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.

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.

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.

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.

Oregon Class Action Filed Against Regence BCBS Over Non-Profit Status

In a follow-on to a much larger class action filed earlier this spring in Illinois against another Blue Cross/Blue Shield insurer group, the same Chicago law firm (along with an East Coast personal-injury firm) has turned its sights on Oregon's Regence Blue Cross/Blue Shield, accusing Regence of violating its own charter and Oregon law by funneling profits to executive bonuses and hoarding cash, rather than operating like a true non-profit.  This adds to the trouble that the "blues" find themselves in from a ruling two days ago in the BCBS Antitrust MDL proceeding in federal court in Alabama, in which Judge Proctor denied the BCBS' motion to dismiss the allegations that BCBS conspires on a national level to squelch competition in the health insurance market.  The Oregon class action suit likely faces similar challenges on a procedural level before the merits are addressed, meaning that even if the suit proceeds forward, it is unlikely to have any short-term impact on health insurance rates in Oregon.

Fifth Circuit Certifies Whether "PRP" Letter Is a "Suit" to Texas Supreme Court

A new development, of sorts, in development of state law on whether a PRP letter constitutes a "suit" under legacy long-tail CGL policies: the Fifth Circuit has certified the question over to the Texas Supreme Court in McGinnes v. Phoenix Insurance.  Texas remains as one of the few states not to have addressed the question.  Most states have answered in the affirmative; a few have said "no."  Indeed the federal district court in McGinnes appears to have sided with the minority, holding that because CERCLA did not exist when the policies were issued, the parties could not have intended that the definition of "suit" would be broad enough to encompass administrative actions like a PRP letter.  That approach begs the question whether a policy should be interpreted based on modern "lay" understandings of terms, or based on lay understanding at the time of the policy.  Most courts (including Oregon) interpret GL policies -- which, after all, never "expire" -- based on current versions of the dictionary.  But the way the Fifth Circuit phrased the insurer's view on Texas law suggests that Texas law may be different, or at least may be open on that point.  As a very large state with a lot of industrial activity, Texas cases tend to get cited a lot and can have an outsized impact on insurance industry litigation strategy nationally.  The Texas Supreme Court is not required to accept the referral, so we will follow this to see what develops.

Update: The Texas Supreme Court has accepted the certified questions.

Nevada Supreme Court Knocks It Out of the Park on Pollution Exclusion

We are venturing a little afield from the Pacific Northwest today to acknowledge a big win for policyholders in Nevada.  The Nevada Supreme Court in CENTURY SURETY COMPANY v. CASINO WEST INC, answering questions certified to it in 2012 by the Ninth Circuit (after oral argument was held back in 2011), held that the so-called "absolute" pollution exclusion is not in fact "absolute" when it comes to non-"traditional" pollutants.

The facts of this case are very sad: four people died in a hotel room situated over a pool heater room when carbon monoxide filled the room, due to a blocked fresh-air intake.  The carrier denied coverage based on the pollution exclusion and an "indoor air quality" exclusion.  (That "indoor-air" exclusion is not typical, and therefore I won't discuss it here).  The federal trial court denied the carrier's motion for summary judgment, finding that both exclusions were ambiguous.  However, the trial court (and then the Ninth Circuit) noted that there is a considerable split among the states on whether the modern pollution exclusion applies only to traditional pollutants or covers all substances arguably within the broad scope of its wording, but that the courts could not determine how the Nevada courts would come down in that debate.

The Nevada Supreme Court put itself firmly in the pro-policyholder camp, using an analysis that could have been lifted from some of the best Oregon case law on policy interpretation.  The court first emphasized that insurance policies are interpreted from the perspective of the ordinary purchaser of insurance, not a lawyer or insurance professional.  Second, the court emphasized that any ambiguity in a policy -- whether on its face or when applied to a factual situation -- is resolved against the drafter (the insurer) and that exclusions are read very narrowly, with the burden on the insurer to establish application.

With that, the court observed that although it would be reasonable to read the pollution exclusion as broadly applying, and including carbon monoxide, it would also be reasonable to take the policyholder's view that it only covers "traditional," outdoor, pollutants.  The court noted that the exclusion is worded so broadly (using, for example, the term "irritants") that it could potentially apply to any substance including soap or shampoo, barring coverage for any accident involving such common, and usually innocuous, items.  The court also noted that dictionary definitions of "pollutant" are narrower than the exclusion and implicitly refer only to "traditional" pollution.  Finally, the court looked to the exclusion's drafting history, noting that it was put in place largely in reaction to the proliferation of environmental contamination statutes (like CERCLA).  The court therefore found the exclusion ambiguous and adopted the policyholder's proposed interpretation, meaning that the carrier cannot rely on the exclusion.

The Nevada court's decision is similar in many ways to the seminal Oregon case on the subject, A-1 Sandblasting & Steamcleaning Co., Inc. v. Baiden, 53 Or. App. 890, 894, 632 P.2d 1377 (1981), aff’d, 643 P.2d 1260 (Or. 1982), in which the Oregon Court of Appeals held that paint was not within the ambit of the exclusion, and found the exclusion ambiguous.  Nevertheless, insurers in Oregon continue to deny indemnity coverage -- and sometimes even a defense -- based on a broad interpretation of the pollution exclusion, perhaps because the exclusion is written so broadly and because so many other courts have applied the exclusion broadly.  (Which again points to the need for additional disincentives in Oregon law for carriers to deny claims first to see if the insured will complain.)  This new decision will make it more dangerous for carriers to take that approach, at least in Nevada.