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 (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 (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.
Posted by Marc Mayerson at 4:08 PM | Comments (8) | TrackBack
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) InstructionsNature 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 RecessesFinal 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
August 22, 2006
Conflict of Laws and Insurance Disputes: Choice of Law or Choice of Outcomes?
Most insurance policies are silent as to which state’s substantive law governs their terms. As a result, insurance-coverage lawyers often find ourselves deep into the world of choice of law and conflict of laws, a subject most of us sidestepped in our law-school education. Conflicts issues are (largely) untethered from the merits yet can be outcome determinative, so it is crucial to understand and focus on choice-of-law principles in complex insurance disputes, which can yield the application of different state laws within a single case to issues of contract formation, performance, and bad faith.
There are two paradigmatic approaches to choice of law, but nuances in every state affect the analysis. What one can call the First Restatement or lex loci contractus approach looks to some formal act involved in the making of a contract and holds that the location of that act tells one which state’s law governs. Now more than 75 years old, several states still follow its teachings.
Then there is the Second Restatement approach, promulgated thirty years ago, which is plainly the dominant intellectual framework for choice of law in the US. This looks to the state with the “most significant relationship” between the issue to be resolved and the states affected. See Restatement 2d §§ 6, 188, 193. The Second Restatement analysis proceeds issue by issue, that is, one state’s law can apply to one issue in a case and another state’s law to a different one. (This is a principle called depeçage.)
In the absence of a contractual choice-of-law clause (which in any event is considered merely to be evidence of the proper choice of law and not determinative in and of itself), one can predict the governing substantive law only if one starts with a particular forum in mind. The choice of forum is not directly a selection of the forum’s law; instead, it is a selection of the forum’s rules for choice of law (there being no difference between suing in state or federal court on this issue, Klaxon Co. v. Stentor Electric Mfg. Co., 313 US 487 (1941)).
The choice-of-law question is not what law governs this contract for all purposes but rather what law should govern a particular issue for which there is a difference were one state’s or another’s law to apply. One law can govern a single contract issue or a discrete claims-handling issue, all depending on the interests of the state involved. Typically, the law of the forum applies unless and until a party demonstrates that another state’s law should apply to a particular issue. E.g., Trostel & Sons Co. v. Employers Ins. of Wausau, 576 N.W.2d 88 (Wis. Ct. App. 1998). (Note also that some states have enacted choice-of-law statutes that will supersede the common-law choice-of-law analysis, so long as their application passes muster under constitutional principles. See generally Sangamo Weston Inc. v. National Surety Corp., 414 S.E.2d 127 (S.C. 1992). )
The court’s selection of a given state’s law can be change the result, which introduces great instability in the relationship between insureds and carriers given that a race to the courthouse may lead to one result (coverage) or the other (none). To be concrete, in one matter I handled for the Michigan subsidiary of an Illinois corporate parent, we considered suing in South Carolina (where one of the carrier defendants was located), which would have resulted in the application of Georgia law (where the broker was located) and which we thought would be relatively favorable; instead, we sued in Illinois and argued successfully for the application of Illinois law to the contract (which we obviously perceived to be a bit more favorable than Georgia law). See generally Babcock & Wilcox Co. v. Arkwright-Boston Manufacturing Mutual Ins. Co., 867 F. Supp. 573 (N.D. Ohio 1992); Gabe's Construction Co. v. United Capitol Insurance Co., 539 N.W.2d 144 (Iowa 1995) (additional-insured issues); Auto Europe, LLC v. Connecticut Indemnity Co., 321 F.3d 60 (1st Cir. 2003) (location of subsidiary in forum an important contact even where parent negotiated policy). In that case, we were seeking insurance recovery for a nationwide product-liability problem, involving possible death cases and a nationwide, multi-industry product recall and replacement program involving the Consumer Products Safety Commission (CPSC). That on the same facts it was possible to apply any of Georgia, Illinois, or Michigan law underscores the malleability of the issue as well as the importance of considering carefully choice-of-law in deciding how to manage insurance recovery. See Piper Aircraft Co. v. Reyno, 454 U.S. 235, 250 (1981) (“Ordinarily, these plaintiffs will select that forum whose choice-of-law rules are most advantageous.”).
Additional complexity is introduced when one considers insurance bad-faith issues or similar remedial measures that may exist both at common law and as a matter of statute in individual states. The question in part concerns due process: does the state legislature have the power to regulate the conduct at issue? The question may also involve choice of law: does the state’s law apply to the transaction at issue? Ever since the US Supreme Court decision of Allstate Ins. Co. v. Hague, 4498 U.S. 302 (1981), which was a 4-1-3 decision (with 1 recusal), the analysis has been collapsed into the choice-of-law inquiry alone, eschewing examining the power of a state to regulate conduct. As the Third Circuit has explained:
[T]he relevant issue is the constitutionality of a choice of substantive law (not constitutional limitations on the permissible scope of a state’s substantive law). In our case we must ask whether New York’s substantive law would constitutionally apply to the facts we review, not whether New York could permissibly choose to apply its law (the choice of which substantive law to apply being an issued reserved to Pennsylvania law).
Budget Rent-a-Car System, Inc. v. Chappell, 407 F.3d 166, 176 (3d Cir. 2005).
Through the 1940s and 1950s, there was a series of US Supreme Court cases that approached these issues by looking at Due Process, Equal Protection, and Full Faith and Credit. Some of these cases have fallen into disfavor under Hague but others were cited in Hague and thus have continued vitality. E.g., Watson v. Employers Liability Corp., 348 U.S. 66 (1954). I have argued in a case that Watson dictates that the forum (Virginia) state’s statute on bad faith applies to benefit the (former) Virginia subsidiary of a D.C. company that purchased insurance from a New York company and that suffered a fidelity loss through the operation of a (sub)subsidiary in New Hampshire. On its face, the statute applied to admitted insurers doing business in the state (as was true in my case), and we posited that the legislature meant to protect Virginia citizens from the misdeeds of foreign, but admitted, insurers. While we could run that argument under choice-of-law principles, e.g., Babcock & Wilcox, 867 F. Supp. 573, to me it makes more sense to approach the matter as one of the scope of legislative authority, which is what Watson speaks to.
The Supreme Court’s decision in Watson is not a choice-of-law case but rather concerns the constitutionality of applying a state insurance statute. Watson involved Louisiana’s direct-action statute, which conflicted with a provision in the insurance policy requiring that no action could proceed against the insurer until the underlying tort claim was resolved. Given that the dominant approach to selecting which law to apply involves consideration of which state “‘would have the strongest interest in seeing its laws applied to the particular case,’” United Western Grocers, Inc. v. Twin City Fire Ins. Co., slip op. at 9550 (9th Cir. Aug. 14, 2006) (citation omitted), Watson remains relevant in assessing state interest.
At issue there was a bodily injury claim stemming from the use in Louisiana of a home hair-care product manufactured by an Illinois subsidiary of a Massachusetts company where the insurance policy was negotiated and issued in Massachusetts and delivered in Massachusetts and Illinois. “The basic issue raised . . . . is whether the Federal Constitution forbids Louisiana to apply its own law and compels it to apply the law of Massachusetts or Illinois.” 348 U.S. at 69. The plaintiff was a tort victim with no privity of contract seeking to force the insurer to provide coverage to the defendant-tortfeasor, the Illinois company.
The Supreme Court ruled that Louisiana had an interest in applying its law because the tort victims, while strangers to the contract, were Louisiana residents who obtained medical care in Louisiana and drew upon other Louisiana private and public services in connection with their injuries. “Where, as here, a contract affects the people of several states, each may have interest that leave it free to enforce its own contract policies . . . . [M]ore states than one may seize hold of local activities which are part of multistate transactions and may regulate to protect interests of its own people, even though other phases of the same transactions might justify regulatory legislation in other states.” 348 U.S. at 73, 72.
As Watson anticipates, coverage disputes can involve the application or potential application of the law of more than one state within a given case. Two recent federal district court decisions addressed choice of law in the context of both coverage questions and alleged bad-faith conduct. A comparison between them highlights the vagaries of judicial outcomes in this area. (Choice-of-law decisions are invariably fact bound, so it is always difficult to conclude that rulings are inconsistent.) In one case, an out-of-state statute was held not to be available for bad-faith conduct by claims handlers occurring in that jurisdiction; in the other, while the bad-faith acts took place in a different state – the jurisdiction whose law plainly governed the coverage questions – the court nonetheless applied the law of bad faith where the effects of that conduct were felt and thus afforded a more vigorous remedy to the policyholder who had moved to a different jurisdiction after the policy period.
In Cecilia Schwaber Trust Two v. Hartford Accident & Indem. Co., 2006 WL 1888691 (D. Md. June 26, 2006), the policyholder sought coverage as construed under Maryland law with regard to a property located in Baltimore but sought to impose bad-faith liability on the insurer based on the location of the insurer’s claims handlers (Pennsylvania). The federal district court held that Maryland had an affirmative policy against allowing first-party bad faith claims (that is, claims for unreasonable denials of coverage), which the policyholder sought to side-step by arguing that the location of the wrong at issue – bad-faith claim denial – occurred in Pennsylvania, whose law should apply under principles of lex loci delicti. The court ruled, however, that although Pennsylvania’s bad-faith scheme is implemented pursuant to a statute the question was controlled by what law properly governed the contract/coverage claim. Id. at *3.
Moreover, the court observed:
Plaintiffs are Maryland residents pursuing a claim for damage to a Maryland property under an insurance contract they admit is governed by Maryland law. Maryland has consistently refused to permit tort claims based on bad faith conduct by insurers . . . . I am confident that Maryland would not choose to import tort claims from other states in a case such as this, particularly when those tort claims are not intended to protect Maryland residents..
Id. The court sought to buttress its conclusion by arguing that the mirror-image result would likewise be absurd: that is, if a Pennsylvania policyholder with Pennsylvania property suffered bad faith at the hands of a Maryland-based claims handler, then the Pennsylvania citizen would have no bad-faith remedy. Id. at n.3.
But the problem of analytical symmetry posited by the Schwaber court does not exist: there is nothing inconsistent for choice-of-law purposes in applying Pennsylvania law on claims-handling conduct to claims handers dealing with Marylanders and applying Pennsylvania law also to claims handlers dealing with Pennsylvanians, so long as the claims handlers in each instance are located and licensed in Pennsylvania. Pennsylvania can well have an interest in ensuring that all insurance operations conducted in its state conform to its standards. (New York for example has always sought to require licensed insurers to conform to the standards of New York wherever they may operate.)
A useful contrast to the Maryland case is another federal court decision decided one week before, Love v. Blue Cross and Blue Shield of Georgia, Inc., 2006 U.S. Dist. LEXIS 42275 (D. Wis. June 20, 2006). In Love, the insured purchased a health-insurance policy in Georgia and was a permanent resident there. Later, the insured moved to Wisconsin, and the dispute concerned the handling of certain bills submitted for treatments received in Wisconsin.
The question presented was whether a Georgia statute applied, which limited bad-faith remedies, or whether Wisconsin common law did. The insured applied for coverage in Georgia, lived in Georgia, and Georgia law applied to construe the policy. The court stated that applying the law of wherever the insured roamed would lead to “confusion, not predictability, in the law.” Id. at *7. Consequently, the court concluded that “predictability of results is fostered when a state’s substantive law applies to a policy issued in that state by a state corporation to a resident of that state, especially when, as here, the policy in question explicitly states that Georgia law should apply.” Id.
Nevertheless, the court concluded that Wisconsin had a strong interest in protecting Wisconsin residents regarding services provided in Wisconsin, even from an out-of-state insurer that issued a policy under out-of-state law to someone who then lived outside the state. Id. at *11-12. This was true even though “a policy issued in Georgia to Georgia residents might well cost less because of the damage caps the [Georgia] state legislature has put in place” and “the processing of the claims occurred in Georgia.” Id. at *9, *12. As the court concluded, “Wisconsin has indicated its belief that bad faith is a tort for which a wide array of damages [should be] available, and it has a strong interest in ensuring that its residents receive full compensation for such torts.” Id. at *19.
That an insurance contract was issued and delivered in Massachusetts did not preclude the application of Louisiana law in Watson, where Louisiana had a more direct and concrete interest in the particular dispute before the court. A Maryland policyholder suffering bad faith at the hands of Pennsylvania claims handlers perhaps should have the same remedies that a resident of Pennsylvania would have in the same circumstances, Schwaber notwithstanding. The former Georgia policyholder in Love was found to have the same remedies available as Wisconsin residents because the impact of the insurer’s alleged post-policy bad-faith conduct occurred there, even though performance otherwise would be gauged under Georgia law.
The choice-of-law issue, albeit seemingly divorced from the merits, can determine who wins or loses a coverage case. See Fluke Corp. v. Hartford Acc. & Indem. Co., 7 P.3d 825 (Wash. App. 2000), aff’d, 34 P.3d 809 (Wash. 2001) (finding insurance coverage for punitive damages following choice-of-law analysis). Given the current regime of state-by-state regulation of the insurance industry and the absence of choice-of-law provisions in policies, fighting over which law to apply (and to which issues) is one more crucial battle in complex insurance disputes.
Posted by Marc Mayerson at 5:39 PM | Comments (3) | TrackBack
June 5, 2006
Discovery of Other-Insured Claim Files in Insurance and Bad-Faith Disputes
Among the typical skirmishes in insurance-coverage litigation is the scope of discovery. In seeking discovery in insurance-coverage cases and for insurance bad-faith claims, policyholders seek information from insurers about the underwriting of the policy at issue and the carrier’s handling of the policyholder’s claim for coverage. Disputes arise once the policyholder moves beyond those materials to information showing the general practice of the insurer, how the insurer’s response to the particular insured compares with how it has handled other claims, and the insurer’s own understanding of the policy language as evidenced through claims-handling manuals, training materials, and other types of interpretative aids. See generally Saldi v. Paul Revere Life Ins. Co., 224 F.R.D. 169 (E.D. Pa. 2004); Colonial Life v. Superior Court(Perry) 31 Cal. 3d 785 (1982); Carey-Canada v. Cal. Union Ins., 118 FRD 242 (D.D.C. 1986). One recurring subject has been other-claims information, that is, information in claim files dealing with other insureds.
Policyholders argue that such extrinsic evidence is both discoverable and potentially admissible. A recent case from the Federal Court in the District of Columbia had occasion to address the discoverability information from insurers that is stored electronically. In J.C. Associates v. Fidelity & Guarantee Ins. Co., 2006 WL 1445173 (D.D.C. May 25, 2006), Magistrate Judge John M. Facciola ordered the production of various “other claim” file information in the context of a dispute over application of the “absolute pollution exclusion.” In the earlier days of environmental coverage litigation, policyholders and insurers reached détente on production of the “ten and ten” – the ten oldest environmental claim files and the ten most recent. In this era of ediscovery, however, the J.S. Associates case looked more generally to information that was stored electronically.
In addressing the relevance of claim-file information in general, Magistrate Judge Facciola ruled:
[
T]he information plaintiff seeks is clearly relevant. For example, information as to how defendant interpreted the absolute pollution exclusion would qualify as an admission under Rule 801 of the Federal Rules of Evidence and relevant to the claim presented by plaintiff if that interpretation is different from the interpretation that the defendant is asserting in this case.
Id. at *1. The insurer had searched its computerized index of its 1.4 million claim files, which yielded 454 similar claims. The originals were not stored in electronic format, and the court considered the costs of manually reviewing the 454 claim files for relevant information as against the amount in controversy, $124,000. To balance the competing interests, the court required the insurer to scan the originals into a searchable format and directed it to search that population using the terms “1) pollution, 2) pollutant, 3) pesticide, and 4) insecticide.” Id.
For any of the 454 converted files that contained one of the search terms, the insurer was required to manually review the material for privilege. The insurer further was told to log the costs of the privilege review, but to count attorney time only for work “that requires an attorney’s skill and judgment.” Id. at *2. Citing the judge’s own prior decision in McPeek v. Ashcroft, 202 F.R.D. 31, 34 (D.D.C. 2001), the court reserved ruling on further discovery and the costs of any such discovery.
While the law is not uniform, the J.C. Associates decision is consistent with courts that recognize that extrinsic evidence from insurance companies may be offered to show (i) an ambiguity or uncertainty in policy terms, (ii) a coverage-promoting meaning when considered in context, or (iii) the reasonableness of the insured’s proffered construction. The evidence may also block a carrier from advocating a coverage-defeating construction in the particular case. Statements by the carrier may constitute admissions, as Judge Facciola found, or statements against interest. E.g., Gerrish Corp. v. Universal Ins. Co., 947 F.2d 1023 (2d Cir. 1991); Phoenix Ins. Col. v. Glens Falls Ins. Co., 253 F. Supp. 1014, 1019 (M.D. Fla. 1966) (state filings); Greer v. Northwestern Nat’l Ins. Co., 743 P.2d 1244 (Wash. 1987); Allegheny Airlines Inc. v. Forth Corp., 663 F.2d 751, 755 (7th Cir. 1981); Aetna Cas. & Sur. Co. v. Haas, 422 S.W.2d 316, 320 (Mo. 1968); Grinnell Mut. Reinsurance Co. v. Voeltz, 431 N.W.2d 783, 787-89 (Iowa 1988); Ford Motor Co. v. Northbrook Ins. Co., 838 F.2d 829, 833 (6th Cir. 1988).
More generally, “the interpretation given to the same contract by one of the parties in its dealings with third parties . . . has some weight – as demonstrating the past interpretation of at least one of the parties, and also suggesting the reasonableness of that interpretation.” Tymshare, Inc. v. Covell, 727 F.2d 1145, 1150 (D. C. Cir. 1984) (Scalia, J.).
The policyholder’s burden is to offer a construction of the policy language that is both linguistically permissible and reasonable. In discharging its burden of showing a reasonable construction, a policyholder’s proffering extrinsic evidence out of the mouths of insurer witnesses or from their pens or keyboards can be helpful. As one court stated in a related context, “[a]ny suggestion that an insured’s identical interpretation is unreasonable is absurd.” Montrose Chem. Corp. v. Admiral Ins. Co., 5 Cal. Rptr. 2d 358, 369 (Cal. App. 1992).
Often judges seem to take the position that they understand what a particular policy provision must mean when they see it. But that is not the relevant legal question; the task for the judge is not to pick the best construction or the one he or she thinks makes the most sense. Rather, the hermeneutical task is: what construction does the language admit and is the construction being offered a reasonable one? To this end, evidence from claim files and other materials from insurers sheds light – and thus is discoverable and potentially admissible on motions for summary judgment and at trial.
Posted by Marc Mayerson at 5:05 PM | Comments (2) | TrackBack
March 19, 2006
Witness for the Prosecution: Me!
Insurance lawyers face a dilemma in that we sometimes can be called as witnesses in bad-faith trials. As a result, policyholder counsel like me need to consider whether we should be the person who interacts with the insurance company’s representatives, for we risk being disqualified from serving as trial counsel for our clients.
The potential for disqualification of the policyholder's lawyer stems in part from the fact that settlement discussions with the insurance company are admissible in bad-faith cases. Many lawyers and claims handlers seem surprised that settlement discussions to resolve an insurance claim constitute evidence in bad-faith cases and point to the settlement “privilege” as a shield.
But like the heffalump and the griffin, the settlement privilege is the stuff of myth: in the absence of an actual confidentiality contract between the parties that specifies that all communications for settlement are inadmissible for any purpose and in any proceeding, e.g., Tower Action Holdings, LLC v. LA County Waterworks Dist., 129 Cal. Rptr. 2d 640, 647 (Cal. App. 2002), communications during the course of settlement discussions are admissible for any purpose other than proving liability on the claim itself. See Federal Rule of Evidence 408. Indeed, Rule 408 states expressly that settlement-related discussions are admissible for “another purpose.”
Evidence of the insurer’s conduct during negotiation of a settlement of the insured’s (or a third-party’s) claim may be admitted at trial for purposes other than proving the insurer’s liability to pay under the contract. E.g., Crackel v. Allstate Ins. Co., 92 P.3d 882, 893 (Ariz. App. 2004); see also ESPN Inc. v. Office of Comm’r of Baseball, 76 F. Supp. 2d 383, 412-13 (S.D.N.Y. 1999); American Re-Insurance Co v. United States Fid. & Cas. Co., (N.Y. App. Div. June 2, 2005).
Insurers’ settlement communications and conduct are relevant evidence. Insurers must negotiate with their insureds in good faith, neither providing "lowball" offers nor "hoping the insured will settle for less," Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 280 (Ariz. 2000), nor failing “in good faith to effectuate prompt, fair and equitable settlements of claims” nor failing to provide “reasonable explanation of the basis . . . for the offer of a compromise settlement” nor compelling insureds to “institute litigation” where they recover substantially more than what the insurer has offered. E.g., Unfair Claims Settlement Practices Act, A.R.S. sec. 20-461(A)(6), (A)(7), (A)(14). A policyholder’s means of proof that its insurer violated these various obligations during the process of adjusting the claim is to offer evidence of how the insurer sought to negotiate the claim. Evidence during settlement or during the claim-adjustment process, therefore, is admissible to prove undue delay or bad intent or for impeachment of the insurer’s witnesses. E.g., Southwest Nurseries LLC v. Florists Mut. Ins. Inc., 266 F. Supp. 2d 1263 (D. Colo. 2003); Bower v. Stein Eriksen Lodge Owners Ass’n Inc., 201 F. Supp. 2d 1134, 1139 (D. Utah 2002) (while denying admission of the particular evidence, ruling that “[e]vidence of a party’s bad faith may fall under ‘another purpose’ [under Rule 408].”). All this evidence goes to the insurer’s independent obligations to conduct itself in good faith, rather than its liability for the claim itself (which is the purpose for which Rule 408 limits the admission of evidence). (Fed. R. Evid. 105 allows for a party to ask the court to provide a limiting instruction to the jury making this clear.)
While policyholders may welcome that this type of evidence can be admitted in the litigation against the insurance company, the next question is what is that evidence and who are the witnesses? The reality is that the policyholder’s lawyer may be the person who on behalf of the policyholder witnessed the insurer’s course of conduct during settlement negotiations. If this is so, then there is risk that the lawyer will be disqualified from representing the policyholder in the insurance litigation for he or she may be a percipient witness at trial of the insurance bad-faith claim.
This is the question that was presented in a recent case, Carta v. Lumbermen’s Mut. Cas. Co., __ F. Supp. 2d __, 2006 WL 595496 (D. Mass. March 13, 2006). In general, a lawyer representing a party at trial is not allowed to be a witness because it can prejudice the other side and confuse the jury.
Nevertheless, motions to disqualify policyholder counsel in such circumstances are highly disfavored for the obvious reason that they can be offered not for reasons of fairness and the appearance of neutrality of court proceedings but rather for tactical advantage and harassment. “Thus, it is clear that disqualification should be allowed only when ‘absolutely necessary.’” Carta, 2006 WL 595496 at *4.
In Carta, the court described the anticipated scope of testimony of the plaintiff’s lawyers:
The proposed testimony of the plaintiff’s lawyers is certainly relevant and material – indeed, her two attorneys are the only people who will be able to testify on the plaintiff’s behalf about the settlement negotiations with the defendants, the correspondence that went back and forth between the parties, the meetings that were had between the plaintiff’s counsel and defense counsel and the strategic decisions made during the settlement process. Even the plaintiff herself likely would not be able to testify about such matters since they were undertaken by the attorneys themselves, not by the plaintiff, and they involve technical legal nuances that the plaintiff herself probably would not understand.
Id. at *5. The Carta court furthermore rejected (in my view, too quickly) the lawyers’ argument that proof of the bad-faith case would come solely from the mouths and pens of the insurer’s witnesses – so the policyholder’s representatives’ testimony would be unnecessary.
Where as in Carta the policyholder is willing to hamstring its own case by limiting the scope of proof that may be offered, the court should be more chary in disqualifying counsel and should defer pulling the trigger until absolutely necessary (that is, defer until it is certain there is actual prejudice to the insurance company rather than merely a prospect of prejudice). Courts should also be leery of permitting the insurance company’s witnesses to prevaricate necessitating rebuttal through the testimony of the policyholder’s attorney.
An adequate remedy in most circumstances is simply to prevent the policyholder’s counsel from testifying at the trial, even if that limits the scope of proof of the bad-faith claim. What Carta also teaches – along with the admissibility of settlement discussions – is that the policyholder (or its counsel) should be mindful in structuring the interactions with its insurer to make sure that it has the witnesses it wants at trial. (The policyholder should be mindful also that all its dealings with the insurance company – including its settlement correspondence – are trial exhibits.)
Dealing with insurance companies in the resolution of complex and contentious claims requires, as in chess, that one see the whole board, which includes understanding the risk that the policyholder’s selected counsel might later be the target of a motion to disqualify as a key witness to the insurance company’s bad-faith tactics.
Posted by Marc Mayerson at 3:41 PM | Comments (3) | TrackBack
March 12, 2006
Aloha to Unasserted Coverage Defenses: Waiver, Estoppel, and Mend the Hold in Insurance Cases
Sometimes when an insurance company does not have an obligation to perform, it can be required to pay anyway. There are typically three doctrinal hooks that force insurers to provide coverage in circumstances where the terms of the contract strictly speaking does not require them to do so: waiver, estoppel, and “mend the hold.”
While commonly conflated, the doctrines are different, and there’s no good reason for lawyers for either insurers or policyholders to wrap their arguments in the wrong garb. As the Hawai'i Supreme Court recently reiterated:
In the context of insurance law, . . . the terms “waiver” and “estoppel” have often been used without careful distinction, and thereby abused and confused. . . . The fact that these doctrines are closely akin and often may coexist does not mean they are identical in connotation.
Enoka v. AIG Hawai'i Ins. Co., Inc. (Haw. Feb. 23, 2006), slip op. at 32 (citations omitted). In the Enoka case, the Hawai‘i Supreme Court was forced to “attempt to extricate” the two arguments, which were used “interchangeably throughout [the] opening brief, ” and in doing so the Hawai‘i Supreme Court helpfully collected cases nationwide on both waiver and estoppel in the insurance context. In addition to waiver and estoppel, insurance cases also may involve the less commonly invoked “mend the hold” doctrine, which like the others is a principle whose effect is to preclude an insurer from interposing an otherwise valid ground for avoidance.
By way of background, it is important to recognize that insurers have duties to investigate claims submitted by insureds, may only reasonably assert the grounds they interpose for refusing to perform, and must assist their insureds in perfecting claims against them. Let’s assume that an insurer has done all this and thereafter asserts two valid grounds for refusing to perform, each of which is sufficient to bar coverage. In such circumstances, the insurer quite obviously has no obligation to pay and has breached no duty to the insured.
Let’s say that instead, the insurer asserts two grounds for refusing to pay, but only one is valid. It is still possible (at least in some jurisdictions, including Hawai'i) for the insurer to be liable for first-party bad faith – or flipping the matter around, a valid ground for denial of coverage is not a license to commit bad faith. E.g., Enoka. But in those circumstances, the insurer will not be liable for breach of contract.
But where the situation is reversed, that is, where the invalid ground is asserted, and the valid ground is not, questions of waiver, estoppel, and mend-the-hold arise. Really, the question is whether we should allow the insurer belatedly to assert the valid ground for denial. (The use of the word “belatedly” in the previous sentence is not a question-beg but rather is a matter of definition: these issues do not arise if the assertion of the valid coverage defense is timely.)
There is nothing wrong with an insurer’s electing not to press one defense or another. Moreover, one does not wish to encourage insurers to change tack after they learn that a claim may be expensive (and covered) and seek to refuse to perform on a ground they initially thought to be a trifle. Precluding insurers from resuscitating defenses thus forecloses opportunistic behavior.
Similarly, the law does not wish to induce in insureds a false sense of security, that is, even if the insurer asserts an invalid ground, one can suppose the insured would have understood the ground not to be valid, and therefore have assumed there will be coverage (once the misunderstanding is cleared up and since the insured does not know the insurer will (later) rely on the unasserted, valid ground). Allowing insurers then to raise seriatim defense after defense undermines the objective of security that the insurance is meant in part to provide.
Further, where an insurer interposes only the invalid ground, we do not want to create a situation where an insured acts in a manner different from how it would have acted had the insurer articulated the valid ground for denying coverage; in other words, if an insured changes its position in a fashion based on the nonassertion of the coverage defense, the insurer should not later be permitted to revive the coverage defense that it could have asserted earlier.
A countervailing consideration is that absent unusual circumstances a policyholder that incurred a loss never comprehended within the insurance contract should not be able to manufacture coverage merely from an insurer’s misstep.
These are all principles that animate how insurance law deals with the situation of the untimely assertion of a valid coverage defense by insurers, many of which are explored by the Hawai'i Supreme Court in Enoka.
The Enoka court first addressed whether the insurer in that case “waived” its coverage defense. Sometimes the case law in this regard is confused in drawing a distinction between express and implied waivers: it is not the “waiver” that is express or implied; rather, it is the insurer’s conduct that may be said to waive a defense expressly or by implication. Either way there is a waiver, and the only question is how that waiver is proved at trial. (The idea is similar to the “difference” between an express and implied contract – there is no difference, the only distinction is one of proof.) So it is with “waiver,” and the question is whether the insurer mouthed or wrote the words that it was waiving a particular defense or whether though silent the carrier’s conduct indicates its waiver.
There is no doubt that insurers are free to waive their valid coverage defenses or to make a payment to an insured for a loss that was never covered by the insuring agreement to begin with. (Insurers may give such succor deliberately to foster positive business relationships with the particular insured or may make payment for other reasons, such as obtaining the favor of politicians or insurance regulators.)
Waiver can be evidenced by conduct inconsistent with the assertion of the coverage defense, and courts are more willing to find such waivers when the defense concerns “technical” or “forfeiture” grounds, such as timely notice or proof of loss; courts are less likely to find a waiver if that which is being claimed to have been waived goes to the non-existence of coverage in the first place (i.e., that a loss was not covered by the insuring agreement, without regard to exclusions, etc.).
Accordingly, a demand by an insurer for more information after a deadline for submitting claims whose expiration is readily apparent will be deemed to be a waiver of that deadline. Enoka, slip op. at 37. (One can also conceive of this as an estoppel claim based on the insured’s going to the effort to respond to this request, but its aptness is questionable given that the expiration of the deadline should be as apparent to the policyholder as it is to the insurer which leads to questions of the reasonableness of the insured’s reliance on the insurer’s request for more information, etc. etc.)
But where the carrier’s defense relates to a “coverage issue”, waiver will be less likely to be found from conduct alone. The notion largely goes to the burden of proof on each party’s prima facie case: the insurer bears the burden of showing exclusions and limitations on coverage and as with any affirmative defense it can be waived (in this context classed as a “technical” defense); this is different, however, from an insurer’s “waiving” its objection to the policyholder’s failure to sustain its prima facie case for coverage (classed as a “coverage” issue).
The other common fount for argument that an insurer cannot revive a defense to performance is estoppel, which prevents an insurer from switching positions in its dealings with the particular insured. (One should also be aware of the notion of “judicial estoppel,” which prevents litigants from taking inconsistent positions from case to case where the party had prevailed on a prior ground, Iowa v. Duncan (Iowa Feb. 17, 2006); Whiteacre Partnership v. Biosignia Inc. (N.C. Feb. 6, 2004) (containing a lengthy discussion of estoppel and judicial estoppel).)
Many if not most courts say that estoppel may not be used to “broaden the coverage” granted to begin with, Enoka slip op. at 39. Nevertheless, estoppel can apply to broaden coverage in three circumstances according to the Enoka court:
1. Where the insurer or its agent made a misrepresentation at policy inception that, if corrected at that time, would have enabled the insured to protect itself by buying back an exclusion or purchasing a different policy form;
2. Where the insurer undertook and controlled the insured’s defense in a liability matter without mentioning the coverage issue (and thus prevented the insured from protecting its interest in the conduct of the defense or in settling the matter, a topic on which I have previously commented .
3. Where the insurer has acted in bad faith or relatedly where allowing the change of position would be manifestly unjust.
“Estoppel” requires detrimental, reasonable reliance by the “innocent” party and injury that would result from allowing the change in position. In the first exception, the principle applied is meant to prevent “sharp practices” and is more a pure invocation of equity. (There is also the related idea of estoppel in pais, which applies more broadly in that the party claiming the benefit of the estoppel need not be the same as the person to whom the representation was made (i.e., there is no “mutuality” limitation), as in Free v. Sluss, 87 Cal.App.2d Supp. 933 (1948) and Morton Int'l Inc. v. General Accident Ins., 134 N.J. 1, 629 A.2d 831 (1993) (unnecessarily called “regulatory estoppel” when estoppel in pais is sufficient).) It is also related to a rule of contract construction whereby an promisor will be held to a meaning of a contract in the sense it knew the promisse had understood it at the time of contract formation.
The third situation again is more a broad principle of equity such that where the conduct involved is sufficiently unreasonable, equity will prevent a party from changing its position in order to prevent manifest injustice – i.e., detrimental, reasonable reliance is not needed. (Injury is implicit, otherwise there would be no fight over the issue: de minimis non curat lex.) This type of circumstance may fall also under “quasi estoppel” principles but mutuality is required for quasi-estoppel to apply. See Whiteacre.
Waiver and estoppel are not confined to contracts or insurance contracts, but there is one additional doctrine that is derived from contract law whose operation is similar, which is the “mend the hold” principle. The most important recent articulation of this rule is the opinion for the Seventh Circuit authored by Judge Posner in Harbor Ins. Co. v. Continental Bank Corp., 922 F.2d 357, 362 (7th Cir. 1990). And while notions of estoppel and waiver are sprinkled into analyzes of the rule, the core notion, as stated by the US Supreme Court well more than a century ago, is that:
Where a party gives a reason for his conduct and decision touching any thing involved in a controversy, he cannot, after litigation has begun, change his ground, and put his conduct upon another and a different consideration. He is not permitted thus to mend his hold.
Railway Co. v. McCarthy, 96 US 258, 267-68 (1877). The phrasing “mend the hold” hearkens to wrestling.
The mend-the-hold idea is grounded in contract law (substantive law) rather than being a mere implementation of a procedural rule requiring the articulation of claims or defenses (or elections of remedies). It effectuates ex ante decisionmaking and conduct (which undergirds all contract law), whether that prospective private ordering takes place at the time of contract formation or at the time of contract performance (or non-performance). As the Kansas Supreme Court held, “[s]ince the defendant here, before litigation was commenced, gave only as its reason for nonperformance a ground which was inadequate, it could not, after suit was filed, ‘mend its hold’ and rely upon other and different defenses. It was limited in the trial to the single defense it asserted at the time of breach.” Heidner v. Hewitt Chevrolet Co., 199 P.2d 481, 484 (Kan. 1948); see also Coporacion de Mercadeo Agricola v. Mellon Bank Int’l, 608 F.2d 43, 348 (2d Cir. 1979); Western Grocer Co. v. New York Oversea Co., 28 F.2d 518, 520-21 (N.D. Cal. 1928).
Mend-the-hold should have particular force in insurance cases, as the Seventh Circuit found in Continental Bank, but courts sometime dilute its effect by importing (in error) some of the limits to estoppel more generally, Design Data Corp. v. Maryland Cas. Co., 503 N.W.2d 552, 560 (Neb. 1993). But it is in the insurance context and real-estate-brokerage contexts that the doctrine has most typically been applied. See Sitkoff, “Mend the Hold” and Erie, 65 U. Chi. L. Rev. 1059 (1998). It also prevents insurers from insulating against the application of waiver or estoppel by putting in general language in disclaimer/denial letters or reservation-of-rights letters whereby they purport to reserve generally other grounds that have not been articulated, a practice that if validated by the courts undermines the whole purpose of requiring insurers to investigate claims and state their coverage positions.
Insurers are supposed to be the masters of the contracts they sell, and all three of these doctrines create incentives for insurers to do their job right the first time. (They also give insurers incentives to over-articulate defenses to coverage, an incentive that (one hopes) may yield self-correction in the marketplace due to consumer revolt from being greeted with interminable denial-of-coverage letters and regulatory displeasure from such market conduct.) On balance, forcing the prompt articulation of coverage defenses, a corollary of the rule that insurers have the duty to investigate claims, is a good thing, and courts should not hesitate in the individual case to apply waiver, estoppel, or mend the hold, even though an “undeserving” insured obtains coverage from the carrier’s mistake. In the long run everyone – insurers too – benefits from a system that requires insurers, which are responsible for the terms of coverage, sell peace of mind and promptness of performance in the time of need, and have trained forces of claims handlers (paid for by policyholders through the collection of premiums), to both put up and shut up.
Posted by Marc Mayerson at 5:17 PM | Comments (2) | TrackBack
October 20, 2005
It’s Good to Be a Bad Insurance Company in America
The most recent Supreme Court decision on the constitutionality of punitive damages was a third-party insurance bad-faith case. State Farm Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003). In that case, the Supreme Court gave strong indications that in insurance cases the maximum punitive damages that may be constitutionally awarded is predicated on a one-to-one ratio between the punitive damages and the compensatory damages, i.e., they must be (nearly) equal to one another. However, on remand from the US Supreme Court the Utah Supreme Court held that, considering the facts involving State Farm and the Campbells, the insurer’s conduct and the injury involved merited punitive damages that were nine times the compensatory-damages award. 2004 UT 34.
Recently, the Oregon Court of Appeals had the opportunity to address the question of the appropriate ratio between punitive and compensatory damages in an insurance bad-faith case, finding that a three-to-one ratio was appropriate. Goddard v. Farmers Ins. Co., (Ore. Ct. App. Oct. 12, 2005). And the court made clear that this ratio approached the asymptotic limit.
In Goddard, the court found that the insurer intentionally, deceitfully, and maliciously:
stonewalled the claimant and lowballed settlement offers;
fraudulently manipulated the claims process;
unreasonably refused to settle;
sacrificed the insured’s interest in security to the insurer’s interest in maintaining its reputation for toughness on claims;
all of which the court found to be typical of the insurer's business practices.
Nevertheless, in determining the appropriate multiplier for punitive damages, the court focused on the facts that the harm to the policyholder involved “only economic, not physical injury” and that the insurer’s conduct did not implicate any broad health or safety interest of the general public.
The court reviewed its recent decisions on punitive damages where it had upheld ratios of 4 to 1 or greater as constitutional. The cases all involved the risk of serious injury to the particular plaintiff and to similarly situated consumers.
In the context of this third-party bad-faith case, however, the court found that the maximum constitutionally permissible ratio was three times the compensatory damages. As the court summed up:
[T]he injury here was purely economic, without any threat to public health or safety,[though]defendant’s conduct was far more reprehensible – a calculated and repeated course of cynical and malicious betrayal of its insured’s trust – than the [Supreme] Court found to be the case in State Farm Mut. Ins. [v. Campbell]. Nor was this an ‘isolated incident.’ . . . [T]here can be no question . . . that ]the ‘stonewalling,’ the ‘low-balling’ the pressured manipulation of claims evaluations and the like, are all typical of how defendant did business: Defendant’s interests came first. On balance, the egregiously unethical character of defendant’s conduct justifies a proportionately greater award of punitive damages than the 1:1 ratio suggested by the Court in State Farm Mut. Ins. Conversely, the lack of serious physical injury or disregard for the health and safety of the consuming public dictates a proportionately lower award of punitive damages . . . . Accordingly, a 3:1 ratio of punitive damages to compensatory damages in this case comports with due process.
The Oregon court, however, did not mention that the remand in the State Farm case to the Utah Supreme Court, generally a steady court on bad-faith issues, held that a ratio of 9 to 1 was appropriate; presumably, since the Oregon court found the facts in Goddard to be more egregious than those in State Farm it would seem that more than a 9 to 1 ratio could have been sustained.
At all events, what the Goddard case signals is that, because the harms in insurance cases are psychic and economic and involve injury to the policyholder’s security, the new punitive-damages case law grants far more robust constitutional protections to insurers, banks, and other financial-services companies than what is afforded other companies that create a risk of physical harm. Verily, I recognize that Benjamin Franklin helped establish the insurance industry in this country, but it does not seem likely that he or the other founders of the Republic would have intended to clothe this one class of businesses with such special, constitutional protection.
Posted by Marc Mayerson at 12:18 AM | Comments (7) | TrackBack
June 9, 2005
Denominators and Punitive Damages in Bad-Faith Cases
In State Farm v. Campbell, which limns the constitutional parameters of awarding punitive damages, the United States Supreme Court in a third-party insurance bad-faith case ruled that “in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” 538 U.S. 408, 425 (2003). The State Farm Court went on to hold that the “precise award . . . must be based upon the facts and circumstances of the defendant’s conduct and the harm to the plaintiff[, and] courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered.” Id. at 425-426. See generally Simon v. San Paolo U.S. Holding Co. Inc., (Cal. June 16, 2005), available at http://www.courtinfo.ca.gov/opinions/documents/S121933.PDF.
Even where an insurance company eventually pays a claim, the policyholder still may be able to bring an action for first-party bad faith, that is, a claim that the insurer has breached its obligation to provide coverage benefits. See generally Marc S. Mayerson, “First Party” Insurance Bad Faith: Mooring Procedure to Substance, 38 Tort Trial & Ins. Prac. J. 861 (2003) (available at http://www.spriggs.com/news/pdfs/MSM-31.pdf). If the policyholder is forced to bring suit against its insurer, Campbell raises the question of what is included in counting the “amount of harm to the plaintiff and . . . the general damages recovered.” Specifically, are the policyholder’s attorneys’ fees in the coverage case, which is an element of its damages, properly included in determining the amount that can be multiplied in a punitive-damages assessment?
Two cases have addressed this question, with differing results. As will be seen, one crucial difference – though concededly not fleshed out in the two decisions – is the difference between third-party bad-faith claims (a failure to settle claim that typically is assigned to the underlying tort plaintiff) and a first-party bad-faith claim (where the policyholder seeks recovery due to the carrier’s failure to perform unreasonably and without proper cause).
On remand from the US Supreme Court, the Utah Supreme Court in Campbell v. State Farm, 2004 UT 34, found that attorneys’ fees should not be included in the calculus. The Utah justices said, without real analysis, that they were “convince[d]” they were not “at liberty” to include the attorneys’ fees as part of the compensatory damages for these purposes, though the fees were to be included in the award of “special damages as part of our punitive damages award.” ( 48).
The Campbell court further reasoned that to include the attorneys’ fees would necessitate analyzing the conduct of the litigation as separate acts of bad faith. Finally, the court was troubled by the procedural complexities introduced by including attorneys’ fees because under Utah practice fees are usually awarded in a separate proceeding by the judge as opposed to being awarded by the jury in the damages assessment.
The Utah court’s reasoning is not altogether satisfying. The Utah court has developed a sophisticated and refined contract-damages analysis in the first-party context in which the court recognizes that the policyholder’s cost of pursuing coverage, i.e., its attorneys’ fees in the coverage case, are properly included as an element of recoverable consequential damages flowing from the carrier’s denial of coverage. See Machan v. Unum Life Ins. Co., 2005 UT 37 (June 17, 2005), available at http://www.utcourts.gov/opinions/supopin/Machan061705.htm; Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985). It also does not seem to flow from the court’s analysis that it would need to analyze the reprehensibility of the carrier’s litigation tactics in order to properly assess punitive damages on top of the attorneys’ fees recovery. Of course, there is authority for the proposition that the carrier’s post-denial conduct, including its coverage litigation tactics, are themselves actionable under bad-faith principles, e.g., McIlravy v. N. River Ins. Co., 653 N.W.2d 323 (Iowa 2002); Ingalls v. Paul Revere Life Ins. Group., 561 N.W.2d 273, 280 (N.D. 1997); Southerland v. Argonaut Ins. Co. 794 P.2d 1102, 1106 (Colo. Ct. App. 1990); Spadafore v. blue Shield, 486 N.E.2d 1201, 1203-04 (Ohio Ct. App. 1985). (There’s contrary law as well.)
But if one focuses on the idea that Campbell is a third-party bad-faith claim assigned to the plaintiff the Court’s notion is clearer: the insurer does not owe direct duties to the tort victim (or its duties are more attenuated than those owed its policyholder in resolving the policyholder’s claim for coverage), such that it is more sensible to require a showing of independent harm in order to then include that in the punitive damages calculus. An insurance company owes its insured an abiding duty of good faith, even when it is litigating with its policyholder; thus litigation tactics may be independently actionable in the first-party context, but it is also true that once a carrier denies the claim wrongly, then the policyholder’s only recourse is to bring litigation, so its attorneys’ fees more naturally can be seen as an element of its compensatory damages.
The first-party relationship was the context for the recent decision of the United States Court of Appeals for the Third Circuit in Willow Inn, Inc. v. Public Service Mut. Ins. Co., http://www.ca3.uscourts.gov/opinarch/032837p.pdf (3d Cir. Nov. 16, 2004). In Willow Inn, the Third Circuit held that attorneys’ fees in the bad-faith case were to be included in determining the constitutional propriety of the punitive-damages award. (Note this is slightly different from the question whether the costs of establishing bad faith are a recoverable element of bad-faith damages, which the California Supreme Court, for example, has refused to award as part of the remedy in bad-faith cases, see Brandt v. Superior Court, 37 Cal.3d 813 (1985).)
The Willow Inn court addressed a claim where the insurer dragged its feet in paying the insured’s claim but eventually paid the bulk of the claim. One element the carrier refused sub silentio was the claim for $2000 to defray the insured’s cost of preparing a proof of loss, an express benefit under the insurance policy. The insured brought suit for bad faith and to recover the $2000 (since the insured’s principal claim eventually had been paid by the insurer). The court awarded approximately $135,000 in attorneys’’ fees, plus the $2000. The question on appeal was whether an additional $150,000 punitive-damages award was appropriate, with the narrow question being whether the single-digit multiplier embraced in State Farm v. Campbell applied as against the $2000 contract recovery, as the insurer contended, or whether the attorneys’ fees could be included in assessing whether the amount of punitive damages was disproportionate and unconstitutional.
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The Third Circuit held that the attorneys’ fees incurred in proving bad faith were properly included in determining the punitive-damages:compensatory-damages ratio. Implicitly, the court found that the attorney’s fees were an element of the compensatory damages for bad faith and that the denominator was not limited to the breach-of-contract common-law recovery ($2000). Compare Commissioner v. Banks __ U.S. __ (2005) (http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=000&invol=03-892) (contingency fee paid to attorney is taxable to client). By not splitting off the breach-of-contract damages from the awarded attorneys’ fees in the punitive-damages ratio analysis, the Third Circuit easily concluded that the ~1:1 ratio passed constitutional muster.
As suggested at the outset, the principal viable distinction between the Utah decision and the Third Circuit’s decision is the nature of the claim at issue. The Campbell decision on remand was a third-party bad faith claim, that is, a claim that the insurer unreasonably failed to settle the underlying litigation against the insured, and the attorneys’ fees were incurred not by the insured but rather by its assignee who pursued the failure-to-settle claim. In contrast, Willow Inn involved attorneys’ fees stemming from the course of action by the insurer in denying the insured’s claim, paying slowly and after making it jump through procedural hoops, and finally in defending against the insured’s coverage litigation (the insurer’s rationale for that conduct is never explained). All the while, the insurer had an obligation to act in good faith and treat its insured fairly in Willow Inn, a duty it failed to discharge and which caused its insured to incur the attorneys’ fees. On that basis, including those fees in assessing whether the $150,000 punitive damages comported with due process surely seems eminently reasonable.
Posted by Marc Mayerson at 4:19 PM | Comments (1) | TrackBack
April 22, 2005
Expecting the Run-Around: Juries and Insurance-Coverage Cases
Over the past few years, we have participated in mock jury exercises in some of our coverage cases for policyholders. These exercises are extremely helpful in preparing for trial. They allow us to road test trial themes and to see what points gain transaction with our mock jury. Mock jury exercises sometimes will provide us with great handles for the real trial, such as a phrase or analogy that we had not thought of ourselves. We watch via closed-circuit television or through a one-way mirror while the jurors discuss the case and deliberate (they also fill out a raft of questionnaires that help us understand attitudes, demographics, and the like). But it is the deliberations that are most helpful to the trial lawyer. As an example, a mock juror in one exercise said, “A half truth is a whole lie,” which nicely characterized what we were trying to say about how the insurance company had misrepresented the policy language to the policyholder by omitting the key sentence that undercut its position entirely.
Typically, we compress the case into two 90-minute presentations, one for the insurer and one for the policyholder. (We – that is, lawyers for the policyholder – play both roles, but I haven’t found this to skew the exercise in the policyholder’s favor; we don’t tell the jurors that the lawyer playing the insurance-company’s lawyer really is a lawyer for the policyholder.) The presentations will use key documents and graphics. One of the consultants with whom I’ve worked calls what we do a “clopening”, that is, a combination of opening statement and closing argument. Essentially, we summarize and present the evidence and then argue our case. We’ll have a group of 30 to 40 people who are the audience; sometimes we make the presentation to all the jurors, and sometimes we present the case twice or three times to different juror panels (this allows us to tinker with our presentations based on the feedback from the prior mock jury).
Reflecting on the exercises I’ve participated in over the years has led me to the surprising realization that one consequence of (what I believe to be) the downward moral spiral of the insurance industry over the last couple of decades has been the lowering of expectations of jurors as to appropriate insurance company conduct. Jurors may have experienced the runaround themselves in the adjustment of their own claims, seen major price hikes in personal-lines coverage, and been flooded the stream of news of corruption in the industry (such as the broker-compensation imbroglio, the AIG mess, insurer bankruptcies, or in some states insurance commissioners being in the pocket – or trying to be – of insurance companies). I think the conventional wisdom is that juries are therefore primed to sock it to an insurance company and to cast the policyholder as a hero that in a surrogate capacity is vindicating the rights of the jurors.
No doubt that some jurors have this reaction. But I am increasingly feeling that the accumulation of years and years of insurer misconduct has browbeaten juries into submission. It is not that jurors feel that insurers are right or correct; rather, there is more of a sense that this is what you get when you buy insurance, whether you are a big guy or a little one. (One can think of this as a variant on a blame-the-victim theme.) In some ways, it may even be a relief to jurors to see companies encounter the same runarounds and hurdles that individuals deal with. None of this is to say that the insurance company is doing the right thing or is properly construing the policy or forthrightly dealing with its policyholder. Rather, misconduct now may be increasingly seen as par for the course. (The recent movie The Incredibles portrays well some of the inappropriate attitudes and approaches by insurers, where one needs an ex-superhero on your side in order to have your claim fully paid.)
The startling cynicism of some jurors – and perhaps an increasing percentage of them – has some important consequences:
1. At trial, it is crucial to establish the standards by which insurers are to be judged. The jurors must understand that both the aspirations of the insurance industry and its (best) customs and practices embrace fidelity to the interests of the insured and providing help and support in the policyholder’s time of need. The jury cannot be permitted to take the reality of current (mis) conduct and raise that to a normative standard by which to judge the insurer’s actions.
2. Long before we get to trial or litigation, the policyholder needs to be mindful that it has to set up its claim well. This means not putting things on the table simply in order to take them away and thus have something to negotiate with; that only serves to legitimize insurer nit-picking. The policyholder also must consistently provide full and detailed responses to the insurance company, demonstrating patience but also showing that the insurer is abandoning the insured and failing to discharge its obligations. (I’m not saying that policyholders should threaten bad faith at every turn but rather explain how they need the insurer’s support and are looking to the insurer for help.) Policyholders need to cross their T’s, dot their I’s, and turn square corners, or one provides the insurer with a cover for misconduct. (For some guidelines on doing this see, Mayerson, Pursuing and Perfecting Liability Insurance Coverage: A Primer for Policyholders on Complying with Notice Obligations, 32 Tort & Ins. L. J. 1003 (1997), available http://www.spriggs.com/news/pdfs/MSM-6.pdf.)
3. Insurance companies should not be heartened by all of this. In the short term, this may help insurers win trials (or the bad-faith claim) by moving the line for bad faith further out, such that bad faith is considered less to be a breach of acting in good faith and instead to require evil and malicious conduct (collapsing bad-faith liability into punitive damages). In the long run, however, a recognition by consumers and businesses that insurance really isn’t there for you when you need it most will doom the industry. What value would there be in buying insurance? On this point, see the extraordinarily thoughtful article (that also discusses past episodes of insurer shenanigans), Richard Stewart and Barbara Stewart, The Loss of the Certainty Effect, 4 Risk Management & Ins. Rev. 29 (2002), available at http://www.stewarteconomics.com/Certainty%20Effect.pdf.
Posted by Marc Mayerson at 3:54 PM | Comments (2) | TrackBack