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).

Tagged with: , , ,
Posted in Bad Faith

Rescission: An Underutilized Tool


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.

Tagged with: , , , ,
Posted in Bad Faith

Production of Insurance Company Claim Files In Bad Faith Litigation: Three Years After Cedell, Where Are We?

Bad faith litigation is complex and costly. In these types of cases, the discovery process often sets the initial tone of the lawsuit and the request for production of the insurer’s claim file is automatic. Typically, the insurer’s response is to produce a heavily redacted copy of its claim file, including a privilege log that cites the attorney-client privilege and work product doctrine as the bases for the redactions and withholdings. In response, the insured files a motion to compel, claiming that the attorney-client and work product privileges do not apply in bad faith litigation. The courts are left to decide if the insurer is required to produce a full and un-redacted copy of its claim files.

Under Federal Rule 26, “Parties may obtain discovery regarding any non-privileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues…”

attorney-client-privAs you may remember, in Cedell v. Farmers Ins. Co. of Washington, 176 Wash.2d 686, 295 P.3d 239 (2013), the Washington Supreme Court held that “permit[ting] a blanket privilege in insurance bad faith claims because of the participation of lawyers hired or employed by insurers would unreasonably obstruct discovery of meritorious claims and conceal unwarranted practices.” Id. at 245. Accordingly, the court held that there is a presumption of no attorney-client privilege in “first party insurance claims by insured’s claiming bad faith in the handling and processing of claims, other than UIM claims.” Emphasis added. Id. at 700. An insurer can overcome this “presumption of discoverability” if it shows that “its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability….” Id. at 296. Even with regard to these documents, however, the insured may pierce the privilege by showing a foundation in fact for the allegation of bad faith.

Washington is not alone in applying a waiver of attorney-client privilege in certain bad faith litigation circumstances. In Ohio, the filing of a bad faith case entitles a court to conduct an in camera review of the insurance company’s attorney-client privileged communications. Boone v. Vanliner Insurance Co., 744 N.E.2d 154, 158 (Ohio 2001). In Hilborn v. Metropolitan Grp. Prop. Cas. Ins. Co., 2013 WL 60555215 (D. Idaho Nov. 15, 2013) the court ordered that the entire file of the insurer be provided to the adverse party, including attorney-client communications. The Idaho Supreme Court adopted and extended the Cedell holding to a third party liability dispute. Stewart Title Guar. Co. v. Credit Suisse, Cayman Islands Branch, 2013 WL 1385264 (D. Idaho Apr. 3, 2013).

A number of states, however, have held to the contrary, as expressed in Aetna Cas. & Sur. Co. v. Superior Court, 153 Cal.App.3d 467, 474 (Cal.App. 1984):  “[C]onsultations regarding a policy of insurance between an insurance company and its attorney prior to the time the insurance company has accepted its obligations under that policy are protected by the attorney-client privilege vis-à-vis the person insured by the policy. Such a rule makes perfect sense, as an insurance company should be free to seek legal advice in cases where coverage is unclear without fearing that the communications necessary to obtain that advice will later become available to an insured who is dissatisfied with a decision to deny coverage. A contrary rule would have a chilling effect on an insurance company’s decision to seek legal advice regarding close coverage questions, and would disserve the primary purpose of the attorney-client privilege – to facilitate the uninhibited flow of information between a lawyer and client so as to lead to an accurate ascertainment and enforcement of rights.” (Emphasis in the original).

In holding that the documents need not be produced, the Aetna court rejected the three grounds on which the insured argued that the attorney client privilege is unavailable: (1) that the insured and the insurer are the “joint clients” of coverage counsel, (2) that the fact that the attorney has provided guidance implicitly invokes the defense of “advice of counsel” and therefore places that advice at issue, and (3) that coverage counsel was acting as an investigator for the insurer and not as an attorney. Id. at 472-77.

Since Cedell, federal courts in Washington have cited the state court’s holding but with mixed results. Not all federal courts agree that the in camera review mandate of Cedell applies in federal court. See, e.g., Lynch, Jason v. Safeco Ins. Co. of America, 2014 WL 12042523 (W.D. Wash. March 7, 2014); MKB Constructors v. Am. Zurich Ins. Co., No. C13–611JLR, 2014 U.S. Dist. LEXIS 78883, at *18–23, 2014 WL 2526901 (W.D.Wash. May 27, 2014); Indus. Sys. & Fabrication, Inc. v. W. Nat’l Assur. Co., No. 2:14–cv–46–RMP, 2014 U.S. Dist. LEXIS 154021, at *4, 2014 WL 5500381 (E.D.Wash. Oct. 30, 2014). Instead, a federal court exercises discretion in deciding whether in camera review is appropriate. MKB Constructors, 2014 U.S. Dist. LEXIS 78883 at *19–20, 2014 WL 2526901; Indus. Sys., 2014 U.S. Dist. LEXIS 154021, at *4, 2014 WL 5500381.

As such, the battle to protect attorney-client privilege in bad faith litigation wages on. In order to protect its privileged communications with counsel, insurers may want to use in-house claims handlers, field adjusters and independent adjusters rather than attorneys to perform factual investigations. This may not be practical in all situations, but it could limit the inclination of some courts to use the factual investigation as a waiver of the attorney client privilege for all reporting by counsel to the insurer. The insurer may also want to consider creating separate files for coverage advice and for factual investigation, at least in Washington state since it is suggested by Cedell.

Tagged with: , , , ,
Posted in Bad Faith

Don’t Let a Little Concealer Ruin Your Coverage Defenses

May an insurer in New York delay asserting (or conceal, according to Estee Lauder) a late notice defense without waiving it? According to the New York Court of Appeals a jury should decide whether the insurer manifested a clear intent to abandon the defense. Estee Lauder, Inc. v. OneBeacon Insurance Group, LLC, 2016 WL 4792170 (N.Y. Ct. App. Sept. 15, 2016).[1]

concealorEstee Lauder initiated this coverage action in 2005, claiming that OneBeacon was obligated to defend and indemnify Estee Lauder for environmental claims relating to Estee Lauder’s alleged dumping of hazardous waste.[2] From 1999 to 2002, OneBeacon sent various reservation of rights and declination letters to Estee Lauder. In the 1999 and 2000 letters, OneBeacon generally reserved all rights to deny coverage. In the November 1999 letter, OneBeacon specifically reserved the right to deny coverage to the extent that Estee Lauder failed to provide timely notice of the claims. Then, in 2002, OneBeacon sent a series of denial letters in which it did not assert late notice.

Despite having omitted the defense from its later denial letters, OneBeacon raised late notice as a defense in its initial answer. However, later in the proceedings, OneBeacon’s amended answer again omitted the defense. When OneBeacon sought leave to reinstate the late notice defense, Estee Lauder argued that OneBeacon had waived the right to assert it.

The trial court granted OneBeacon’s request to amend, finding that OneBeacon had not waived its late notice defense. In support, the court noted that in New York when an insurer expressly reserves all rights to deny a claim, it does not waive the right to later deny coverage on a particular ground merely because it was not referenced in a later disclaimer.

The Supreme Court, Appellate Division, First Department disagreed and held that OneBeacon had waived the late notice defense because its 2002 disclaimer letters failed to make reference to the defense.[3] The court noted that under New York law, an insurer intends to waive a coverage defense, as a matter of law, where other defenses are asserted, but the insurer fails to raise a defense about which it was aware. Because OneBeacon admitted to having knowledge of its late notice defense long before it sent the 2002 disclaimer letters, the appellate court found OneBeacon had waived the right to raise late notice as an affirmative defense in the coverage action.

On September 15, 2016, the New York Court of Appeals reversed, finding that because OneBeacon raised the defense in early letters to Estee Lauder, a jury should decide whether OneBeacon waived the defense by manifesting an intent to abandon it when it was omitted from later declination letters.[4] Therefore, the court reversed the First Department and ruled that OneBeacon should be allowed to amend its answer to assert the late notice defense.

Practice Tip

When an insured argues that an insurer failed to timely or consistently assert a late notice defense in New York, counsel must first consider whether the more stringent requirements of 3420(d) apply. If 3420(d) does apply, failure to assert the defense within 30 days may preclude the insurer from relying on it. If 3420(d) does not apply, the court may find an issue of fact as to whether the insurer clearly manifested an intent to abandon the defense. Thus, it is important to be clear that the insurer is reserving, and not waiving, its defenses.

The Court of Appeals reversed the intermediate court’s ruling that an insurer who raises certain defenses, but fails to assert another, is deemed to have intended to waive that defense as a matter of law. Even so, an insurer is well advised to include every policy defense of which it is aware in all coverage letters and pleadings.

[1] Unless Insurance Law 3420(d) applies (imposing a more stringent standard on the timing of an insurer’s assertion of coverage defenses under certain circumstances); but that is for another article.

[2] Estee Lauder Inc. v. OneBeacon Ins. Grp, LLC, No. 602379/05, 2006 WL 5110780 (N.Y. Sup. Dec. 11, 2006).

[3] Estee Lauder Inc. v. OneBeacon Ins. Grp., LLC, 130 A.D.3d 497, 498, 13 N.Y.S.3d 415, 416 (1st Dept. 2015).

[4] Estee Lauder Inc. v. OneBeacon Ins. Grp., LLC, 2016 WL 4792170 (N.Y.)

Relevant Case History

Tagged with: , ,
Posted in Bad Faith

Texas Supreme Court to Decide Whether a Policyholder Can Recover Damages When The Carrier Does Not Breach the Policy

According to both the appellant and the appellee, the Texas Supreme Court already decided this issue. Each, of course, finds a different answer.

Cause No., 14-0721, USAA Texas Lloyds Co. v. Gail Menchaca, in the Texas Supreme Court, arises from an unusual fact pattern and some unusual jury findings. Trial plaintiff Gail Menchaca suffered damage to her home as a result of Hurricane Ike. USAA investigated the loss and found some covered damage, but concluded that the repair costs fell below the applicable deductible and therefore issued no payment. Menchaca then sued USAA, asserting claims for breach of contract and several extra-contractual claims, including a failure to adequately investigate her loss. However, Menchaca alleged no damage from those extra-contractual claims, other than the loss of policy benefits.

At trial, the jury concluded that USAA did not breach its insurance policy obligations, but found that USAA failed to conduct an appropriate investigation and awarded Menchaca damages of $11,350.00. USAA argued to the trial court that without an “independent injury,” the jury finding of “no contract breach” precluded a finding of extra-contractual liability. By “independent injury,” USAA argued that Menchaca must show some harm other than the loss of policy benefits. The trial court disagreed, and entered judgment for Menchaca, including an award of $130,000 in attorney’s fees.

gavel-clip-artOn appeal, the intermediate court disregarded the jury finding of “no breach,” contending that the submitted question was so confusing as to make the answer disregardable. As a result, the intermediate court affirmed the trial court.

In its writ of review with the Texas Supreme Court, USAA has argued that its alleged failure to adequately investigate Menchaca’s storm damage did not cause a loss of policy benefits, and that it cannot support a damage award for a failure to investigate the claim. Arguing common law supports the recovery of damages for a failure to investigate, Menchaca claimed that case law requiring an “independent injury” applies only where no coverage exists. Here, she argued, the policy covered the loss though it did not exceed the deductible.

The Texas Supreme Court granted USAA’s petition for review and scheduled oral argument for October 11, 2016. The Menchaca case presents a number of important issues to insurance practitioners, including questions regarding the pleading of claims, the predicate for submission of extra-contractual claims, damages recoverable for extra-contractual violations, and potential changes to the Texas Pattern Jury Charge for first party claims. Stay tuned for additional developments in this interesting case.

Menchaca Petitioner’s Brief

Menchaca Respondent’s Brief

Tagged with: , , ,
Posted in Bad Faith

Missouri Federal Court Identifies Roadblocks For An Excess Carriers’ Claim For Attorney Fees Against Primary Carrier

The court’s decision in Axis Specialty Insurance Company v. New Hampshire Insurance Company highlights the scope of recovery available for an excess carrier seeking to recover against a primary carrier. Emboldened by the recent Missouri Supreme Court decision recognizing the right of an excess carrier to sue a primary carrier for failure to reasonably settle an underlying claim in Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818 (Mo. Banc 2014),  Axis Specialty sought to recoup not only its excess indemnity payment but also its attorney fees incurred in monitoring and eventually settling the underlying lawsuit as well as its attorney fees in pursuing its equitable subrogation and the assigned claims for bad faith and vexatious litigation.    In Scottsdale, the primary carrier ultimately paid its limits to settle the underling claim but in the underlying case in Axis Specialty, the case went to the jury which rendered a large excess verdict.

Although not directly addressed in the underlying opinion, one must assume that the case could have been settled within the primary and first layer of excess.  Thereafter, Axis paid its limits to satisfy the judgment but then took an assignment from the insured of its bad faith and vexatious litigation claims and then sued New Hampshire for its excess payment plus attorney fees.

The issue identified by the federal court was “whether an excess insurer who pays a third-party claim on behalf of its insured after a primary insurer refused in bad faith to settle the claim has a right to equitable subrogation to obtain the amount paid from the primary insurer.”

roadblockNew Hampshire defended by asserting anti-assignment and lack of standing arguments and opposed Axis Specialty’s claims for attorney fees.  New Hampshire argued that since both the insured and Axis was asserting the same claim which the insured had assigned to Axis, the insured had no claim to assign and that since the insured had assigned away its claim, Axis had no claim to make against New Hampshire.  The federal court had little difficulty in rejecting New Hampshire’s anti-assignment and lack of standing arguments.

However, with respect to Axis’s claim for attorney fees incurred in monitoring and eventually settling the underlying lawsuit as well as for pursuing the assigned bad faith claim and for vexatious litigation, the court, granted New Hampshire’s motions for summary judgment on both Axis’s direct claim and its consequential damages claim on the basis for there is no statutory law permitting the recovery of attorney fees in a lawsuit in which the excess carrier was not a party.  With respect to New Hampshire’s motion for summary judgment on Axis’ claim for prejudgment interest, the court denied such on the basis that it was premature.

The learning of this case is that an excess carrier which seeks to recover attorney fees may have to look for different avenues of recovery in seeking its damages and attorney fees if state statutes do not directly authorize recovery of attorney fees.   Perhaps offering summary judgment evidence on the amount of time claims personnel expended on monitoring the claim or even asserting a claim for punitive damages if the conduct suggests such a claim, are ways to help in making the insurer whole.

Tagged with: , ,
Posted in Bad Faith

California Supreme Court Invites Suits against Defendants Doing Any Business in California

In a hotly contested 4-3 decision, the California Supreme Court in Bristol-Myers Squibb Company v. The Superior Court of San Francisco County, 2016 WL 4506107 greatly expanded the concept of specific jurisdiction to allow a non-resident plaintiff to file suit in California courts against any defendant who conducts or transacts any business in California, even though the plaintiff purchased that defendant’s product in another state.   The Court broadened the scope of specific jurisdiction to overcome the requirements of International Shoe Co. v. Washington, 326 U.S. 310 (1945), finding that a tangential use of the forum constitutes a “substantial” connection between plaintiff’s claim and the defendant’s forum activities.

PrescriptionThe product in question was Plavix, developed and manufactured by Bristol-Myers Squibb outside of California.  BMS was sued in California by 678 plaintiffs, of which 592 were residents of other states who had obtained the drug outside the state.  BMS moved to quash service on it by the non-resident plaintiffs.  Its affidavit in support of the motion showed that BMS is incorporated in Delaware, is headquartered in New York City, and maintains substantial operations in New Jersey.  Fifty-one percent of its 6500 employees work in New York and New Jersey.  BMS employs 164 people in R&D in California (unrelated to Plavix) and 250 sales representatives.  The development and manufacturing of Plavix did not take place in California, nor was any work relating to its labeling, packaging, regulatory approval or advertising or marketing performed by its employees in California.  California sales of Plavix constitute 1.1 percent of the company’s total nationwide sales revenues of all products.

In opposition, plaintiffs showed that over a six year period, BMS sold 187 million Plavix pills with a sales revenue of nearly $918 million.  Plaintiffs also argued that Plavix was sold to California residents pursuant to a “common nationwide course of distribution” and that the product defect and representations made about the product were common issues sufficient to justify specific jurisdiction over the non-resident defendant by non-residents who had not purchased Plavix in California.

The Supreme Court adopted the plaintiffs’ position, stating that BMS had been given “fair warning” because it conducted business in California; the injuries to the non-residents were sufficiently related to BMS conduct in California even though they did not arise directly from its conduct in California; it was not unreasonable to require BMS to litigate in California; and BMS did not offer any evidence to establish the cost of litigating in California versus other relevant forums.

The lesson of Bristol-Myers is that insurers who underwrite product manufacturers may now find themselves and their insureds embroiled in multi-party class action litigation in plaintiff friendly California, losing the benefit of tort reform measures.  Moreover, it will be imperative that defendants now mount a more aggressive defense showing the additional costs of litigating in California than in the forum states of the plaintiffs.  As the dissent suggests, the decision will increase rather than reduce multiplicity of litigation because MDL litigation is not available in state courts, and there are no mechanisms to prevent multiple class actions in different states.

Tagged with: , ,
Posted in Bad Faith

Expanding When Liability is “Reasonably Clear”: Massachusetts Court Chips Away at Bad Faith Counterarguments

Earlier this month, a Massachusetts Appellate Court affirmed a trial court’s award of bad faith damages in a case where it found the insurer’s approach to a claim to be “at best inattentive, if not incompetent.”  Although the state appellate court in McLaughlin et al. v. American States Insurance Co. ultimately denied an award of multiple damages, its award of attorneys’ fees and costs, along with loss of use of funds damages, shows the limits of arguing no bad faith because the insured’s liability was not “reasonably clear” under Massachusetts’s bad faith statutes.  The Court’s decision, even though unpublished, serves as yet another reminder of the importance for insurers to properly investigate claims and objectively analyze whether an insured’s liability is reasonably clear.

The underlying litigation arose out of a botched landscaping project on coastal property.  The homeowners hired the insured subcontractor to install a well as part of the project.  The homeowners claimed that the subcontractor was negligent for failing to take into account, or at least warn of, the possibility that the well may become inundated with seawater because of its proximity to the coast.  The lack of freshwater caused damage to decorative and ornamental landscaping paintings that had also been installed.  After the homeowners settled their claims against the two other defendants, the claims against the subcontractor went to trial, where he was found liable.

The homeowners (third party claimants) then filed suit against the subcontractor’s insurer for failure to conduct a reasonable investigation of their claim and failure to make a reasonable offer of settlement after liability of its insured (the subcontractor) became reasonably clear, in violation of the unfair claims handling and settlement practices of Massachusetts law.

Massachusetts’ claims settlement statute, G.L.c. 93A, §2(a) taken together with G.L.c. 176D, §3(9)(f), provides that an insurer is liable if it fails to promptly settle claims within the thirty-day period set forth in G.L. c. 93A, § 9(3) or as soon thereafter as liability and damages make themselves apparent.  In practice, this caveat, i.e. when “liability has become reasonably clear,” protects insurers from paying out claims not yet substantiated in the underlying litigation.  The insurer asserted that it was not liable for bad faith because liability was not “reasonably clear” when the claim was under investigation.  According to the insurer, its determination was supported by the fact that although judgment was entered against the insured, the jury did not award any monetary damages.  The insurer also claimed that liability was not reasonably clear because other defendants were named in the suit.  The Court rejected both of these arguments holding that the term “reasonably clear” does not turn on whether the insured will eventually be liable for monetary damages, and is independent of how a jury will ultimately view the insured’s liability.  In addition, the presence of other tortfeasors is not pertinent to the analysis and does not absolve an insurer of its statutory obligation to make an offer when liability of its insured is clear.

In addition to finding the insurer liable for unfair claims settlement practices, the Court also held the insurer failed to conduct a reasonable investigation under G. L. c. 176D, § 3(9)(d).  The Court’s holding was primarily based on the fact that the insurer did not consult an expert in hydrology to independently assess the merits of the homeowners’ claims.

Expert AdviceSo what does this mean?  Under the holding of McLaughlin, to avoid bad faith damages, insurers at a minimum must objectively assess their insureds’ liability and where they recognize the need for expert assistance in assessing their insured’s liability, engage an independent expert to assist them in making an independent or neutral assessment of the insured’s potential fault.

Tagged with: , , ,
Posted in Bad Faith

“Low-Ball” Settlement Offer On Its Own Is Insufficient To Support A Claim for Bad Faith Under Pennsylvania Law

A low-ball settlement offer on its own is not enough to state a claim for a bad faith according to a federal district court for the Eastern District of Pennsylvania which granted the insurer’s motion to dismiss the insured’s claim for alleged violation of Pennsylvania’s bad faith insurance statute, 42 Pa.C.S. §8371. See West v. State Farm Insurance Company, 2016 U.S. Dist. LEXIS 106783 (E.D.Pa. Aug. 11, 2016). The statute provides that in an action on an insurance policy, if the court finds that the insurer acted in bad faith toward its insured, the insured may be awarded interest on the amount of the claim from the date the claim was first made by the insured, punitive damages, court costs and attorneys’ fees,. 42 Pa.C.S. §8371. The statute does not identify what constitutes bad faith on the part of the insurer.

Money            In West, the insured alleged that State Farm acted in bad faith in handling his uninsured motorist claim.  State Farm offered to settle the claim for $1,000 despite receiving medical bills in excess of $8,200. The insured argued that State Farm’s “low-ball” offer on its own was sufficient evidence of bad faith. The court disagreed, explaining that Pennsylvania law requires an insured to show more. Specifically, an insured must allege facts that show the insurer “lacked a reasonable basis for denying benefits under the policy” and the insurer “knew or recklessly disregarded its lack of [a] reasonable basis in denying the claim.” 2016 U.S. Dist. LEXIS at *5. An insurer’s low (even facially unreasonable) estimate of its insured’s damages, without more, does not rise to the level of bad faith.

While the court granted the insured’s request to file a second amended complaint, the insured may be out of luck if he is unable to allege additional facts.  We will continue to monitor the case to see whether the insured can meet the heightened pleading standard imposed by the court.

Tagged with: ,
Posted in Bad Faith


The recent California decision Barickman v. Mercury Casualty Company, 2016 WL 3975279, (Calif. App. – July 25, 2016), previously reported in Cozen’s bad faith blog on July 28, 2016, is worth revisiting on a bigger picture issue.  Low policy limit demands are often more dangerous than high policy demands.  This is because often times less experienced adjusters are assigned to lower policy limit cases and may not have recognized some of the red flags presented in Barickman and more importantly may not have recognized the need for legal advice.  In Barickman, those red flags were as follows:  (1) serious injuries; (2) clear liability; (3) low policy limits; (4) policy limits demand made with short time fuse to respond; (5) numerous extensions of time for adjuster to make decision granted by plaintiff’s counsel; and (6) a quirky legal question not frequently seen by adjusters.  The more red flags on a claim, the more urgency there should be for an adjuster to promptly seek legal advice on quirky legal issues.

In response to notification of the claim, and after determining that the claimants had been seriously injured and that there was a policy limits settlement demand from a low limit policy, the adjuster rightly recognized the need to offer those limits of $30,000 and in fact did so quite promptly.  In response to the policy limits offer the plaintiffs’ lawyer added the following language to the standard release:   “This does not include court-order restitution.”  At that point in time, the settlement negotiations went awry.

Lawyer SearchThe adjuster’s concern was whether his insured would receive credit against the order of restitution and the plaintiffs’ lawyer wanted to make certain that the settlement did not extinguish the restitution award.  The adjuster received several letters from the plaintiffs’ lawyer explaining the reasons for the request for the additional language but for whatever reason the adjuster was concerned that the insured would not receive credit for the insurer’s payment.  Rather than seeking legal advice from an experienced insurance coverage attorney, the adjuster contacted the insured’s mother and her daughter’s criminal lawyer seeking an answer to his question.  Additionally, the adjuster sought legal advice from plaintiffs’ counsel on whether payment of the policy limits would go to reducing the restitution order.  Shortly thereafter the insured, through her mother, demanded that the policy limits be paid.  Unfortunately, the final deadline for payment had come and gone, being replaced by a personal injury lawsuit and an agreed judgment for $3 million with the subsequent assignment of that claim and the insured’s bad faith claim.  Despite Mercury’s best arguments the agreed judgment was upheld.

The obvious learning from this decision is that if an adjuster is dealing with a policy limits demand and a quirky legal issue of first impression to him/her, then he/she should seriously consider seeking legal advice from an experienced insurance coverage attorney, not the plaintiffs’ lawyer or the insured’s criminal lawyer.  As a practical matter, had the adjuster sought legal advice on this quirky issue from an experienced coverage lawyer, he could have short-circuited the months of uncertainty regarding this issue and there would most probably have been a more successful outcome for the insurer.

Update: Barickman v. Mercury Casualty was certified for publication on August 15, 2016. Cite as 16 C.D.O.S. 8932.

Tagged with: , ,
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
Stay Connected


Cozen O’Connor Blogs