NJ: National Union Avoids Claim Due To Late Notice; Need Not Show Prejudice

NEW JERSEY,  Feb. 11 – The New Jersey Supreme Court has ruled that National Union Fire Ins. Co. of Pittsburgh need not demonstrate prejudice  to avoid liability to provide defense and indemnity to an insured who reported the underlying claim six months late,  in violation of the policy’s notice requirements.  In Templo Fuente De Vida Corp. v. National Union Fire Ins. Co. of Pittsburgh, the Court ruled that the insurer did not have to defend or indemnify its insured, First Independent Financial Group, in a lender liability suit brought by putative borrowers.

The policy provided that First Independent provide notice of any claim made against it  during the policy period, or within 30 days following the end of the policy period, provided the notice was no later than 30 days following the insured’s initial notice of the claim.    First Independent did not report the claim at issue  until six months after it was sued, had hired its own counsel, and answered the complaint.  National Union denied coverage  on grounds of late notice, and First Independent settled the underlying claims in part, assigning to the plaintiffs its coverage claims against National Union.

The assignee plaintiffs filed a declaratory judgment action, and National Union was granted summary judgment based on the late notice defense.  An intermediate appeals court affirmed the ruling in favor of National Union.

In affirming the ruling in favor of National Union, the Court undertook an analysis of the differences between claims made policies and occurrence policies, and wrote:

Claims made policies commonly require that the claim be made and reported within the policy period, thereby providing a fixed date after which the insurance company will not be subject to liability under the policy. … Claims made policies also tend to have an additional notice of claim provision phrased in terms of the insured notifying the insurer of a claim or potential claim promptly or the like[.] 13 Couch on Insurance 3d 186:13 (2009).

The prompt notice requirement and the requirement that the claim be made within the policy period in claims made policies maximiz[e] the insurer s opportunity to investigate, set reserves, and control or participate in negotiations with the third party asserting the claim against the insured and mark the point at which liability for the claim passes to an ensuing policy,

The Court also held that in the claims made context, prejudice was not an element of establishing the late notice defense:

[W]hen First Independent began defending against plaintiffs claims without first notifying National Union, an action explicitly barred by the terms of the policy, it violated a condition precedent of timely notice to National Union, and thus breached the policy’s express condition of notice of a claim in order for coverage to attach. We decline plaintiffs invitation to read the insurance policy at issue as a contract of adhesion, or engage in a strained construction to support the imposition of liability or write a better policy for the insured than the one purchased…

 Accordingly, we hold that First Independent s failure to comply with the notice provisions of the bargained for Directors and Officers policy constituted a breach of the policy, and National Union may decline coverage without demonstrating appreciable prejudice. We recognize that a different conclusion may have been reached in other jurisdictions, but our jurisprudence has never afforded a sophisticated insured the right to deviate from the clear terms of a claims made policy.

The Court unanimously upheld judgment as a matter of law in favor of National Union.

Templo Fuente De Vida Corp. v. National Union Fire Ins. Co. of Pgh., (N.J. 2016)

Alternative Fee Spotlight: Allowing Clients To Adjust The Fee For Value Perceived

It is a dangerous thing for a lawyer to put his fate, even partially, in the hands of his client – the lawyer is used to having it the other way around.  For centuries, lawyers have always set their value, and disclaimed the risk of a bad result, placing it squarely on the shoulders of their customers.  (I do not chose and use the word “customers” lightly.  Clients, especially legal departments,  are in this day and age customers in the truest sense of the word:  discerning buyers with pricing power.  Those lawyers who fail to approach clients as customers risk being left behind.)

The billable hour arrangement swims hard against this tide of modern reality, and is faltering against the strength of the current.  Hourly rate engagements seek to dictate value to the customer in a top-down manner, and in  an age when customers have the capability and desire to assess and decide value for themselves, and use that data to hire outside law firms.

As lawyers read this, especially older ones, they are likely to feel a tightness in their throats and to see their own knuckles whitening.  The thought of sending a bill out to a client and giving the client the power of even partial veto over that bill is to them rather like paying the cable TV  company based on whether the viewer liked what she watched, and how much she liked it.  Preposterous, right?

Wrong.  They day has arrived when lawyers, including old ones and very good ones, must face the reality that clients want and expect to have far greater influence on how they compensate their outside law firms, and how that compensation should be linked to something other than merely the time expended.

There are at least two reasons to do so.  First, legal departments are already  exercising such control, with auditing departments and third party auditing vendors poring over and oftentimes unilaterally adjusting invoices.  And second, those lawyers not willing to cede this power to their customers are going to be either passed over on the legal departments panel lists, are removed from the lists altogether.  Lawyers have no choice; and to believe they do have a choice is to risk extinction.

The Nuts And Bolts of Client Value Adjustments

There are a number a ways to place greater value control in the hands of the legal departments who engage outside counsel.  The two most prominent ones at this stage of the game, however, are holdbacks, and value adjustments.

Under the holdback system, a percentage (usually in the range of 10%-25% or 30%) of the total fee paid to the outside firm , whether via hourly arrangement or an alternative, is held back until either a specific case goal is reached, or the conclusion of the matter.  The client then has the authority to pay some, all, or none of the holdback to the outside law firm, based on the value the client believes it received.

The value adjustment method is similar, but not identical, to the holdback method.  Under the value adjustment approach, clients are given authority over any invoice to adjust an invoice downward or upward by an agreed upon percentage (again usually 10%-25% or 30%) based on the value it feels it received  during the period covered by the invoice.

Why Give A Client So Much Pricing Power?

Outside law firms who have been compensated for decades by the billable hour simply don’t have their interests sufficiently aligned with those of their clients.  Where the client wants fast, efficient and inexpensive, the outside law firm compensated hourly has interests which, while not diametrically opposed to speed, efficiency, and cost-consciousness, are sufficiently opposed to those goals to  have led legal departments to question the arrangement, and to move toward something better.

Holdbacks and client value adjustments allow lawyers and clients to realign their interests in the same general direction, to jointly shoulder the risks of poor performance and bad results, and to restore the feeling that the legal department and the outside lawyer are in the same boat, and rowing in the same direction.

 

 

Judge Rules DWI Victims Adequately State Bad Faith Claim Against Progressive

PHILADELPHIA, Feb. 4 – U.S. District Judge Timothy J. Savage has denied a motion to dismiss filed by Progressive Insurance Company in response to a bad faith complaint filed by Progressive insureds Jeffrey and Aimee Kelly arising out of a UM/UIM claim.    The Court did dismiss, however, claims the Kellys made against progressive under the Pa. Unfair Trade Practices and Consumer Protection Law.

The Kellys were injured in 2010 when their vehicle was struck from behind by a drunk driver.  They settled with the drunk driver for the driver’s policy limits, and then filed a UM/UIM claim with their own carrier, Progressive.  Progressive denied the claim, and the Kelly’s filed suit.

The Judge stated succinctly:

The Kellys allege that Progressive failed to pay their claims, make a reasonable settlement offer, investigate their claims properly, and consider medical and other documentation. These allegations suffice to state a claim under § 8371… The insurance bad faith statute applies to post-contract formation conduct. The UTPCPL, on the other hand, applies to conduct surrounding  the insurer’s pre-formation conduct.  The UTPCPL applies to the sale of an insurance policy.  It does not apply to the handling of insurance claims.

Kelly v. Progressive Advanced Ins. Co., (E.D. Pa. Feb. 4, 2016)(Savage, J.)

GC’s: Are You Demanding Fee Options From Outside Counsel?

For many years the arrangement was understood — a negotiated hourly rate would cover the assignments from General Counsels at Insurance Companies and other Corporations to their outside lawyers.  The seismic shift in legal departments to emphasis on speed, efficiency, and cost-effectiveness has obliterated that status quo, for the most part.

Some outside firms have slowly, glacially, begun to shift to alternative fee arrangements.  But as I have written in the past, this shift is not likely enough to keep pace with what  in-house legal departments are searching for:  the nimble ability to select the right fee arrangement for each and every case which gets assigned to outside firms.   Having a single, alternative fee proposal is barely better than the hourly rate concept it replaces.

How can outside lawyers offer more? By letting the clients, the law departments and general counsel we serve pick the arrangement.  This can be done either by a.)  offering the client a list of several alternative fee options; b.)  listening to the client to hear about what they have been using and what they like (that is what good service is all about):  or c.) collaborating somewhere between these two approaches to tailor an arrangement that works in a particular case for both the law department and the outside lawyer.

There is no magic to it.  It is simply a matter of demanding options from outside lawyers so that clients are comfortable that with cost control over the assignment, and the alignment of the clients interests and outside counsel’s interests.

 

 

Breach of Contract, Bad Faith Cases Dismissed In Pittsburgh

PITTSBURGH, Feb. 5 – Chief District Magistrate Judge Maureen Kelly has dismissed breach of contract and bad faith claims against State Farm by an insured contractor, finding that the underlying allegations of damage caused by the contractor fell outside of policy period.

Reginella Construction was insured under a contractor’s liability policy with State Farm between July 2004 and May 2006.  In 2013, a homeowner filed suit against Reginella complaining of problems with the floor, caused by poor materials and workmanship.  The homeowner subsequently won the underlying case against Reginella.  State Farm denied defense and indemnity to Reginella in February 2014, claiming that the occurrence per the suit against Reginella fell outside of the policy period(s).

After Reginella sued State Farm in Allegheny County, Pa. in 2015, State Farm removed the case to federal court and filed a motion to dismiss pursuant to F.R.C.P. 12(b)(6).

“Although the cause of the damages to the Eck home was arguably within the coverage period, ‘the cause of injury . . . has no special relevance to determining the date an insurance policy is triggered, unless specifically required by the language of the applicable policy of insurance.’ Where, as here, there is no policy language requiring the cause of injury to be identified, Pennsylvania courts apply the ‘first manifestation rule’ to occurrence policies; that is, the court looks to when injury is ‘reasonably apparent,’ i.e., when it is first manifested.”

Judge Kelly granted State Farm’s motion to dismiss, based on the first manifestation rule and the allegations of the underlying complaint against Reginella, the damage caused by Reginella’s conduct fell outside of the applicable policy period.

Because the Court found that State Farm’s coverage position was supported by a “plain reading” of the policy provisions, it dismissed bad faith claims against State Farm as well.

Reginella Construction Co., Inc. v. State Farm Fire and Casualty Co., (W.D. Pa. Feb 5. 2016)(Kelly, C.M.J.)

Florida: Policyholder Can Assign Benefits Without Insurer Consent

FLORIDA, Feb. 5 – An intermediate state appeals court in Florida has ruled that the policyholder can assign the right to post loss benefits to third parties without insurer consent.  In Bioscience W., Inc. v. Gulfstream Prop. & Cas. Ins. Co., 2016 Fla. App. LEXIS 1548 (2nd Dist. 2016), a unanimous three-judge panel held that the homeowner/insured could assign post loss benefits to Bioscience W., reversing a summary judgment entered for Gulfstream by the trial court.

In Bioscience the homeowner-insured, Gattus, engaged Bioscience, an emergency water mitigation company, to provide cleanup services after a water loss her home.  As part of Gattus’ arrangement with Bioscience she assigned all loss-related policy benefits to them as compensation.  Following the loss, and the assignment, Gattus made a claim under her property insurance policy with Gulfstream.

Gulfstream denied the claim as an uncovered loss, and Bioscience subsequently filed suit against Gulfstream for breach of the policy.  Gulfstream sought dismissal, and the  trial court granted summary judgment to Gulfstream on grounds that the policy had an anti-assignment provision, requiring Gulfstream’s consent to any policy assignment.

In reversing the trial court, the appeals court held:

“Gulfstream does not and cannot argue that the entire policy was unilaterally transferred from Ms. Gattus to Bioscience, which would have been void under the language of the policy’s anti-assignment clause. Instead, it is clear that Ms. Gattus merely assigned to Bioscience the “insurance rights, benefits, and proceeds pertaining to services provided by” the policy in consideration for Bioscience’s emergency mitigation services and authorization to directly bill and to be directly paid by Gulfstream. (Emphasis added).  Stated differently, it was a post-loss assignment of a benefit under the policy to Bioscience, namely a right to seek payment for the mitigation services it rendered under the policy, not an assignment of “this policy” issued by Gulfstream to Bioscience.”

The Court also found support for its ruling in the policy’s loss payable provisions, which contemplated that payment of policy benefits might be made to persons or entities other than the insured.  It also pointed out a long history of Florida case law which permitted post-loss assignment of policy benefits without the insured’s consent.

The case remanded to the trial court for further proceedings.

Bioscience W., Inc. v. Gulfstream Prop. & Cas. Ins. Co., 2016 Fla. App. LEXIS 1548 (2nd Dist. 2016)

Texas Judge Rules Bad Faith Claim Inadequate To Survive Summary Judgment

SHERMAN, Feb 4 – A federal judge has ruled that a bad faith suit against State Farm Lloyds arising out of property damage claims lacked sufficient questions of material fact to avoid dismissal by summary judgment pursuant to F.R.C.P. 56.

After the case, involving breach of contract and statutory and common law bad faith claims was removed from Texas state court to federal court, the Plaintiff voluntarily dismissed common law bad faith claims, but retained statutory bad faith claims under the Texas Insurance Statute and the Texas Deceptive Trade Practices Act.

“Plaintiff has failed to cite any evidence that would create a genuine issue of fact as to whether Defendant acted unreasonably in its handling of the claims.”

Judge Amos Mazzant ruled.

He found that the Plaintiff did not produce any credible evidence that the insurer misrepresented provisions of the policy,  misrepresented the authority of the agents, or that it unreasonably delayed the investigation or the processing of the Plaintiff’s insurance claims.

The Court ruled that the Plaintiffs breach of contract claims for coverage should proceed to trial.

Broxterman v. State Farm Lloyds, (E.D. Tx. 2016)(Mazzant, J.)

Hawaii: Defending Insured In Underlying Claim Not Necessarily Bad Faith Safe Harbor

HAWAII, Feb. 4 – The Supreme Court of Hawaii has ruled that a title insurer’s defense of its insured in underlying action to quiet title does not shield that insurer from bad faith exposure, and that questions of fact regarding the reasonableness of such action, as opposed to settling the underlying claim which appeared to be meritorious,  precluded summary judgment in favor of the title insurer.

In Anastasi v. Fidelity National Title Ins. Co., the Court affirmed an intermediate appeals court ruling that a summary judgment in favor of Fidelity National should be reversed, and the case remanded to trial for exploration of whether the title insurer should have paid to settle the underlying action to quiet title against its insured, Anastasi,  earlier, as opposed to continuing to litigate.  There was evidence that a warranty deed upon which Anastasi issued a mortgage to the borrower  was falsified, and the true owners of the property would prevail in the underlying suit against Anastasi and the mortgagee.

The Court found there were questions of fact regarding the reasonableness of Fidelity National’s continuing the defense of its insured in the underlying case after learning the deed upon which Anastatia issued the mortgage was forged.  Justice Paula Nakayama wrote for the court:

“If insurance companies were held to be acting reasonably as a matter of law any time they filed or defended lawsuits under a contractual right to pursue litigation, frivolous lawsuits could be used to unfairly delay payments to insureds for years…

The opinion also contains an excellent discussion of an ongoing discovery dispute regarding whether documents prepared by Fidelity’s in house legal department during the claims investigation were protected by attorney client privilege or the attorney work product doctrine.  The Court remanded that issue to the trial court as well, directing it to make a determination whether the documents in question were prepared “because of” litigation or the threat of litigation, or whether they would have been prepared regardless.

Anastasi v. Fidelity National Title Ins. Co. (HI 2016)(Nakayama, J.)

Dickie McCamey Lawyers Obtain Rescission of $25M Product Contamination Policy For Client In Coverage Dispute

PITTSBURGH, Feb. 1 – Dickie McCamey lawyers Robert Marino and Dave Ziegler along with lawyers from Choate, Hall & Steward have successfully obtained rescission of a $25 million dollar surplus Product Contamination Insurance (PCI) policy issued by Starr Surplus Lines Inc. Co . to H.J. Heinz.  The ruling  relieves the insurer of reimbursing Heinz for expenses arising out of the furnishing of lead-contaminated baby food.

Applying New York law, U.S. District Judge Arthur Schwab ruled earlier this week that the omission of multiple significant prior contamination claims from Heinz’ loss histories in the application for coverage was material, thereby entitling Starr to rescission of the policies.  Schwab found testimony from Starr’s underwriters and executives that the unreported losses were material to insuring Heinz’ risk credible.

The Court, with the consent of counsel, empaneled an advisory jury to assist with fact finding, and while it agreed with most of the jury’s findings,  it departed and disagreed with that portion of the advisory jury verdict which found that Heinz had adequately proved Starr had waived the right to assert Heinz’ material misrepresentations as to prior losses.  Schwab wrote:

While Starr was not “perfect” in its assessment and underwriting practices, perfection is not the standard.  Instead, this Court finds that Starr acted more than reasonably under the circumstances.  Specifically, the Court finds that Starr’s expert was credible, and that Starr’s underwriters lacked sufficient knowledge of Heinz’ misrepresentations or omissions.

The Court rejected Heinz’ claims that Starr engaged in post-claim underwriting, and that Starr should have conducted further investigation during the underwriting process about prior losses, including delving into information about Heinz’ prior losses from sources other than the application, including applications for other coverages, and prior news coverage of Heinz contamination claims.

While Schwab conceded the equitable remedy of rescission ab initio was an extreme one, he ruled that Starr met its burden of proving entitlement to the equitable remedy.  Dickie McCamey’s attorneys worked as co-counsel in the case with Attorneys Bob Frank, John Nadas, Matt Arnould and others at Choate Hall & Stewart in the representation of Starr.

H.J. Heinz Company v. Starr Surplus Lines Ins. Co., (W.D. Pa., Feb. 1, 2016)(Schwab, J.).

Editor’s Note:  Judge Schwab’s opinion makes it fairly clear that an insurer does not have a reasonable duty to either 1.) presume an applicant is omitting information; or 2. ) investigate items which do not appear on the application.

Insured’s Failure To Disclose Prior Pathogen Losses Results In Dismissal of Coverage, Bad Faith Claims

SANTA CLARA, Jan. 14 – An intermediate state appeals court in California has affirmed dismissal of coverage, negligence,  and bad faith claims by a geranium grower against excess insurer  Great American Insurance Co., finding the trial court acted properly in granting rescission ab initio of the policy because the insured omitted material facts from a loss history on the policy application.

The court ruled that the grower omitted from the policy application’s loss runs and loss histories prior pathogenic outbreak issues experienced by the grower, and that such failure to disclose was material to Great American’s agreement to issue a policy insuring against such losses.   The appeals panel further held that under California law, including the statutory scheme for rescission of insurance policies,  the trial court acted properly within its “broad equitable discretion to fashion appropriate remedies so as to establish equity between the parties.”

The Court also found that the grower “substantially contributed” to the delay in the investigation of the contaminant outbreak claims, dismissing all contract, bad faith, and negligent claims and affirming judgment in favor of the insurer.

Goldsmith Seeds v. Great Am. Ins. Co., (Jan. 14, 2016, Cal. Sixth App. Dist)