Insurance Scrawl: Bad Faith Archives

February 2, 2008

Cleaning Up the Mess in Texas: Insurer Funding Payment of Liability Claims When Coverage Is Doubted

In May 2005, the Texas Supreme Court unanimously held that a liability insurer that voluntarily settles a claim against an insured may recover the payment against its own insured if it proves that the claim is uncovered and it reserved its right to seek recoupment. The Texas Supreme Court, while unanimous in result, was badly splintered in rationale.

Two years ago, the Court granted rehearing. Yesterday, the Court changed course, with a majority ruling that an insurer does not have a unilateral right or an equitable claim to recover a settlement payment. Excess Underwriters v. Frank's Casing (Tex. Feb. 1, 2008). The court reaffirmed its prior decision in Matagorda County, which barred a primary insurer from seeking recoupment of defense cost. Recent case law in other jurisdictions have split on the issue, but the more robust recent opinions (Illinois, Massachusetts, Wyoming) line up with Texas.

I analyzed the Supreme Court’s original opinion from May 2005 at some length previously, criticizing it fairly strongly on a number of its points and approaches. In the new iteration issued yesterday, the three opinions (majority and two dissents) adopt three approaches: (i) the contract is silent and insurers should fix the drafting omission; (ii) the contract is silent but equity should balance out the resolution (and generally permit recoupment); and (iii) in this particular instance, the contract is not so silent that when combined with the facts there was created a new implied in fact or new implied in law agreement to reimburse.

The Frank's Casing case was challenging in that an undeserving insured stood before the court – the insurer owed no obligation to pay. Had the insurer refused to pay, it would not have breached its contract and would not (on this basis) be liable for any bad faith or extra-contractual obligation. And the policyholder did not settle the case in reliance on the insurers forfeiting whatever claim they may have possessed at the time to obtain reimbursement.

The majority, per Justice O’Neil, found there was no fundamental unfairness in allowing the insured to reap the benefit of the settlement even when the claim is shown not to be covered. Settlement paid by the insurer is a welcome relief for the policyholder – unless the “other shoe” drops and the carrier seeks to prove in a separate suit both (i) the tort plaintiff was right and the insured-defendant truly was liable, (ii) the insured’s liability was such that it was entirely excluded from coverage and (iii) the insurer alleges the insured must reimburse it for all the money it paid. This result is essentially worse for the insured than is “rolling the dice” at trial, because if the case is triable then a reasonable jury could rule in favor of the insured. By the insurer’s settling, the insured loses the opportunity to have an outcome whereby it walks scot free.

Faced with a reasonable settlement offer from the tort plaintiff, what is the carrier to do? An insurer surely has a privilege to reject an unreasonable settlement offer, but a reasonable settlement offer cast against doubtful coverage places the insurer in a difficult situation. If the insurer doubts the existence of coverage but later is proven wrong, and the settlement offer was reasonable but spurned, the insurer is at risk of being held liable for the entirety of the verdict against the insured even if the verdict exceeds policy limits. This is a consequence of the law of “third party” bad faith or what is called in Texas “Stowers.” An insurer that unreasonably fails to settle a third-party claim that results in a verdict adverse to the insured is potentially liable for all the damages stemming from its unreasonable conduct, i.e., the value of the verdict that could have been averted had the settlement been accepted.

The insurers and their backers in the Texas Supreme Court found it unfair that the insurer could be set up or pressured to make payment on behalf of an insured yet be unable to prove that coverage was not properly owed. The split between the majority and dissent might be thought of as a difference in opinion whether the insurers are required to put into the policy some sort of provision addressing the situation of a reasonable settlement that might or might not be covered. The majority holds the insurer that fails to clarify its contract on this point bears the consequences, that is, if it makes the payment to extinguish the insured’s liability it does so without recourse against the insured (unless the insured expressly agrees to a right of reimbursement). The articulate dissent by Justice Hecht reasons that because the policy is silent the insurer should be able to pay under protest (i.e., with a reservation) such that it can mount an equitable claim to recover the benefit conferred on the insured that was never owing to begin with (assuming that coverage does not apply).

Justice Hecht’s dissent argues cogently that principles of equity generally permit a party that doubts performance is owed to tendered performance subject to a reservation; the dissent then argues that there is no distinction between insurance companies and other contracting parties. Assuming Justice Hecht is right in his premise on what equity generally provides, policyholders need to fashion a persuasive response as to why insurance is different.

I think the difference lies in the fact that other kinds of contracting parties do something else in the world other than make contracts. If I make widgets and you are a supplier, and you then think that you don’t owe me some delivery, equity (apparently) will permit you to provide performance to me, subject to straightening it all out later. No doubt the parties’ contract does not address this situation, that is, of uncertain obligations to perform, and the law or equity seeks to ensure a fundamentally fair outcome and does not blame the parties for not accounting for this situation ex ante.

That widget makers and their suppliers do not lay out in their contracts what happens in these circumstances is understandable. They are in the business of widgets, and their making a contract is ancillary to what they do. But insurance companies are different.

Insurers are professional contract-writing companies; what they sell are not widgets but contracts. Insurers have the knowledge that there are many circumstances where coverage may be uncertain but a reasonable settlement will be presented. What the insurer may do or may be required to do might be deemed to be something in the insurer’s superior knowledge vis a vis a prospective insured, such that an omission in the contract can be considered to be deliberate by the insurer. Under this approach, an insurer’s failure to clarify what might happen in a situation that is not altogether unlikely to arise can be considered a species of sharp practice such that Justice Hecht’s equitable remedy will not lie. It is well established that he who seeks equity must do equity, and that doctrines such as unclean hands will preclude the exercise of equity power. Accordingly, while the dissent makes a powerful argument that in an ordinary circumstance payment under protest is allowable and equity will reallocate, an insurer that finds itself in this situation and has not clarified its intentions in its contract has only itself to blame, such that equity should not intervene.

Instead, insurers should write out how such claims will be handled, and allow insurance regulators and market forces to scrutinize and differentiate among insurance products. This is the essence of the holding of the new majority opinion in Frank’s Casing:

We resolved this quandary in Matagorda County, determining that the risk of coverage uncertainties was best placed with the insurer. Id. We reasoned that “[r]equiring the insurer, rather than the insured, to choose a course of action is appropriate because the insurer is in the business of analyzing and allocating risk and is in the best position to assess the viability of its coverage dispute.” Id. at 135. An insurer in this situation has a number of options. If the insurer assesses its coverage position as strong, it may refuse to participate in settlement and rely on its coverage action, leaving the insured to negotiate a settlement with its own resources. Or, an insurer may seek prompt resolution of its coverage dispute, a course we have encouraged insurers in this position to take. Id. at 135 (citing State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996); Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997)). Or, if an insurer’s coverage position is difficult to assess, as is sometimes the case, the insurer can leverage the coverage dispute during settlement negotiations to lower the claimant’s demand; by paying the negotiated claim, the insurer eliminates its own potential bad-faith liability, saves defense costs, and avoids protracted coverage litigation with its insured. Or, at the outset, the insurer may include a reimbursement right in the policy, which may yield a lower premium than a policy that does not contain such a right.

Slip op. at 7. Texas joins the high courts of Massachusetts and Illinois, among others, in placing the initial onus on insurers to state their intentions ex ante and not to permit case by case adjudication after the tort claim is settled. An insurer that has a contract that is silent on the point can choose to settle the claim against the insured and fund the settlement, can arrange with the insured to provide it with a loan to fund a settlement while the coverage issues are worked out, or can refuse to pay for a settlement and hope to prove there is no coverage or that its refusal to perform at least was reasonable. There is no reason for courts to create one further remedy for insurers when they are well-positioned to protect themselves at the point of contract. The Texas Supreme Court in its majority opinion contributes to stability in contract relationships and cleans up what had been a real mess conceptually in the initial opinion in Frank’s Casing.

Posted by Marc Mayerson at 9:03 AM | Comments (0) | TrackBack

August 30, 2007

The "Insurance Hoax" -- Insurers Paying Too Little and Too Late

Bloomberg recently published a hard-hitting piece decrying the property-casualty industry's claims-handling practices. Insurers perceive that the article to punches below the belt, as this response from the Insurance Information Institute shows. The III piece is interesting to me because of its immoderate tone, something at odds with most of the writing that comes from III, which is a great source of financial statistics in particular on the performance of the P-C insurance industry. While the III is certainly right that insurers pay claims every day, the III and the rest of the industry need to recognize the wide-spread perception that at the point of claim insurers adopt an adversarial posture. Experienced, thoughtful observers of the industry have written about this at length (and the linked article is I think the most important thing ever written on the P-C industry), and the point of first-party insurance bad-faith law in part is to counterbalance the power imbalance that insurers hold over their insureds at the time of claim -- at the time their insureds are most in need and dependent on their performance, which explains the emotional oomph that typifies through-the-eyes-of-insureds' reporting on insurers' claims-paying (or claims-denying) practices.

I agree with the III that the Bloomberg story is too facile, and it is inappropriate to leap from the observation that an insurer paying less than what the policyholder wanted ineluctably means that the insurer is paying less than what the policyholder deserved. I recently suffered a major homeowners' loss when a (crazed) intruder broke into my home and caused huge amounts of damage; our insurer was fantastic in dispatching someone to board up a broken door, arrange for a contractor to do repair work, and reimburse us for other loss (including paying the vendor of our choice on some home electronics). So I know first hand that insurers can ride to the rescue, treat their customers with "good hands," and live up to their advertising slogans. On the other hand, I bring suits against insurers on behalf of clients when I think amounts are owed and unpaid, and I am kept busy by wrongful denials by insurers inflicted against my corporate clients (both large and small). At a time when respected news outlets like Bloomberg (and CNN and PBS) feel comfortable producing pieces that seem well suited to the Fight Bad Faith Insurance Companies website, the insurance industry should look deep into its practices and understand the perceptions of consumers and businesses to ensure that insurers' historic mission of helping their insureds, being "there" in the time of need, is embraced and, more importantly, put into practice every day in paying claims.

Posted by Marc Mayerson at 1:06 PM | Comments (8) | TrackBack

The "Insurance Hoax" -- Insurers Paying Too Little and Too Late

Posted by Marc Mayerson at 1:06 PM | Comments (6) | TrackBack

February 18, 2007

Does a Court's (Reversed) Disparagement of the Policyholder's Coverage Claim Alone Eviscerate Its Bad-Faith Claim?

A common enough scenario in a liability-insurance case: the parties file cross-motions for summary judgment, with the insurer arguing it has no duty to defend. In Acme United Corp. v. St. Paul Fire & Marine Ins. Co. (7th Cir. Jan. 9, 2007), the question presented was whether an advertising injury liability insurance policy provided coverage for a suit against the insured for product disparagement. In Acme, the district court accepted the argument of the insurer, thus cutting off the ability of the policyholder to obtain recovery of the defense costs it had run up. Where, as here, the appellate court reverses and finds coverage, does the district court's now-reversed ruling effectively impale the policyholder's bad-faith claim?

Acme manufacturers scissors and paper trimming products and advertised that its products were better because they contained titanium. The question naturally arises -- “better”? "better" than what? Fiskars, another scissors manufacturer, believed that Acme was dissing its products, and Fiskars sued on the ground that there really wasn’t titanium in Acme’s products or that it was negligible or not on the blade or didn’t keep Acme’s scissors extra sharp when tested against Fiskars' products that used only stainless steel. Acme turned to St. Paul and asked for a defense, which St. Paul denied.

St. Paul's policy provided coverage for “advertising injury offense” which was defined in part to be “[m]aking known . . . . material that disparages the . . . products of others.” The district court agreed with Acme that its promotional materials constituted advertising and were disparaging of stainless-steel blades, but granted summary judgment to St. Paul on the ground that the disparagement was not of Fiskars’ products specifically.

The Seventh Circuit agreed that the advertising by Acme was disparaging, finding that disparagement results when a “false comparison” is made or when advertising “bring[s] reproach . . . by comparing with something inferior.’” Slip op. at 6 (citing dictionaries). In looking at Fiskars’ complaint against Acme, the appeals court reasoned that “[w]hile Fiskars did not allege that Acme actually named Fiskars’ products in the text of its advertisement, Fiskars’ underlying complaint specifically alleged that Acme’s advertisements were directed at Fiskars’ products and that Fiskars lost sales to Acme as a result.” Slip op. at 7. Accordingly, “Acme disparaged Fiskars products through a false comparison between its products and [implicitly] Fiskars’ products.” Id. As a result, even assuming that the policy requires a specific “other” in the disparaging of “products of others,” the complaint alleged sufficient facts to indicate the disparagement was of Fiskars even without Fiskars being named. As a result, the Seventh Circuit reversed the grant of summary judgment in favor of St. Paul and directed that summary judgment on the duty to defend be instead granted to Acme. (Any further argument that the Acme's ads were not sufficiently focused on Fiskars instead of the broad class of paper-cutting devices presumably should be advanced in the underlying case that should be being defended by the insurer.)

When St. Paul won at the trial court on its motion for summary judgment, we can assume that the district judge endevored to construe the facts in the light most favorable to the nonmoving party, Acme, construed any uncertain or ambiguous policy language in favor of the insured, Acme, but concluded that St. Paul was entitled to judgment as a matter of law. The Seventh Circuit disagreed and not only found that summary judgment should not be granted in favor of St. Paul (such that the matter should be remanded for trial), but in reversing the district court ruling it directed that summary judgment should be entered in favor of Acme.

Yet, the question arises whether St. Paul is inoculated against a bad-faith claim on the ground that even though its coverage determination was wrong it was at least a reasonable one – given that the district court judge agreed with it and entered summary judgment in its favor. Putting the question more broadly, if an insurer wins a summary judgment ruling on coverage does it simultaneously show that there are no circumstances that would support the policyholder's bad-faith claim (with respect to the coverage decision itself).

In general, insurers face first-party bad-faith liability only if they deny a claim unreasonably and without proper cause. Here, St. Paul may argue that the district court’s decision in its favor perforce shows that its decision was reasonable. Accordingly, so the argument would go, it cannot be held liable for bad faith.

The California Court of Appeal has addressed the question whether a trial-court victory by an insurer insulates its from bad-faith liability on the ground that the decision alone demonstrates that there was a genuine issue as to coverage (and thus the insurer’s denial of coverage even if erroneously was reasonable). In Filippo Industries, Inc. v. Sun Ins. Co., 74 Cal.App.4th 1429 (Cal. App. 1999), the insurer argued that the trial-court ruling in its favor – though reversed on appeal – established that its interpretation had a sufficient basis as to evidence a genuine-issue as to whether coverage applied. In effect, the carrier argued that a trial court ruling in its favor alone precludes bad faith as a matter of law.

The California appellate court rejected this proposition, reasoning:

“We certainly have great faith in the sagacity and reasonableness of trial judges but we decline to impute infallibility to any court, trial or appellate. . . . . Mistakes happen, but . . . that mistake should [not] automatically result in depriving an insured of [its bad-faith claim].”

Insurers are required to construe uncertain policy language or unclear facts in favor of coverage; consequently, they may not rely on ambiguous policy language to argue there is a legitimate dispute and thus no bad faith. Employees Benefit Ass’n v. Grissett, 732 So.2d 968, 976 (Ala. 1998) (“[I]n a ‘normal’ case, the insurer cannot use ambiguity in the contracts as a basis for claiming a debatable reason not to pay the claim.”); Mixson, Inc. v. Am. Loyalty Ins. Co., 562 S.E.2d 659 (S.C. App. 2002) (Although no legal precedent on point, common meaning of disputed term indicated that insurer’s contrary construction was unreasonable.); Lucas v. State Farm Fire & Cas. Co., 963 P.2d 357 (Idaho 1998) (uncertain or disputed factual record insufficient to preclude bad faith claim).

A trial court’s erroneous ruling on the question of coverage is not sufficient to show that the insurer’s original coverage denial was reasonable at the time it was made. See generally Sobley v. S. Natural Gas Co., 210 F.3d 561 (5th Cir. 2000). Indeed, at trial of the bad-faith claim, the court should preclude the insurer even from offering into evidence the erroneous trial court ruling for a number of reasons, including: (i) because the court’s decision post-dates the coverage determination the decision itself is irrelevant as a matter of law; (ii) an erroneous ruling by a trial court does not establish the reasonableness of the carrier’s initial erroneous coverage determination; and (iii) it would be prejudicial to admit the ruling into evidence because it threatens to displace the role of the jury or risks the jurors overweighting the overruled decision.

Posted by Marc Mayerson at 11:02 PM | Comments (8) | TrackBack

Does a Court's (Reversed) Disparagement of the Policyholder's Coverage Claim Alone Eviscerate Its Bad-Faith Claim?

The California appellate court rejected this proposition, reasoning:

“We certainly have great faith in the sagacity and reasonableness of trial judges but we decline to impute infallibility to any court, trial or appellate. . . . . Mistakes happen, but . . . that mistake should [not] automatically result in depriving an insured of [its bad-faith claim].”

Posted by Marc Mayerson at 11:02 PM | Comments (2) | TrackBack

January 21, 2007

Cone of Silence or Echo Chamber: A Policyholder’s Privileged Communications and its Insurers

An insurance company that receives a claim from one of its policyholders inevitably wears both a white hat and a black one. The insurer is there to help its insured deal with the claim – it may dispatch claims handlers or service providers to help the policyholder in its time of need; the insurer, however, also is the insured’s adversary in the sense that it must determine whether it has any obligation to pay the insured. To the latter extent, the insured and the insurer have directly adverse interests. (The law of first-party insurance bad faith is predicated on the recognition in part of this fundamental adversity of interests between the insurer and its insured, especially at the precise moment when the insured is calling upon the insurer for performance.)

The insurer’s wearing two hats poses the opportunity for mischief when those roles get confused or blurred. Take the example of a defense lawyer hired by an insurance company to defend the insured: the defense attorney plainly has an attorney-client relationship with the insured, the touchstone of which is confidentiality. Assume that the defense lawyer is told a fact by the insured that supports the insurer’s denying coverage: the insured confesses to being drunk while driving, the insured acknowledges that it knew of a latent problem before it purchased the policy, or the insured knew of the potential claim against it for a long time but had simply hoped it would go away and so did not notify the insurer sooner. The insurance company might wish to learn of this fact because it might permit it to terminate its defense obligation and avoid paying anything on the claim. In these circumstances, may the defense counsel tell the insurance company about this admission from the insured?

Ratting out the insured in this fashion would be found to be a breach of the lawyer’s duties to his or her client (the policyholder). What happens if the insurance company acts on this information to deny coverage? Has the insurer breached any duty?

Different courts have approached this question somewhat differently, but no court (to my knowledge) is comfortable with the insurer acting on this information. The Arizona Supreme Court has held that the insurer has committed an act of bad faith if it denies coverage based on defense counsel’s breach of the policyholder’s confidence. In Parsons v. Continental National American Group, 660 P.2d 94 (Ariz. 1976), the court held:

When an attorney who is an insurance company’s agent uses the confidential relationship between an attorney and a client to gather information so as to deny the insured coverage . . . . we hold that such conduct constitutes waiver of any policy defense, and is so contrary to public policy that the insurance company is estopped as a matter of law from disclaiming liability.

550 P.2d at 99. Other courts have adopted an exclusionary-rule approach, barring the insurer from using the information or any fruit from the poisonous tree in service of a denial of coverage Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 560-61 (Tex. 1973); Snodgrass v. Baize, 405 N.E.2d 48, 54 (Ind. App. 1980). These cases recognize that mixing the insurer’s two roles – mixing up its white and black hats – is at a minimum inappropriate and potentially abusive. This double betrayal – of confidence and using the confidence as a weapon against the insured – calls for some remedy.

But let’s vary the situation somewhat, from an insurer that has provided defense counsel to an insurer that has not provided counsel when the insured believes it should have done so. In those circumstances, the insured will defend the liability case against it and separately pursue coverage against the insurer in a coverage case. Routinely, we see insurers seeking discovery of underlying defense counsel’s files. Often, this is seemingly an effort to obtain evidence that will embarrass the insured and sway the jury – for example, a memo from defense counsel to the insured evaluating the liability case and stating something like “the [insured] company’s conduct flagrantly disregarded standards for appropriate conduct and safety and this led directly to the injury.” In a coverage case, the insurer would like to proffer this kind of document against the insured to argue that the insured expected/intended the injury and thus coverage should not be provided. (Moreover, carrier counsel wants to argue at closing that “even the insured’s defense counsel agrees that the insured flagrantly disregarded safety standards, etc. etc.”) Discovery of this kind of document also makes carrier counsel’s job easier because the defense lawyer has investigated and synthesized the facts leading to the liability claim.

Insurers have argued that they are entitled to the discovery of this information in the coverage case on the ground that it fits within the scope of discovery and that, although the documents constitute privileged communications, no privilege is properly assertable as against them. The rationale insurers offer is that they share a common interest with the insured in these privileged communications.

A tiny number of jurisdictions have accepted this argument, and the vast majority of cases have rejected it. In Illinois for example, where the argument has been accepted, insurance companies have an unfettered right of access to defense counsel’s files. Waste Management Inc. v. International Surplus Lines Ins. Co., 579 N.E.2d 332 (Ill. 1991). The Illinois Supreme Court reasoned that, even though the insurer was alleged to have breached its contract with the policyholder, the insurers nonetheless shared a “common interest” with the insured in defeating the underlying plaintiff’s claim against it. Because the insurers “shared” in the privilege, relevant materials could not be withheld on this ground. (In other words, like Big Brother, in Illinois one’s insurers are always looking over defense counsel’s shoulder, even where the insurer has breached its contract to perform.)

Thus, even though there is direct adversity of interests between the insurers and the policyholder at the time that the insurers are seeking discovery of defense counsel-s files, the Illinois courts hold that at the time of document creation (as opposed to disclosure) the insurer’s are privy to the thoughts of defense counsel.

Policyholders find this argument preposterous; the insurer may be in breach of contract and unquestionably is seeking bullets to fire at the insured. Ruling that insurers are on the same side as the policyholder and therefore get access to defense counsel’s files confuses the two different roles of insurers – in service of a coverage denial insurers plainly have adverse interests with the insured, and when the insurer has failed to perform they have failed to come to the insured’s aid and rescue (the role that forms the premise for the Illinois courts’ ruling that insurers have a common interest with the insured). As the Fifth Circuit observed in a related context:

We know of no case in which the insured’s duty of assistance and cooperation has been used to force a putative insured to divulge to the insurer every jot and tittle of information which may aid the insurer in defeating his claim for coverage but which in no way hinders the insurer’s ability to provide the insured with a proper defense.

Martin v. Travelers Indemnity Co., 450 F.2d 542, 553 (5th Cir. 1971).

Most courts have rejected the Illinois approach, on a variety of rationales. See Remington Arms. Co. v. Liberty Mut. Ins. Co., 142 F.R.D. 408, 418 (D. Del. 1992). One is that, properly understood, the common interest “privilege” is no privilege at all but rather is a shorthand way of considering whether the disclosure of otherwise privileged communications effects a waiver of the privilege. See United States v. McPartlin, 485 F.2d 1321, 3336 (7th Cir. 1979). As a result, whether there is a common interest depends on the circumstances at the time of disclosure. In these circumstances, while the coverage war is en flagrante there will typically not be a common interest. Put differently, the insured’s privilege still exists and may properly be interposed as a basis for refusing to produce otherwise relevant documents and materials. In Re Envtl. Ins. Declaratory Judgment Actions, 612 A.2d 1338, 1341-43 (N.J. Super. App. Div. 1992). An insurer cannot force a waiver by the fact that a coverage suit is pending. (Relatedly, courts uniformly hold that the mere fact that the insured has been required to file a suit against its insurer does not waive privilege or put all privileged communications “at issue” (which is simply another variant of waiver principles). See FDIC v. US, 527 F. Supp. 942, 950-51 (S.D.W.Va. 1981) (advice-of-counsel defense places communications at issue and subject to discovery); Long Island Lighting Co. v. Allianz Underwriters Ins. Co., 749 N.Y.S.2d 488, 496 (App. Div. 2002); Home Ins. Co. v. Advance Mach. Co., 443 So. 2d 165, 168 (Fla. 1st Dist. App. 1983); Rockwell Int’l Corp. v. Superior Court, 26 Cal. App. 4th 1255, 1268 (1994).)

Nor is the insured’s duty of cooperation with its insurers construed as a waiver of privilege. Metropolitan Life Ins. Co. v. Aetna Cas. & Sur. Co., 730 A.2d 51, 63-64 (Ct. 1999); Martin, 450 F.2d at 553. See also Gulf Ins. Co. v. Transatlantic Reinsurance Co., 788 N.Y.S.2d 44 (1st Dep’t 2004).

So, insurers cannot compel insureds to provide them with privileged (or work product) information. This is true both informally and in the context of coverage litigation. Nevertheless, insureds and their insurers may wish to exchange defense counsel’s evaluation of a case, for example. Can an insured provide its carrier with privileged communications without fear that it has effected a broad waiver with respect to the tort claimants? Does a policyholder need fear that its carrier will use that communication against it to deny coverage?

Policyholders may wish to share defense-counsel’s analysis with its insurers to facilitate the insurers decision to pay to settle a case. I have found it reasonably common in the directors’ and officers’ liability insurance, fiduciary-liability insurance, and errors and omissions insurance contexts that policyholders and their insurers do share privileged communications, reflecting the reality that in many cases the insurers will pay for settlement of the underlying claim against the insured. On the other hand, in the product-liability and mass-tort context, such sharing of information is seemingly more rare.

If an insured elects to share privileged information, is there a risk of finding of waiver? While I am reluctant to provide a definitive conclusion one way or the other, no doubt there is a risk that a court may find waiver.

The starting point for any analysis of this problem is that, in most jurisdictions, there is no insured-insurer privilege. Linde v. Resolution Trust Corp., 5 F.3d 1508, 1514-15 (D.C. Cir. 1993) (“we now firmly reject any sweeping general notion that there is an attorney-client privileged in insured-carrier communications”). As the Linde court ruled:

An insured may communicate with its carrier for a variety of reasons, many of which have little to do with the pursuit of legal representation or the procurement of legal advice. Certainly, where the insured communicates with the carrier for the express purpose of seeking legal advice with respect to a concrete claim, or for the purpose of aiding an insurer-provided attorney in preparing a specific legal case, the law would exalt form over substance if it were to deny application of the attorney-client privilege. However, a statement betraying neither interest in, nor pursuit of, legal counsel bears only the most attenuated nexus to the attorney-client relationship and thus does not come within the ambit of the privilege. . . . . [I]f what is sought is not legal advice, but insurance, no privilege can or should exist.

Linde, 5 F.3d at 1515. See also Aiena v. Olsen, 194 F.R.D. 134, 136 (S.D.N.Y. 2000). As the Alaska Supreme Court explained, “communications between insured and insurer are not in the same class as communications between client and attorney, because the insurer may use its information for purposes inimical to the interests of the insured.” Langdon v. Champion, 752 P.2d 999, 1002-03 (Alaska 1988). Thus, some courts have found that otherwise privileged communications lose their protection from sharing them with an insurer. See Go Medical Indus. Pty., Ltd. V. C.R. Bard, Inc., 1998 WL 1632525 (D. Conn. Aug. 18, 1998); Hartford Fire Ins. Co. v. Guide Corp., 206 F.R.D. 249, 250-51 (S.D. Ind. 2001).

Even if both the carrier and its policyholder would benefit from a defense victory over a tort plaintiff, that may not be sufficient to establish a “common interest” to maintain privilege. See Shamis v. Ambassador Factors Corp., 34 F. Supp. 2d 879, 893 (S.D.N.Y. 1999) (holding that the fact that two entities would benefit from a judgment in favor of the plaintiff, that is not sufficient to find that they share an identical legal interest). What constitutes a common interest has been defined in the following manner:

A community of interests exists among different persons or separate corporations where they have an identical legal interest . . . . The key consideration is that the nature of the interest be identical, not similar, and be legal, not solely commercial. The fact that there may be an overlap of a commercial and legal interest for a third party does not negate the effect of the legal interest in establishing a community of interest.

North River Ins. Co. v. Columbia Cas. Co., 1995 WL 5792, at *3 (S.D.N.Y. Jan. 5, 1995) (citation omitted). The court continued, “What is important is not whether the parties theoretically share similar interests but rather whether they demonstrate actual cooperation toward a common goal.” Id. at *4. Stated further, the same court held in International Insurance Co. v. Newport Mining Corp., 800 F. Supp. 1195 (S.D.N.Y. 1992):

The “common interest,” logically viewed, and New York law supports, which makes the privilege inapplicable, is where an attorney actually represents both the insured and the carrier – joint representation – and accordingly both clients are working together with a single attorney toward a common goal.

Id. at 1196 The International Insurance court found that, while the insurance carrier and its insured shared the same desire for a successful defense of a legal claim against the insured, this was insufficient to find a common legal interest. Id. The International Insurance case involved a defendant-insured seeking to withhold from a plaintiff-carrier materials that were privileged. When the plaintiff-insurer argued that the common-interest exception should apply and the privileged materials (which were otherwise relevant) therefore should be produced, the court disagreed. The court stated:

I conclude that while the insurer had the same ‘desire’ as its insured to have a successful defense of [the actions that necessitated the case at bar], for if coverage was later determined to exist, it would be responsible for any obligation of its insured remaining, this in my view is an insufficient ‘common interest’ to warrant invasion of the attorney-client relationship with the privilege . . .

By extension, and this is the key point, if the insured provided these types of materials to its insurers, then it is providing the communications to an entity that does not share a common interest; therefore, privilege (or immunity) may not be preserved vis a vis (other) third parties. Kansas City Fire & Marine Insurance Corp., 351 N.Y.S.2d 767, 768 (App. Div. 1974).

In Go Medical Industries Pty, Ltd. v. C.R. Bard, Inc., 1998 WL 1632525, a patent-infringement action, the defendant sought production of the plaintiff’s communications with its insurance carrier, which included certain opinions of its lawyer that had been provided to the carrier. The plaintiff alleged the common-interest extension of the attorney-client privilege shielded these documents from discovery. The court in Go Medical disagreed, finding that the plaintiff and its insurance carrier did not share common legal interests:

Go Medical’s [the plaintiff] purpose in providing these documents to CIC [its insurance carrier] was to try to obtain coverage from CIC for expenses Go Medical would incur in litigation to stop the alleged infringement of its patent. However, whereas Go Medical’s interest is in protecting its patent, CIC has no interest in the [] patent. CIC’s interest in Go Medical’s infringement claim is limited to CIC’s coverage of Go Medical’s litigation expenses. An insurer’s contractual obligation to pay its insured’s litigation expenses does not, by itself, create a common interest between the insurer and the insured that is sufficient to warrant application of the common interest rule of the attorney client privilege.

Id. at *3.

So, can communications with an insurer be conducted in a manner that does not result in a waiver? Certainly, if the insurer acknowledges coverage and takes over control of the defense, unquestionably in that circumstance the insurer is functioning as the insured’s lawyer and is entitled to no less protection. When the insurer has not yet provided full-throated acknowledgement of coverage, the insured and the insurer need to lay a foundation to show that, in the particular circumstance, the exchange of privileged information should not be deemed to be a waiver. To accomplish this, the parties are advised to make clear that there is a purpose related to the settlement or defense of the underlying case that justifies sharing the information – that is, the justifies extending the cone of silence over lawyer-client communications of the policyholder to include the carrier. (The carrier’s merely sharing the hope that the policyholder may win the liability case is not likely to be sufficient basis for proving sufficient commonality of interest. E.g., Shamis, 34 F. Supp. 2d at 893.)

So the issue for all counsel involved – policyholder, carrier, tort plaintiffs, government investigators – is whether a foundation has been established that satisfies a showing that in the particular circumstance disclosure of privileged/work product material is consistent with preserving the confidentiality protections we otherwise protect them with. See Cutchin v. State of Maryland, 143 Md. App. 81 (2002); Metroflight Inc. v. Argonaut Ins. Co., 403 F. Supp. 1195 (N.D. Tex. 1975); Reavis v. Metro Property & Liability Ins. Co., 117 F.R.D. 160 (S.D. Cal. 1987); Bellman v. District Court, 531 P.2d 632 (Colo. 1975); Grand Union Co. v. Patrick, 246 So.2d 474 (Fla. Dist. Ct. App. 1971); People v. Ryan, 197 N.E.2d 15 (Ill. 1964). Some courts have ruled that statements to an insurance adjuster are protected by the work-product doctrine, and thus the plaintiff who later sues the insured making the statement cannot obtain its discovery. In re Fontenot, 13 S.W.3d 111 (Tex. App. 2000); Heidebrink v. Moriwaki, 706 P.2d 213 (Wash. 1985). Some courts have employed seemingly more stringent proof requirements to show that privilege should be preserved. In Re Bevill, Bresler & Schulman Asset Mgmt Corp., 805 F.2d 120, 126 (3d Cir. 1986); Government of Virgin Islands v. Joseph, 685 F.2d 857, 862 (3d Cir. 1982); Sheet Metal Workers Int’l Ass’n v. Sweeney, 29 F.3d 120 (4th Cir. 1994); Ft. Howard Paper Co. v. Affiliated FM Ins. Co., 64 F.R.D. 694 (E.D. Wisc. 1974); Travelers Ins. Cos. v. Superior Court, 143 Cal. App. 3d 436 (1983).

The key lesson is that, if one desires to preserve the privilege (or immunity) that would otherwise attach to a statement shared with an insurance company, the circumstances surrounding sharing the statement should indicate that it is being provided to assist the insurer in the defense or in evaluating the settlement of the claim. E.g., Exxon Corp. v. St. Paul Fire & Marine Ins., 903 F. Supp. 1007, 1010 (E.D. La. 1995). In other words, to the extent that one can show that the insurer’s role is in protecting the interest of the insured, then the communication is more likely to remain protected. If the role of the insurance company is more ambiguous – that is, if it is unclear which hat the insurer is wearing and whether the statement might be used against the insured in service of a denial of coverage – then the risk of a court finding waiver is increased. See Hedebrink, 706 Pl.2d at 220 (Goodloe, J., dissenting) (“The use of the statement for a purpose adverse to the interest of the insured is certainly inconsistent with the claim of privilege upon his behalf.”); see also Vermont Gas Systems, Inc. v. United States Fid. & Guar. Co., 151 F.R.D. 268, 277 (D. Vt. 1993); cf. Great American Surplus Lincs, Inc. v. Ace Oil Co., 120 F.R.D. 533 (E.D. Cal. 1988) (preserving insurer’s privilege re information shared with reinsurer). Ideally, the policyholder and the insurer will enter into an agreement that pledges the insurer will maintain the communication in confidence, is receiving the communication for the purpose of evaluating the defense of the claim or settlement of the claim, and will not use the communication as a basis to deny coverage to the insured (subject to the insurer’s being able to use the documents in defense of a failure-to-settle bad-faith claim and allowing the insurer to seek the identical discovery in a coverage case against the insured, though without being able to argue that sharing the information effected a waiver). Such an approach differentiates the insurer's white hat and black hat and allows the policyholder's privileged information to be kept under the insurer's hat.

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Cone of Silence or Echo Chamber: A Policyholder’s Privileged Communications and its Insurers

When an attorney who is an insurance company’s agent uses the confidential relationship between an attorney and a client to gather information so as to deny the insured coverage . . . . we hold that such conduct constitutes waiver of any policy defense, and is so contrary to public policy that the insurance company is estopped as a matter of law from disclaiming liability.

We know of no case in which the insured’s duty of assistance and cooperation has been used to force a putative insured to divulge to the insurer every jot and tittle of information which may aid the insurer in defeating his claim for coverage but which in no way hinders the insurer’s ability to provide the insured with a proper defense.

An insured may communicate with its carrier for a variety of reasons, many of which have little to do with the pursuit of legal representation or the procurement of legal advice. Certainly, where the insured communicates with the carrier for the express purpose of seeking legal advice with respect to a concrete claim, or for the purpose of aiding an insurer-provided attorney in preparing a specific legal case, the law would exalt form over substance if it were to deny application of the attorney-client privilege. However, a statement betraying neither interest in, nor pursuit of, legal counsel bears only the most attenuated nexus to the attorney-client relationship and thus does not come within the ambit of the privilege. . . . . [I]f what is sought is not legal advice, but insurance, no privilege can or should exist.

A community of interests exists among different persons or separate corporations where they have an identical legal interest . . . . The key consideration is that the nature of the interest be identical, not similar, and be legal, not solely commercial. The fact that there may be an overlap of a commercial and legal interest for a third party does not negate the effect of the legal interest in establishing a community of interest.

The “common interest,” logically viewed, and New York law supports, which makes the privilege inapplicable, is where an attorney actually represents both the insured and the carrier – joint representation – and accordingly both clients are working together with a single attorney toward a common goal.

I conclude that while the insurer had the same ‘desire’ as its insured to have a successful defense of [the actions that necessitated the case at bar], for if coverage was later determined to exist, it would be responsible for any obligation of its insured remaining, this in my view is an insufficient ‘common interest’ to warrant invasion of the attorney-client relationship with the privilege . . .

Go Medical’s [the plaintiff] purpose in providing these documents to CIC [its insurance carrier] was to try to obtain coverage from CIC for expenses Go Medical would incur in litigation to stop the alleged infringement of its patent. However, whereas Go Medical’s interest is in protecting its patent, CIC has no interest in the [] patent. CIC’s interest in Go Medical’s infringement claim is limited to CIC’s coverage of Go Medical’s litigation expenses. An insurer’s contractual obligation to pay its insured’s litigation expenses does not, by itself, create a common interest between the insurer and the insured that is sufficient to warrant application of the common interest rule of the attorney client privilege.

Id. at *3.

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August 31, 2006

Jury Instructions in Insurance-Coverage and Insurance Bad-Faith Cases

There is no formbook of jury instructions for complex insurance-coverage disputes, and even were there such a tome at best it would be a point of departure and not the destination. Complex insurance coverage disputes are marked by factual uncertainty, difficult legal terrain, and close parsing of issues. One mistake that lead counsel often makes in my view is not to personally take ownership of the jury instructions and instead delegates their preparation to the junior member of the team. Ultimately, it is the jury instructions that determine the case – and the appeal. Thus, it should be the responsibility of lead trial counsel to be intimately familiar with the drafting, submission, and argument over instructions to the jurors.

When we prepare instructions for jurors, we try to focus on making issues understandable to jurors by breaking down issues into understandable bites. Further, we typically will structure the instructions as a recipe: a logical step-by-step decision tree leading to a (correct) result. There is no profit in trying to trick the jury or the judge into giving the wrong or misleading instructions, for that simply invites error (and retrial – and thus further delay in the policyholder’s receiving recovery). So while there is always the temptation to structure the instructions to place the jury’s thumb on the scale, experienced counsel will demur.

This holds true for both instructions that are submitted to juries and those that are not. For cases that are tried, the instructions are “the thing.” (Hamlet, II, ii, 633) Evidentiary errors are often shielded by the court’s discretion and fights over the admission of evidence – which we surely pursue – often seem to tread over the line of trial and appellate court patience. See R&B Auto Center, Inc. v. Farmers Group, Inc. (Cal. Ct. App. June 9, 2006). Evidentiary rulings can reflect the substantive law, and thus motions in limine can be a proper vehicle for elucidating the legal issues in a case. But it is the jury instructions that form the actual basis for the trial-court judgment, and just as lead counsel focuses on his or her opening statement and closing argument, so too should the jury instructions be the subject of high-level attention.

One reason that this does not occur is that the preparation of jury instructions is tedious. One needs not only to draft the recipe for proper decision but also the supporting authority as to why the instruction is proper. Where true substantive issues are involved, we try to frame issues discretely for the court to decide and support our legal position with what I term “brieflets.” A brieflet is the supporting essay found below the instruction that supports its being offered. A brieflet can be as much as a several page essay replete with case discussions both within the jurisdiction and from across the nation. Often I find that the law in a state needs to be clarified or granulated, so we will argue for the extension or refinement of existing law in our instruction and supporting brieflet. If we don’t do this, then we may not be able to argue on appeal that the law should be one way or another. Appellate courts correct errors, and if we as the trial lawyers do not give the trial court the “opportunity” to commit error there is nothing for the appeals court to do when we complain about a misguided result.

Of course, this all can annoy the trial judge, yet as lawyers we need to take into account the needs of the trial court but also the need to preserve our record. Unfortunately, since instructions really are “the thing,” trial judges should devote their attention to the fine details of the instructions. All too often, however, I find that trial judges are not pleased by being invited to chew into a case and struggle with instructions.

Let me give an example by listing the titles for the instructions we proposed in a recent case in Arizona:

Preliminary (i.e., before commencement of the trial) Instructions
Nature of the case
Outline of the Trial
Duty of Jurors
Evidence
Weighing Conflicting Testimony
Redacted Documents
Rulings of the Court
Credibility of Witnesses
Expert Witnesses
No Trial Transcript for the Jurors; Taking Notes
Admonition
Questions by Jurors
Alternate Jurors
Bench Conferences and Recesses

Final Jury Instructions

Duty of Jurors
Instructions Are to Be Considered as a Whole
What Is Evidence
What Is Not Evidence
Direct and Circumstantial Evidence
Inferences
Rulings of the Court
Credibility of Witnesses
Depositions as Substantive Evidence
Prior Inconsistent Statements
Weighing Conflicting Testimony
Evidence Admitted for Limited Purpose
Redacted Documents
Stipulations of Fact
Judicial Notice
Admissions of Party Opponent
Expert Witnesses
Charts and Summaries in Evidence
Charts and Summaries Not Received in Evidence
Corporate Party
Burden of Proof (Preponderance of the Evidence)
Breach of the Policy
Breach of [Separate Claims Handling] Agreement
Waiver
Terms of a Contract
Breach of Contract – Duty to Defend
Damages for Breach of Contract
Duty of Good Faith and Fair Dealing
Breach of Good Faith and Fair Dealing Damages
Punitive Damages
Communications Between Court and Jury During Deliberations
Chance Verdict Prohibited
Verdict Required
Excused Alternate Jurors
Conclusion and Verdict

Many of these instructions are really multiple instructions with discrete subparts and issues. Some of the accompanying brieflets are several pages long as we try to support why we are drilling down so much and articulating matters as we do.

As an example, one key can be the burden of proof on issues, and the ping-pong between what satisfies the policyholder’s prima facie case and how the carrier then has the ability to overcome that proof. If we take defense costs, for instance, then the policyholder’s offering of invoices satisfies its prima facie case as to the incurrence of damages and their presumptive reasonableness; the insurer then has the opportunity under Hadley v. Baxendale to show that the particular costs constitute unforeseeable damages or that some portion of the costs incurred are wholly attributable to an excluded head of loss (for which the insurer bears the burden of proof). Accordingly, we need to structure our introduction of evidence in a fashion that is mindful of our satisfying the elements of our prima facie case such that without more a verdict in our favor could be properly supported and defended on appeal.

It is necessary in the jury instructions, however, to set forth that we have satisfied our burden of proof by introducing the invoices, so that the jury can award us these damages; the jury then can consider whether the carrier has carried its burden of showing that the costs are not recoverable. But it is error to conflate this all to instruct the jury that the policyholder is entitled to its reasonable costs of defense. The policyholder in fact is entitled to all costs of defense it incurred, except to the extent the carrier has a legal basis not to pay under the policy or according to the standards governing recovering damages at trial for breach of contract. So a relatively straightforward bottom line – the reasonable costs of defense – ends up with a multipart decision tree that incorporates the nature of the proof and the shifting burden of proofs between the policyholder and its insurer.

On the other side of the equation, diligent counsel needs to look carefully at the instructions proposed by the other side. Accordingly, when the insurer submits its set of instructions, it is crucial that the policyholder set forth specific objections to those instructions where appropriate. And those objections can be either or both substantive (as a matter of insurance law) or based on the standards for properly articulating instructions for a jury. In terms of substance, once again we will submit a brieflet on why the carrier’s substantive articulation of the rule of law is in error. This is a crucial brieflet because if the court does submit the carrier’s proposed instruction our grounds for appeal principally will be that the court erroneously rejected the legal position we articulated (thus necessitating that we in fact articulate the grounds and arguments).

Among the general types of objections that one can make are these (again taken from our recent Arizona case), one can object to an instruction to the extent:

1. They are misleading or confusing. See Life Investors Ins. Co. of Am. v. Horizon Res. Bethany, Ltd., 182 Ariz. 529, 532, 898 P.2d 478, 481 (Ct. App. 1995) (holding a jury instruction should not mislead the jury).
2. They incorrectly charge the jury. See Valley Nat’l Bank v. Witter, 58 Ariz. 491, 121 P.2d 414 (1942) (holding that a jury should not be instructed through an instruction that only partially states the applicable law); State v. Bass, 198 Ariz. 571, 576-77, 12 P.3d 796, 801-02 (2000) (holding jury instructions must not misstate the applicable law, and must not mislead or confuse).

3. They do not inform the jury of the applicable law in understandable terms. See Barrett v. Samaritan Health Services, Inc., 153 Ariz. 138, 143, 735 P.2d 460, 465 (Ct. App. 1987).

4. We already provided a corresponding instruction that contains clearer and more understandable terms. See Noland v. Wootan, 102 Ariz. 192, 194, 427 P.2d 143, 145 (1967) (“The purpose of jury instruction[s] is to inform the jury of the applicable law in terms they can readily understand. It is therefore inappropriate to employ words in jury instructions which are susceptible to more than one definition, one of which does not properly expound the law of the case to the jury.”).

5. They misstate the law. See State v. Bass, 198 Ariz. 571, 576-77, 12 P.3d 796, 801-02 (2000) (holding jury instructions must not misstate the applicable law); State v. Hussain, 189 Ariz. 336, 337, 942 P.2d 1168, 1169 (Ct. App. 1997) (holding no err in refusing to give a jury instruction that is an incorrect statement of the law); Nichols v. Baker, 101 Ariz. 151, 416 P.2d 584 (1966).

6. They are not predicated upon the facts of the case. See State v. Hussain, 189 Ariz. 336, 337, 942 P.2d 1168, 1169 (Ct. App. 1997) (holding no err in refusing to give a jury instruction that does not fit the facts of the case); State v. Williams, 120 Ariz. 600, 601-2, 587 P.2d 1177, 1178-79 (1978) (holding that an instruction is misleading if it is not predicated on some theory of the case which may be found in the evidence).

7. They will not be supported by evidence admitted at trial. See State v. Williams, 120 Ariz. 600, 601-2, 587 P.2d 1177, 1178-79 (1978) (holding that an instruction is misleading if it is not predicated on some theory of the case which may be found in the evidence); State v. Allen, 400 P.2d 589, 529, 1 Ariz. App. 161, 164 (1965) (holding that “an instruction must be based not on a theory but upon something which is backed by some substantial evidence introduced in the case”).

8. They allow jury speculation on issues. See Brierley v. Anaconda Co., 111 Ariz. 8, 12, 522 P.2d 1085, 1088-89 (1974) (holding “it is reversible error to instruct on a theory which is not supported by the facts since the court thereby invites the jury to speculate as to possible non-existent circumstances”).

9. They do not address claims raised in the insured’s pleadings. See Porterie v. Peters, 111 Ariz. 452, 455, 532 P.2d 514, 517 (1975) (holding that the correctness of instructions given in a case must be determined in the light of the issues “raised by the pleadings”).

10. They assume facts properly determined by the jury. See State v. Patterson, 4 Ariz. App. 265, 267, 419 P.2d 395, 397 (1966) (stating that the jury should be properly instructed and be left to determine the facts).

11. They indicate any breach of duty by the insured or indicate there is a triable issue on any alleged breach by the insured, where the insured denies there is a basis for submitting such issues to the jury. See Sparks v. Republic Nat’l Life Ins. Co., 133 Ariz. 529, 539, 647 P.2d 1127, 1137 (1982) (“error to instruct the jury on a legal theory which is not supported by the evidence”).

See generally Walbolt and Alonso, Jury Instructions: A Road Map for Trial Counsel, 30 Litigation 29 (Winter 2004).

Most objections, however, are not general like the foregoing but rather go to quite detailed objections of articulation – the instruction unfairly embraces the proffering party’s theory of the case – or that they misstate the details of the law. A recent Tennessee Supreme Court decision addresses appellate review of instructions on substantive grounds. Johnson v. Tennessee Farmers Mut. Ins. Co., (Tenn. Aug. 28, 2006).

The key question there was third-party bad faith, that is, a claim that the insurer unreasonably failed to settle a liability case against the insured resulting in a judgment against the insured in excess of policy limits that could have been avoided had the earlier settlement offer been accepted. The Tennessee Supreme Court on review held that “Where a special instruction that has been requested is a correct statement of the law, is not included in the general charge, and is supported by the evidence introduced at trial, the trial court could give the instruction’ [but] [r]eversal of a judgment is appropriate . . . only when the improper denial of a request for a special jury instruction has prejudiced the rights of the requesting party.” Slip op. at 4.

In Johnson, the carrier argued that it was error for the court not to submit four instructions to the jury, all going to different ways of articulating that bad faith requires some sort of malevolence above and beyond negligent conduct. For example, the insurer argued that the trial court erred in refusing to submit the following instruction:
“Bad faith embraces more than bad judgment or negligence and it imports a dishonest purpose, moral obliquity, conscious wrongdoing, breach of a known duty through some ulterior motive or ill will partaking of the nature of fraud, and it embraces an actual intent to mislead or deceive another.”

The Tennessee Supreme Court affirmed the trial court’s correct decision not to give this instruction holding that the proposed instruction did not accurately state the law. Slip op. at 6. Cf. Rawlings v. Apodaca, 151 Ariz. 149, 160, 726 P.2d 565, 576 (1986) (For first-party bad faith, the insurer need only “form that intention without reasonable or fairly debatable grounds. [A]n ‘evil mind’ is not required.”).

Trial counsel is required to know the details of the law and what the facts will support; trial counsel must think about how the evidence will go in and how the evidence meshes with the instructions; counsel must understand what the instructions will be and develop the case and introduction of evidence to match the instructions; and counsel must be able to object on all proper bases to the other side’s proposed instructions, both as a matter of substantive law and as a matter of poor or inappropriate articulation. All this is tedious, especially when trial counsel wants to focus on the more glamorous (or stressful) tasks of examining and cross-examining witnesses and making the opening statement and closing argument. But it is not enough to plan on winning at trial; one must be able to sustain that victory on appeal. (Or unhappily, one must be able to turn around an adverse trial verdict on appeal by pointing out that the judgment was due to an error in the instructions and what the jury was erroneously asked to decide.)

Preparing jury instructions in a complex coverage case requires considerable effort in terms of legal research and fine drafting. Standard, formbook instructions do not exist or frankly are inartfully articulated, even as to the most basic instruction on what is a preponderance of evidence or a prior inconsistent statement. (But a useful exception is the new plain-English instructions from California. ) Counsel has a duty not only to the client but also to help the lay people on the jury actually understand what they are being asked to decide. The last thing one wants is an unhappy, confused jury. The instructions really are “the thing” – and as such are the responsibility of lead counsel to get right and to shape as much as the order of witnesses and the development of the evidence at trial.

Posted by Marc Mayerson at 12:17 PM | Comments (1) | TrackBack

Jury Instructions in Insurance-Coverage and Insurance Bad-Faith Cases

Let me give an example by listing the titles for the instructions we proposed in a recent case in Arizona:

Preliminary (i.e., before commencement of the trial) Instructions
Nature of the case
Outline of the Trial
Duty of Jurors
Evidence
Weighing Conflicting Testimony
Redacted Documents
Rulings of the Court
Credibility of Witnesses
Expert Witnesses
No Trial Transcript for the Jurors; Taking Notes
Admonition
Questions by Jurors
Alternate Jurors
Bench Conferences and Recesses

Final Jury Instructions

Duty of Jurors
Instructions Are to Be Considered as a Whole
What Is Evidence
What Is Not Evidence
Direct and Circumstantial Evidence
Inferences
Rulings of the Court
Credibility of Witnesses
Depositions as Substantive Evidence
Prior Inconsistent Statements
Weighing Conflicting Testimony
Evidence Admitted for Limited Purpose
Redacted Documents
Stipulations of Fact
Judicial Notice
Admissions of Party Opponent
Expert Witnesses
Charts and Summaries in Evidence
Charts and Summaries Not Received in Evidence
Corporate Party
Burden of Proof (Preponderance of the Evidence)
Breach of the Policy
Breach of [Separate Claims Handling] Agreement
Waiver
Terms of a Contract
Breach of Contract – Duty to Defend
Damages for Breach of Contract
Duty of Good Faith and Fair Dealing
Breach of Good Faith and Fair Dealing Damages
Punitive Damages
Communications Between Court and Jury During Deliberations
Chance Verdict Prohibited
Verdict Required
Excused Alternate Jurors
Conclusion and Verdict

Among the general types of objections that one can make are these (again taken from our recent Arizona case), one can object to an instruction to the extent:

1. They are misleading or confusing. See Life Investors Ins. Co. of Am. v. Horizon Res. Bethany, Ltd., 182 Ariz. 529, 532, 898 P.2d 478, 481 (Ct. App. 1995) (holding a jury instruction should not mislead the jury).
2. They incorrectly charge the jury. See Valley Nat’l Bank v. Witter, 58 Ariz. 491, 121 P.2d 414 (1942) (holding that a jury should not be instructed through an instruction that only partially states the applicable law); State v. Bass, 198 Ariz. 571, 576-77, 12 P.3d 796, 801-02 (2000) (holding jury instructions must not misstate the applicable law, and must not mislead or confuse).

3. They do not inform the jury of the applicable law in understandable terms. See Barrett v. Samaritan Health Services, Inc., 153 Ariz. 138, 143, 735 P.2d 460, 465 (Ct. App. 1987).

4. We already provided a corresponding instruction that contains clearer and more understandable terms. See Noland v. Wootan, 102 Ariz. 192, 194, 427 P.2d 143, 145 (1967) (“The purpose of jury instruction[s] is to inform the jury of the applicable law in terms they can readily understand. It is therefore inappropriate to employ words in jury instructions which are susceptible to more than one definition, one of which does not properly expound the law of the case to the jury.”).

5. They misstate the law. See State v. Bass, 198 Ariz. 571, 576-77, 12 P.3d 796, 801-02 (2000) (holding jury instructions must not misstate the applicable law); State v. Hussain, 189 Ariz. 336, 337, 942 P.2d 1168, 1169 (Ct. App. 1997) (holding no err in refusing to give a jury instruction that is an incorrect statement of the law); Nichols v. Baker, 101 Ariz. 151, 416 P.2d 584 (1966).

6. They are not predicated upon the facts of the case. See State v. Hussain, 189 Ariz. 336, 337, 942 P.2d 1168, 1169 (Ct. App. 1997) (holding no err in refusing to give a jury instruction that does not fit the facts of the case); State v. Williams, 120 Ariz. 600, 601-2, 587 P.2d 1177, 1178-79 (1978) (holding that an instruction is misleading if it is not predicated on some theory of the case which may be found in the evidence).

7. They will not be supported by evidence admitted at trial. See State v. Williams, 120 Ariz. 600, 601-2, 587 P.2d 1177, 1178-79 (1978) (holding that an instruction is misleading if it is not predicated on some theory of the case which may be found in the evidence); State v. Allen, 400 P.2d 589, 529, 1 Ariz. App. 161, 164 (1965) (holding that “an instruction must be based not on a theory but upon something which is backed by some substantial evidence introduced in the case”).

8. They allow jury speculation on issues. See Brierley v. Anaconda Co., 111 Ariz. 8, 12, 522 P.2d 1085, 1088-89 (1974) (holding “it is reversible error to instruct on a theory which is not supported by the facts since the court thereby invites the jury to speculate as to possible non-existent circumstances”).

9. They do not address claims raised in the insured’s pleadings. See Porterie v. Peters, 111 Ariz. 452, 455, 532 P.2d 514, 517 (1975) (holding that the correctness of instructions given in a case must be determined in the light of the issues “raised by the pleadings”).

10. They assume facts properly determined by the jury. See State v. Patterson, 4 Ariz. App. 265, 267, 419 P.2d 395, 397 (1966) (stating that the jury should be properly instructed and be left to determine the facts).

11. They indicate any breach of duty by the insured or indicate there is a triable issue on any alleged breach by the insured, where the insured denies there is a basis for submitting such issues to the jury. See Sparks v. Republic Nat’l Life Ins. Co., 133 Ariz. 529, 539, 647 P.2d 1127, 1137 (1982) (“error to instruct the jury on a legal theory which is not supported by the evidence”).

See generally Walbolt and Alonso, Jury Instructions: A Road Map for Trial Counsel, 30 Litigation 29 (Winter 2004).

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