Insurance Scrawl: Settlement Archives

February 2, 2008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Witness for the Prosecution: Me!

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.

Posted by Marc Mayerson at 3:41 PM | Comments (3) | TrackBack

February 4, 2006

Fettering the Insurer’s Privilege to Control the Defense It Is Duty Bound to Provide

For more than fifty years, policyholders and their insurers have been struggling over the insurer’s promise to defend and the insurer’s control the defense. Policyholders properly have been concerned that an insurance company that controls the defense of an action potentially covered by the carrier’s duty to indemnify will use that control to avoid that very same indemnity obligation. While in egregious cases where a lawyer hired by the carrier has abused his or her relationship with the insured, the client, so as to favor the lawyer’s source of income – the insurance company – the courts have responded to protect the insured’s interests. But most courts have ruled that such after-the-fact remedies are insufficient: they do not adequately compensate for the injury; meritorious claims are not pursued (in part because insureds may not discover the abuse); and the potential for this abuse alone undermines the dominant purpose of the insurance relationship to afford protection and peace of mind for the insured.

As a result, most jurisdictions have fashioned a number of rules affording remedies in cases of actual abuse – by allowing bad-faith actions to proceed against insurers, by barring insurers from using the fruits of the poisonous tree, by allowing malpractice claims against the lawyer, and other measures. But most furthermore have held that where there is a situation of potential abuse a prophylactic approach is appropriate; thus the insured is permitted to select the lawyer to defend it and the carrier continues to have the obligation to pay for that defense. This is usually referred to as the "independent counsel" rule (or in California, the Cumis or 2860 rule).

Rarely do I see as a policyholder lawyer a insurance provision that expressly addresses this problem – something that is incomprehensible given that for more than two generations this struggle has been waged. Since at least the 1950s, the courts have made clear to insurers that, because their policies do not set out how these circumstances should be handled, the courts themselves will fashion rules designed to balance the interests of policyholders and their insurers. In general, the courts have looked to the dominant promise of the insurance contract to defend (and to indemnify) the insured and held that the correlative responsibility of the insurer to defend can yield to safeguarding that dominant purpose of the insurance contract. In part this stems from the contract drafting in which two words – “right and” -- in the insurance policy are what carriers rely on: they have the “right and duty to defend” (plus the insured’s duty to cooperate set out in the boilerplate portion of the policy).

Because insurers are well aware of the rule that uncertainties in the contract will be construed against them and the rule in the overwhelming majority of jurisdictions that their right to defend and its entailed privilege of selection and control of counsel has to yield to protect the benefit of the bargain the insured struck to obtain both defense and indemnity, the courts generally have held that insurers forfeit their privilege of control.

The paradigmatic circumstance where the insurer’s privilege of control yields to its duty to defend, to protecting the insured’s expectations of coverage, and to subordination to the insured’s interest is where a complaint alleges more than one claim arising out of a single event and the case can be lost on either a covered basis or an uncovered one. Take as an example where an during a pickup basketball game an elbow is thrown: if that occurred because of gross negligence, there will be coverage, but if it occurred because the player sought to intentionally injure the recipient, there won’t be. Trial of the case involves the same facts and testimony either way, and ultimately it’s up to the jury to weigh the testimony and the facts. The insurer if it is to lose the case would prefer to lose it on intentional-injury grounds, for then it won’t have to pay the judgment.

Another example: assume there is a technical defense available to the covered claim; should the lawyer file a motion for summary judgment on the covered claim, which will effectively pretermit the carrier’s ongoing obligation to defend (since the case no longer can eventuate in a judgment covered by the duty to indemnify)? Does the lawyer have an obligation to leave the weak claim hanging around just to preserve the defense or does the lawyer – whose bills are being paid by the insurer – have the obligation to clean out the dross and thus allow the carrier off the hook?

Insurers have pooh-poohed such concerns by contending that lawyers act ethically so the courts’ concerns are unfounded. And the United States Court of Appeals for the Fourth Circuit – a court that has a penchant for mispredicting state insurance law by siding with insurance companies – recently agreed with the insurers in what should become carrier-side lawyers’ favorite case to cite on these issues. In a well-written, well-analyzed, but erroneous ruling, Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. (4th Cir. Dec. 27, 2005), the Fourth Circuit rejected the argument that an insurer’s reservation of the right to deny coverage called for prophylactic protection of the interest of the insured by allowing it to select counsel of it choice to defend at the insurer’s expense.

Of course, Ben Arnold involves reasonably favorable set of facts for carriers and overbroad argument by the policyholder, but the court’s ruling is not so confined. The court sets up the question presented as follows:

When a party with insurance coverage is sued, the insured notifies the insurance company of the suit. The insurance company, in turn,typically chooses, retains, and pays private counsel to represent the insured as to all claims. If the suit involves some claims that are covered under the insurance policy and some claims that are not covered, the insurance company typically will send a reservation of rights letter to the insured stating what claims the insurance company believes are covered and what claims it believes are not covered. In this case, we examine whether, under South Carolina law, such a reservation of rights letter automatically triggers a conflict of interest entitling the insured to reject counsel tendered by the insurance company and instead to choose and retain its own counsel and to have the insurance company pay for that counsel.

Slip op. at 1. The proposition offered by the insured was that any time an insurer issues a reservation-of-rights letter it is still required to provide a defense but the policyholder gets to select counsel to defend it and control the course of the defense.

The Fourth Circuit rejected the policyholder’s argument, noting correctly that courts tend to require that the insured show there to be a conflict of interest between it and the insurance company before wresting the defense from the carrier. This is sensible, of course, given that in the insurance policy the policyholder delegated to the insurance company the right to defend the case. Insurance companies issue reservation-of-rights letters in response to case law in the 1950s and 1960s that a carrier that defends a suit cannot turn around at the end of the case and tell the insured that it won’t pay for the judgment – at least without alerting the insured of this possibility earlier; as a result, insurance companies issue reservations of rights to prevent the insured from having detrimental reliance (or claiming waiver). National Mut. Ins. Co. v. McMahon & Sons, 356 S.E. 2d 488, 493 (W. Va. 1987); Safeco Ins. Co. v. Elllingshouse, 725 P.2d 217, 221 (Mont. 1986); Richmond v. Georgia Farm Bureau Mut. Ins. Co., 231 S.E.2d 245 (Ga. 1976); Royal Ins. Co. v. Process Design Associates, 582 N.E.2d 1234, 1239 (1st Dist. 1991).

But it is not the insurance company’s fault that a suit may involve both covered and uncovered amounts, and coverage is not to be expanded beyond the terms of the policy through application of principles of waiver. As a result, it is entirely appropriate for an insurance company that is contractually obligated to provide a defense to a policyholder to alert it to the possibility that the judgment in the case might not be covered. D.E.M. v. Allickson (North Star Mut. Ins. Co.), 555 N.W.2d 596 (N.D. 1996). In this way, the policyholder can act to protect its own interest, including in some states choosing to settle the lawsuit against it in a fashion that camouflages whether the payment is also on account of uncovered amounts or claims. See generally Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982).

So, unless some other interest or question is involved, the mere fact that an insurer sends a reservation-of-rights letter should not alter the parties’ preexisting rights and powers (since all the insurer is trying to do is to avoid waiver/estoppel from its assuming the defense).

Against this background, the Fourth Circuit rejected the notion that a reservation-of-rights letter per se creates some sort of conflict between the interests of the insured and its insurer such that the insurer is divested of its contractually bargained-for right to defend. But the court went on to recognize that there are circumstances where the interest of the insured and the insurer in the development of the defense can diverge, which has led most courts to express concern about insurer-appointed and insurer-directed counsel.

The Ben Arnold court reviews the law in a number of jurisdictions (having found that South Carolina law applies and was without governing precedent) and concludes that some courts allow the insured to select counsel paid contemporaneously by the insurer whereas other courts permit the insurer to select “independent” counsel who in turn may have heightened professional duties to safeguard the insured’s interest. Because a strong undercurrent in those cases vesting the choice of counsel in the hands of the insured questions the ethical integrity of the insurance-defense bar, e.g., Howard v. Russell Stover Candies, Inc., 649 F.2d 620, 625 (8th Cir. 1981) (requiring independent counsel for fear that counsel for insurer “would be inclined, albeit acting in good faith, to bend his efforts, however unconsciously” in insurer’s favor), the Fourth Circuit was highly reluctant to impugn with such a broad brush the integrity of an entire swath of the bar. Slip op. at 11 (“We are equally unable to conclude that the Supreme Court of South Carolina would profess so little confidence in the integrity of the members of the South Carolina Bar. Rigorous ethical standards govern South Carolina attorneys.”).

The Fourth Circuit concluded that the ethical rules and discipline, “coupled with the threat of bad faith actions or malpractice actions if a lawyer violates these rules, provide strong external incentives for attorneys to comply with their ethical obligations.” Slip op. at 12. Accordingly, the Ben Arnold court refused to find that, where there was a conflict of interest between the insured and the insurer in the development of the facts at issue in the liability case, the insured had a right to counsel of its choice, paid for contemporaneously by the insurer.

The court furthermore adopted a strict forfeiture rule in this regard, finding that if an insured rejected counsel tendered by an insurance company it forfeits the right to defense coverage. In other words, the policyholder is precluded from seeking coverage even if the insurance company cannot show that it was in any way was harmed by the policyholder’s selection of counsel (e.g., competent counsel at the same rate, for example, who obtains an outstanding result). The court rejected the policyholder’s contention that the insurers must show substantial injury or prejudice or at least some detriment in order to be excused from providing the policyholder any of the benefit of the bargain. Slip op. at 13-15.

Ben Arnold is sure to be relied on by insurance companies as a cogent statement of their position in favor of rejecting the policyholder’s selection of counsel of its choice. Nevertheless, the court need not have reached out to proclaim its own, pro-insurer prophylactic rule because the facts of the case and the conduct of the insurers at issue merit no such prolegomenon.

In Ben Arnold, the insurers retained qualified counsel to defend the covered counts and in addition offered to pay for separate counsel to represent the insured’s interests with respect to uncovered counts. Moreover, with respect to a different insured in the case where there was a conflict of interest in the development of the facts, both the trial court and the Fourth Circuit found that independent counsel was required to be appointed at the carriers’ expense. And even with respect to the principal insured for which there was no conflict at issue in the development of the underlying facts, the trial court recognized that at the time of settlement independent counsel might be required due to the conflict that then would be manifest. 2004 WL 2165971 (D.S.C. July 26, 2004), at n. 14.

What is lamentable about the Fourth Circuit’s opinion is that the court could easily and more properly have held that, given the absence of a conflict of interest between the insured and insurer in the development of the underlying facts, independent counsel was not required and in any event the insurers satisfied their obligations by offering to pay for two sets of counsel. This is the rule in “independent counsel” states where most courts recognize that merely sending a reservation-of-rights letter – without more – is insufficient to oust the insurer of the control of the defense. National Union Fire Ins. Co. v. Hilton Hotels Corp., 1991 WL 405182 (N.D. Cal. 1991). In fact, wresting control whenever a reservation of rights is sent ironically defeats the purpose for why such reservations were sent in the first place.

But Ben Arnold should not be rejected just because it is overly broad, for even were the facts to match the very broad rule adopted that rule still would be ill advised and erroneous under principles both of insurance law and of contract law. Perhaps because the issue has been in dispute for so long (half-a-century), the footings of the independent-counsel rule seem to have become beclouded.

Let’s look first at the consequences of the Ben Arnold court position. The court makes clear that, while there might a perception of discomfort by the policyholder in the carrier’s selected lawyer being in charge (and thus having the ability to steer the defense toward uncovered grounds), the insured’s interest is adequately protected because of legal-ethics rules, attorney-malpractice liability, and insurance bad-faith principles. This rejoinder to the policyholder position really does not withstand scrutiny.

The Fourth Circuit’s remedies render nugatory the peace of mind and security the insured is supposed to receive by paying a premium to the insurance company for the broad protection afforded by insurance policies. See Rawlings v. Apodaca, 151 Ariz. 149, 154-55 (1986) (“Although the insured is not without remedies if he disagrees with the insurer, the very invocation of those remedies detracts significantly from the protection or security which was the objection of the transaction.”). The court envisions requiring policyholders to endure bad faith or ethical breaches, and then seeking recovery only at the end of the underlying litigation by suing for legal malpractice or bad faith. Ben Arnold thus replaces the security that insurance is supposed to provide with a chose in action against the insurer-appointed lawyer, requiring the policyholder to (a) sue for legal malpractice, requiring a showing both of breach of the standard of care and a showing that the outcome would have been different (the “trial within the trial” of such malpractice actions), (b) undertake that action at its own expense (since the insurer is not paying, and there’s no attorneys’ fees recovery in malpractice cases), (c) in the meantime front the money for the adverse judgment in excess of policy limits or even the entire judgment if it is based on an uncovered claim (and subsequently, if successful, refund to the carrier in subrogation any amounts recovered after the policyholder was made whole), and (d) expose itself to an uncollectible judgment because the lawyer may not have assets sufficient to cover the judgment that resulted from his malpractice.

The Ben Arnold solution to the conundrum of insurer-appointed counsel further would do substantial injury to the attorney-client relationship; not only would the insured find it difficult to confide in counsel assigned to it, but counsel’s effectiveness would be undermined by its knowledge that the carrier has set it up for an impending malpractice action. And the same problems apply regarding suing the carrier for bad faith for some misconduct of the insurer-appointed lawyer or suing for negligent performance of the duty to defend by providing inadequate counsel.

The proposed remedy that the Ben Arnold court contemplates is a feeble substitution for the security and protection that the policyholder thought it was paying for. And if one looks at the cases decided forty or fifty years ago, these courts found it salient that the insurers’ policies did not spell out how this conflict situation would be handled. Standard insurance policies then (as now) were not written to state plainly and unambiguously that (i) interference with the right to defend forfeits coverage or (ii) the right to defend constitutes a material part of the consideration of the overall insurance transaction (which would be an overreach anyway given the aleatory nature of insurance contracts, that is, that the policyholder has fully performed its principal obligation of paying the premium).

Thus, the courts have applied the ordinary rules that where the policy language was uncertain and the insurer was in a position to clarify by drafting a provision clearly, the policy is construed in favor of coverage to achieve its purpose of indemnifying the insured, especially bearing in mind the reasonable expectations of insureds and avoiding the appearance of unseemliness from insurer-appointed counsel’s being in the position to steer the case to favor his or her source of future business. E.g., Employers' Fire Ins. Co. v. Beals, 240 A.2d 397, 402 (R.I. 1968); Magoun v. Liberty Mut. Ins. Co., 195 N.E.2d 514 (Mass. 1964); Prashker v. United States Guarantee Co., 136 N.E.2d 871 (N.Y. 1956); see also CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844 P.2d 1113, 1116 (Alaska 1993). As a result, most courts ruled that the carriers’ right to control the defense – an ancillary part of the insurance contract – must yield to the predominate purpose of the contract to provide the policyholder a defense and to safeguard the policyholder’s peace of mind. See Jacobs & Youngs, Inc., 129 N.E. 889, 891 (N.Y. 1921) (Cardozo, J.) (“There will be no assumption of a purpose to visit venial faults with oppressive retribution.”). That carriers have not fixed their policy language after 50 years of litigation and instead require that the law be developed in each state and locality smacks of ineptitude or bad faith or some synergistic combination of the two.

Nevertheless, one dissembling rejoinder to this would be to contemplate a situation where the policyholder does erroneously reject the carrier’s offered defense (which approximates the actual facts in Ben Arnold). In that circumstance, so the argument goes, if the carrier remains responsible for funding the defense, the carrier that offers to perform properly is no better off than is the carrier that breaches its contract by refusing to provide a defense at all. In other words, a carrier that breaches its duty to defend by erroneously denying coverage is liable to pay the reasonable costs of defense; and according to this argument a carrier that offers counsel that is rejected by the policyholder is still obligated to pay the reasonable costs of defense.

This is a false counter, because it misstates the damages that are to be paid by a breaching carrier (that is, the contract-law damages it owes for breach of the duty to defend). It is not precise to say that a breaching insurer owes the reasonable costs of defense; rather, under Hadley v. Baxendale, the insurer owes all foreseeable damages. In the circumstances, the policyholder proffers in its prima facie case all defense costs it incurred (that were caused in fact by the carrier’s failure to perform), and the carrier may argue by way of affirmative defense (and for which it has the burden of proof) that the costs were so unreasonable as to constitute unforeseeable damages ( which when framed correctly is a difficult standard for the carrier to meet, especially in the light of the fact that the insured had every economic incentive to incur only reasonable costs since, at the time, it was paying them out of its own pocket with no certainty of recovery from the carrier). Moreover, a breaching carrier is not just liable for defense costs, it is liable for all damages incurred by the insured from the breach. Beck v. Farmers Insurance Exchange, 701 P.2d 795, 801 (Utah 1985).

Contrast this situation to that of the carrier that does offer a defense but which is rejected by the policyholder on the ground that independent counsel is required – though in this illustration the policyholder is wrong to do that. In that circumstance, the concepts of material versus immaterial breach are key (as are dependent versus independent covenants). Here, the carrier has not breached, but the policyholder has. But the policyholder’s breach – by interfering with the carrier’s right of control – exposes the policyholder to the carrier’s set-off claim because it is an immaterial breach of the overall contract. In other words, the carrier is still required to perform its contract – for the policyholder’s breach is not a material breach of the contract excusing the carrier’s obligation (especially when the policyholder has probably already paid the full premium). See generally Steakhouse, Inc. v. Barnett, 65 So.2d 736, 738 (Fla.1953)(defining dependent covenants). But because the policyholder did breach the contract, the carrier is entitled to show its damages from the policyholder’s breach. In this context, what that means is the additional cost of the defense that would not have been incurred had the policyholder not breached (i.e., not been in charged). So, if the defense counsel the insurer would have appointed charged only $300 an hour (because of say a bulk deal with the carrier) and the policyholder’s selected lawyer charges $400 an hour, the carrier is not obligated to pay the $100 an hour difference. (Unlike Ben Arnold where the carriers' to their mirth owe nothing.) Importantly, this is in contrast to the breaching carrier which is unlikely to be able to show that the $100 an hour delta is such an unreasonable cost differential as to constitute unforeseeable damages under Hadley v. Baxendale. Moreover, the carrier that properly offered counsel is not exposed to paying the insured’s full damages (sometimes pejoratively characterized as “consequential damages” (Machan v. Unum Provident Ins. Co., 2005 UT 37 (Utah June 17, 2005)), because it did not breach.

Thus, a carrier that properly tenders performance that is incorrectly rejected is not in the same (disadvantaged) position as is a carrier that breaches its contract. Accordingly, under this analysis, everyone is put in the position they would be in had the contract been properly performed – the benefit of the bargain is preserved.

Until such time, therefore, that insurers revise their contracts to specify that even in a conflict of interest situation the insurer still gets to appoint counsel (or whatever method it would propose, such as allowing the insured to pick from a list of five counsel suggested by the insurer), the uncertainty of the contract, and the disproportionality of the proposed remedy contemplated by the Ben Arnold court, confirms the rightness of the independent-counsel rule. See generally Restatement (2d) Contracts Sections 197, 229 (2004). If insurers do revise their contacts, then (i) insurance regulators would be in the position to weigh in, (ii) policyholders would know expressly what the process is for dealing with a conflict situation if it purchases the particular insurance policy, and (iii) policyholders could choose to purchase policies from other insurers that offer more generous terms. But it is folly to believe that policyholders contemplate the remedial scheme adopted by the Ben Arnold court. See Restatement (2d) Contracts Section 211(3).

Note: A version of this commentary was published in 5 Insurance Coverage Law Bulletin (May 2006) at 1

Posted by Marc Mayerson at 11:39 PM | Comments (0) | TrackBack

Fettering the Insurer’s Privilege to Control the Defense It Is Duty Bound to Provide

When a party with insurance coverage is sued, the insured notifies the insurance company of the suit. The insurance company, in turn,typically chooses, retains, and pays private counsel to represent the insured as to all claims. If the suit involves some claims that are covered under the insurance policy and some claims that are not covered, the insurance company typically will send a reservation of rights letter to the insured stating what claims the insurance company believes are covered and what claims it believes are not covered. In this case, we examine whether, under South Carolina law, such a reservation of rights letter automatically triggers a conflict of interest entitling the insured to reject counsel tendered by the insurance company and instead to choose and retain its own counsel and to have the insurance company pay for that counsel.

Note: A version of this commentary was published in 5 Insurance Coverage Law Bulletin (May 2006) at 1

Posted by Marc Mayerson at 11:39 PM | Comments (0) | TrackBack

January 20, 2006

Insurance Industry Spared from Bankruptcy: Asbestos 524(g) Settlements

The California Court of Appeal has reversed a ruling holding that liability insurers of an asbestos company had immediate obligations to perform in full once a trust was established through section 524(g) of the bankruptcy code that concurrently extinguished the liability of the policyholder vis a vis the asbestos claimant creditors. Fuller-Austin v. Highlands Ins. (Cal. App. Jan. 19, 2006). The "acceleration" of insurers' obligations that these 524(g) trusts might create has caused apoplexy in the insurance industry, and the California court's reversal of the insurance ruling that the creation of the trust meant the insurers had immediate obligations to perform for the total (non-bankruptcy) value of the future claim stream no doubt produced a collective sigh of relief from the insurance industry (and their reinsurers).

There are two bankruptcy elements in these modern asbestos-driven bankruptcies that, when combined with prior rulings of courts dealing with bankruptcy effects on insurance, yielded an extraordinary result: immediate obligations of insurers to pay the future asbestos obligations of the policyholder-debtor immediately and in full. Before turning to the Fuller-Austin decision itself, it is important to understand what debtors like Fuller-Austin were trying to achieve.

The first step in an asbestos-driven bankruptcy is to take the asbestos claims stream and estimate its value. The debtor then needs to satisfy that creditor claim in the bankruptcy, which it does by setting up a trust and funding it with cash (from itself and sometimes its corporate parent), stock, and preexisting insurance rights. The debtor receives a channeling injunction that bars the assertion of any asbestos-related claim against itself (and sometimes against non-debtors, see Susan Power Johnston and Katherine Porter, Extension of Section 524(g) of the Bankruptcy Code to Nondebtor Parents, Affiliates, and Transaction Parties, 59 Business Lawyer 511-12 (2004)), and the injunction furthermore funnels all claims to the trust. In other words, the debtor is able to emerge from bankruptcy shorn of its asbestos liabilities without fear of any future claims.

The trust in turn is charged with resolving the asbestos claims and sets up an administrative compensation process, usually with relaxed standards of proof, to “adjudicate” the tort claims. The claimant may have the right further to bring an action in court, though with no ability to seek punitive damages for example.

This is the model that was used in the Manville bankruptcy and was confirmed, expanded, and modified by Congress in 1994 when the bankruptcy code was amended with the addition of section 524(g), 11 U.S.C. § 524(g), a provision specially designed to deal with asbestos-driven bankruptcies. While certain procedural and substantive changes were implemented in 524(g), from the debtor’s perspective one key was that 524(g) made clear that future claims, claims by persons exposed to asbestos but who at the time of the bankruptcy filing had no legal claim, would have their claims channeled to the trust as well. Dealing with “futures” has been the Achilles heel of several non-bankruptcy deals in the class-action context, Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999); Amchem v. Windsor, 521 U.S. 591 (1997), so the express conferral of power on bankruptcy courts to limit the right to sue of future claimants was quite significant.

How did all this impact insurance companies? In most jurisdictions, the court have adopted a model of asbestos insurance recoveries where insurers from the 1940s through the mid-1980s together are liable to pay the policyholder’s defense costs and costs of settlements and judgments. There remained key questions in the insurance cases concerning the order of payment by insurers, which principally was an issue for the excess insurance carriers. The question is whether, if one were an excess insurer in 1970 that wrote coverage excess of $50 million, an amount that would represent about one-quarter of one year’s asbestos expense for a major defendant, that insurer is required to perform once the insured/asbestos-defendant pays $50 million or whether that insurer is effectively excess to the sum total of all primary and excess coverage, both before and after its policy period, that attaches lower than $50 million. E.g., United States Gypsum Co. v. Admiral Insurance Co., 643 N.E.2d 1226 (1991) (holding that an umbrella carrier was excess to policies before and after its policy year). If one assumes a constant level of $50 million annual coverage, the 1970 excess carrier might than be excess to hundreds of millions of dollars in “underlying” coverage. The key point is that the objective of excess carriers was to defer as long as possible the time at which they were required to perform; given the size of excess policy limits, the likelihood that asbestos liability will suck dry an entire insurance program, and the value of holding onto money as long as possible so as to “earn out” the value of claims, excess insurers have been banking on deferring their obligations to pay.

In this context, the developments in the bankruptcy cases took on added importance to excess insurers. Under a key decision more than a decade ago in the Seventh Circuit, UNR Indus., Inc. v. Continental Cas. Co., 942 F.2d 1101 (7th Cir. 1991), two crucial issues were resolved: (1) the debtor/insured’s establishment of the trust in exchange for the release of the asbestos claims against it (which were channeled and funneled to the trust) constituted a “judgment” as to which the insurers had a mature obligation to indemnify (even though payment to any individual claimant might not occur for decades); and (2) while a claimant might receive only a percentage payment from the insured/debtor/trust due to its limited funds, the value of the claim for insurance-indemnification purposes was the face value (not the end-of-the-day paid value) of the claimant’s damages. As to the second point, even though an individual settlement is paid in “bankruptcy dollars” in calculating the duty to indemnify the value of the claim extinguished is determinative (not the value paid to extinguish the claim, an amount that takes into account the insured’s insolvency).

The consequence of the UNR decision for excess insurers was frightful: they could be required to immediately perform calculated against the full value of the debtor’s claim portfolio, even though the trust itself might not pay out the individual claims for years to come.

The situation became more acute for excess insurers after 524(g) was passed by Congress in 1994. Section 524(g) requires 75 percent approval by creditors, typically the asbestos claimants (and commercial bondholders). Utilizing the pre-packaging structure under the bankruptcy code, through which debtors may negotiate the plan of reorganization prefiling, debtors began to file section 524(g) “pre-pack” bankruptcies wherein the debtor/insured/defendant would strike an agreement with the asbestos plaintiffs (in reality, their contingency-fee-paid lawyers) to establish a value of the portfolio of asbestos claims and payment values. This informal estimation process (with the asbestos-plaintiffs’ lawyer taking a percentage recovery) yielded huge nominal values, since they include asbestos claims that will be asserted for the next thirty years.

Thus, insured/debtors/defendants would negotiate a pre-pack bankruptcy plan where often the key asset that would be used to fund the massive asbestos liabilities driving the bankruptcy was insurance rights. E.g., In re Johns-Manville Corp., 40 B.R. 219, 229 (S.D.N.Y. 1984) (insurance among “the most important assets of the estate”). Moreover, the creditors’ committee (the asbestos-plaintiffs’ lawyers) would be in charge of the trust – which insurers likened to the fox guarding the hen house. (This also resulted in strange reversals of roles where some policyholder lawyers, who for years worked for asbestos defendants, suddenly became the lawyers for the trusts/creditors, working for the asbestos claimants who were suing the asbestos-defendants who had formerly been their clients – a situation that produced intriguing professional ethics and bankruptcy issues.)

Fearing that they were being set up in these pre-pack 524(g) deals (and insurers were not alone in being critical of these pre-pack, 524(g) arrangement), insurers sought to protect their interests by intervening in the bankruptcy proceedings, leading to fights over the insurers’ standing to object to a plan (given that insurers were debtors to the estate not creditors). In Re Combustion Engineering, (3d Cir. Dec. 2, 2004); In Re A.P.I. Inc., 331 B.R. 828, 842 (Bankr. D. Minn. 2005); Barron & Budd, P.C. v. Unsecured Asbestos Claimants (321 B.R. 147, 157-52 (D.N.J. 2005); Metropolitan Life Ins. Co. v. Alside Supply Center (In Re Clemmer), 78 B.R. 160 (Bankr. E.D. Tenn. 1995). Insurers (and others) fought against each other where one insurer settled the coverage with the debtor/insured. In Re Dow Corning, 192 B.R. 415, 421 (Bankr. E.D. Mich. 1996); MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir. 1988); see also In Re FortyEight Insulations Inc., 133 B.R. 973 (Bankr. N.D. Ill. 1991), aff’d, 1149 B.R. 860 (N.D. Ill. 1992). Insurers sometimes would seek to litigate coverage questions against their insured in bankruptcy (though those courts often were thought to be favorable fora for the debtor/policyholder), presenting questions of core/non-core proceedings, removal, and withdrawals of reference as well as questions whether the insured must satisfy deductibles or retentions as a pre-condition to accessing coverage or whether the deductible is an affirmative claim by the insurer that gets resolved at the end of the line in the bankruptcy with other unsecured claims against the estate. E.g., Amatex Corp. v. Aetna Cas. & Sur. Co., 107 B.R. 856, 871-72 (Bankr. E.D. Pa. 1989); Kleban v. National Union Fire Ins. Co., 2001 Pa. Super. 92 (2001); Columbia Cas. V. Federal Press, 104 B.R. 56, 62-64 (Bankr. N.D. Ind. 1989); Home Ins. Co. v. Hooper, 691 N.E. 2d 65 (Ill. App. 1998); Haisten v. Grass Valley Reimbursement Fund, Ltd., 784 F.2d 1392, 1403 (9th Cir. 1986)). Some carriers sought to litigate the coverage outside of the bankruptcy, but those ran into the rule that coverage actions (including “defensive” affirmative claims) outside of the bankruptcy court may not be initiated by insurers, due to the protections of the automatic stay. ACandS, Inc. v. Travelers Cas. & Sur. Co., (3d Cir. Jan. 19, 2006); Minoco Group v. First State Underwriters Agency, 799 F.2d 517, 519 (9th Cir. 1986).

This brings us to Fuller-Austin, a company that filed a pre-pack 524(g) bankruptcy that was confirmed in September 1998. Though it had commenced coverage litigation in 1994, the case suffered litigation interruptus due to the bankruptcy filing; the case picked up again with bench trials in December 2000 and September 2001, and a jury trial in November 2002. In May 2003, the jury returned a verdict in favor of Fuller-Austin awarding $188 million in damages. The jury further found that the value of Fuller-Austin’s asbestos stream exceeded $966 million. Following that trial loss, the insurers appealed, largely challenging the jury instructions formulated by the trial judge. As crushing a defeat that the trial court judgment was, the appellate decision was equally a vindication for the insurers. The insurers won virtually every issue on appeal. The appellate court was unequivocal in its rejection and criticism of the policyholder’s arguments.

The first question presented was whether the bankruptcy court’s confirmation of the plan constituted was a binding determination of the insured’s liability to the asbestos claimants. In other words, does the amount determined in the bankruptcy court constitute the amount to which the insurer’s duty to indemnify applies? The Fuller-Austin court ruled that the determination of the insured’s liability to the class in the bankruptcy proceeding was not sufficient to constitute an actual “adjudication” of the insured’s liability. There was no actual, adversarial process of factfinding such that would effectively bind the insurer by finally establishing the insured’s liability. Compare Hamilton v. Maryland Cas. Co., 27 Cal. 4th 718 (Cal. 2002).

The California court found that the bankruptcy-confirmation process, including the formulation of a plan, was a “settlement” of the insured’s liability, which presented the question whether the insurers had the right to refuse to consent to the settlement. While the insurers did not consent in fact to the plan, the court embraced the notion that insurers did not have the power to withhold consent unreasonably. In other words, so long as the settlement is reasonable, the question of the insurers’ consent vel non is academic. Because the insurers did not establish a lack of good faith by Fuller-Austin in the process leading to the plan, the court held that the insurers were permitted to object to the settlement only to the extent they could show that, as to them, the bankruptcy plan is “unfair, unreasonable or the product of fraud or collusion.” (slip op. at 34; 52-54)

The court next turned to the key question of acceleration, whether the coverage-trial jury could “estimate the aggregate sum of an insured’s liability for present and potential future asbestos claims for the purpose of accelerating [the] insurers’ obligations;” the court concluded that the estimation of the value of the claim portfolio did not “represent the amount that Fuller-Austin is legally obligated to pay.” Slip op. at 41. The court’s discussion, on this point, is not entirely focused. The issue (at least as I understand it) is whether the claim-estimation process in bankruptcy when combined with the discharge of the debtor and funneling of all claims to the separately established trust, constitutes a then-present release of the insured’s liability to the class. If so, then the plan-confirmation process results in an immediately indemnifiable judgment as against the insured (and concurrent assignment of the choses in action under the policies to the trust). In other words, rather than a claim-by-claim exhaustion of coverage as they are adjudicated (or settled) in the ordinary course, the bankruptcy process results in the equivalent of a class-action judgment against the debtor/insured. If like a class-action the claims are resolved en masse, it matters not that the payments for the individuals will occur over time. Relative to the insured, it has extinguished its liability, not as of the time that any individual claimant receives his or her money but when the judgment is entered (which the insured/debtor satisfies by establishing the trust).

The Fuller-Austin court does not frame the question this way, and it is unclear to me whether procedurally this is precisely how the issue was served up. But the court is unequivocal in declining the follow the Seventh Circuit’s UNR decision on this point, which concededly was decided prior to the enactment of 524(g). (Notably, there is no evidence of which I am aware that Congress in enacting 524(g) intended to overturn the UNR decision.) For future bankruptcies, the Fuller-Austin decision may be inapposite or at least unpersuasive on this point.

Relatedly, the court concluded that the value of the claims of the asbestos claimants were measured by the percentage recovery they obtain from the trust rather than the “full” value of their claims. In other words, because of the limited assets of the debtor-insured, the asbestos claimants were to receive only a percentage of the value of their claims (say, 45¢ on the dollar). The court paid little heed to the standard policy provision and statutorily imposed term that the insured’s bankruptcy or insolvency was not to reduce the insurer’s obligation. This policy provision was intended expressly to overcome decisions early last century where an insurer skated out of its obligations because its insured was (otherwise) impecunious and thus was not obligated to pay for the claimant’s full damages. The California court again declined to follow the UNR decision on this point. Excusing the insurers on this basis improperly favors their interests over that of the tort claimants and indeed other asbestos defendants, which will be exposed to the shortfall under joint-and-several liability principles.

The court further addressed issues dealing with the fairness of the trial-court’s jury instructions, including one that effectively presumed the existence of coverage and required the insurers to disprove that their policies were triggered or provided coverage.

What are the implications of Fuller-Austin for asbestos and mass-tort driven bankruptcies? First, it seems likely that the case will stand within the California court system because review by the California Supreme Court seems unlikely. Second, the parties upon retrial will be litigating whether the plan was a fair estimate of the insured’s liability. Assuming the settlement will be found to reasonably approximate the insured’s liability, the insurers will be required to perform only as and to the extent that claims are resolved by the trust. The likely finality of the appellate court’s ruling that the insurers’ obligations are not accelerated and are measured only by the actual payouts are the twin pillars of the excess insurers’ victory.

It’s fair to say the Fuller-Austin decision represents a major win for insurers, but the losers are the asbestos claimants (and their lawyers). The policyholder has received its discharge through the bankruptcy process and under 524(g) is protected against future asbestos-liability claims. The insurers have become increasingly aggressive and litigious in all the spate of asbestos-driven bankruptcies, and Fuller-Austin will not quell their enthusiasm for battle.

Posted by Marc Mayerson at 10:37 AM | Comments (1) | TrackBack

Insurance Industry Spared from Bankruptcy: Asbestos 524(g) Settlements

Posted by Marc Mayerson at 10:37 AM | Comments (1) | TrackBack