Policyholders celebrated a win from Idaho's federal courts in IDAHO TRUST BANK v. BancINSURE, INC., involving a conflict between an exclusion and the coverage grant. Here's a brief factual set up: a bank agreed to loan money to its customer to buy steel to build a new building. The bank failed to come through with the loan and company sued. The bank's insurer (under an Errors-and-Omissions type policy) defended the bank under the "lender liability" coverage portion. This is a common provision in bank policies, covering errors committed in making a loan, failing to make a loan, or connected with making a loan. The bank and the company settled round 1 of the litigation, but the bank somehow failed to live up to its end of the bargain, resulting in the litigation being revived, and the company adding claims against the insured bank for breach of the settlement agreement.
After some procedural maneuvering in the underlying case the insurer pulled its defense, whereupon coverage litigation began. The bank and its insurer filed cross-motions for summary judgment. The insurer first asserted that the claim relating to the settlement agreement was not interrelated with the original claim, and since it had stopped insuring the bank after that original claim came in, there was no coverage (these policies are of course "claims made" policies). The court rejected that argument, relying on the abundant case law interpreting the standard related-claims language to be very, very broad, and the somewhat muddy factual record about whether the insured had admitted that the claims were independent.
The insurer also relied on its policy's "contractual liability" exclusion as precluding the claim for breach of the settlement agreement. However, the court noted that the coverage part that had clearly applied to the original complaint - coverage for "lending liability" - defined lending in terms of an "agreement" with someone to make a loan. Therefore, there was a conflict between the coverage grant for "lending liability" and the contractual liability exclusion. The court held that an insurer cannot enforce an exclusion that eats so directly into the promised coverage, and refused to interpret the contractual liability exclusion so broadly that it would exclude a breach of contract claim that arose out of a failure to make a promised loan.
Thanks to two other bloggers: D&O Diary and Jones Lemon Graham's D&O Digest, for tipping me off to this Northwest case.
Blog on insurance coverage legal issues in the Pacific Northwest of the United States.
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A Miller Nash Graham & Dunn blog, created and edited by Seth H. Row, an insurance lawyer exclusively representing the interests of businesses and individuals in disputes with insurance companies in Oregon, Washington, and across the Northwest. Please see the disclaimer below.
Thursday, July 31, 2014
Friday, July 25, 2014
Washington Federal Court Orders Broad Discovery of AIG Defense Rates
A significant win for policyholders in a discovery dispute over internal carrier records. AIG and Coinstar/Redbox have been locked in coverage litigation in the Western District of Washington for some time over AIG's obligation to defend Redbox in several class actions alleging that Redbox has violated privacy laws in its handling of consumer information. Redbox lost a critical motion in February, when the court granted AIG summary judgment on the duty to defend some of those claims because of a broadly-worded statutory violation exclusion.
But another aspect of the dispute is the rates that AIG has been paying Redbox's defense counsel. It appears that Redbox chose counsel that it thought would do the best job, but that AIG has refused to pay those lawyers' full rate, instead only agreeing to pay "panel" rates. Redbox, apparently, is paying its lawyers the difference between what AIG will reimburse and the full rate, and that differential is now over $2 million. These kinds of disputes are, unfortunately, quite common in high-stakes litigation where companies want to choose highly-qualified counsel for themselves.
In an effort to show that AIG acted in bad faith in setting its rates, Redbox demanded information on the rates that AIG has paid to defend insureds in other similar cases, and what rates AIG pays counsel in coverage cases where it has to defend itself. AIG naturally refused (what else would you expect?) asserting that the information is not relevant, that it is proprietary, and that compiling the information would be unduly burdensome. AIG also attempted to limit the disclosure to the rates that the specific AIG unit that provided insurance to Redbox (National Union) pays, rather than AIG as a whole.
The court rejected all of these arguments. First, the court held that AIG had opened the door to discovery of rates paid by AIG and all of its subsidiaries by admitting that there is an AIG-wide committee that evaluates law-firm qualifications and sets panel rates. Second, the court held that nothing in the policy permitted AIG to unilaterally or unreasonably set rates paid to defense counsel, invoking not only Washington law that circumscribes insurer control of defense counsel, but also the duty of good faith and fair dealing (the subject of a recent post on this blog). Third, the court held that AIG had failed to put in competent evidence that disclosure of the rate information would assist its competitors, and that an existing protective order would be sufficient to shield the information from public disclosure. Overall, the court showed little patience with the insurance companies' bob-and-weave approach to disclosing critical information.
This decision is an important strike in the ongoing campaign by policyholder advocates to pull back the curtain on insurance company internal business practices that disadvantage insureds and allow insurers to profit.
But another aspect of the dispute is the rates that AIG has been paying Redbox's defense counsel. It appears that Redbox chose counsel that it thought would do the best job, but that AIG has refused to pay those lawyers' full rate, instead only agreeing to pay "panel" rates. Redbox, apparently, is paying its lawyers the difference between what AIG will reimburse and the full rate, and that differential is now over $2 million. These kinds of disputes are, unfortunately, quite common in high-stakes litigation where companies want to choose highly-qualified counsel for themselves.
In an effort to show that AIG acted in bad faith in setting its rates, Redbox demanded information on the rates that AIG has paid to defend insureds in other similar cases, and what rates AIG pays counsel in coverage cases where it has to defend itself. AIG naturally refused (what else would you expect?) asserting that the information is not relevant, that it is proprietary, and that compiling the information would be unduly burdensome. AIG also attempted to limit the disclosure to the rates that the specific AIG unit that provided insurance to Redbox (National Union) pays, rather than AIG as a whole.
The court rejected all of these arguments. First, the court held that AIG had opened the door to discovery of rates paid by AIG and all of its subsidiaries by admitting that there is an AIG-wide committee that evaluates law-firm qualifications and sets panel rates. Second, the court held that nothing in the policy permitted AIG to unilaterally or unreasonably set rates paid to defense counsel, invoking not only Washington law that circumscribes insurer control of defense counsel, but also the duty of good faith and fair dealing (the subject of a recent post on this blog). Third, the court held that AIG had failed to put in competent evidence that disclosure of the rate information would assist its competitors, and that an existing protective order would be sufficient to shield the information from public disclosure. Overall, the court showed little patience with the insurance companies' bob-and-weave approach to disclosing critical information.
This decision is an important strike in the ongoing campaign by policyholder advocates to pull back the curtain on insurance company internal business practices that disadvantage insureds and allow insurers to profit.
Friday, July 18, 2014
Court of Appeals: Insured Cannot Place Extra-contractual Conditions on Compliance with Policy
When an insurance policy requires the insured to provide information to the insurer, may the insured demand that the insurer enter into a confidentiality agreement, even when the request from the insurer is reasonable? Heck no, says the Oregon Court of Appeals in a new decision, Safeco v. Masood. According to the decision, the policyholder suffered a fire loss and them, to add insult to injury, had personal items stolen from the home while the fire was being investigated. Masood tendered the loss to his first-party carrier. The carrier demanded all kinds of information from Masood about the missing items. Although Masood did not contest the information request itself, he sought to have the insurer sign a confidentiality agreement restricting its use of the information. The carrier refused.
The insured contended that the terms of the policy requiring the insured to provide information did not preclude a separate confidentiality agreement, and that the carrier's duty of good faith and fair dealing (inherent in every contract, under Oregon law) required the insurer to enter into a confidentiality agreement where the insured had a good reason for it.
The Court of Appeals pointed out a few important facts: the policy stated that the insured "must" provide the information requested by the carrier; the insured did not contend that the scope of the insurer's request for information was unreasonably broad (although it certainly appeared to be); and the insurer was already by law and other legal principles not to disclose or misuse the insured's information. The Court of Appeals held, therefore, that what the insured was demanding was not only entirely outside of the terms of the policy but also beyond the carrier's duty of good faith and fair dealing.
The court appears to have taken some care to limit its holding to this set of facts, and it seems unlikely that this case will have much impact, if any, on the approach taken by Oregon courts in the majority of cases, because most cases in which the duty of good faith and fair dealing is invoked involve much closer questions of the insurer's duties.
The insured contended that the terms of the policy requiring the insured to provide information did not preclude a separate confidentiality agreement, and that the carrier's duty of good faith and fair dealing (inherent in every contract, under Oregon law) required the insurer to enter into a confidentiality agreement where the insured had a good reason for it.
The Court of Appeals pointed out a few important facts: the policy stated that the insured "must" provide the information requested by the carrier; the insured did not contend that the scope of the insurer's request for information was unreasonably broad (although it certainly appeared to be); and the insurer was already by law and other legal principles not to disclose or misuse the insured's information. The Court of Appeals held, therefore, that what the insured was demanding was not only entirely outside of the terms of the policy but also beyond the carrier's duty of good faith and fair dealing.
The court appears to have taken some care to limit its holding to this set of facts, and it seems unlikely that this case will have much impact, if any, on the approach taken by Oregon courts in the majority of cases, because most cases in which the duty of good faith and fair dealing is invoked involve much closer questions of the insurer's duties.
Wednesday, July 2, 2014
Insurers Trying to Have It Both Ways on 'First Party' v 'Third Party'
Insurance carrier-side lawyers are celebrating the result in Cox v. Continental Casualty Company, a decision out of the Western District of Washington in which Judge Pechman held that Washington's Insurance Fair Conduct Act (IFCA) does not apply to claims under liability policies because the policyholder there is not a "first-party claimant," and IFCA specifically refers to "first-party claimants" as the class the statute is intended to protect. The Cox lawsuit was brought by a group of allegedly injured patients of a dentist who sued the dentist and then took an assignment of the dentists claims against his malpractice carriers as partial satisfaction of their malpractice claims. Malpractice insurance is simply one variety of liability insurance, sometimes referred to as "third-party insurance" because it is designed to protect the policyholder against claims brought by "third-party" others (that is, a party other than the two parties to the insurance contract: a "third" party).
In Cox the court took it upon itself to consider whether IFCA's purported limitation to "first-party claimants" means that all claims other than those by policyholders under traditional "first-party" insurance (such as fire insurance, or inland marine insurance) are outside the scope of the statute. Judge Pechman held that IFCA only encompasses traditional "first party coverage" insurance relationships, and not liability policies in which policy proceeds are paid to others. In denying reconsideration of that initial ruling, the court ignored evidence presented by the policyholder that this is not the proper interpretation, including ambiguities in the language of the statute, the fact that liability coverage is often referred to as "indemnity" coverage, and that cases from Washington federal and state courts have applied IFCA to "third-party coverage" situations. The trial court's decision is wrong, is in the minority, and is likely to be overturned if appealed.
But for a contrasting view from the insurance industry itself, consider NW Pipe v. RLI Insurance. NW Pipe is an environmental coverage case from Oregon involving a dispute between one of the larger corporate targets at the Portland Harbor Superfund Site and its primary-layer liability ("third-party") insurer. The crux of the dispute is whether the limits of the primary-layer policies have been exhausted, meaning that the insurer is off the hook for defense costs. In NW Pipe the insurer paid for a lot of cleanup-type work on the insured's property, the payment of which clearly eroded some of the limits of the policies. But those limits were not fully eroded, and it appears that the insured intentionally did not have the insurance company pay for some items to prevent the policies from being exhausted. Still, the carrier wanted out of its defense obligation, so it sent the insured a check for the balance of the limits (which the insured wisely refused to cash). The insurer then argued to the court that it could force the insured to take the insurance company's money to pay for things that the insured had not asked to be paid for, so that the policies would be exhausted. You can see where I'm going here: the insurance company in NW Pipe was clearly unconcerned with the "third-party" aspect of this insurance policy (that is, protecting its insured against claims by others) and was completely focused on paying out small benefits to its policyholder in order to further the insurer's larger financial goals.
The insurance industry knows full well that the distinction relied on by Judge Pechman in Cox is only semantic, that liability coverage is fully as much for the benefit of the policyholder as fire insurance, and that policy proceeds in liability coverage are frequently paid directly to the insured. NW Pipe is but one example. Hopefully an appeals court will get a crack at the Cox decision and turn it around.
In Cox the court took it upon itself to consider whether IFCA's purported limitation to "first-party claimants" means that all claims other than those by policyholders under traditional "first-party" insurance (such as fire insurance, or inland marine insurance) are outside the scope of the statute. Judge Pechman held that IFCA only encompasses traditional "first party coverage" insurance relationships, and not liability policies in which policy proceeds are paid to others. In denying reconsideration of that initial ruling, the court ignored evidence presented by the policyholder that this is not the proper interpretation, including ambiguities in the language of the statute, the fact that liability coverage is often referred to as "indemnity" coverage, and that cases from Washington federal and state courts have applied IFCA to "third-party coverage" situations. The trial court's decision is wrong, is in the minority, and is likely to be overturned if appealed.
But for a contrasting view from the insurance industry itself, consider NW Pipe v. RLI Insurance. NW Pipe is an environmental coverage case from Oregon involving a dispute between one of the larger corporate targets at the Portland Harbor Superfund Site and its primary-layer liability ("third-party") insurer. The crux of the dispute is whether the limits of the primary-layer policies have been exhausted, meaning that the insurer is off the hook for defense costs. In NW Pipe the insurer paid for a lot of cleanup-type work on the insured's property, the payment of which clearly eroded some of the limits of the policies. But those limits were not fully eroded, and it appears that the insured intentionally did not have the insurance company pay for some items to prevent the policies from being exhausted. Still, the carrier wanted out of its defense obligation, so it sent the insured a check for the balance of the limits (which the insured wisely refused to cash). The insurer then argued to the court that it could force the insured to take the insurance company's money to pay for things that the insured had not asked to be paid for, so that the policies would be exhausted. You can see where I'm going here: the insurance company in NW Pipe was clearly unconcerned with the "third-party" aspect of this insurance policy (that is, protecting its insured against claims by others) and was completely focused on paying out small benefits to its policyholder in order to further the insurer's larger financial goals.
The insurance industry knows full well that the distinction relied on by Judge Pechman in Cox is only semantic, that liability coverage is fully as much for the benefit of the policyholder as fire insurance, and that policy proceeds in liability coverage are frequently paid directly to the insured. NW Pipe is but one example. Hopefully an appeals court will get a crack at the Cox decision and turn it around.
Tuesday, July 1, 2014
Ninth Circuit Certifies Notice-Prejudice Question to Montana Supremes
One of the perennial issues in insurance coverage is what happens if a policyholder provides notice to its insurance company late - in the case of liability coverage, that usually means after the underlying case has been litigated for a long time, and sometimes gone to verdict, or been settled. Most states have adopted the "notice-prejudice" rule for those situations. The basic concept is this: if the insurance company wants to get completely off the hook for any obligation to pay defense costs or indemnity, based on language in the policy obligating the policyholder to provide notice "as soon as practicable" or similar, the insurance company has to show that it suffered in some way by the late notice, e.g. that it could have negotiated a better deal, litigated the case differently, paid less for defense costs.
Montana's lead case on this subject, according to the Ninth Circuit, contains language that both suggests that notice-prejudice is the standard and also that timely notice is a condition precedent to coverage, meaning that late notice bars coverage with no showing of prejudice needed. The case, Atlantic Casualty v. Greytak, appears to have been a fairly typical construction defect suit at the outset, but with a twist: the insurance company was not notified until almost a year after the defect claims were made and after the parties had entered into a covenant-judgment type lawsuit. Those are not very sympathetic facts on which to argue for the notice-prejudice rule. It will be interesting to see if Montana's Supreme Court takes the case.
Montana's lead case on this subject, according to the Ninth Circuit, contains language that both suggests that notice-prejudice is the standard and also that timely notice is a condition precedent to coverage, meaning that late notice bars coverage with no showing of prejudice needed. The case, Atlantic Casualty v. Greytak, appears to have been a fairly typical construction defect suit at the outset, but with a twist: the insurance company was not notified until almost a year after the defect claims were made and after the parties had entered into a covenant-judgment type lawsuit. Those are not very sympathetic facts on which to argue for the notice-prejudice rule. It will be interesting to see if Montana's Supreme Court takes the case.
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