg In Defense Costs , Duty to Defend
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We have talked before on this blog about the tripartite relationship among insurers, the defense counsel they appoint, and the insured; this is a topic of wide interest to all sides in the insurer/insured relationship, and, in fact, my handy dandy two minute guide to the relationship’s issues is among my most read pages. However, there is a twist in the normal relationship reflected in that guide when, rather than the typical situation where the insurer is appointing defense counsel to represent the insured, the insured is a fortune 100 or so company with its own preferred counsel and wants the insurer to simply pay for that counsel, and not to appoint its own selected counsel to defend the insured against a covered lawsuit. In that scenario, the relationship becomes a little off balance, and not really the sort of equal, three sided triangle that one usually envisions when referring to the tripartite relationship. In that scenario, rather, the defense counsel is much more the handmaiden of its usual client, the insured, than it is controlled by or answerable to the insurer, and the insurer is placed in the awkward position of being expected to primarily simply pay the bills for the insured’s defense. You often run into the old “other people’s money” problem when that happens, where the insured and the defense counsel have no real economic incentive to control costs, because the costs of the case are being paid by a third party, the insurer, to whom neither is really answerable; after all, the insured is still going to continue to use its favored outside counsel in the future, regardless of whether the insurer, who paid the bills in that case, was or was not happy about the defense lawyers’ billing practices, effectiveness or cost efficiency in that case. Various states, to varying degrees, have rules - whether statutory or judge made - in place that try to control for that dynamic, most famously California, which by statute obligates the insurer to only pay counsel in that situation the same rates it normally pays to counsel the insurer itself retains to defend cases of that type. What happens when the insured and its outside counsel don’t want to live by those rates, however, is the subject of this story right here.

Want to Learn More About the Tripartite Relationship?

Posted By Stephen D. Rosenberg In Coverage Counsel , Defense Costs , Duty to Defend , Duty to Indemnify
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One of the widest read and linked to posts I have written recently was this one here providing the law of the so-called tripartite relationship in thumb nail fashion. Interest in this topic surprises me to a certain extent, because very much the point of the post was that, despite all the seminars and publications addressing the topic, I really think the rules governing the relationship among insureds, insurers and insurer appointed defense counsel boil down to a pretty simple set of working principles, which I discussed in that blog post.

However, it is clear that many people have a great deal of questions about the topic and want more education on the subject, and I can think of no better sources to answer such questions and provide education on it than the panelists on this upcoming seminar on the topic; among the panelists is Marc Mayerson, who writes the Insurance Scrawl blog on insurance coverage topics.

The Three Rules of the Tripartite Relationship

Posted By Stephen D. Rosenberg In Coverage Counsel , Defense Costs , Duty to Defend , Duty to Indemnify
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We’ve been a little ERISA heavy here for awhile now, somewhat to the detriment of the insurance litigation half of the blog’s title, simply because of the range of interesting events that have taken place under the ERISA rubric lately. While all that was going on, though, a particularly good collection of articles on different insurance coverage topics have crossed my (electronic) desktop, and I want to pass them along as well; I will try to scatter them in with other posts over the next week or so, until I exhaust them.

One I wanted to pass along is this article here, by two prominent policyholder attorneys, on the tripartite relationship, which concerns the potentially conflicting loyalties of defense counsel appointed by an insurer to defend an insured against a lawsuit that may or may not be covered. This problem stems from the fact that insurers are often obligated to provide insureds with a defense against cases that may turn out, upon further development of the facts of the case, to not actually be covered, in which event the insurer will not have to cover any judgment or settlement, and might even be entitled to recoup from the insured the amount paid to defend the case in certain circumstances and jurisdictions.

Although there is much written and said about the tripartite relationship, the whole topic comes close to falling into the much sound and fury signifying nothing realm, although not completely because there is some substance to the issue, only not as much as lawyers like to make it out to be. The whole issue can really be boiled down to three handy rules of thumb. First, the defense counsel appointed by the insurer must focus only on defending the case as though the insured were his or her only client, and cannot muddle about between the insurer and the insured over any coverage issues that remain outstanding. Second, the insurer needs to retain separate lawyers, in the role of so-called coverage counsel, to take the factual information developed by defense counsel in defending the case and evaluate how it affects coverage. And third, an insured must remember that the defense counsel is solely going to defend the case, without regard to coverage disputes and is not looking out for the insured’s interests with regard to whether any recovery in the case will actually be covered; the insured has to instead hire independent coverage counsel of its own to take steps to parlay the evidence developed by the defense counsel into a commitment of coverage by the insurer.

We Take Requests: More on Excess Insurance

Posted By Stephen D. Rosenberg In Defense Costs , Duty to Defend , Excess Policies
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A loyal blog reader wrote in recently noting a glaring omission of this blog, notably the absence of a subcategory heading over on the left hand side of the blog collecting case law and comments on excess insurance issues. I have added the menu option over there, so readers can find excess cases easily. And to get the ball rolling, I have relocated one of my favorite insurance related blog posts from the past few months, discussing the obligations - or lack thereof- of excess carriers to follow the settlement decisions of underlying primary carriers, over to that new category heading. You can find it there now.

But as a grand opening special, I also thought I would note today this decision out of the United States District Court for the District of Rhode Island discussing a range of issues involving both primary and excess coverage for that golden oldie of insurance coverage law, environmental clean up. The issue that was most interesting to me in the opinion, as it has the most transferability to other types of cases, has to do with when an excess carrier’s defense obligations kick in. The case presented the old chestnut of when an excess carrier, whose policy technically does not attach - or come into play - on a loss until the policies underneath it have been exhausted, begins to have a defense obligation with regard to the claim at issue. The court acknowledged the general rule, relied upon by the excess insurer to try to avoid a defense obligation, that the excess carrier cannot have an obligation to contribute to the defense until the loss exceeds the primary coverage. However, the court manipulated that principle to tack a current defense obligation onto the excess carrier even though the primary policy underneath it had not yet been exhausted by finding that the excess carrier’s defense obligation was triggered without regard to whether or not the underlying primary policy had already paid out its full policy in defense costs, so long as the insured’s incurred defense costs already exceeded the amount of the primary policy. Its an interesting result to me, because the biggest issue, in my book, when it comes to excess policies is the tricky interchange of how and when obligations move out of the primary policy and onto the excess carrier. This case is a neat example of that.

The case is Emhart v. Home Insurance, and you can find it here.

Insurance Policy Interpretation and ERISA Conflict of Interests

Posted By Stephen D. Rosenberg In Defense Costs , Rules of Policy Interpretation
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Insurance coverage could learn a bit from the law of ERISA, particularly from the concept of structural conflicts of interest that is so much in play in ERISA litigation at the moment. In the world of insurance coverage litigation, insurers almost invariably stand in exactly the position that ERISA decisions view as a structural conflict: they both decide the claims for coverage and pay the claims if there is coverage. And yet we don't talk in insurance coverage about such conflicts, and this issue is never the animating principle behind judicial decisions over whether or not a policy covers a particular loss. Instead, insurance coverage law borrows from contract law, and courts purport to be applying contract principles to decide these types of cases.

But the truth of the matter is that many rules of insurance policy interpretation and many rules governing the obligations of insurers and insureds simply don't fit comfortably within a contract law framework. Some of those rules and obligations, however, could be better understood if viewed through the prism of a structural conflict of interest analysis.

For instance, several decisions over the last few years have addressed whether an insurer has the right to be reimbursed by its insured for defense costs incurred on uncovered claims, as discussed here. Some courts allow it, with the thinking being that the insurer did not contract to provide a defense to uncovered claims, but instead only for potentially covered claims, and therefore the insurer should be paid back moneys spent on defending uncovered claims. Yet allowing reimbursement isn't logical if the question is examined from the point of view of traditional contract law. As David Rossmiller pointed out here, the policies don't include an actual contractual term to this effect. Moreover, it has long been, depending on the jurisdiction involved, either an accepted norm or an outright legal rule that the insurer must pay for the defense of the entire case even if only one of many claims in the lawsuit might be covered, and under any traditional approach to contract law, such a long held mutual understanding of the contracting parties would be understood to be part of the contract's terms. Thus, I am skeptical that reimbursement makes any sense under a contract regime, which insurance coverage decisions generally purport to be part of. At a minimum, the answer to whether reimbursement should be allowed under these circumstances certainly isn't clear from the point of view of pure contract interpretation, given that an almost equal number of courts don't allow reimbursement as allow it, as discussed in this article.

But it may be that contract law in its traditional form simply isn't the right framework for understanding this issue, and that instead what we want to do in this situation should instead depend on the outcome that is fairer to both parties to the contract, the insurer and the insured. And the way to figure that out may be to borrow from the law of ERISA the concept of the structural conflict of interest and apply it, and see what we end up with. If the powerful role that the insurer holds as both payor of the loss and initial decision maker on the claim affects this issue, than perhaps it is not fair to interpret the policy to allow such reimbursement, but if it does not have that effect, then perhaps it is appropriate to allow such reimbursement given that the contract terms themselves do not settle the question. Now, in most of these reimbursement cases, the insurer has agreed to pay for the defense of the insured against claims - often ones that are very expensive to defend against - that simply are not covered. An insurer that does so obviously has not made its decision due to any sort of conflict it might face as both the payor of the loss and the decision maker, because it has elected to do something in the insured's favor, and not in its own: namely, defend the insured against a claim that is not even covered. Why would an insurer acting out a conflict do that, one would have to ask, and the short answer is that it wouldn't. Since the insurer was not acting out of a conflict of interest, there is no reason not to simply limit the insured to what it paid for, namely the defense of covered claims, leading to a corresponding obligation to repay the insurer the money spent defending the insured against uncovered claims.

And thus a structural conflict of interest analysis sheds some light on the result that should be reached in a situation in which the terms of the policy itself, and the doctrines of contract law, can't tell us what the outcome should be.

Reimbursement of Defense Costs

Posted By Stephen D. Rosenberg In Defense Costs
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I doubt there is anything that has been the subject of more incessant chatter at seminars, with less to show for it, than the question of when, or if, an insurer can obtain reimbursement of defense costs incurred on uncovered claims. Ever since the California Supreme Court issued its ruling in Buss, the issue has been the focus of much excited talk - perhaps more than it has ever really been the subject of any action - and understandably so, given that insurers have been paying defense costs for what seems like an eternity on uncovered claims because of the long established rule that an insurer must provide a defense against the entire case if even only one claim in the action is covered. One can easily see how the possibility of putting an end to that would grab the imagination of an entire industry.

Finally, though, someone has really shed more light than heat on the issue. Thanks to David Rossmiller, here is insurance coverage litigator Randy Maniloff's detailed look at the question. One thing I liked in particular was Randy's conclusion, which hints at exactly why, as suggested above, the issue has generated more talk than actions by insurers to recover defense costs from their insureds: namely, that the sheer difficulty of allocating defense costs between covered and uncovered claims makes recovering defense costs difficult even in those jurisdictions where such recovery is allowed. On a perhaps more cynical note, it seems to me that courts can also be expected to rely on this fact to protect insureds from reimbursement claims, even in states that allow such claims, in cases where reimbursement strikes the court as inequitable.

More on Who Should Pay for the Defense of Corporate Officers and Directors

Posted By Stephen D. Rosenberg In Defense Costs , Directors and Officers
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Looks like I was not the only one intriqued by the article earlier in the week in the New York Times about companies who stop paying the legal bills of their officers, directors or employees, and the effect it has on the affected individuals. The wired gc talks about it here

This is one of those issues where your take on it seems to depend on where you sit. As my earlier posting on the subject showed, it illustrated to me the need for officers and directors to be proactive in ensuring that the company's bylaws and its directors and officers coverage work in tandem to protect them as much as possible from personally incurring substantial legal fees.

Funding the Defense of Corporate Directors and Officers

Posted By Stephen D. Rosenberg In Defense Costs , Directors and Officers
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Directors and officers policies generally require an insurer to pay the defense costs incurred by a covered corporate officer when a claim is made against her or him. The insurer in that circumstance does not actually provide a defense, but instead, under the terms of the policies, normally must reimburse either the officer for his defense costs or the company itself, if the company is paying the defense bill. I have written and spoken on this point elsewhere,, and have mentioned that a corporate officer or director's best proactive plan is to both have such coverage and ensure that the company bylaws require indemnification; this provides directors and officers with two sources to pay the high legal bills that are often incurred in the types of cases brought against them. Although not directly on point, in the New York Times today is an interesting article about the impact of having to fund their own defense on corporate officers and employees who are charged with criminal wrongdoing,