Back to the Future: Insurance Coverage Law from Asbestos to Cyber Risks
This is a very fun – if you can use that word for insurance disputes – discussion of the United Kingdom’s Supreme Court determining what trigger applies under insurance policies issued to insureds sued for asbestos related injuries. Its partly fun because it replays a highly contentious and, for all involved, expensive chapter in American legal history, namely the decade or so long battle in the United States courts to decide which insurance policies were triggered by – and thus had to cover – injuries caused by asbestos exposure. The courts here struggled for many years to decide which of many possible triggers apply, including: a continuous or multiple trigger which found coverage under all policies in effect from the time the worker was exposed to asbestos through the incubation period in the worker to the time the worker’s illness actually came to exist; an exposure trigger, making policies in effect when the worker was exposed to asbestos applicable; a manifestation trigger, under which policies in effect when the asbestos related disease manifested itself apply; and an injury-in- fact trigger, under which the policies apply that were in effect when a worker, previously exposed to asbestos years before, actually suffered injury from the exposure. Because of the diverse American legal system, with its numerous federal circuits and 50 state court systems, no one, single rule was ever settled upon as universally applicable. It appears in the UK, though, they are settling on one single rule, at least according to the article.
Some of you, particularly those of you who have heard me speak over the years, are familiar with my view that modern American insurance law, for all intents and purposes, springs out of the trigger of coverage and other disputes from the early 1980s concerning coverage for asbestos related losses, and in particular out of the D.C. federal court’s adoption of the multiple trigger standard for applying general liability policies to asbestos losses; in part, these events became the touchstone for coverage disputes to come because of the ease with which court decisions on these issues could, by analogy, be extended to other types of long tail exposures, such as environmental losses and other types of toxic torts, in which - as with asbestos - the event that would eventually cause injury (whether to person or property) happens years before either injury occurs or is learned of. In my view, before then, insurance law had changed little (speaking broadly) for generations. After the explosion in coverage litigation over asbestos, close textual analysis of key terms in insuring agreements, policy definitions and exclusions became crucially important and widespread, far more than it was before these watershed events; indeed, some of the methodology applied by courts at that time and the decisions they made in interpreting policy terms still reverberate in coverage decisions today. Many issues and developments in the insurance industry and the law of insurance coverage can be traced back to these events, from the expansion in use of the claims made policy form to the existence of significant, always on-call insurance coverage practice groups representing policyholders.
A few months ago, I spoke on the subject of cyberinsurance before a large insurance industry group, and the organizing principle of my talk was the idea that the evolution of coverage forms and coverage litigation involving insurance for cyber exposures was mimicking, and would continue to mimic, the industry’s past experience with both asbestos and – in terms both of temporal proximity and legal analysis – its close cousin, environmental exposures. The reality is that, while past performance may not guarantee future results, the development of new insurance coverage exposures as well as of policy forms to deal with them always harken back at this point to the legal and industry developments of 30 years ago that arose out of asbestos and environmental exposures, but almost never, interestingly enough, to legal and industry developments that predate that.
At the Intersection of Insurance and Plan Fiduciaries
Well, given the title of this blog, I couldn’t exactly let this decision pass unnoticed. In this decision from the Court of Appeals of New York, Federal Insurance Company v. IBM, the Court denied insurance coverage for IBM under an excess fiduciary liability (apparently) policy, for a settlement by IBM of a claim that amendments to benefit plans in the 1990s violated ERISA. The Court, in short, found that the claim did not invoke IBM’s status as a fiduciary under ERISA, essentially because it involved settlor, rather than fiduciary, functions. The Court applied standard rules of policy interpretation, under which insurance policy language must be given a reasonable construction under the circumstances, to conclude that policy language that applied to claims against a fiduciary involving ERISA meant claims where the insured qualified as a fiduciary under that statute, and did not, contrary to IBM’s arguments, involve any broader meaning of the word fiduciary.
Three points about the case interested me, which I thought I would mention. The first is the case’s status as an exemplar of a phenomenon of insurance work that I have frequently mentioned in the past, which is that all major litigation disputes end up in court twice: the first time as against the insured, and the next time as against the insurer, involving the question of whether that first dispute is covered under the insurance policies held by that insured.
The second is that the case illustrates one of the most important aspects of another theme of this blog, which is the importance of what I have come here to call defensive plan building, which is a fancy way of saying developing benefit plans and affiliated structures that protect plan sponsors and fiduciaries from liability. Having liability insurance in place to protect them from the costs and potential liabilities of litigation is crucial. While in this case IBM can easily afford the uncovered exposure, this will not be the case for the vast majority of plan sponsors. Careful attention to the scope of, and holes within, insurance coverage for benefit plan operations is crucially important.
And finally, the humorous aspect of the decision is the third item, consisting of IBM being put in the position, to seek coverage, of having to argue for a broad definition of fiduciary in the context of a plan dispute. As we know from the controversy over the Department of Labor’s recent attempt to expand the definition of fiduciary under ERISA to catch more fish, most entities run from the label of fiduciary like a groom from a shotgun wedding.
Deconstructing the Language of Insurance Policies
I have been thinking a lot recently about the development and history of particular aspects of insurance policy language, and how they reflect the continuing efforts of drafters to take language that can often be imprecise and refine it to more accurately reinforce what the insurer actually intends to take on as a covered risk. Over time, many policy forms are revised as insurers find that limited knowledge about a particular type of risk at the time a policy provision is first crafted or changes in the development of the law in a particular area after the initial drafting mean that the original language chosen by the policy drafters did not accurately enough capture the extent to which an insurer meant to include, or instead exclude, a particular exposure from coverage. Historically, for those old enough to remember it, my favorite example was the exclusion written by many carriers before asbestos litigation broke out in waves, that precluded coverage of claims for asbestosis. Personally, I have little doubt that those who drafted that policy language thought they were saying by that language that the policies do not cover any bodily injury/tort liabilities arising from the mining, sale, use, etc. of asbestos and asbestos based products, and that based on what the authors knew of the subject at that time, they thought they were writing such a broad limitation on coverage. As time moves on though, it becomes clear that many suits arising out of asbestos involve other physical ailments, and not just the particular disease of asbestosis. End result? Courts find that the exclusion does not apply to the other types of injuries, since they fall outside the express wording of the exclusions, which were only written as applying to asbestosis, even though the authors undoubtedly understood the word asbestosis to mean something much more than just the specific disease that would bear that name. Indeed, what possible logic could there be behind intentionally excluding just the tens of thousands of claims for asbestosis, and not the tens of thousands of claims arising from other, similar diseases that stem from asbestos exposure and inhalation?
The history of pollution exclusions in liability policies is much the same, and another classic example. It has only taken some forty years for policy language to catch up to the extent of exposure created by environmental liabilities, and the industry has spent an untold fortune covering such claims and defending against claims for coverage of such claims in the interim. That this occurred is completely understandable, as the extent of exposure for pollution losses expanded exponentially only after much of the (then) standard policy language governing this issue was written.
Of course, a sane person might ask why I am spending so much time thinking about this these days, and there are a number of answers to that question, some even halfway legitimate or rational. But the reason is primarily that very interesting articles on the historical development of particular pieces of policy language or structure keep crossing my desk, and they keep reinforcing these points.
Here are two of them. First, the D & O diarist, Kevin LaCroix, has as well written a history of the development and adoption of the breach of contract exclusion that has become standard in many forms of policies as I have seen anywhere. As he explains, insurers always understood that the insuring agreement in their policies covered tort liability, and did not expand coverage to contractual liability; in essence, insurers and insureds alike understood that policies did not cover an insured’s failure to comply with its contractual undertakings, without any need for particular or express policy language detailing that point. However, as Kevin captures in his piece, over time this understanding started to fade into the ether, and insurers found it necessary to add a specific exclusion to policies expressly stating what had, in the past, simply been understood by all concerned, without any need for an express exclusion to that effect.
The second is this historical overview of the development and expansion of claims made policies. In this instance, as the author explains, claims made policies were developed for a particular type of exposure, but because of the usefulness of that structure with regard to such issues as setting premiums and other practicalities of the insurance business, it expanded into other forms of coverage, becoming, eventually, the industry’s “go to” form of coverage.
All of these examples bring one back to the same point, which is that the seemingly dry, contractual recitations in insurance policies are actually only the current manifestation (pun intended, for any insurance coverage lawyers reading this) of what is actually a living, breathing, ever evolving form of literature.
Cost of Living Benefits and Disability Benefits
Permalink | There are some who believe that insurance policies are by definition ambiguous - mostly lawyers who solely represent policyholders for a living - and others, on occasion including judges, who sometimes seem to believe that unless a policy specifically excludes something, than it is either ambiguous and provides coverage or simply provides coverage because the policy didn’t come out and say it does not. None of this is correct. Instead, the question of what policies cover should turn on the specific language of the policy in question and the rules of policy interpretation that apply in the specific jurisdiction in question.
The First Circuit applied this proper approach correctly here in this case, Prostkoff v. Paul Revere Life Insurance Company, where the parties disputed whether the plaintiff was entitled to cost of living increases in his disability benefits after the age of 65. The court correctly concluded that the policy language was not ambiguous and that the policy should not be construed to grant such coverage.
There isn’t much law talked about in this case, so I am not sure of its value to practioners, outside of the unlikely event that someone, somewhere, is presented with the exact same dispute over the availability of cost of living adjustments to disability payments after the age of 65. At a minimum, it’s a case that may be worth citing simply as an exemplar of the right approach to interpreting and understanding policy language that may not be perfectly clear on its face.
Me and LaRue, and Business Insurance Too
Permalink | There is an article in Business Insurance magazine this week, the June 25th issue, on the Supreme Court accepting review of the LaRue decision, in which I am quoted. The article is here - subscription required - and if you read it, you will note that it ends on my comment that I expect the Supreme Court to overturn the Fourth Circuit. A short article intended really just as a little news blurb on the subject for the benefit of the magazine’s business management oriented readership, the reporter did not have the space to go into why I think the Court will overturn the lower court decision, but I, obviously, have the space to do so here. So to the extent anyone is interested in the question, here’s my thinking.
First, I don’t really expect the Court to do much, if anything, with the question of the scope of equitable remedies issue. If anything, given the language of the statute, despite the fact that many people want the Court to expand individual remedies and available damages under ERISA - including, I have found in my litigation practice, many District Court judges who are displeased with the limitations of the statute but nonetheless consider themselves duty bound to enforce its restrictions on recovery - the Court has probably read the range of equitable relief that can be pursued in as broad and pro-plaintiff a manner as the language allows, with its test of whether the relief sought would be equitable or not way back in the days of the divided bench. There simply isn’t much more you can do with the statute’s restriction of recovery in certain circumstances to equitable relief unless you are simply going to ignore the actual language of the statute and rewrite it by judicial fiat, which this Court certainly isn’t going to do and arguably, the thinking of Ronald Dworkin and his heirs aside, no court should do.
In a way, this issue is a perfect parallel to a long running and common problem in the insurance coverage field, in which there was an oft litigated dispute over whether insurance policies, because they only cover claims for damages, cover lawsuits seeking equitable relief, the issue being that the policies only cover damages and equitable relief is something different than damages. In both insurance coverage and ERISA cases - such as LaRue - the simple fact of the matter is that equitable relief does mean something particular, something that is different than a claim for damages, and the question is what is the impact of that difference.
Second, with regard to the more fundamental question of whether the individual plan participant could recover just for losses to his account in the plan, yes, I do think the Court will overrule the Fourth Circuit and find that such an individual plan participant can bring such an action. I can never recall whether the saying is that the Court follows the election returns, or is that the Court doesn’t follow the election returns, so I looked it up, and in fact the saying is that they follow the returns, although every author who writes this then adds qualifiers to the comment, such as in this piece here. Either way, the kind of relief sought by the plaintiff in the LaRue case, to be able to enforce his investment instructions in his own retirement savings account, clearly fits with the current Zeitgeist and, more interestingly, is of a piece - and a natural fit with - the changes to retirement savings plans put into place by the Pension Protection Act. Beyond that, the statutory language that is at issue in this part of the case is completely open to either the interpretation selected by the Fourth Circuit, or that sought by the plaintiff, and thus the Court can realign this part of ERISA without doing any violence to the statutory language. Combine these things, and I get a reversal.
Massachusetts Insurance Coverage Law in a Nutshell
Permalink | I wanted to pass on to you a case out of the United States District Court for the Northern District of Ohio that was issued about the time I was trying a patent infringement case last month, and which I wasn’t able to comment on then as a result. With a little more time now, however, I wanted to go back to it and mention it here, because, despite being out of Ohio, it applies Massachusetts law on the duty to defend under insurance policies and on the rules for interpreting insurance policies. The court provides a terrific, and easily quoted, summation of the rules in this state on those issues:
Under Massachusetts law, as in most jurisdictions, "the question of the initial duty of a liability insurer to defend third-party actions against the insured is decided by matching the third-party complaint with the policy provisions . . ." Sterilite Corp. v. Continental Cas. Co., 17 Mass. App. Ct. 316, 318, 458 N.E.2d 338 (1984). The duty to defend arises if, in comparing the policy terms with the third-party complaint, "the allegations of the complaint are 'reasonably susceptible' of an interpretation that they state or adumbrate a claim covered by the policy terms . . . Otherwise stated, the process is one of envisaging what kinds of losses may be proved as lying within the range of the allegations of the complaint, and then seeing whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy." Id. (quoting Vappi & Co., Inc. v. Aetna Cas. & Sur. Co., 348 Mass. 427, 431, 204 N.E.2d 273 (1965)) (citations omitted); see also Simplex Techs., Inc. v. Liberty Mut. Ins. Co., 429 Mass. 196, 197-98, 706 N.E.2d 1135 (1999) (quoting same). The insured bears the initial burden of proving that a claim falls within the grant of coverage. See Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass. App. Ct. 318, 321, 568 N.E.2d 631 (1991).
"It is well settled in [Massachusetts] that a liability insurer owes a broad duty to defend its insured against any claims that create a potential for liability." Simplex, 429 Mass. at 199 (quoting Doe v. Liberty Mut. Ins. Co., 423 Mass. 366, 368, 667 N.E.2d 1149 (1996)) (emphasis supplied by Simplex court). The cause of action stated in the complaint need only give rise to a possibility of recovery, "there need not be a probability of recovery." Id. (citation omitted) (emphasis added). Indeed, a duty to defend may arise "even if the claim is baseless." Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st Cir. 1997) (applying Massachusetts law); see also Sterilite, 17 Mass. App. Ct. at 324 ("the insurer stands in breach of its duty even if the third party fails in the end to support any such claim of liability by adequate proof."). In addition, "[t]hat some, or even many, of the underlying claims may fall outside the coverage does not excuse [the insurer] from its duty to defend the actions." Simplex, 429 Mass. at 199 (quoting Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass. App. Ct. 318, 322, 568 N.E.2d 631 (1991)).
Massachusetts courts have explained that, "when construing the language of an insurance policy, it is appropriate 'to consider [whether] an objectively reasonable insured, reading the relevant policy language, would expect to be covered." Nashua Corp. v. First State Ins. Co., 420 Mass. 196, 200, 648 N.E.2d 1272 (1995) (quoting Hazen Paper Co. v. U.S. Fidelity & Guar. Co., 407 Mass. 689, 700, 555 N.E.2d 576 (1990). Further, "an insured is entitled to the most favorable interpretation of the policy language when there is more than one rational interpretation of the policy language, or where the policy language is ambiguous." Id.; see also Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 12, 545 N.E.2d 1156 (1989) ("Where the language permits more than one rational interpretation, that most favorable to the insured is to be taken.").
The case is Royal Insurance Company v. Boston Beer Company, 2007 U.S. Dist. LEXIS 25513 (D. Ohio 2007). The decision comes out of a court that, unfortunately, does not make all of its opinions available for free on line, something that all courts frankly should do, and so I cannot provide a link to the opinion.
Insurance Coverage Litigation and the Elastic Concept of Ambiguity
Permalink | When I was taking constitutional law in law school, I had a professor who liked to say that what standard of review the Supreme Court applied to certain types of issues depended on whether or not the justices wanted to uphold or instead overturn the statute before them; a more cursory level of review guaranteed that it would be upheld, and a more searching standard of review would inevitably lead to the statute being struck down. Readers of this blog who are lawyers probably had constitutional law professors who said much the same thing (even then, it didn’t sound particularly original to me).
The concept of ambiguity can sometimes play much the same role in insurance coverage disputes. Courts sometimes invoke it as a handy, out of the blue lightning bolt to tilt the case in favor of the insured, often, frankly, without providing much intellectual support for concluding that the particular insurance policy term involved is in fact ambiguous. Better courts and judges don’t do this, but it happens enough to be a given risk that must be accounted for by any insurance company involved in insurance coverage litigation. Most jurisdictions have a variety of legal rules that buttress the ambiguity question, which in theory should make the interpretation of debated policy terms more complicated than the simple syllogism of ambiguity equals coverage.
What brings these thoughts to mind is that David Rossmiller has a nice post today on the ambiguity of the manner in which courts find ambiguity in insurance policies. Better still, David provides a link to an excellent article on the subject that presents a perfect example of a court subtly handling the ambiguity question in a manner that should be the norm, and never the exception. If you want to know more on the elastic concept of ambiguity and its role in insurance coverage litigation, his post and the article he links to are a fine place to start.
The Eleventh Most Important Insurance Coverage Decision of 2006
Permalink | End of the year lists, to alter an old off color joke, are like opinions: everyone, it seems this time of year, has one. Some are superficial, silly and cursory, like this one here, and others, like Randy Maniloff’s list discussed in my last post, are substantive. For those of you who couldn’t get enough of Randy’s breakdown of the leading coverage decisions issued in the last year, David Rossmiller has his own interesting take on Randy’s top ten list here, including David’s wish that one of his favorite cases - from the Hurricane Katrina coverage cases - had made the list. For myself, I would have included a recent decision out of the Massachusetts Supreme Judicial Court in the list of top ten decisions, in which the state’s highest court cabined a developing trend in Massachusetts court decisions shifting the insured’s costs of litigating coverage disputes onto the insurer, at least in cases where the insured prevails in establishing coverage. I discussed that case here.
And why would I have included it in a list like Randy’s? Because beyond just its holding, I think, when you combine it with other decisions out of that particular court in the last year or so, you see a court beginning to rethink a tendency reflected in the state’s common law to favor insureds in coverage disputes, and to disconnect insurance coverage law from contract doctrines and the actual terms of the insurance policy to do so. We see, in cases such as this one, a swinging back of the pendulum, towards a more level field in the courtroom, at least at this point in this state. Time will tell whether this trend is real, and if it is, the results themselves will tell us whether it is a good thing. But for me, having watched a few generations of the Supreme Judicial Court approach this subject area in differing ways, this is what I make of the recent run of decisions out of that court.
And maybe, in honor of New Year’s, that is my own little take on the crystal ball: that we will see this trend continue in the Massachusetts Supreme Judicial Court, with an inevitable trickling down to the state’s intermediate appellate bench and its trial courts.
Viruses, Asbestos and Exclusions
I am fascinated by this new exclusion that is being drafted and for which approval is being sought, which seeks to exclude claims arising from viruses - not the computer kind, but things like avian flu. I understand the intent, but for any of you who, like I, have been at the insurance coverage business long enough, it ought to ring a bell in your memory about the "asbestosis' exclusions that were at play in the asbestos coverage litigation boom. For those of you who aren't old enough to remember it, the central theme was whether exclusions written to exclude asbestosis were meant to - and did - exclude other asbestos caused diseases, or instead only excluded claims where the victims actually developed the particular disease of asbestosis. For those of you who would like more than just this thumbnail history of the issue, try this case, Carey Canada, Inc. v. Columbia Casualty Co., 291 U.S. App. D.C. 284 (D.C. Cir. 1991).
If we are at all lucky, this new virus exclusion will never come into play on a large enough scale for it to matter, but if it does, one can predict deja vu all over again, to quote Yogi Berra - you can foresee plenty of coverage disputes over whether a particular virus or bacteria or ailment falls within the description of virus included in the exclusion's language, and over which ones do not. Experience suggests to me that the limits of the written word, and the outside limits on the skill set of even the best drafter of policy language, makes it awfully hard to draw a clear line on viruses within, and viruses without, the exclusion.
Contract Law and Insurance Coverage
Although we treat insurance coverage cases as contract disputes, I am not altogether convinced that the law of contracts really is the animating principle behind insurance coverage decisions. Certainly, at the very least, one can't take a gander at a standard contracts hornbook (that is lawyer talk for a book that provides a readers digest type summary of an entire legal subject) and really have any idea from it how to resolve an insurance coverage dispute. At a minimum, it is certainly the case that only by adding quasi-contractual principles - such as the reasonable expectations doctrine - to the traditional rules of contract law that the contract law regime can be seen as explaining the outcome of insurance coverage cases.
Whatever the case may be on that front, one of my favorite blogs, covering decisions out of the First Circuit, has the story of a recent decision from the First Circuit that applies the old law school contracts class chestnut of mutual mistake to an insurance coverage dispute. The post and the case are interesting reading, for those of us who like either contract law or insurance coverage, or worse yet, like me, both.
Insurance Policy Interpretation and ERISA Conflict of Interests
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.
Interpreting ERISA Plans and Insurance Policies
ERISA on the web generally does a nice job of chronicling ERISA decisions out of the Eleventh Circuit, but one of its recent posts, about an August 8th decision by the United States Court of Appeals for the Eleventh Circuit, jumped out at me more than most. The post discusses the case of Billings v UNUM Life Insurance Company, a case involving whether a pediatrician was entitled to continued disability benefits after being disabled due to obsessive compulsive disorder, or whether, instead, the mental health limitation in the plan limited the length of time to which he was entitled to benefits. Although the case presents a somewhat unusual, and certainly curiosity invoking, fact pattern, that is not what drew my attention. Instead, what caught my eye when reading the post was that it discussed the decision and described the court's reasoning in a manner that made me think not of ERISA litigation, but instead of the other focus of this blog, insurance coverage litigation. As the post described and the court's opinion reflects, the Eleventh Circuit decided the question by applying rules of policy construction to the plan language at issue that we more often see in insurance coverage disputes, such as the doctrine of contra proferentem (a fancy way of saying construe ambiguities in the document against the drafter, which in the insurance context most often means against the insurer); the court then decided on that basis whether or not the plan language limited the physician's benefits.
The post left hanging the question of why such an approach was applied, rather than the more typical approach of the court yielding to the administrator's interpretation of the plan language and ultimate decision so long as both were reasonable and rationally supported by the evidence, but it was easy to guess the reason, and a quick jump over to the opinion itself confirmed it; the plan at issue did not grant discretion to the plan administrator, meaning that the court, and not the administrator, was the ultimate decision maker on the issues presented by the claim.
What interested me most about the case, and the post, was that it illustrated the extent to which if you remove the deferential standard of review usually required of courts deciding benefit cases under ERISA from the equation, they would become, essentially, insurance coverage cases, consisting of a dispute over the plan language and an eventual decision by a court over which interpretation - that favored by the plan or that favored by the claimant - should be selected, with the outcome of that determination essentially deciding who wins. That is insurance coverage litigation in a nutshell, but normally is not ERISA benefits litigation in a nutshell.
A Fine Piece of Insurance Policy Analysis
I turn today from my recent obsession with ERISA preemption and the Wal-Mart case to other arguably unhealthy obsessions, including insurance coverage decisions, contract interpretation and the fine art of drawing a good judge. On Monday, the Massachusetts Appeals Court issued its opinion in American Commercial Finance Corp. v. Seneca Insurance Co.,in which the issue before the court was whether a fire insurance policy covered costs incurred after a fire to protect the premises against any possible subsequent damage (including another fire). As per the court's opinion, the policy did not contain any express language stating whether or not the policy covered such costs, and any experienced coverage lawyer will tell you that when a court starts off noting that fact or something similar, it is a pretty good bet that the ultimate finding will be that the loss was covered under the policy. Now the absence of policy language expressly precluding coverage of a certain event - of an exclusion actually stating that the policy does not cover a particular event or loss - should not lead inexorably to the conclusion that the event is therefore covered. Reasoning of this nature goes against the general proposition that an insurer cannot and should not be expected to anticipate every possible turn of events and account for them with express limitations on coverage written directly into the policy; if insurers were prophetic enough to be able to do so, as some courts and commentators have pointed out, you would end up with insurance policies that run into the hundreds of pages. That unremarkable idea, however, as anyone who has defended an insurance company against a claim that is not expressly excluded under a policy will tell you, is most often honored only in the breach.
But the Appeals Court judge here did not proceed in such a manner. Instead, as is more proper and far more defensible intellectually, he analyzed the actual language used in the policy related to the insured's obligation after a fire to use reasonable steps to protect the property from further damage, and concluded that it logically implied an obligation on the part of the insurer to pay for the costs of doing so. Although anytime you argue over words in a contract - any contract, not just an insurance policy - there is room to differ as to what the final conclusion should be as to how to interpret it, the judge's reasoning in this case is logical and hard to fault. As such, it is what many insurance coverage decisions are not: useful to future parties trying to guide their contracting and their conduct, understandable and defensible.
And this leads to the point about drawing a good judge. The opinion was authored by Judge Doerfer, who for several years before being appointed to the Appeals Court, served as a Superior Court judge, the Superior Court being Massachusetts' primary and highest level trial department. I can remember litigating complex coverage cases in state court back then, and being pleased to draw Judge Doerfer, who was known to have the intellectual curiosity and scholarly disposition needed to handle such cases. This is in contrast to a case - a true story - in which I appeared in a trial court (I won't identify it so as to protect both the guilty and the innocent) in a coverage case in which the insured and the insurer filed cross motions for summary judgment on the duty to defend. In that case, as in most cases, the determination of whether there was a duty to defend depended simply on a comparison of the policy to the complaint, with a duty to defend existing if the complaint described a claim that potentially might be covered. There generally either is or is not a duty to defend in that circumstance; it has to be one or the other, and all you have to do to decide is make that comparison, barring peculiarities of a nature absent from that case. Now, since one motion said there is a duty to defend and the other said there isn't, one of the parties had to be right given this standard, yet somehow this judge found both parties to be wrong, denying both parties' motions for summary judgment. It ended up being fixed on appeal, but it just goes to show that drawing the right judge right off the bat makes a world of difference, both in the outcome of the case and in the amount of litigation it will require to get to the right outcome.
Pollution Exclusions and the Reasonable Expectations Doctrine
There is an interesting decision out of the Massachusetts Supreme Judicial Court concerning the application of a policy endorsement and its mirror image exclusion to coverage of an oil leak from an oil delivery truck. The spill occurred while the truck was parked overnight, in between two separate days of delivering oil. The Supreme Judicial Court found that the oil leak fell within the coverage granted by the endorsement for the release of pollutants while being transported by the insured, and not within the exclusion for pollutants released while being stored. Neither the facts themselves nor the finding is particularly noteworthy, other than as a classic example of the traditional approach of Massachusetts courts to the interpretation of insurance policies. The court interpreted the plain language of the endorsement, and found that, particularly in light of the strict construction normally given to exclusionary language in the Commonwealth, the events at issue fit within the coverage grant and not within the language of the exclusion.
What was of more interest to me was the court's reliance on the reasonable expectations doctrine to buttress its reasoning and conclusion. The court stated:
This interpretation of the indorsement is consistent with what an "objectively reasonable insured, reading the relevant policy language, would expect to be covered." Hakim v. Massachusetts Insurers' Insolvency Fund, 424 Mass. 275, 283 (1997), quoting Trustees of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 844, 849 (1993). As noted above, City Fuel is in the business of delivering oil to residential customers. In purchasing an indorsement that covers the oil it delivers both while it is "[b]eing transported" and, more broadly, while it is "[o]therwise in the course of transit by" the insured, an objective purchaser in City Fuel's position would reasonably believe that a release of the oil would be covered from the time the oil is loaded onto its trucks until the time it is delivered to the customer, at least in the ordinary course.
For many years, Massachusetts courts assumed the existence and application of the reasonable insured doctrine in interpreting policies. Regardless of whether and how long it has been recognized in the Commonwealth, of interest to me is the intellectual rationale for this approach to interpretation. Is it legitimate? Is it intellectually defensible?
An insurance policy is a contract, so what warrants deviating from the actual language of it, and basing an interpretation instead on the supposedly reasonable expectations of only one of the parties to the contract? A while back, at a seminar for business and particularly real estate lawyers, I responded to an inquiry from a lawyer who represents real estate developers, and who objected to the idea that the policy was a contract that should be applied as written; his objection was premised on the assertion that what was written in the policy was not always consistent with the insured's purposes in acquiring the insurance. Now there are many ways to respond to such an argument, not the least of which is that, like any contract, it is the contracting party's responsibility to insure, pun intended, that the terms as reduced to writing are consistent with the actual agreement reached by the parties.
But the inquiry got me thinking about a more fundamental question. When I was in law school, more years ago than I care to admit to, Ronald Dworkin's writings on judicial reasoning and interpretation (generally of statutes) were a terrific starting point for much thought and consternation. His key point in one of his books, which one escapes me now, was the idea of the judge as just the next person in the course of reading and understanding the particular statute, or in this case contract, at issue. As extended to a contract, the idea was that the original contracting parties were the initial authors of the contract, but the words themselves in the agreement could not possibly encompass every possible scenario to which they might apply or account for every factual variable. As a result, strict constructionism, so to speak, of the contract is impossible; there is no original intent to the document that will cover all situations. The judge, however, becomes the next author, responsible for making a principled decision as to how to expand the understanding of the contract to make it properly fit the newest events to which the contract is being applied.
At the end of the day, isn't this how we should understand the reasonable expectations doctrine, as the court inserting itself into the role of being the latest author of the policy - rather than the policy and its meaning having been fixed in stone when the contracting parties entered into it? I am not convinced this is necessarily the right way to interpret policies, and I have some truck with the reasonable expectations doctrine itself (more on that some other time), but isn't that exactly what the Supreme Judicial Court was doing in this case, and isn't that exactly what courts are doing when they declare that the reasonable expectations of one party or another dictate that the policy be interpreted today in a particular manner?
The case, incidentally, is 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