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New York's Highest Court Interprets Specific Policy Language as Requiring "All Sums" Allocation
Based on the particular policy language before it, the New York Court of Appeals recently held that "all sums" allocation (not pro rata) and vertical exhaustion applied in coverage litigation over long-tail asbestos bodily injuries.
In re Viking Pump, Inc.
, No. 59, 2016 WL 1735790 (N.Y. May 3, 2016).
The excess policies at issue in
Viking Pump
provided that the insurers would pay "all sums" the insured was legally obligated to pay, and contained "prior insurance and non-cumulation of liability" clauses. The policies also tied their attachment only to specific underlying policies in effect during the same policy period. Based on those policy provisions, the
Viking Pump
court held that: 1) a pro rata approach allocating damage across all years of loss would be inconsistent with the "non-cumulation and prior insurance" language, 2) vertical, rather than horizontal, exhaustion of the primary policies was allowable, and 3) the insured could reach excess coverage in certain policy periods without having to prove the exhaustion of all triggered primary policies.
The decision departs from Consolidated Edison, a 2002 case involving an underlying environmental claim, in which the court suggested that pro rata is the preferred method to allocate damages on long-tail claims due to the inherent difficulty in tying specific injury to a specific period. The Viking Pump court emphasized that the policy language governs, not some "blanket rule, based on policy concerns." Thus, whether this approach applies in other cases will depend on the language of the policies and the nature of the underlying claims.
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California Supreme Court Expands Insurers' Potential Exposure for Punitive Damage
In a case that could open the door to higher punitive damages awards against insurers, the California Supreme Court held that in determining whether a punitive damages award is unconstitutionally excessive, the policyholder's
Brandt
fees (incurred to obtain payment of benefits due under the policy) may be included in calculating the ratio of punitive to compensatory damages.
Nickerson v. Stonebridge Life Ins. Co.
, S213873 (June 9, 2016).
Applying the standard that governs evaluation of punitive damages awards, the court focused on the disparity between the plaintiff's actual or potential harm and the amount of the punitive damages award. Under this analysis,
Brandt
fees typically qualify as compensatory damages reflecting a plaintiff's actual harm, because
Brandt
fees are caused by the tort of bad faith.
The insurer argued that
Brandt
fees awarded by the trial court post-verdict may not be considered in calculating the punitive-to-compensatory ratio because punitive damages must be based only on evidence presented to the jury. The court rejected this argument, finding that a court (or jury) may consider a post-verdict compensatory damages award in determining punitive damages. Indeed, a reviewing court may consider not only the compensatory damages awarded by the jury, but also the plaintiff's "potential harm." Finally, the court held that excluding
Brandt
fees would mean overlooking a substantial component of the plaintiff's harm and would impair the court's ability to consider whether, and to what extent, the punitive damages award is unconstitutional.
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Colorado Supreme Court Deems Voluntary Payments Condition a "Fundamental Term" Enforceable Without Showing Prejudice
The voluntary payment condition provides insurers critical protection. In an important decision enforcing this provision, the Colorado Supreme Court ruled that insurers need not show prejudice resulting from an insured's breach of the voluntary payment condition, because the condition is a "fundamental term defining the limits or extent of coverage" under the policy. Travelers Prop. Cas. Co. v. Stresscon Corp., 370 P.3d 140 (Colo. 2016).
The
Stresscon
court held that the insurer owed no duty to indemnify a settlement the insured negotiated without notifying the carrier. Requiring an insurer to demonstrate prejudice to enforce the condition would "rewrite the insurance contract ... and create coverage where none previously existed." The court distinguished an earlier case holding that, absent a showing of prejudice, coverage under an occurrence-based policy is not barred by the insured's breach of the "notice of occurrence" condition, because timely notice is merely a "technicalit[y] from which insurers 'reap a windfall.'"
The voluntary payment and timely notice provisions are both designed to make policyholders involve their insurers in resolving claims. The court's distinction between "fundamental" conditions and "technicalities" provides a basic framework to analyze other provisions, but little practical guidance about which conditions the court will enforce as written and which it will not.
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Reading Between the Lines: Federal Appeals Court Rejects Claim That Reservation of Rights Was Inadequate
In a cautionary tale that shows the importance of timely and thorough reservations of rights, the Eighth Circuit rejected an insured's effort to prevent its insurer from denying coverage where the insurer allegedly muddled its reservation of rights communications. While the insurer could have stated its position "more definitively," the court held the insurer adequately reserved the right to deny coverage. National Surety Corp. v. Dustex Corp., 820 F.3d 988 (8th Cir. 2016).
In this case, the insured sought coverage under a general liability policy for an arbitration claim. After determining the claim might be covered, the insurer sent an email advising it would defend Dustex. Dustex thanked the insurer for agreeing to "defend this claim under a reservation of rights." The insurer eventually sent an "official" reservation of rights letter, and later sought a declaration it had no duty to defend or indemnify Dustex. Dustex argued the insurer failed to give notice it was defending under a reservation of rights, and therefore, could not deny coverage.
Upholding the trial court, the Eighth Circuit concluded the carrier effectively reserved its right to deny coverage "though it certainly could have done so more clearly." There was evidence Dustex saw an opportunity to capitalize on the haphazard reservation of rights. In an email beginning with the cloak-and-dagger warning "[d]on't forward this email to any other individual ..." Dustex's counsel advised the company president: "[The insurer] is 'locked in' in my opinion, to not only defending this arbitration claim but in paying any award ...." The court cited the email as evidence Dustex knew it was being defended under a full reservation of rights. Without the email, it is uncertain the court would have found the reservation of rights effective.
A carefully worded letter likely would have saved the insurer the trouble of litigation. This case underscores the need to send prompt, well-reasoned reservations of rights.
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Ninth Circuit Phones a Friend: Are Insurers in Nevada on the Hook for All Losses Resulting From Not Defending?
In move that could fill a gap in Nevada's insurance law, the Ninth Circuit has asked the Nevada Supreme Court to clarify whether the liability of an insurer that breached its duty to defend, but did not act in bad faith, is capped at the policy limit plus defense costs and expenses.
Nalder v. United Auto. Ins. Co.
, No. 13-17441, 2016 WL 3082417 (9th Cir. June 1, 2016).
The case arose after an automobile accident. The injured claimant made an offer to the driver's insurer (UAIC) to settle the claim for the $15,000 policy limit. UAIC rejected the offer, arguing the driver was not covered. UAIC never informed the driver that the injured claimant was willing to settle.
The claimant then filed a lawsuit and obtained a $3.5 million default judgment against the driver, who declined to defend himself. The injured claimant and driver then sued UAIC for breach of contract, bad faith, fraud, and violations of Nevada's unfair claims settlement practices statute. They alleged UAIC's failure to defend the driver rendered UAIC liable for the entire $3.5 million judgment. The district court found that UAIC breached its duty to defend its policyholder, but awarded no damages because the driver submitted to a default judgment.
On appeal, the Ninth Circuit noted the lack of Nevada precedent, but observed that another federal court in Nevada held that "Nevada law allows for recovery of all reasonably foreseeable consequential damages for a breach of contract, regardless of the good or bad faith of the breaching party. There is no special rule for insurers that caps their liability at the policy limits for a breach of the duty to defend."
The Nevada Supreme Court's decision will likely provide important guidance about the scope of an insurer's liability for breach of the duty to defend.
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In the Pipeline: ALI Crafting Key Insurance Principles
The American Law Institute (ALI), an independent organization that produces scholarly works on key legal issues facing the insurance industry, is drafting the Restatement of the Law of Liability Insurance, slated for publication in May 2017. Lawyers and courts often cite Restatements, especially in states where there are gaps in decisional law.
To date, the ALI has prepared three chapters, which examine contract rules, management of claims, and principles governing the risks insured. The Restatement position may not be consistent with a particular state's law (just as all states are not in agreement). For instance, the draft Restatement provides that an insurance policy term is interpreted according to its plain meaning, if any, unless extrinsic evidence shows that a reasonable person in the policyholder's position would give the term a different meaning. The Restatement will also set forth a "four corners plus" standard for determining whether there is a duty to defend. In other words, whether there is a potential for coverage is determined not only by the complaint or claim against the insured, but information the insurer obtains (or could have obtained) from a reasonable investigation.
We will continue to keep our clients and colleagues apprised as the ALI moves closer to publishing this potentially influential work.
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Contact Us:
Chicago, IL
| 312.585.1400
San Francisco, CA
| 415.745.3770
Los Angeles, CA
| 213.402.1245
San Diego, CA
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News and Notes
On July 14, 2016, our San Francisco office will move to new space at:
101 Montgomery Street
Suite 2300
San Francisco, CA 94104
Our
Appellate Group secured
summary judgment victory obtained for New Hampshire Insurance Company in
Caudill v. New Hampshire Ins. Co.
, No. 2014-CA-000921-MR, 2016 WL 3356439 (Ky. Ct. App. Jun. 10, 2016). This ruling
solidified a significant victory in a complicated 10-year-old bad faith case addressing an excess insurer's duties before the primary policy is exhausted.
have been recognized by the esteemed legal ranking service Chambers & Partners, in the field of insurance coverage litigation and dispute resolution. Matt's clients remark that "he has provided top-notch analysis and is unafraid to point out what's really at risk." Sara is described by market sources as "bright and tough" and a "vigorous advocate for her clients" who have "every confidence in her ability to handle cases for the market."
San Francisco attorney
Seth Manfredi
has been named Co-Chair of the Insurance Practice Section of the San Francisco Bar Association.
Matt Novaria
and
Mark Swantek
have been appointed to the Chicago Bar Association (Young Lawyers Section) Insurance Coverage Committee as Co-Chair and Vice-Chair. They join
Patrick Emerson
, already a Co-Chair of the Association.
Richard Nicolaides and
Samantha Riley recently presented "Attorney-Client Privilege & London Market Communications" in London to Lloyd's of London syndicate claims handlers, in-house solicitors, managing general agents and underwriters. Richard and Samantha offered practical guidance to prevent disclosure of communications in future coverage litigation.
The Advancement of Professional Insurance Women provides women in the insurance industry opportunities for professional development and career advancement. The Firm is actively involved in APIW in New York, Chicago, and in starting chapters in Northern and Southern California.
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Upcoming Events
Keynote speaker Jennifer Siebel Newsom will share her diverse experience as she makes the case for greater equality in the workplace, encouraging companies to take a leadership role in reshaping the workforce. Sara Thorpe and Ethan Seibert
have been active in organizing this
event. More details are available
here
.
Mary Licari will present "Game of Thrones: Multijurisdictional Battles in Insurance Litigation" at DRI's annual Insurance Coverage Symposium in December, in New York City.
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We welcome Mark J. Sobczak, who has an impressive track record of prosecuting and defending appeals in state and federal courts across the nation.
Recognizing that the strongest appeal always stems from success at the trial court level, Mark also serves as trial monitoring counsel, preparing motions in limine, jury instructions, and trial briefs in high exposure cases.
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