Insurance Scrawl: CGL Archives

February 18, 2008

Insurability of Punitive Damages -- Texas Style

It's not as if the only cases I read these days are from the former independent nation of Texas, but the Texas Supreme Court is on a roll in clearing out its backlog of important insurance cases, some involving additional insured coverage (and here), and a new important decision on the insurability of punitive damages.

One of the great myths in the insurance industry is that punitive damages are not insurable. This is false, particularly considering that the majority of US jurisdictions allow coverage for punitive damages at least in some circumstances. The argument against coverage in premised on the notion that it would undermine the deterrent effect of imposing punitive damages were the defendant able to in turn seek insurance recovery. A century ago the same debate in the same terms was had over whether liability insurance policies were themselves contracts violative of public policy, since it would undermine the deterrent effect of imposing tort liabiltiy were the defendant able to in turn seek insurance recovery. See Mary McNeely, Illegality as a Factor in Liability Insurance, 41 Col. L. Rev. 26 (1941) (an excellent early analysis of some of these questions). As McNeely wrote three score years ago, "Throughout its history the insurance device has been alternatively hailed as a promoter of communal welfare and damned as a generator of evil."

So too is framed the interesting recapitulation of these familiar polarities from the majority and (main) concurring opinions in Texas. Fairfield Ins. Co. v. Stephens Martin Paving LP (Texas Feb. 15, 2008).

What I would add is that the data and more rigorous theoretical analyses do not suggest there is a major "moral hazard" problem in liability insurance, see C. Heimer, Reactive Risk and Rational Action: Managing Moral Hazard in Insurance Contracts (1985). And courts should not assume a set of governing facts without evidence (for given the data here the easy assumption that allowing indemnification "encourages" misconduct is surely problematic and not a proper subject for judicial notice). This is not to suggest that there isn't lazy underwriting -- insurers should vet their potential insureds to see if they might be the kind of of folks or companies to engage in misdeeds. But as the Texas majority holds, the principle of freedom of contract should allow whatever coverage is provided by the contract terms -- and if insurers do not want to cover punitive damages in their policies, they can say that.

Posted by Marc Mayerson at 3:59 PM | Comments (0) | TrackBack

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

October 15, 2007

A Dog in the Fight: Policyholder Interest in Inter-Insurer Disputes

When an insurer pays a policyholder’s claim, the insurer sometimes seeks to off-load that payment “vertically”, that is, by suing other insurance companies that issued lower-layer coverage, or “horizontally”, that is, by suing other insurance companies that issued coverage in other policy periods.

When a performing insurer sues an underlying insurer, it typically does so on the theory of equitable subrogation. In those types of claims, the insurer “steps into the shoes” of the policyholder and pursues the policyholder’s chose in action against the nonperforming insurer. E.g., Greater New York Mut. Ins. Co. v. North River Ins. Co., 85 F.3d 1088, 1096 (3d Cir. 1996). The policyholder’s chose typically is assigned contractually or at equity by subrogation to the performing insurer

In any circumstance where one insurer is suing another entity for performance, the insured will have an interest in the policy proceeds to the extent that it has not been “made whole.” Under the “made whole” or “make whole” doctrine, an insurer pursuing a subrogation claim retain the recovery unless and until the policyholder’s loss has been fully indemnified. Thus, in the event the policyholder’s loss exceeds the combined limits of all its coverage, that an overlying insurer has performed and sued a recalcitrant underlying insurer does not mean that that insurer is able to pocket the money from the nonperforming insurer. Instead, as should be reasonably obvious, the policyholder would be entitled to receive the money from the non-performing carrier, even if the overlying performing carrier is the one that brought suit. If the performing carrier succeeds in this suit, then the only consequence to the policyholder should be that the underlying carrier’s payment is to be debited against its policy limits, and the limits of the performing carrier should be refreshed (to the extent that the policyholder has been fully indemnified and there is money left over from the proceeds from the underlying carrier). Cf. Alta California Regional Center v. Fremont Indemnity Co., 25 Cal. App. 4th 455, 466 (1994), overruled on other grounds, 11 Cal. 4th 1, 34 (1995). Once “made whole,” however, most courts are uncomfortable with allowing the prospect that an insured might obtain more than complete recovery, Burns v. Cal. Fair Plan, __ Cal. App. 4th __ (Ct. App. June 25, 2007), but this issue more properly is policed through the collateral-source rule.

When a performing carrier instead brings an action against other insurers that issued policies in successive or prior policy years, its claim can be brought as a subrogation claim (asserting the rights of the insured) or as a contribution or indemnity claim (depending on whether the insurer is seeking partial recovery or full recovery from the nonperforming carriers). Most courts will look to the insurer’s other-insurance clauses as guidance in determine the relative obligations of the different insurers.

The other-insurance clause does not limit the policyholder’s right in the first instance, see Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 72 (1997) (“Although insurers may be required to make an equitable contribution to defense costs among themselves, that is all: An insured is not required to make such a contribution together with insurers.”); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 909 (2000) (“The other-insurance clause . . . does not excuse the insurer from discharging its independent obligation to indemnify the insured up to policy limits.”). Indeed, there is authority holding that it is bad-faith for an insurer to deny performance to the insured by pointing to another insurer. Silberg v. California Life Ins. Co., 11 Cal. 3d 452, 460 (1974). An other-insurance clause is not a “sue other insurance” obligation on the insured. Rhone-Poulenc Inc. v. International Ins. Co., 71 F.3d 1299 (7th Cir. 1996).

When an insurer pays the insured’s claim, it may want to look around to other insurers to see whether the policies they issued also have an obligation to perform. Insureds may have an interest, however, in the dispute between one insurer and another. That it has an interest does not mean that the insured necessarily can preclude contribution actions.

Some states allow an insured to target its insurance coverage and in effect preclude one insurer from suing another horizontally. For example, in Casualty Indem. Exchange Ins. Co. v. Liberty National Fire Ins. Co., 902 F. Supp. 1235 (D. Mont. 1995), the insured failed to provide notice of a suit to one of its insurers yet obtained recovery from another. The performing insurer sought contribution but the court ruled that principles of equity did not allow it to force contribution from an insurer with a valid notice defense. Id. at 1239. Rather than simply failing to provide notice, sometimes insureds make the deliberate choice not to select an insurer to provide performance; in such circumstances, the question is whether that election precludes a contribution claim. In Illinois, for example, the answer clearly is yes. Under Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill. App. 3d 70 (1992), the court upheld a “targeted tender” of the defense and insulated the non-targeted insurer from equitable contribution/indemnity claims.

Most courts, however, have found that one insurer should be permitted to seek recovery against another. E.g., Insurance Co. of North America v. Travelers Ins. Co., 118 Ohio App. 3d 302, 314 (1997) (“applying the principles of equity and natural justice, the secondary insurer possesses an equitable right to recover from the primary insurer, as well as a right to recover by way of subrogation under the policy.”). But does an insurer have any obligation relative to its own insured not to seek contribution? In Mitchell, Silberberg & Knupp v. Yosemite, 58 Cal. App. 4th 389 (1997), the insured had been sued and several of its insurers agreed to settle the claim, subject to a reservation of rights among the insurers. In the later contribution action, one of the insurers contended that its policy never provided coverage to begin with, and thus it was entitled to contribution/indemnification. The insurer against which contribution was sought at the same time also was providing coverage for other claims against the insured. If it paid the contribution claim, the insurer would not have any limits available to pay for these other claims. The insured in response brought suit against Yosemite (the carrier that sought contribution), contending that it had breached its duty of good faith and fair dealing by paying to settle and then contending it had no obligation whatsoever, with the result being that its other coverage was unduly impaired. The court rejected the contention that the excess insurer’s failure to reserve its rights against its own insured when paying the original settlement effected a waiver of its right to deny its coverage obligation ab initio in the subsequent litigation with the other carriers.

Consequently, an insurer in general breaches no duty to its insured when it seeks to pursue contribution against another insurance company issuing similar coverage at the same layer/risk. E.g., Illinois Emcasco Co. v. Continental Cas. Co., 487 N.E.2d 1110 (Ill. App. 1985); cf. Guaranty Nat’l Ins. Co. v. American Motorists Ins. Co., 981 F.2d 1108, 1109 (9th Cir. 1992) (discussing primary, true excess and “excess by coincidence” coverages). This is true when the effect on the policyholder from the contribution action is indirect, that is, a successful contribution action affects the policyholder’s ability to obtain performance with respect to other claims.

An insurer, however, may not obtain contribution from “other insurance” when if successful the contribution action would result in a money award that comes from the policyholder’s own pocket, at least in part. While it may not be bad faith for an insurer to pursue contribution, the insurer can obtain contribution only from “other insurance.” Many commercial policyholders have various forms of “fronting” arrangements with insurers, so the question arises whether an initially targeted insurer may obtain contribution from an insurer that in turn will demand reimbursement from the policyholder pursuant to a side indemnity agreement, captive reinsurance arrangement, or matching deductible program. See Gabe’s Constr. Co. v. United Capitol Ins. Co., 539 N.W.2d 144, 148 (Iowa 1995).

For example, a Florida appellate court held that an employer’s $1 million deductible was not “other insurance” subject to contribution from a performing insurer. State Farm Mut. Auto. Ins. Co. v. Universal Atlas Cement Co., 406 So.2d 1184 (Fla. Dist. Ct. App. 1981); see also Wake County Hospital System v. National Cas. Co., 804 F. Supp. 768 (E.D.N.C. 1992). This has been the result in a number of other jurisdictions, e.g., American Fam. Mut. Ins. Co. v. Missouri Power and Light Co., 517 S.W. 2d 110 (Mo. 1974); USX Corp. v. Liberty Mut. Ins. Co., 645 N.E.2d 396 (Ill. App. 1994); Physicians Ins. Co. v. Grandview Hosp. and Medical Center, 542 N.E.2d 706 (Ohio App. 1988); Hertz Corp. v. Robineau, 6 S.W.3d 332 (Tex. App. 1999). Courts have looked to the economic substance of transactions to determine whether these are insurance – and thus even within the purview of “other insurance” clauses. E.g., Lawyers Title Ins. Co. v. Norwest Corp., 493 S.E.2d 114 (Va. 1997); State v. Continental Cas. Co., 879 P.2d 111, 1116 (Idaho 1994). As the Idaho court explained, “[t]he nature of ‘self-insurance,’ and the fact that it is not a form of insurance, is well-established. . . . Because ‘self-insurance’ does not involve a transfer of the risk of loss, but a retention of that risk, it is not insurance. [A] payment of . . . losses [that] was a matter of ‘self-insurance’, rather than insurance, . . . did not trigger the ‘other insurance’ clause in Continental’s policy.” Id. at 1116. Cf. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297 (9th Cir. 1987) (captive-issued policies are not insurance).

Thus, various forms of fronting arrangements are not considered “other and valid collectible insurance” within the meaning of an other-insurance clause. Citgo Petroleum Corp. v. Yeargin, Inc., 690 So.2d 154 (La. App. 1997). This is true even where the self-insurance or fronted component is administered by an entity other than the insured in the first instance. State Farm Mut. Auto. Ins. Co. v. Universal Atlas Cement Co., 406 So.2d 1184 (Fla. Dist. Ct. App. 1981). Accordingly, an insurer that is targeted for performance from the insured cannot pursue contribution from other insurance companies where the result of a successful contribution action would be for the policyholder to pay in part for the claim. Any other result would defeat the substance of the policyholder’s transaction with the originally targeted insurer, whereby it sought to transfer the risk of loss away from itself to its insurers.

Posted by Marc Mayerson at 10:05 AM | Comments (2) | TrackBack

A Dog in the Fight: Policyholder Interest in Inter-Insurer Disputes

Posted by Marc Mayerson at 10:05 AM | Comments (3) | TrackBack

May 21, 2007

Odoriferous Occurrence

Anaerobic decomposition produces among other things hydrogen sulfide gas. It is this gas that makes flatulents distinctive from, shall we say, the bouquet of a rose. This was illustrated in a recent coverage case involving a Minnesota pig farm that created a concrete lagoon with capacity to hold 1.5 million gallons of manure. Three-quarters of a mile away was a neighbor’s home.

The homeowners were none too pleased with the “extremely noxious and offensive odors and gases” that impeded their enjoyment of their home; so they sued the pig farmer for, among other things, creating a nuisance. The farmer turned to its insurer to defend arguing there was covered property damage – the homeowners’ loss of the use and enjoyment of their property (i.e., loss of use of tangible property that is not physically injured) arising from an occurrence.

Overturning part of the ruling of the trial court in favor of the insurance company, the Minnesota Court of Appeals held that the choice to locate the manure lagoon, while deliberate, resulted in an occurrence. Wakefield Pork, Inc. v. RAM Mut. Ins. Co., (Minn. App. May 15, 2007). The lagoon was in compliance with state environmental regulation and zoning ordinances. As a result the Minnesota court reasoned: “it would be inconsistent for this court to acknowledge, on the one hand, that appellant’s hog operation is legally operated and fully compliant with all applicable regulations, but to conclude, on the other hand, that appellant acted with a willful disregard or intent to harm its neighbors.” Slip op. Reasoning that the insurance company would have known at the time of underwriting that pig farms produced noxious gases, the court was reluctant to hold that the ordinary operations of the farm was uninsurable.

Nevertheless, the court held that the policy did not provide coverage because of the pollution exclusion, which barred coverage for liability on account of “fumes.” Because foul odors – or porcine odors – were gases released from the decomposition process, the Minnesota court held these were plainly encompassed within the pollution exclusion. As a result, the insurer had no duty to defend.

Posted by Marc Mayerson at 2:04 PM | Comments (0) | TrackBack

Odoriferous Occurrence

Posted by Marc Mayerson at 2:04 PM | Comments (0) | TrackBack

February 18, 2007

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

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

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

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

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

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

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

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

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

The California appellate court rejected this proposition, reasoning:

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

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

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

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

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

The California appellate court rejected this proposition, reasoning:

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

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

February 10, 2007

Insurers' Duty to Defend their Insureds Against Intentional Torts

The duty to defend undertaken by an insurance company is an essential component of the “peace of mind” coverage provided by liability insurance protection. Given the breadth with which the duty to defend is ordinarily construed by the courts, the defense-cost coverage of a policy is also referred to as “litigation insurance,” that is, insurance against the risk and burden of suits brought against the insured. Disputes have raged over whether that litigation insurance applies, however, to suits against the insured alleging an – or only – intentional tort.

In most states, the test for whether an insurer will have a duty to defend is whether the suit against the insured might eventuate in a judgment covered by the duty to indemnify, that is, the insurance company’s obligation to pay for the damages owed by the insured on account of bodily injury, property damage, or wrongful acts. If the claim against the insured permits proof of a covered indemnity claim, the insurer has a duty to defend. Thus, if a “lesser included offense” would be covered by the duty to indemnify, the insurer has the obligation to mount a defense. E.g., Abrams v. General Star Indem. Co., 67 P.3d 931 (Ore. 2003) (conversion claim).

Naturally, if an insurer has a duty to defend where the claim or suit against the insured (only) might result in a covered judgment, the insurer’s obligation to defend may apply even though the judgment ends up being uncovered. E.g., Tanner v. State Farm Fire & Cas. Co., 874 So.2d 1058 (Ala. 2003); Automobile Ins. Co. v. Cook (N.Y. July 26, 2006). (Note that public policy does not prevent the insurer from having a duty to defend even if that public policy would bar the insurer from indemnifying the insured for its deliberate misconduct. E.g., Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076 (Cal. 1993).) In this way, the duty to defend is broader than is the duty to indemnify: a claim might need to be defended even if it need not be paid -- or it is uncertain whether initially the claim will need to be paid by the insurance company. E.g., Fresno Econ. Import Used Cars, Inc. v. United States F&G Co., 142 Cal. Rptr. 681, 685 (Cal. App. 1977). (Note if that certainty that there is no duty to indemnify comes into focus from the undisputed facts developed in the underlying case, the insurer may be able to terminate its defense, prospectively. See Firco Inc. v. Fireman's Fund Ins. Co., 343 P.2d 311 (Cal. App. 1959); Mayerson, Insurance Recovery of Litigation Costs, at 1000 & n. 16; see also Sterlite Corp. v. Continental Cas. Co., 458 N.E.2d 338, 344 (Mass. Ct. App. 1983) (holding that an insurer "can, by certain steps, get clear of the duty [to defend] from and after the time when it demonstrates with conclusive effect on the third party that as a matter of fact -- as distinguished from the appearances of the complaint and policy -- the third party cannot establish a claim within the insurance," but that "[w]hat is not permitted is that an insurer shall escape its duty to defend the insured against a liability arising on the face of the complaint and the policy by dint of its own assertion that there is no coverage in fact.") .

But what about the situation where the allegations of the complaint, if true, show there is no duty to indemnify and there is no covered lesser-included offense? Insurers typically argue, often with success, that there is no duty to defend such a complaint. E.g., Farmland Mut. Ins. Co. v. Scruggs, 886 So. 2d 714 (Miss. 2004). The paradigm case involves allegations of an intentional tort against the insured the essential elements of which negate coverage.

The intentional consequences of an intentional act may still be the basis for coverage, where the legal consequences are not anticipated by the insured. The Illinois Court of Appeal addressed a recurring fact pattern recently, where a contractor cut down trees on the wrong property. Finding it “immaterial that the underlying complaint alleges intentional torts,” the Illinois court found that the insured did not expect liability for the physical injury of cutting down the trees. Pekin Ins. Co. v. Miller, 854 N.E.2d 693, 696 (Ill. App. 2006).

Recently, the Eighth Circuit was called upon to get involved with a domestic love triangle, in which the insured had an affair with someone’s wife, and the cuckold filed suit for alienation of affections. The policy provided coverage for “loss,” defined as an “accident . . . which results in bodily injury.” The insurer conceded that the injury at issue was bodily injury (though without any physical harm being alleged, cf. Lavanant v. General Accident Ins. Co., 595 N.E.2d 819 (N.Y. 1992). The insurer denied coverage, however, on the ground that affairs of the heart (or body) are not accidents or, in this case, that the cuckold’s injury was “expected or intended” by the insured.

The Eighth Circuit in Pins v. State Farm Fire and Cas. Co. (8th Cir. Feb. 8, 2007) analyzed the elements of proof for the tort claim of alienation of affections under the applicable law (South Dakota). The court found that “intent to injure the marital relationship” was the sine qua non of the tort. As the court explained, “ ‘the acts must have been done for the very purpose of accomplishing this result.’” Slip op. at 4 (citation omitted). The policyholder argued that the record was not sufficient to find conclusively that he expected/intended injury; but distinguishing prior authority, the Eighth Circuit found there were no circumstances where an “accidental loss was even arguably possible.” Slip op. at 5. The court concluded that proof of the underlying tort ipso facto and ipso jure meant the injury was expected or intended, holding:

[T]he comfort and consortium injuries alleged by [the husband] were sufficient to state a claim for alienation of affections, and under South Dakota law, [the husband] could not recover on this claim unless he proved that Pins intended to cause those specific injuries. In these circumstances, any ‘loss’ to [the husband] was ‘expected or intended’ by Pins and could not be deemed an ‘accident.’ Therefore, State Farm had no contractual duty to defend.

Slip op. at 5. Put differently, the court found that State Farm issued a homeowner’s policy, not a home-wrecker’s policy.

The Eighth Circuit’s conclusion that there was no duty to defend where the elements of proof by definition negated coverage is consistent with a Tenth Circuit opinion decided two months before, Notwen Crop. v. American Economy Ins. Co. (10th Cir. Dec. 1, 2006). The gravamen of the underlying tort in Notwen was that trade secrets were misappropriated and the tortfeasor-insured allegedly used corporate and bankruptcy maneuvers to try to shield its misconduct. While recognizing that unintended consequences of an intentional act still may qualify as covered conduct, the court found that the complaint against Notwen admitted of no such possibility. Compare Cincinnati Ins. Co. v. Eastern Atl. Ins. Co., 260 F.3d 742 (7th Cir. 2001). As in Pins, the policyholder sought to argue that there was a dispute of fact whether it was culpable and that those facts should be aired out in the underlying action – which the insurer should be defending. The Tenth Circuit rejected this argument in part reasoning:

[T]he argument is patently circular, rendering the exclusion of intentional torts from the liability policy meaningless, at least under the circumstances presented here: it asserts, in effect, that a duty to defend against intentional-tort claims excluded under the policy is nevertheless triggered whenever the insured seeks to defend itself (with the insurer’s assistance) in a lawsuit alleging intentional-tort claims.

Cf. Evett v. Corbin, 305 S.E.2d 469, 472 (Mo. 1957). While courts are reluctant to confer on insureds the power to compel their insurers to defend solely by their incanting a denial of the allegations, policyholders reasonably do expect their insurers will protect them when they are wrongly accused of torts.

Many insurance-coverage lawyers are familiar with the California Supreme Court’s landmark decision in Gray v. Zurich Ins. Co., 419 P.2d 168 (Cal. 1966), but there is a lesser-known companion case to Gray decided concurrently that addresses the important issue of insurers’ duty to defend against intentional torts. Lowell v. Maryland Cas. Co., 65 Cal.2d 298 (1966). Standard liability policies provide that the insurer will defend an insured “even if such suit is groundless, false or fraudulent.” The California Supreme Court in Lowell found this "groundless, false or fraudulent" language to be key in giving rise to a reasonable expectation that the insurer will defend a suit that if the allegations were true would not be covered but where the insured also could obtain a defense verdict of non-liability. (This is different from an insured not being liable for intentional injury but being held liable of the lesser-included offense of negligently caused injury.) So long as there was a substantial basis for the insured’s contention of non-liability, the insurer is required to defend:

The insured could reasonably expect that the insurer would furnish him a defense against the “groundless” charge that the insured had committed an assault and battery against the third party. The insured would not expect that the insurer could avoid the obligation of defense on the ground that such obligation covered only ‘accidents” which were indemnifiable under the policy and that an assault and battery was not such an indemnifiable “accident.” The policy promised a defense “even if [the third party] suit is groundless.”

65 Cal. 2d at 301. Lowell was in some regards an easy case because the insured obtained a defense verdict in the tort case and the policy expressly afforded defense to "groundless, false or fraudulent" claims; the exclusion for assault and battery did not apply (since the insured was found “not guilty”). See Travelers Ins. Co. v. North Seattle Christian and Missionary Alliance, 650 P.2d 250, 254 (Wash. 1982). Thus, given that Lowell was -- if defense were not granted -- an insured who would be left with a gap in coverage for defense costs that inurred to the insurer's benefit (by avoiding a potentially larger loss or a change in the course of the mounting of the successful defense, cf. Arenson v. National Auto. & Cas. Ins. Co. , 48 Cal.2d 528 (1957) ), the court reached out to find an obligation to reimburse the cost of the successful defense. Nevertheless, forty years after Lowell insurers and insureds continue to tangle over the applicability of the duty to defend to cases of intentional torts.

Posted by Marc Mayerson at 11:52 PM | Comments (3) | TrackBack

Insurers' Duty to Defend their Insureds Against Intentional Torts

[T]he comfort and consortium injuries alleged by [the husband] were sufficient to state a claim for alienation of affections, and under South Dakota law, [the husband] could not recover on this claim unless he proved that Pins intended to cause those specific injuries. In these circumstances, any ‘loss’ to [the husband] was ‘expected or intended’ by Pins and could not be deemed an ‘accident.’ Therefore, State Farm had no contractual duty to defend.

[T]he argument is patently circular, rendering the exclusion of intentional torts from the liability policy meaningless, at least under the circumstances presented here: it asserts, in effect, that a duty to defend against intentional-tort claims excluded under the policy is nevertheless triggered whenever the insured seeks to defend itself (with the insurer’s assistance) in a lawsuit alleging intentional-tort claims.

The insured could reasonably expect that the insurer would furnish him a defense against the “groundless” charge that the insured had committed an assault and battery against the third party. The insured would not expect that the insurer could avoid the obligation of defense on the ground that such obligation covered only ‘accidents” which were indemnifiable under the policy and that an assault and battery was not such an indemnifiable “accident.” The policy promised a defense “even if [the third party] suit is groundless.”

Posted by Marc Mayerson at 11:52 PM | Comments (3) | TrackBack

December 26, 2006

‘Round and ‘Round the Tort Liability Goes – When It Stops, Whither the Insurance Chose?

Generally, the law allows “choses in action” to be alienated (sold). This is a change that has been adopted over the course of the last 100 years or more. See W.W. Cook, The Alienability of Choses in Action, 29 Harv. L. Rev. 816 (1916). Because claims under insurance contracts properly viewed are choses in action, (Black’s Law Dictionary (5th ed. 1979) at 219), most courts have allowed insurance claims to be sold, too, even when the transaction takes the form of an “assignment.”

This is different from assigning the policy. Policies cannot be assigned, but what we mean by that is to change the named insured under the policy. Let me give an example: I have a car that I want to sell, which is worth $800. And let’s assume that I have an auto insurance policy with four months left in the policy term. What I cannot do is say, “buy my car for $1000 and I’ll throw in my insurance coverage” (as if you can be covered for the remaining policy term). This is changing the “named insured” going forward; the insurers haven’t checked out the buyer’s driving record, who might be a worse driver or a driver with a slew of speeding tickets.

But let’s change the scenario a little: let’s assume the day before I’m supposed to meet with you to sell my car I run into a bollard, which dents my fender and causes $200 of damage. Is there anything wrong with the idea that (assuming the $200 repair bill would be covered by my auto insurance) I can sell you my car for $700 plus the receivable from my insurance company for $200?

Most insurance policies state that “assignment of interest under this Policy shall not bind the [insurer] without its prior written consent.” Is selling the receivable – the chose in action – something that violates the policy terms? Is the chose an “interest under this Policy”? And if I breach this provision, is coverage vitiated (i.e., is this anti-assignment clause a condition precedent to coverage or a term whose breach is considered to be material to the contract as a whole)?

A more common real-life scenario is this: an insured-defendant settles with the tort plaintiff where one element of the consideration is the receivable owed from the insurance company (the insured’s claim for reimbursement of its defense costs and ultimately the value of its settlement with the plaintiff). See generally Enserch Corp. v. Shand, Morahan & Co., Inc., 952 F.2d 1485 (5th Cir. 1992) (Wisdom, J.) (approving of a “two tier” settlement whereby plaintiffs received certain monies up front and then additional monies on the back end depending on the recovery against the defendant-insured’s carriers). In these circumstances, the courts typically have held that the assignment of the chose in action to the insurers has not expanded the carrier’s risk, that choses are freely assignable, that the insurer is not at risk of double payment, and that the plaintiff may proceed against the insurer to assert on behalf of the insured its (pre-existing) contractual claims against the insurer. See generally International Rediscount Corp. v. Hartford Acc. & Indem. Co., 425 F. Supp. 488 (D.Del. 1977); Ardon Constr. Corp. v. Firemen’s Ins. Co., 185 N.Y.S.2d 723 (1959). Courts have held similarly regarding whether a fire insurance policy applies after property transfer. National Am. Ins. Co. v. Jamison Agency, Inc., 501 F.2d 1125 (8th Cir. 1974); Imperial Enter., Inc. v. Fireman’s Fund Ins. Co., 535 F.2d 287 (5th Cir. 1976); University of Judaism v. Transamerica Ins. Co., 61 Cal. App. 3d 93 (1976).

As with my selling my car and throwing the auto insurance in, there are countervailing concerns: in the auto example, the insurance company – at least insofar as liability insurance – elected to insure me and set a premium based in part on my driving record (although zip codes nowadays may be a stronger determinant of premium); if my insurance could be transferred to a riskier driver then the insurance company’s risk has changed – and the courts will invalidate that transfer on any number of grounds including “prejudice” or expansion of the risk to the carrier. See Muslin v. Frelinghuysen Livestock Managers Inc., 777 F.2d 1230, 1233 (7th Cir. 1985) (first-party mortality insurance on a racehorse not assignable).

Note that the issue on which I am focused concerns the anti-assignment provision. Courts (and insurers) sometimes also focus on the “duty to cooperate” and the “no action” provision in disputes involving to some extent assignments of the chose in action under an insurance policy. Hamilton v. Maryland Casualty Co., 27 Cal. 4th 718 (2002); Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). Unique policy provisions or unique interests may affect whether a transfer of the right to collect from an insurance company is proper or whether pre-transfer insurance policies apply, but until the last few years the courts in virtually all states have allowed transfers of the insured’s chose in action, reasoning in part that an insurer has been paid to accept the transfer of risk, and if that risk has come to pass it matters not to whom the check is cut – the original insured or an assignee.

(In fact, it doesn’t matter who litigates against the insurer – an assignee or an assignor, so long as the absent party is bound to the result in the coverage case. See Greco v. Oregon Mut. Fire Ins. Co., 12 Cal. Rptr. 1802 (Cal. App. 1961); Clarkson Co. Ltd. v. Rockwell Int’l Corp., 441 F. Supp. 792 (N.D. Cal. 1977); Urrutia Aviation Enterprises, Inc. v. B.B. Burson & Assoc., Inc., 406 F.2d 769 (5th Cir. 1969); Icon Group, Inc. v. Mahogany Run. Dev. Corp., 829 F.2d 473, 478 (3d. Cir. 1987); Prosperity Realty, Inc. v. Haco-Canon, 724 Supp. 254, 258 (S.D.N.Y. 1989).)

And the reason for this consistent string of outcomes is that courts typically have found that there is no legitimate interest in allowing an insurance company to refuse to perform when its risk has not been (materially) altered and it has received payment for the transfer of that risk.

Nevertheless, there have been inconsistent results (spurring further litigation) regarding large-scale liability claims that came to rest on some corporate-successor-in-interest to the original tortfeasor-insured following a series of complex corporate transactions – which should cause serious concern for corporate-transactions lawyers who ignore the insurance consequences of the deals they put together. The Ohio Supreme Court just decided a case allowing insurers to get off the hook completely for mass lead-paint liability claims, not because the claims were not covered but rather because the insurance mysteriously evaporated along the way of a number of corporate transactions, leading to the tort liability flowing through to the successor but inadvertently stripped of the insurance protection that would have otherwise applied to the claims had the corporate transactions never occurred. See Glidden Cos. v. Lumberman’s Mut. Cas. Co. (Ohio Dec. 20, 2006).

Until the modern coverage wars broke out, however, the courts routinely allowed whoever ended up with the tort liability to tap the insurance coverage that would have applied before the later corporate transaction took place. See Ocean Acc. & Guar. Corp. v. Southern Bell Telephone Co., 100 F.2d 441 (8th Cir. 1939); Chatham Corp. v. Argonaut Ins. Co., 334 N.Y.S.2d 959 (N.Y. Supr. 1972); Aetna Life & Cas. v. United Pac. Reliance Ins. Cos., 580 P.2d 230 (Utah 1978); Paxton & Vierling Steel Co. v. Great American Ins. Co., 497 F. Supp. 673 (D. Neb. 1980); Brunswick Corp. v. St. Paul Fire and Marine Ins. Co., 509 F. Supp. 750 (E.D. Pa. 1981); Travelers Ins. Co. v. Western Fire Ins. Co., 709 P.2d 639 (Mont. 1985); Oklahoma Morris Plan Co. v. Security Mut. Cas. Co., 455 F.2d 1209 (8th Cir. 1972).

But the modern, large-dollar coverage cases often involve detours and frolics into corporate transactions, all ultimately concerned about whether the entity paying the liability of some historic predecessor somehow or another is naked as far as insurance coverage goes. Note that the issue does not involve any expansion of the insurers’ obligations beyond that which would exist had the original insured not been merged out of existence, sold its assets, or otherwise sliced, diced, chopped, and slawed. In each instance, the entity claiming the benefit of the coverage is paying for the historic insured’s liability, and the only question is whether the insurers somehow or another get off the hook – as in Glidden – because of the manner in which some legitimate post-injury corporate transaction took place. Indeed, in one of my coverage cases, the parties no doubt spent a million dollars exhuming various corporate transactions – all to the end that the court concluded that none of these really mattered so long as the insurers could be assured that nobody else would sue the insurance companies for the same obligations being claimed by the entity before the court.

Earlier this year, in rebuffing the effort of an insurer to deny coverage based on the assignment of the chose in action, the Pennsylvania Supreme Court likewise allowed the transfer of the right to collect. As that court explained:

The assignment changed only the identity of the party who was entitled to recover under the Gulf policy, in the event an excess verdict was obtained. [B]ecause [the insurer’s] risk was not increased following the assignment, [and] since the assignment was subject ‘to such claims, demands, or defenses as the insurer would have been entitled to make against the original insured,’ [citation omitted] the Superior Court correctly determined that the assignment was valid.

Egger v. Gulf Ins. Co. (Pa. Aug. 23, 2006). Indeed, several months ago, the California Supreme Court went so far as to hold that not only the insured’s coverage benefits but also first-party insurance bad-faith damages could be recovered by an assignee. Essex Ins. Co. v. Five Star Dye House Inc. (Cal. July 6, 2006).

In sharp contrast, the Oregon Supreme Court recently allowed an insurer off the hook because of an assignment of the chose in action. Holloway v. Republic Indem. Co. of Am. (Ore. Nov. 16, 2006) . As the Oregon court framed the question presented: “The central issue in this insurance contract case is whether an anti-assignment clause providing that ‘[y]our rights or duties under this policy may not be transferred without our written consent[]’ is ambiguous and thus should be construed against its drafter.” In Holloway, the court ruled that the policy’s anti-assignment provision was clear, thus eschewing any difference between pre-loss assignments (changing the named insured) with post-loss assignments (transferring the chose in action) and held that a post-loss assignment of the right to collect under the policy vitiated coverage.

Some courts, as in Holloway, look at the question in terms of whether the terms of the anti-assignment provision applies – but most courts as did the Pennsylvania Supreme Court in Egger find that the terms of that provision do not apply or are ambiguous in their application to the assignment of the right to collect and thus must be construed against the drafter. The court in Holloway put on blinders and failed to examine whether there was any real consequence to the insurer from changing who was asserting the insured’s rights (the original insured or someone else suing in the name of the insured or suing for the benefits owed the insured); instead, the Holloway court (like Glidden) viewed the anti-assignment clause as being applicable and absolute.

But even if one were to accept that analysis at face value, Holloway plainly goes wrong in not asking what is the consequence of the violation of the anti-assignment provision. In other words, it is never enough to say that the terms of a contract were violated – before the non-breaching party’s performance is excused, the breach must be one that is either material to the contract as a whole or whose satisfaction is a (valid) condition precedent to performance. Holloway simply stops after finding that the assignment at issue was subject to the policy provision – and the court does not address whether its violation constitutes a material breach of the contract as a whole.

This is another way of backing into the argument that assignments of the chose in action – as distinct from an assignment of the policy itself, i.e., changing the named insured – is not material in the ordinary case. The only real difference is to whom the insurance company is supposed to write its check. As in Egger, the insurance company is free to argue that the nature of the damages are uncovered or that the conduct leading to the claim is uncovered – but that is different from saying that because someone other than the original insured is knocking on the carrier’s door with the original-insured’s hat in hand the insurer somehow escapes paying.

Even though had the original insured pursued the identical claim for damages the insurance company would be required to pay, the courts in Holloway and Glidden allow insurers to distract them from the merits, expose managers to claims of waste from making good on the legal obligation of the tortfeasor-insured – sometimes decades later and many corporate-predecessors removed, permit insurers to keep the premiums for risks they were paid to assume and which came to pass, or allow tort victims who pursue collection against the tortfeasor’s insurer to go uncompensated, all because the court concludes the twain did not meet between the liability and the insurance. In contrast, the rule in Egger and cases like it ensures that the contracting parties achieve the benefits (or detriments) of the original bargain in the event the risk the insured sought to transfer-- and for which the insurer collected premium -- comes to fruition.

Posted by Marc Mayerson at 6:02 PM | Comments (2) | TrackBack

‘Round and ‘Round the Tort Liability Goes – When It Stops, Whither the Insurance Chose?

The assignment changed only the identity of the party who was entitled to recover under the Gulf policy, in the event an excess verdict was obtained. [B]ecause [the insurer’s] risk was not increased following the assignment, [and] since the assignment was subject ‘to such claims, demands, or defenses as the insurer would have been entitled to make against the original insured,’ [citation omitted] the Superior Court correctly determined that the assignment was valid.

Even though had the original insured pursued the identical claim for damages the insurance company would be