Fifth Circuit Provides Road Map for Review and Trial of Bad Faith Claims in Mississippi

Mississippi essentially has three levels of claim when insurance is at issue: (1) mere breach of contract, allowing recovery of contract damages; (2) breach of contract + no arguable basis for breach, which entitles recovery of consequential damages; and (3) breach of contract + no arguable basis for breach + malice/gross disregard for the rights of the insured, which entitles the recovery of punitive damages.  In Briggs v. State Farm Fire & Cas. Co., 2016 WL 7232136 (5th Cir. Dec. 16, 2016), the Fifth Circuit Court of Appeals approved the bifurcation of the trial of an insurance dispute by the district court.  In so doing, the Fifth Circuit provided a road map for how such claims should be handled for trial.

The Underlying Dispute

In 2011 a tornado damaged the Briggses’ home.  The Briggses made a claim with State Farm for property damage.  A dispute arose between the Briggses and State Farm as to the value of the loss.  The Briggses claimed that the damage to their home exceeded the $250,000 policy limit of the State Farm policy and that their home needed to be demolished and rebuilt.  State Farm contended the home damage could be repaired and valued the loss at approximately $150,000. The Briggses filed suit against State Farm, claiming that State Farm breached the insurance policy by not paying the full value of their claim, that such a breach had no arguable basis and that they were entitled to compensatory and punitive damages.

At trial plaintiffs tried to submit evidence to the jury that State Farm inappropriately relied on Xactimate to value the loss, as well as failed to use proper pricing for materials and labor.  The Briggses also claimed that State Farm used 15 different claims representatives and attempted to intimidate the Briggses.  They also sought to introduce the Mississippi “Policyholder Bill of Rights” to show State Farm improperly adjusted their claim.

The trial court instead bifurcated the claims, and held that claims for extracontractual relief would be presented, if at all, only after a jury found the existence of a breach of contract.  The trial court excluded evidence such as the “Policyholder Bill of Rights” from the breach of contract portion of the bifurcated trial.  The jury returned a verdict, finding that the Briggses were entitled to an additional $75,000 in policy benefits, which was more than the State Farm adjustment, but less than the amount sought by the Briggses.

After the contract phase of the case, the trial court reviewed the Briggses’ evidence to determine whether they had sufficient evidence to proceed with the “bad faith” portion of the bifurcated trial.  The trial court determined the evidence was insufficient to show that State Farm lacked an arguable basis for its actions and entered judgment for State Farm on the bad faith claims.

The Fifth Circuit Opinion

The Fifth Circuit affirmed. The Court of Appeals noted that the decision to bifurcate claims rested within the sound discretion of the trial court.  Because the Briggses’ claims for extracontractual relief and punitive damages both required a showing that State Farm in fact had breached the policy, the Fifth Circuit held that bifurcation was appropriate.  The Fifth Circuit confirmed that evidence such as the “Policyholder Bill of Rights” was excluded appropriately at the initial trial phase because such evidence did not relate to the Briggses’ claim for breach of contract.  Finally, the Fifth Circuit noted that the case always focused on whether or not the Briggses’ home could be repaired.  Thus, the jury verdict which “split the baby” between State Farm and the Briggses demonstrated that the claim was a mere “pocketbook dispute” over the extent of damage, making State Farm’s position at least arguable.  As such, the Briggses possessed insufficient evidence to proceed with the second portion of the bifurcated trial.

Conclusion

The Fifth Circuit opinion in Briggs does not announce new law so much as draw together several strands of Mississippi insurance and bad faith law to provide a road map for how a trial court should handle bad faith claims.  From the decision to bifurcate, to the types of evidence admitted, to a pre-second phase evidentiary exam, the Fifth Circuit held that the trial court in Briggs did everything right.  Litigators should consider Briggs as guidance for how to prepare and present their claims for relief and how to approach evidentiary issues.

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WHOSE SETTLEMENT IS IT, ANYWAY? NEGOTIATING CONSISTENT WITH AN INSURER’S STRONG COVERAGE DEFENSES

test-your-strengthThis author suggested, in an earlier May 2016 Bad Faith blog article, that an insurer can measure on a “strength scale” its insurance coverage defenses while it defends its insured against underlying claims and lawsuits under a reservation of rights. The “strength scale” of coverage defenses, especially when subject to ongoing updates, can become a useful decision-making tool during settlement negotiations. An insurer has a legitimate basis to assess its coverage defenses as part of the settlement process when the coverage issues may render it unclear whose money will be used to pay for a judgment or settlement: the insurer’s money, the insured’s money, or combined contributions of both.

“Bad faith” case law can be scarce, in many jurisdictions, regarding insurers that base their settlement decisions in whole or in part on insurance coverage considerations. Although Washington state has many reported decisions addressing “bad faith” breaches of an insurer’s duty to defend and/or its duty to indemnify, it has only a few cases specifically addressing the “duty to settle.” And, it has no case law setting forth specific guidelines or rules for an insurer’s settlement decisions based upon “mixed” evaluations of underlying tort claims versus insurance coverage disputes with the insured. But Washington’s often-cited treatise on insurance coverage law, and at least two federal judges in Washington, have stated that insurers are not prohibited from considering coverage issues when deciding how much money to contribute to a settlement. Berkshire Hathaway Homestate Ins. Co. v. SQI, Inc., 132 F.Supp.3d 1275 (W.D. Wash. 2015); Specialty Surplus Ins. Co. v. Second Chance, Inc., 412 F.Supp.2d 1152 (W.D. Wash. 2006) (“Second Chance”) (An insurer can lawfully protect its “monetary interest,” because the insurer has a right to be concerned with “whether it owes a settlement payment” based on a coverage dispute with the insured); Thomas V. Harris, Washington Insurance Law § 19.05 (3d ed. 2010).

These two opinions, reflecting the federal court’s prediction of Washington law and not binding precedent in the Washington state courts, adopted tests set forth in a 1991 Florida appellate case (Robinson v. State Farm, 583 So.2d 1063) as the factors involved in an insurer’s good faith consideration of its coverage concerns during the settlement process. Their five listed factors include not only “the weight of legal authority on the central coverage issues”; but also whether the insurer’s efforts to settle the liability claim were “consistent with the strength of its coverage position.” Although the similar Robinson factor may have originally focused on sufficiency of the insurer’s efforts to settle, the Washington court’s comments in Second Chance support that in Washington, a reasonable element of the analysis is whether the insurer’s proposed contribution to settlement is consistent with the insurer’s genuine coverage disputes.

Ultimately, when faced with reasonableness of settlement bad faith disputes, Washington courts permit an equal consideration of the insurer’s interests, but they also warn insurers against actions demonstrating a greater concern for their own monetary interests than the monetary interests of the insured being defended under a reservation of rights. Like many jurisdictions nationwide, Washington and Florida courts conclude that the entire context of the insurer’s decision making process will determine whether the insurer was reasonable. Therefore, insurers that engage in “mixed” evaluations of tort issues and coverage issues during settlement efforts may benefit from a review of the full factual history leading up to settlement, while they also obtain legal counsel’s confirmation of the most currently applicable legal standards.

Michael D. Handler

Michael D. Handler is resident in the Seattle office where he is a member of the Global Insurance Group in our Litigation Department. Michael joined the firm in 2000 with a litigation-intensive background, and he became a member of the firm in 2002. With more than 18 years of legal experience in several states, Michael is litigating matters involving contractual and extracontractual claims, and he is advising insurers regarding some of their most challenging and interesting matters across the country.

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First Circuit Provides Guidance as to When a Notice of Claim Triggers Policy Obligations

When does receipt of a pre-suit claim notice letter trigger an insurance carrier’s obligation to provide a defense and/or indemnity? In Sanders v. Phoenix Insurance Co., the First Circuit provided some guidance to this question, holding that a pre-suit notice letter would not trigger a carrier’s obligations unless a non-response would impact the policyholder’s ability to contest liability during a following proceeding.

The Underlying Dispute

Sanders arises from a “tragic tale of unrequited love.” Ms. Anderson hired an attorney to represent her in a divorce proceeding from Mr. Sanders, her husband. During the course of that representation, Ms. Anderson and her attorney began an affair. Ms. Anderson suffered from depression and anxiety. When the affair cooled, Ms. Anderson wrote a suicide note and drank herself to death.

Mr. Sanders became the executor of Ms. Anderson’s estate (“Claimant”) and sent a demand letter to Ms. Anderson’s attorney (“Insured”). As the affair occurred partially at the attorney’s home, the attorney placed his homeowner’s carrier, Phoenix Insurance Co. (“Insurer”) on notice of the claim. Insurer denied coverage, arguing that Ms. Anderson’s death was not a covered “occurrence” and that the policy’s professional services exclusion barred coverage.

Insured alerted Insurer that he intended to mediate the claim and invited Insurer to participate. Insurer declined. Insured argued Claimant asserted claims for negligent infliction of emotional distress against him, but Insurer continued to decline coverage. Insured settled his personal liability for $500,000 and assigned his rights against Insurer to Claimant in exchange for a non-recourse agreement which precluded any collection from Insured.

The Coverage Lawsuit

Claimant, as assignee of Insured, filed suit against Insurer for allegedly engaging in unfair settlement practices. Claimant argued that Insurer breached its duty to defend Insured when it failed to respond to the pre-suit demand letter sent to Insured. Insured’s policy contained the following language:

If a claim is made or a suit is brought against any insured for damages because of bodily injury or property damage caused by an occurrence to which this coverage applies, even if the claim or suit is false, we will:

. . . .

b.            provide a defense at our expense of counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate.

Insurer argued that the plain language of the policy obligated it only to investigate a claim and that no duty to defend would be triggered until a lawsuit was filed.

When Does the Duty to Defend Commence?

The First Circuit noted that the cited policy language did not contain an obligation to defend an insured prior to a suit being filed. However, the court also noted that the “no pre-suit obligation” rule was not ironclad, as some types of claims were sufficiently analogous to an actual lawsuit so as to trigger a carrier’s obligation to defend. In this regard, the court looked at claims and notice letters sent by the Environmental Protection Agency for CERCLA liability.

The First Circuit distinguished Claimant’s pre-suit demand from an EPA claim notice, stating that the defense of the policyholder would be substantially compromised if there was no response to an EPA notice letter. Specifically, the EPA could proceed unilaterally with an administrative action against a policyholder, which decision would then impact any later judicial review. Also, failure to respond to an EPA notice letter could subject a policyholder to monetary penalties regardless of the outcome of any subsequent litigation. As such, receipt of a notice letter from EPA would force a policyholder (and concomitantly its carrier) to respond.

Claimant argued that failure to respond to a pre-suit demand letter also placed a non-responding party/policyholder at risk, as failure to respond to such a letter could expose the non-responding party to additional damages, attorney’s fees and costs of suit under state law. The First Circuit held that a pre-suit demand letter was not fairly analogous to an EPA notice of claim because the policyholder’s ability to contest liability would be compromised by the latter. The types of additional damages identified by Claimant for non-response to a pre-suit demand, however, would come only after the policyholder was given the opportunity to defend; i.e. after the carrier’s duty to defend had been triggered.

Claimant also argued that, duty to defend issues aside, the indemnification obligations of the policy were triggered by the mediation settlement with Insured. The First Circuit also rejected this argument, stating that the policy contained no such language. Further, the First Circuit noted that a mediation was be an informal, voluntary proceeding. Thus, Insured’s decision to participate in mediation was simply a strategic decision, as opposed to something compelled by operation of law.

Conclusions and Thoughts

Sanders draws a reasonably bright distinction between those “claims” which trigger the obligations of a carrier and those which do not. If the “claim” is such that a non-response could impact the recipient’s liability, the “claim” may trigger a defense obligation. Most pre-suit claims or demands simply do not fall into this category, even though a failure to respond may impact some other aspect of litigation. However, if federal or state law more substantially penalizes a failure to respond, then a different result may follow. Thus, when a carrier assesses whether and how to respond to notice of a pre-suit claim or demand, the carrier may want to, and should under First Circuit case law, consider the consequences of a non-response on the subsequent assessment of a policyholder’s liability.

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Don’t Get Burned by a “Holt Demand” in Georgia

flagGeorgia has a very specific law called “Holt demands” concerning time-limited demands made against a liability insurance policy. In Southern General Ins. Co. v. Holt, 262 Ga. 267, 416 S.E.2d 274 (1992), the Georgia Supreme Court held that where the insurer has full knowledge of the insured’s liability and damages exceeding policy limits, the insurer can be subject to bad faith damages if its failure to settle within policy limits subjects the insured to a judgment in excess of those limits. In deciding whether to settle a claim within policy limits, the insurer must give equal consideration to the interests of the insured.

The Holt demand was later codified in a statute addressing only motor vehicle claims, at O.C.G.A. Section 9-11-67.1. To constitute a valid demand to an insurer under the statute, a claimant must adhere to the following: (1) the demand must be in writing; (2) the time period for accepting the demand must be clearly stated, but cannot be less than thirty days; (3) the specific amount of monetary payment requested must be included; (4) the demand must specifically outline the party the claimant is willing to release; (5) the demand must specify the type of release, if any, the claimant is willing to provide; (6) the demand must specify the claims to be released; and (7) the demand must be sent by certified mail or overnight delivery, return receipt requested.

The motor vehicle claims statute permits insurers to request further information from the claimant to evaluate the demand, and such requests are not deemed a counteroffer or rejection risking potential bad faith exposure. Further, insurers still have defenses to a bad faith claim for refusing a settlement demand where (1) the insured’s liability was not clear; and/or (2) there was no confirmation that the damages would be in excess of the policy’s limits.

Georgia courts have recently shown their willingness to hold claimants to the statute’s specific requirements before an insurer may be sued for bad faith. In September 2016, DeKalb County State Court Judge Michael Jacobs dismissed a claim based on a purported Holt demand letter in the automobile context because it “was not a clear demand, let alone a time-limited demand” that could expose the insurer to bad faith for failure to timely respond. Hughes v. First Acceptance Insurance Company of Georgia, Inc., No. 14A52088 (DeKalb State Ct., Sept. 20, 2016). The court specifically found that there was no evidence the insurer knew or reasonably should have known the complex claims against the insured could have been settled within the policy limits. In October 2016, the claimants appealed this decision to the Georgia Court of Appeals, and the record for review was issued November 21, 2016. At the end of November 2016, the appeal remained pending.

Faced with a settlement demand in Georgia, an insurer acts reasonably when it does not place its interests above that of its insured. The following checklist is also helpful in responding to “Holt demands” in Georgia, and may help the insurer in any defense of a claim or lawsuit for refusal to settle a claim:

  1. Review the demand letter and document your review, itemizing the statutory requirements either met or not met.
  2. Either respond timely to the letter or seek an extension of time to respond.
  3. Request the information that you don’t already have but is necessary to assist in evaluating the demand, including liability assessment reports from defense counsel, accident, police, or other causation reports and information, expert analysis, school records, medical records, medical bills, medical liens, subrogation claims by health insurers, workers’ compensation, Medicare/Medicaid payments, and other relevant facts and/or testimony.

Consult with coverage counsel to ensure you have properly responded and met applicable requirements.

Jennifer A. Kennedy-Coggins

Jennifer A. Kennedy-Coggins joined Cozen O’Connor in October 2004. She concentrates her practice in civil litigation and is a member in the firm’s Atlanta office. She has experience in litigating a wide variety of civil and commercial matters, including matters pertaining to construction defect, premises liability, mass and complex torts, transportation injuries, products liability, insurance coverage, and extracontractual disputes, including defending bad faith claims.

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Insuring Fine Art: The Visual Artists Rights Act and Its Bad Faith Implications

mona-lisaInsuring fine art can present challenges that are not encountered with other types of property. One of these challenges involves the application of the Visual Artists Rights Act of 1990 (17 U.S.C. §106A) (“VARA”) when artwork by a living artist is damaged.   VARA protects an artist’s “moral” rights in his/her work of art beyond traditional property law – in other words, even after a piece of art is sold, the artist retains certain rights to make sure that the artwork is not impermissibly modified.

VARA provides the author of a “work of visual art” the right to “prevent any intentional distortion, mutilation, or other modification of that work which would be prejudicial to his or her honor or reputation, and any intentional distortion, mutilation, or modification of that work is a violation of that right.” That right remains for the life of the artist.   Some states, such as California, have similar statutes (see, e.g. Cal. Civ. Code §987).

When a work of art by a living artist is damaged, VARA may come into play.   If the damage itself was intentional, then the person who damaged it may be liable under VARA. More important in the insurance context, however, is that the restoration of the piece can also implicate VARA.   The work very well may be able to be restored, but the restoration may itself be an impermissible “modification” if it is performed with “gross negligence.”   Though this has not been heavily litigated, at least one court has held that attempted repair without the artist’s permission states a claim for violation of VARA.   (Flack v. Friends of Queen Catherine, Inc., 139 F.Supp.2d 526 (S.D.N.Y. 2001).   Because of this, it is important that when restoring art by a still-living artist, the insurer make a good faith effort to get the artist to approve the restoration plan, if not perform the restoration him/herself.

VARA’s interaction with insurance has not been frequently litigated, and thus there is little legal guidance on an insurer’s potential liability under VARA, but there are several potential issues that could give rise to liability.   The first is an insurer’s direct liability to the artist if it undertakes restoration which violates VARA. The second is potential liability to the insured for breach of contract or bad faith.   If the artwork is restored without input from the artist, then it is possible that the artist can denounce the work in its entirety, rendering the piece virtually worthless. Although this issue has yet to be litigated, it is conceivable that this could lead to bad faith claims against the insurer.   Once again, in the case of damaged art by a living artist, we recommend that insurers consult not just with restoration experts, but with the artist him/herself, prior to restoration in order to avoid potential VARA and bad faith claims.

If you’re interested in learning more about this topic, and other issues related to insuring fine art, we are hosting a webinar on November 29, 2016. To sign up, go here.

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Nickerson Redux: Five Lessons On Punitive Damages For Bad Faith Attorneys

This past June the California Supreme Court issued its decision in Nickerson v. Stonebridge Life Insurance Company, 63 Cal.4th 363 (2016), holding that post-trial Brandt fees could be included in the damage calculus for purposes of evaluating the ratio of punitive damages to compensatory damages. We wrote about this decision in an earlier blog. The Supreme Court remanded the $19 million punitive verdict to the Court of Appeals to amend the judgment to correct the maximum allowable amount of punitive damages of 10:1, or $475,000. In doing so, the Court of Appeals reissued its original decision. This decision has a number of issues that may guide insurance counsel in handling bad faith cases with a punitive exposure.

hospital-bedThe policy involved was a hospital stay policy that paid $350 per day for each day of confinement in a hospital for a covered injury. The definition of “Hospital Confinement” required that the confinement be for a “Necessary Treatment”, as considered by a peer review, and that it not take place in a convalescent facility. Stonebridge determined that 109 days of confinement to a hospital for a broken leg was not necessary, and allowed only 14 days of payment. The payment could be used for any purpose whatsoever, and because Mr. Nickerson was a veteran staying at a VA Hospital, he did not need to use it to pay for his free hospital care.

Issue One: The trial court directed a verdict on the limitation of coverage to “Necessary Treatment”, finding as a matter of law that the limitation was not “conspicuous, plain or clear” in the policy, and therefore was unenforceable. There are few clues as to why the trial court found this definition was unclear since Stonebridge did not appeal from the decision on the contract. The lack of appeal led the Court of Appeals to conclude that Stonebridge conceded its “hidden” definition was not enforceable. Lesson: Unless the insurer’s coverage position is indefensible, counsel should consider asserting an issue on appeal for any coverage denial by a trial court.

Issue Two: Stonebridge admitted in response to discovery that there were 224 other claims in California where lack of “Necessary Treatment” was the basis of a coverage denial.   Its counsel did not object to the admission of this discovery response into evidence at trial. There is no indication in the Court of Appeals decision of factual differences between the various other cases. The Court of Appeals rejected out of hand Stonebridge’s argument that it was being punished for other cases in which no bad faith claims were made. Instead, it concluded Stonebridge was guilty of “recidivism” in using an unenforceable term in its policy, rather than being punished for other dissimilar matters. Lesson: Counsel should object to discovery of other claims involving the same or similar policy language, and if that is not successful, object at trial to its use. Counsel should also be prepared to present evidence of the dissimilarity of those claims.

Issue Three: After receiving the records from the VA, Stonebridge informed Mr. Nickerson that it was seeking a peer review. The case review form had a box that could be checked indicating that the peer reviewer was required to consult by phone with the treating physician. The claims person testified that she never checked this box. After the peer reviewer concluded that more than 14 days’ hospital confinement was not medically necessary, Mr. Nickerson had his treating physician write to the insurer to advocate that he needed to remain in the hospital. The insurer did not forward the letter to the peer reviewer but instead responded by citing grounds not in the insurance policy. Lesson: Trial counsel should consider having an expert witness testify that the basis for denial was valid, such as a medical expert in this case. In preparing a claims handler for deposition or trial, counsel might caution the witness not to go beyond what he or she does in handling a claim.

Issue Four: Both the claims handler and the vice president of claims testified that they would have handled the matter in the same way. The court found this to be evidence of bad faith, which was not contested on appeal. Lesson: Trial counsel should consider using a claims-handling expert to counter the inevitable argument that the insurer committed bad faith regardless of whether or not it would act the same way again. A jury consultant can assist in preparing witnesses to deflect this type of cross-examination. Bad faith is the predicate to the punitive damages, and should almost always be appealed. See Lesson One.

Issue Five: The ground for punitive damages was that the insurer engaged in fraud by concealing the policy limitation in the definition of “Necessary Treatment”, and by not requiring peer reviewers to communicate with treating physicians. The Court of Appeals held that “fraud” for punitive damages in insurance cases equates to the conduct that gives rise to liability, namely bad faith. Additionally, the court held that the fact that the insurer ignored the post-treatment letter by the treating physician violated its obligation to inquire into all grounds that could support Mr. Nickerson’s claim. Lesson: An award of punitive damages generally requires conduct that goes beyond the conduct that supports a mistake in claims handling. Expert witnesses on claims handling and the validity of the grounds for the coverage decision and manner in which the claim was handled should be considered to limit the claim of bad faith at trial. Then the appeal of any bad faith verdict may further limit punitive damages based solely on the same grounds as the defense against the bad faith claims.

Julia Molander

Julia A. Molander represents the insurance industry in virtually all aspects of their business, including insurance coverage litigation, insurance counseling, extracontractual (bad faith) liability, insurance fraud, underwriting matters, policy drafting, regulatory compliance, brokerage and agency liability, insurance insolvency and legislative issues. She has served as first-chair in more than 20 bench trials, jury trials and arbitrations.

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Ninth Circuit Finds Plausible Claim of Damages Avoids Dismissal of Bad Faith Lawsuit

Can an insurer be potentially liable for breach of contract or bad faith where the insured can only plead a plausible claim of damages? The Ninth Circuit has answered “yes” in a recent decision in the case of Beverly Burton v. The Prudential Insurance Company of America, No. 14-56721, 2016 U.S. App. LEXIS 18617 (9th Cir. October 18, 2016). The Court held that the lower district court erred in dismissing a claim for breach of the covenant of good faith and fair dealing where the Plaintiff has plausibly alleged that she incurred an economic loss, but where the relevant facts are known only to the carrier.

In Burton, the Plaintiff asserted that Prudential failed to calculate interest on her son’s unclaimed life insurance benefits in accordance with the Court’s interpretation of California Insurance Code Section 10172.5 and that Prudential “prevented… [her] from knowing” whether Prudential paid her the full coverage amount of the life insurance policy at issue.

interest-rateIn 1958, Plaintiff’s husband purchased from Prudential a $1,000 insurance policy on the life of Plaintiff’s son, Roderick Burton, who died in 1981. Plaintiff was the named beneficiary under the policy but she did not make a claim until 32 years later. In July 2013, Prudential paid Plaintiff $5,040.11: the $1,000 death benefit due under the policy, plus interest. Plaintiff alleged that Prudential misrepresented that it paid a 2.5% interest rate; that Prudential only paid interest rate at the fixed rate in effect in 2013, and that it refused to answer follow-up questions regarding its interest calculations. Id. *4. Prudential filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6).

To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This “facial plausibility” standard requires the plaintiff to allege facts that add up to “more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). While courts do not require “heightened fact pleading of specifics,” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 544, 555.

In ruling on the motion to dismiss in the Burton case, the lower district court interpreted California Insurance Code Section 10172.5 as “requiring insurers to pay at least the same interest rate that they paid to their depositors during the period in which the life insurance benefits were due.” Id. at *1.   However, the lower court granted Plaintiff’s motion to dismiss, finding that Plaintiff did not “plausibly” allege a violation of Section 10172.5.   The Ninth Circuit reversed, finding that Plaintiff’s “allegations plausibly state a claim that Prudential did not pay a rate at least equal to that paid to depositors from 1981 to 2013.” Id.

The Burton case continues to reinforce the reality that “plausibility” has replaced the liberal standards of notice pleading in all federal cases. The Twombly and Iqbal decisions are required reading for anyone filing or defending a motion to dismiss in federal court, but defense counsel have a greater arsenal in challenging plaintiff’s pleadings either through a motion to dismiss or a motion requesting a more definitive statement. Fed. Rule of Civ. Proc. 12(b) and (e).

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Cumis Counsel: An Insurer’s Right To Dispute Coverage Does Not Automatically Trigger A Right to Cumis Counsel

Recently, once again, a California appeals court weighed in on the scope of the right to Cumis counsel and the meaning of Cal. Civil Code §2860. St. Paul Mercury Insurance Company v. McMillin Homes Construction, Inc., No. 15cv1548 JM (BLM), 2016 WL 5464553 (S.D. Cal.) (decided on September 29, 2016).[1] The Cumis decision holds when a conflict of interest exists between an insurer and its insured arising out of possible non-coverage under the insurer’s policy, the insurer is obligated to offer independent counsel to the insured, which is to be paid for by the insurer.

The classic example of an asserted conflict of interest, giving rise to a demand by an insured for independent counsel, is a complaint alleging the insured’s liability results from intentional or negligent conduct. The expected or intentional acts exclusion, however, is not usually a bar to a defense obligation.[2] This conundrum is nothing new in California.

While the Cumis decision is from California and is a California principle, most states have their own rules, either codified by statute or case law, of when an insurer’s reservation of rights to contest insurance coverage triggers the insured’s right to independent counsel. At a minimum, Professional Rules of Conduct address conflicts of interest where an attorney has multiple clients or where a third party is paying the attorney to represent a client which is at the core of the reasoning for the insured’s right to independent counsel.

In the McMillin Homes matter, St. Paul sought a declaration that (1) St. Paul has the right to control the defense in the underlying construction defect action; (2) McMillin is not entitled to the appointment of independent counsel under Cal. Civil Code §2860; (3) McMillin breached the Policy by refusing to acknowledge St. Paul’s right to control the defense, including the selection of counsel, and (4) St. Paul has no obligation under the Policy to pay any fees or costs incurred by McMillin’s retained counsel.

In a district court opinion granting St. Paul’s motion for summary judgment, the court reiterated that “not every conflict of interest entitles an insured to insurer-paid independent counsel.” Id. at *5. Here, St. Paul accepted the tender of its additional insured, McMillian Homes, under its general liability policy issued to McMillian’s subcontractor, Executive Landscape, Inc. St. Paul assigned defense counsel; however, McMillian rejected appointed counsel and requested that St. Paul McMillian’s already-retained counsel continue as independent counsel under Civil Code §2860. McMillian argued that “ ‘St. Paul has every incentive to minimize Executive Landscape’s liability only, and it could do this through counsel it retained.’ ” Id. The court found that McMillian’s “theoretical incentives” against St. Paul to manipulate the litigation do not cause a conflict of interest requiring independent counsel under Cal. Civil Code §2860. The court noted that McMillian failed to present any evidence to support its contention and reiterated that the “conflict of interest must be ‘significant, not merely theoretical, actual, not merely potential’ ”. Id., citing James 3 Corp. v. Truck Ins. Exchange, 91 Cal.App.4th 1093, 1101 (2001).

The district court’s ruling in fact follows a prior published decision where the California Court of Appeal unanimously refused to hold that that the interests of the insurer and the subcontractor were “irreconcilably adverse” to each other so as to allow Centex the right to independent counsel.[3] Instead, California Courts have consistently held that an insurer that appoints counsel must prove that the appointed counsel could not impact the coverage by the manner in which the defense is handled. In contesting an insured’s request for independent counsel, the insurer must make a showing as to how the issues presented by its reservation of rights differ from or are extrinsic to those issues that develop in the underlying action.[4]

attorney-client privilegeUnder California law, the existence of a conflict of interest entitling the insured to independent counsel is a question of law.[5] California Civil Code §2860 specifically refers to the conflict of interest created by the carriers’ reservation of rights. There is no right to Cumis counsel in a vacuum. Accordingly, it is imperative that the insurer understand fully the facts of the loss and the case law that may control the insured’s right to independent counsel before issuing a reservation of rights. Alternatively, a carrier may also waive coverage defenses and avoid providing independent counsel. Caution should be undertaken in doing so, however, because the waiver of the coverage defense as to the insured (to avoid independent counsel) may also operate as a waiver of the right to assert that same coverage defense against the plaintiff in a subsequent direct action to recover a judgment.[6] However, where the reservation of rights letter only asserts, as a basis for non-coverage, damages or exclusions which cannot be controlled by defense counsel, there is no per se conflict of interest. See Centex Homes v. St. Paul Fire and Marine Ins. Co., supra 237 Cal.App.4th at 31.


[1] The Cumis doctrine is derived from the California Court of Appeal milestone decision in San Diego Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal.App.3d 358 (1984), which holds that when a conflict of interest exists between an insurer and its insured arising out of possible non-coverage under the insurer’s policy, the insurer is obligated to offer independent counsel to the insured, which is to be paid for by the insurer. Shortly after the issuance of the Cumis case, the California Legislature passed Civil Code §2860 to codify and clarify the rights and responsibilities of insureds and insurers when a claim of conflict of interest is asserted. For example, the mere fact the insurer disputes coverage does not entitle the insured to Cumis counsel; nor does the fact the complaint seeks punitive damages or damages in excess of policy limits. Cal. Civil Code §2860(b); Blanchard v. State Farm Fire & Casualty Co., 2 Cal.App.4th 345, 349 (1991).

[2] See Horace Mann Ins. Co. v. Barbara B., 4 C4th 1076, 1087 (1993).

[3] Centex Homes v. St. Paul Fire and Marine Ins. Co., 237 Cal.App.4th 23 (2015).

[4]James 3 Corp. v. Truck Ins. Exchange, 91 Cal.App.4th 1093, 1100-02 (2001) (independent counsel is required where there is a reservation of rights “and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.”).

[5]Blanchard v. State Farm Fire & Casualty Co., 2 Cal.App. 4345 (2 Dist. 1991).

[6] See Shafer v. Berger, Kahn, et al., 107 Cal.App.4th 54 (2003).

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Posted in Bad Faith

Rescission: An Underutilized Tool

brokencontract

The rescission of an insurance policy is one of the most underutilized tools in handling insurance claims. If used properly, it unwinds the insurance transaction and the parties are restored to their position prior to the contract; it is as if the insurance contract never existed. Although rescission is primarily an equitable device, its use and scope is authorized by many state statutes. In situations where the insured has made material misrepresentations or fraudulently applied for a policy, it shields the insurer from unwarranted claims and unjust liability.

There are three types of state statutes regarding rescission: (1) states that allow rescission based on material misrepresentation; (2) states that limit rescission to a knowing or reckless misrepresentation; and (3) states that limit rescission to an intentional or fraudulent misrepresentation. Most commonly, statutes provide that a misrepresentation, omission, concealment, or incorrect statement will defeat recovery under an insurance policy in 3 instances. First, the policy may be rescinded when the omission, concealment, or incorrect statement is fraudulent. Second, the policy may be rescinded if the omission, concealment or incorrect statement was material either to the acceptance of the risk or to the hazard assumed by the insurer. Third, and finally, the policy may be rescinded if the insurer in good faith would not have issued a policy at the same premium or rate, or in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been known.

Typically, in the insurance context, a misrepresentation is deemed material if it would affect the premium charged or exposure to the risks of providing the coverage. For a policy to be rescinded, both (1) false statements, concealment of facts, omissions, or misrepresentations must have been made in the application and (2) the statements, omissions, concealment, or misrepresentations must be material. Almost every state requires that the insured’s misrepresentation be material in order to justify rescission of the policy. Though “materiality” varies among jurisdictions, it is commonly agreed that a material misrepresentation in an insurance application prevents recovery under the insurance policy. An underwriter can often be used to prove that the misrepresentation is material to the insurer.

Insurance carriers must also be mindful of whether their policy contains a contestable clause, which places a time limit for contesting the policy in the future and bars an insurer from rescinding a policy based on a misrepresentation or misstatement. If the policy contains a contestable clause, the insurer must act to rescind the policy within that time period (which is usually 2 years from the date of issuance).

When the decision to rescind is reached, the insurer must announce its intent to rescind, refund the premium, and act consistently with an intent to repudiate the insurance policy. If the insurer fails to announce its intent to rescind or acts contrary to that intent, some states recognize a waiver of the right to rescind. Therefore, it is very important that the insurer acts consistently with its intention to rescind the policy.

Insurance carriers rescinding policies have two options: (1) they may refund the premium and then file a declaratory judgment action seeking rescission; or (2) they may refund the premium and notify the insured that the policy is no longer in force. The latter functions as a voluntary rescission, provided the insured accepts the refund with the understanding the policy is null and void. The best practice for a voluntary rescission is to have the insured execute a policy release that has explicit language stating that the policy is being rescinded, the premiums have been refunded, and the policy is void ab initio. A policy release can protect the insurer if there is ever a challenge regarding the rescission.

Of course, an insurer should always be mindful of rescinding an insurance policy. If a court finds that an insurer rescinded in bad faith, some states will allow an insured to recover punitive damages and attorney’s fees. A bad faith denial occurs when an insurer’s refusal for coverage is frivolous or unfounded in law or in fact to comply with the demand of the policyholder to pay according to the terms of the policy.

In sum, insurance carriers should be cognizant of situations lending themselves to the potential rescission of the insurance policy. Where the insured has made material misrepresentations, the absence of which would have resulted in the insurer not underwriting the risk at the rate it did or not issuing the policy at all, the insurer can, and should, seek rescission of the insurance policy.


Webinar: Insurance Policy Rescission and Navigating Its Potential For Subsequent Bad-Faith Litigation

10/13/2016 – 11:30 am ET

Alycen Moss and Michael Handler of the Global Insurance Department present this one hour Cozen O’Connor webinar on Rescission. The rescission of an insurance policy is one of the most underutilized tools in handling insurance claims. If used properly, it unwinds the insurance transaction and the parties are restored to their position prior to the contract; it is as if the insurance contract never existed. Although rescission is primarily an equitable device, its use and scope is authorized by statute in most states. In situations where the insured has made material misrepresentations or fraudulently applied for a policy, it shields the insurer from unwarranted claims and unjust liability.

This webinar will discuss:

  • How to rescind
  • Waiver of rights to rescind
  • Common defenses raised by the insured
  • Litigation Strategies for rescission actions and responding to insured’s bad faith counterclaim

FL, GA, NC, TX approved for 1 CE Credit. 1 CLE credit approved in PA, NY and NJ. CLE pending in any additional requested states.

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Posted in Bad Faith
Avoiding Insurance Bad Faith
Cozen O’Connor represents insurance clients in jurisdictions throughout the U.S. against statutory and common law first- and third-party extracontractual claims for actual and consequential damages, penalties, punitive and exemplary damages, attorneys’ fees and costs, and coverage payments. Whether bad faith claims are addenda to a broader coverage matter or are central to the complaint, Cozen O’Connor attorneys know how to efficiently respond to extracontractual causes of action. More
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