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.

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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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Posted in Bad Faith

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.

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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


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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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.

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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

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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

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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.

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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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