Desk Clearing: Efficiently Using Outside Counsel to Evaluate, Negotiate, and Close Claims

efficiency

Decades of the billable hour have left insurance company and other commercial legal departments gun-shy about using outside counsel as a resource. Outside counsel is often thought of as far too expensive and inflexible.  But that is changing, and offices of general counsel should be aware of the change to position their departments to take advantage of it.

The “small” matter, or the matter not in litigation but percolating,  are two of the largest drains of psychic energy for the in-house legal department.  Nevertheless, legal departments are loathe to refer such matters out, fearing the cost of doing so cannot possibly be justified.  This is no longer true — there is a way.

Outside counsel should have a pricing structure in place to allow, even  encourage, the referral of the small and the percolating matter, either one at a time or in block assignments.  Flat rate pricing, block pricing, and other cost-favorable arrangements are now available, permitting  legal departments to send pesky matters out for quick evaluation, and where appropriate, negotiation and conclusion.

Closed matters.  That is the goal of every law department of every insurer and corporation.  But all too often in the past,  sending a small or percolating matter out to counsel was the farthest thing from leading to a closed matter, in the minds of general counsel.  It was the opposite of getting a matter closed — it was instead seen as  the  opening a matter, and the start of having to pay for the privilege of keeping it open.

Outside law firms for too long have been seen as matter  “gators” — elongators and prolongators;  instead, they should be seen as truncators and terminators.  Legal departments should have the ability to take a look at the stacks of small unresolved matters on their desks, and be incentivized to send the stacks to outside counsel with instructions to dispose of them quickly, efficiently, and inexpensively.   And outside counsel should know how to do that.

If you do not have an outside firm who can perform that service for your legal department, it is not because there are no outside firms who can do it.  It is only because you haven’t yet located the right outside firm.  Hire fewer elongators, and more terminators.

 

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Florida Appeals Court Overturns $1.4 Million In Coverage For Sinkhole

sinkhole

LAKELAND, March 30 — A Florida appeals panel partially  reversed a lower court decision awarding $1.4 million in fees, costs and prejudgment interest to an insured in a sinkhole coverage dispute.

In September 2005, River Oaks Condominium II Association Inc. sued its insurer Citizens Property Insurance Corp.in a Florida state court for breach of contract.  The complaint alleged Citizens failed to conduct an investigation for sinkhole claims as required under Florida law.  The condo association also sought a declaratory judgment ordering coverage for the sinkhole collapses including costs to stabilize them.  A court- ordered appraisal led to  awards totaling $4,777,607 for damage to 12 units.  The association was also awarded attorney fees and costs.

Citizens appealed to the Second District Florida Court of Appeal, and contended nearly $900,000.00 in appraisal, property management and public adjusting fees and costs were not covered, and the appeals court agreed:

“We conclude that the trial court abused its discretion in taxing the property management fees and public adjuster fees because they were not litigation costs. Further, as compared to expert witnesses, a public adjuster is more akin to a consulting expert, whose costs should not be taxed according to the guidelines. We agree with Citizens that these were not proper taxable costs, and we reverse on this issue…River Oaks was required to pay its own appraiser and bear an equal share of the umpire and other appraisal expenses.”

The Court, in an opinion written by Judge Stevan Northcutt,  also found that the trial court’s use of a 2.0 multiplier in to calculate attorneys fees was not lawful.

Citizens Property Insurance Corp. v. River Oaks Condominium II Association, Inc. (Fla. App. 2nd Dist., 2016)

Data Breach Covered Under Traditional Travelers’ Policy, 4th Circuit Says

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VIRGINIA,  April 11  – The U.S.  Fourth Circuit Court of Appeals  has affirmed a ruling which obligates Travelers to defend Portal Healthcare in a class action case alleging its failure to protect a records server from unauthorized access.  What is mildly surprising is that the Court found this obligation exists under an Advertising Injury Endorsement to a commercial general liability policy issued by Travelers to Portal.

In an unpublished opinion, the appeals Court approved the  reasoning of a Virginia district court, which in 2014 ruled that Portal published, and therefore disclosed, confidential patient information, which falls under the terms of its policy with Travelers.   U.S. District Judge Gerald Bruce Lee found that Travelers had a duty to defend Portal because the medical records were “published,” implicating the personal and advertising injury coverage provision in the insurer’s CGL policy.

The Appeals Court held:

“[T]he [district court] opinion concluded that the class-action complaint ‘at least potentially or arguably’ alleges a ‘publication’ of private medical information by Portal that constitutes conduct covered under the policies.”

The appeals Court commended Judge Lee’s “sound legal analysis.”

In 2013,  Portal was sued in a New York class action claim alleging that it  negligently failed to secure a server containing confidential records for patients at a Glen Falls, New York, hospital.  The complaint alleged that this confidential material was available online for viewing without the need of a password.  Google searches by several of the patients discovered the breach.

Travelers denied coverage for the suit, and Portal filed suit against Travelers in federal court in Virginia for coverage.

Travelers Indemnity Co. of America v. Portal Healthcare Solutions LLC, 14-1944 (4th Cir. 2014)

NJ: Crum & Forster No Duty To Defend Contractor in Faulty Installation Case

construction

NEW JERSEY, April 13 –  A New Jersey appeals court ruled insurer Crum & Forster  had no duty to defend an insured contractor against claims of  faulty installation of insulation and cladding at a condominium complex.

The appeals court affirmed a lower court grant of summary judgment in favor of Crum & Forster Insurance Co. relieving it of the obligation to defend contractor  Breese Corp.  Breese was a defendant in an underlying suit brought by a condominium association alleging defective work in the installation of an external insulation and finishing system, EIFS.   Breese installed insulation boards at Lakeside  at North Haledon condos.

The policy contained an  exclusion for EIFS-related claims, and the appeals court ruled it applied to bar coverage.  At the trial court level, the court there determined that the system installed by Breese met the specifications of an EIFS  — a rigid insulation board, an adhesive layer attached to the substrate, a reinforced base coat and a finish coat.

Lakeside argued that stucco did not meet the definition of substrate, and therefore that the exclusion did  not apply.  The appeals court disagreed:

“It was undisputed that the installation was not made in accordance with the plans, and so Lakeside’s reliance on using the plans to define ‘the’ only permissible ‘substrate’ is misplaced…The experts’ disagreement does not make the language of the exclusion ambiguous,…[trial ] Judge [Ralph] DeLuccia listened to the testimony, had the opportunity to observe the witnesses and his factual findings were based upon substantial, credible evidence in the record. We find no reason to disturb them.”

The underlying litigation commenced, as it so often does, after the condominium experienced water infiltration problems, including mold and bacteria issues.  Crum & Forster also argued the a bacterial and mold related exclusion also barred coverage.

 

Legal Malpractice Policy Does Not Cover Late Claim

 

DAYTON, March 24 — An Ohio federal judge has granted a legal malpractice carrier’s motion for judgment on the pleadings, finding that the claim was not submitted timely under the insured’s claims made policy.

In 2011 David and Cynthia McCartys sued attorney Miguel Pedraza for legal malpractice relating to representation in business litigation, which led to a $275,825.29 final judgment against Pedraza.

 

Pedraza’s insurer,  National Union, moved for judgment on the pleadings, arguing that McCarty’s claim against Pedraza was not originally reported by their insured to National Union during the policy period .  Judge Thomas M. Rose agreed, relying on policy language, and rejecting the malpractice plaintiff’s argument that the filing of their suit on the docket was sufficient to constitute constructive notice to National Union:

“The Insuring Agreement’s language is clear and unambiguous. In order for there to be coverage for a claim, the claim must be made during the Policy Period and reported to National Union pursuant to the policy’s notice provisions. The notice provisions state that written notice of a claim must be given to National Union “as soon as practicable,” but “no later” than either 60 days after the end of the Policy Period or the end of any applicable Extended Reporting Period. Sixty days after the end of the Policy Period was 60 days after February 21, 2011, or April 22, 2011. National Union asserts that there is no applicable Extended Reporting Period, and the McCartys do not dispute that assertion. Thus, in order for the claim against Pedraza’s policy to be covered, it must have been reported, in writing, to National Union by no later than April 22, 2011. In sum, National Union’s interpretation of the policy is correct.”

“[T]he McCartys argue that National Union had an obligation to continuously review the dockets of Ohio courts to determine if there were any claims against Pedraza. The McCartys do not cite to any provision of Pedraza’s policy that imposes such an obligation on National Union. To the contrary, the policy unambiguously states that notice of a claim ‘shall be given in writing to the addressee and at the address identified in Item 7 of the Declarations.’ Requiring that written notice be sent to National Union at its address is inconsistent with an interpretation of the policy that would require National Union to search for claims against its insured. The Court rejects the McCartys’ argument that National Union had actual and constructive notice of their legal malpractice action merely by virtue of its filing in a publicly available docket.”

David C. McCarty, et al. v. National Union Fire Insurance Company of Pittsburgh, PA, et al., No. 15-247, S.D. Ohio; 2016 U.S. Dist. LEXIS 39526).

Outside Counsel Re-Packaged and Re-Focused: Four Pillars

PILLARS

If your outside counsel has not worked on re-purposing how their services  are delivered to suit your needs, you are entitled to ask why, and to ask them to get to work on doing so.  In-house legal departments in the current market are entitled to value in at least four key areas:

1.  Monthly Access to Counsel at No Cost For Questions on Miscellaneous or on-Assigned Matters – My clients each have several hours per month of free phone consultation time, analysis, or research on any subjects of their choosing.   A good client who invests their money in you to represent them in paid matters is entitled to be able to pick up the phone or send an email with a random or miscellaneous question without worrying about the meter running.  It is a way to provide value to good clients, and a way to encourage them to reach out and stay in touch to take advantage of the benefit.

2.   No-Cost Quarterly  At-Client “Office Hours” – This is an extension of the no-cost consultation service.  My clients each get eight hours per quarter of my spending time in their offices, where I can assist and consult on matters of importance, provide updates or continuing education on topics of interest, or to listen and learn about the legal department’s or company’s goals and objectives, and to discuss how we might assist the client in achieving those goals.  It is a great way to learn more about a client’s DNA and institutional culture, so that legal services can be aligned with those things.

3.   Alternative Fee Options, And The Willingness To Negotiate Any Fee, Any Time – I have posted about the complex subject of alternative legal fees many times, and have a page dedicated to describing many popular alternative fee options.  Clients like the ability as they assign matters to outside counsel to toggle back and forth between traditional hourly rate arrangements and alternative fee proposals based on the nature of the matter assigned.  The only real rule here is absolute flexibility.  The client should be given the option of deciding which fee approach they feel is best for them at the outset of assigning a matter.

Outside counsel  should be open always to adjustments in the fees as a case or matter proceeds.  Circumstances change, cases can take unexpected twists and turns, and an in – house legal department should never, never feel locked into an unfavorable fee agreement after circumstances material change.  Setting legal fees is NOT an adversarial process between outside counsel and general counsel;  rather, it is a collaborative one.

4.   Re-Thinking Hourly Fee Engagements To Provide More Value – Some clients still prefer engaging outside counsel by way of a traditional hourly fee deal.  At the same time, however, in addition to the extras discussed above, they are also looking for value from outside counsel even under these engagements.  We have re-packaged our hourly fee engagements with legal departments, and re-thought how they should operate.

Our clients have begun to regularly see “No Charge” line items in their invoices.  Under our re-vamped hourly rate system, clients are not charged for routine letters and phone calls, and  charged only for substantive work which moves a matter forward.  In that way, a client feels like it is paying only for value received, not merely a ticking clock.

All of these pillars serve the same goals:  First, these features encourage clients to reach out to outside counsel on non-assigned matters, and feel like they are partnering together to serve the common goal – the client’s interests, without necessarily worrying about cost.  Second, these features provide value to clients on the matters which are formally assigned to outside counsel.

To put these advantages to work for your in-house legal department or office of general counsel, reach me at chaddick@dmclaw.com or 717-731-4800.

 

N.C.: Insurer No Duty To Defend Environmental Contamination Claims

Refinery

 

RALEIGH, N.C., March 29  — A North Carolina federal judge ruled as a matter of law that several insurers had no duty to defend its insured  under certain of its policies for two underlying environmental contamination claims, finding no plausible allegation of sudden and accidental release of contaminants which would have triggered coverage.

PCS Phosphate Co. Inc.sought a declaratory judgment for defense and indemnity from American Home Insurance  in two underlying actions alleging environmental contamination. American Home joined Zurich American Insurance Co. and Federal Insurance Co., seeking contribution and indemnity related to the defense and indemnity of PCS.

Between 1978 and 2002, PCS and its predecessor Texasgulf Inc. sent transformers to facilities in North Carolina for repairs. During the transformer repairs, PCBs were released, resulting in an E.P.A. investigation on the site.  The E.P.A. ultimately settled with certain potentially responsible parties (PRP’s) following an investigation launched in 2003.

In April 2008, PCS advised American Home that PCS had been identified as a potentially responsible party for the contamination, and sought defense and indemnity in any related litigation.  In April 2009, some of the PRP’s sued PCS, seeking contribution and reimbursement for costs related to their settlement with the E.P.A.

American Home accepted the defense of PCS in the Consol and CP&L actions pursuant to a reservation of rights.

Judge James C. Dever III granted Zurich American’s motion for partial judgment on the pleadings.with respect to its duty to defend or indemnify PCS in  the underlying actions against PCS.  Judge Dever ruled that American Home had not met its burden “to show that an allegation in either underlying complaint can be reasonably interpreted to allege a sudden release of contaminants or pollutants at the [site]” which would have triggered coverage under the Zurich American policy.

He wrote further, “American Home has not plausibly alleged that either the 1981-1986 policies or the 2005-2008 policy oblige Zurich American to contribute to PCS’s defense or indemnification in either of the underlying actions. Thus, the court grants Zurich American’s motion for partial judgment on the pleadings concerning both the Consol and CP&L actions.”

PCS Phosphate Co. Inc. v. American Home Assurance Co. (E.D. N.C. 2016)